Annual Financial Report

RNS Number : 2644J

Monks Investment Trust PLC

28 June 2011

 



THE MONKS INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT

Copies of the Annual Report and Financial Statements for the year ended 30 April 2011 have been submitted electronically to the National Storage Mechanism (which replaced the UKLA's Document Viewing Facility on 1 September 2010) and will shortly be available for inspection at http://www.hemscott.com/nsm.do.

The Annual Report and Financial Statements for the year ended 30 April 2011 including the Notice of Annual General Meeting is also available on Monks page of the Baillie Gifford website at:

www.monksinvestmenttrust.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 30 April 2011 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co

Company Secretaries

28 June 2011

 

CHAIRMAN'S STATEMENT

Performance

In the year to 30 April 2011 the net asset value total return, with borrowings at fair value, was 11.2% and the share price total return was 16.7% while the FTSE World Index in sterling terms returned 9.3%. For our portfolio the gains were relatively evenly spread between the first and second halves of the year with a bias to the first half, while changes to the comparative index showed a different pattern, falling in the first half and rising in the second. During the first half of the year net asset value per share rose by 5.9%, while the comparative index fell by 2.1%, and during the second half net asset value per share rose by a further 4.7% and the index rose by 8.8%. The share price ended the Company's year at 364p, 16.3% higher than at the end of the previous year. Over the five years to 30 April 2011 the net asset value total return was 33.6% and the share price total return was 33.8% while the comparative index returned 30.3%.

There were a number of events during the Company's year that one might have expected to have had a major negative effect on markets. These included the earthquake, tsunami and nuclear accident in Japan, revolutions in the Arab world, and sovereign debt crises necessitating bailouts within the eurozone. The Japanese market fell sharply in March and has yet to recover to its pre-disaster level, but other markets suffered only transient reversals in response to these events. Monetary policy appears to have been a more powerful influence and in this respect the most important event of the year was a speech by the chairman of the US Federal Reserve in August 2010 in which he announced that the US Central Bank would engage in a new round of quantitative easing. Prior to that point the trend in markets was downwards, after it the trend was upwards, notwithstanding the potential shocks noted above.

Elsewhere in the world the direction of monetary policy was towards tightening, either in response to the problems of excessive growth and inflation in the case of major emerging economies such as China, India and Brazil, or in order to pre-empt inflation in the case of the eurozone and countries such as Sweden and Australia. Possibly in response, international investors withdrew funds from emerging markets during the later part of the year, leading to relative underperformance of these markets compared to those of the United States, Europe and the United Kingdom. Given our significant exposure to Brazil and other Emerging Markets, this had an adverse effect on performance during this period.

The Managers' Report below contains more detail on the individual investments that made the greatest positive and negative contributions to performance. Of particular note is the positive contribution of our investments in Japan during a period when the Japanese market fell in sterling terms.

Earnings and Dividend

Earnings per share were 4.06p compared with 4.02p last year, an increase of 1.0%. Income from investments rose despite a reduction in income from bonds owing to purchases of high yielding equities. This was, however, largely offset by higher payments arising from increased borrowings and a rise in other costs. Monks invests with the aim of achieving capital growth rather than income and all costs are charged to the Revenue Account.

The Board is recommending a final dividend of 2.50p, which together with the interim (0.50p) already paid, would make the total dividend for the year 3.00p, unchanged from last year.

Long Term Borrowing

During the year we borrowed an additional £40m for a three year term at a fixed rate of 3.57%. We also rolled over shorter term borrowings of the same amount taken out last year in combination with a thirty year interest rate swap. While the rate paid under the thirty year swap agreement is fixed, there is some variability in the overall rate paid on the combination of swap and shorter term borrowings arising from changes in margin and the current rate is 5.1% compared to 5.4% at this time last year. The 11% debenture stock will mature in 2012 (and the 6⅜% debenture stock in 2023) and the new borrowings undertaken this year and last reflect a strategic view of the Company's capital structure and the attraction of locking in interest rates that are low relative to history, rather than a desire to increase the gearing of the Company. The new borrowings have been largely invested in equities whose current yields in aggregate more than cover the interest paid and the additional exposure to general movements in share prices has been hedged out through the sale of index futures.

Investment Activity

Over the course of the year there was a net investment of £34.1m, of which £31.2m was in equities. There were net sales of equities in North America and non-Asian Emerging Markets and net purchases in all other regions. We also purchased call options on the Japanese market and sold futures on United Kingdom, American and eurozone markets.

The call options enable us to participate in future capital appreciation of the Japanese market for a modest initial outlay and potential losses are capped at this amount. We purchased the first of these options in November and added to the position in March, following the Japanese earthquake. We currently hold options maturing in December 2011 and December 2012. The purchase of call options introduces a form of gearing, as their market value varies more than that of the underlying Japanese index, and this is taken into account when setting policy for the overall level of gearing.

The sale of futures reduces the sensitivity of the net asset value to changes in the level of the United Kingdom, American and eurozone markets while changes in the value of our holdings in these markets relative to the market indices covered by the futures contracts become a more important factor. In this way the sale of futures reduces gearing to general moves in markets and so acts to mitigate the gearing introduced by investing additional borrowed funds and holding call options.

At the year end, holdings of equities amounted to 103.7% of shareholders' funds and holdings of equities and bonds together to 112.5% but when the effects of holding options and selling futures are taken into account the effective gearing was equivalent to 10% of shareholders' funds.

Discount and Buybacks

The discount (at fair value) narrowed to 9.9% from 14.0% over the course of the year. The Board considers the level of discount and has authorised the repurchase of shares when this will be of benefit to continuing shareholders as well as being in the interest of those shareholders who may need to sell some or all of their shares. In order to assist it with the control of the discount and the communication of the Company's objectives and positioning the Board has engaged Cannacord Genuity.

During the year to 30 April 2011 £807,000 was spent on the repurchase of 250,000 shares. Since the power to buy back shares was first granted in 1999, 127.2m shares have been bought back and cancelled, representing 33% of the share capital at the start of that period. The Board will continue to buy back shares if suitable opportunities appear.

Outlook

Whatever one's view of the aggressive buying of bonds and other financial assets by central banks that is known as quantitative easing, one immediate and intended consequence of this process is that the prices of financial assets are higher than they would have been had central banks not been buying. One therefore has to wonder what will happen when they stop. An optimist would probably argue that quantitative easing will only end if the economic recovery is well established with the financial system well on its way back to robust health and that, if these conditions are in place, asset prices can be driven higher by the usual processes of credit growth and saving. A pessimist would argue that the withdrawal of buyers whose aim has been to boost the price of the assets they are purchasing will lead to a sharp correction. These fears are voiced most clearly with respect to government bonds but, given the way money flows between different asset classes, all financial investments are likely to be affected to a greater or lesser extent. It seems likely that we will find out which side is right fairly soon and until the answer is clearer it seems prudent to adopt a cautious attitude with respect to changes in the general level of markets and to focus on creating value through the selection of individual investments.

On a more positive note, corporate profitability has increased greatly in recent years in many countries and borrowing costs for those companies with access to bond markets are extremely low. If these conditions are sustained, companies are likely to pay higher dividends, repurchase shares and take each other over, all activities which are normally associated with good returns for equity investors. One risk to this scenario is that of rising inflation. This has already become an issue in some of the leading Emerging Market economies and there are indications of similar pressures elsewhere. Another is the rather precarious finances of various governments, not only in Europe but also at various different administrative levels in the United States. So far governments have responded in different ways, but some are now exploring the limits of tolerance of the markets, their populations or their neighbours.

Looking further ahead it seems likely that the pattern of the closing years of the last century and the first years of this will continue. Global economic growth has been accelerating as more rapidly growing parts of the world come to account for more of total economic activity and technological developments have created huge new markets for things that did not exist before. While this creates opportunities for investment in new areas, it also leads to greater pressure on scarce resources and rising demand for many traditional products. Supplying that rising demand remains one of the main themes within our portfolio.

AGM

I hope shareholders will come to the Annual General Meeting, which will be held on 2 August 2011 at 11.00am at the Institute of Directors (see map on page 49 of the Annual Report). Our manager will give a short presentation and there will be an opportunity to ask questions.

James Ferguson

13 June 2011

 

MANAGERS' PORTFOLIO REVIEW

Among the changes made to the portfolio during the Company's year was the complete sale of the holding in the Baillie Gifford Pacific Fund and its replacement with a number of new direct holdings in Chinese companies, most of which are listed in Hong Kong. This completed a process of moving to direct holdings within the Asia-Pacific region that had been underway for some years. We also reduced our exposure to the markets of the Middle East and sold our holding in a fund investing in Vietnam. Taken together with reductions and sales in Turkey and Brazil, these sales more than offset new purchases of holdings in Emerging Markets. We still have  a very significant exposure to these markets and continue to believe that this will prove rewarding in the long run despite the short-term headwind created by the need to tighten monetary and fiscal policy in response to rising inflation.

Our increased investment in Japan is slightly more opportunistic in nature and reflects a view that the Japanese market is out of favour and cheap despite the fact that it contains many companies that should benefit from rising global demand. The longer term outlook for Japan is, however, extremely challenging given its poor demographics and large stock of government debt. Part of the exposure to Japan is through call options on the Nikkei 225 index, some of which expire in December 2011 and the rest in 2012 with strike prices ranging from 9,500 to 11,000. The initial position was bought in November 2010 and added to in March 2011 following the earthquake and tsunami.

We are relatively optimistic about economic developments in the large countries of theeurozone, notably Germany which seems to be enjoying something of a boom. This success greatly complicates the work of the European Central Bank as it strives to contain inflation while supporting a banking system that has heavy exposure to the small troubled nations of the periphery. It also adds to existing concerns about the future profitability of banks in an environment of increasing regulation and has led us to sell a number of holdings such asBanco Santander while at the same time looking for more opportunities in 'core Europe' such as the German housing company  Deutsche Wohnen.

With the additional funds raised by new borrowings we have added to holdings of higher yielding stocks and our positions include companies in a number of sectors and countries ranging from telephone companies in the United States, Europe and Asia to the bus and train group Go-Ahead in the United Kingdom and out of favour technology stocks in Taiwan. The one thing they have in common is that we believe that the market is underestimating their ability to maintain or increase their dividends. This additional investment was hedged through the sale of index futures on the FTSE 100, S&P 500 and Euro Stoxx 50 indices in approximately equal amounts. By hedging our equity exposure in this way exposure to market movements in the United Kingdom, the United States and the eurozone has been reduced but no hedging has been applied to our holdings in Japan or Emerging Markets. In the second half of the Company's year this was unhelpful for performance.

When the sale of futures and the purchase of call options are taken into account the geographical exposures are somewhat different to those shown for the distribution of assets in below. In particular, the exposure to Japan rises to 13% from 5% while exposures to the UK, European and US markets fall to 14%, 13% and 15% from 17%, 16% and 17% respectively.

The ten largest positive and negative individual stock contributors to performance are described below. In aggregate the positives outweighed the negatives by a comfortable margin. Four of the largest positive contributors to performance, Aggreko, Seadrill, OGX and the Athena Debt Opportunities Fund were, also in the top ten positives last year and OGX was also in the top ten positives two years ago. Of this year's largest negative contributors, Petrobras was in the top positives last year whereas Allied Irish Banks and OSX were among last year's top ten negative contributors.

Largest positive contributions to performance:

Healthspring is a US provider of Medicare Advantage healthcare plans. We bought it in late 2009, at the height of concerns over US healthcare reforms. We felt that the fears were overdone, and that Healthspring's more efficient operating model would allow it to exploit an environment of tighter costs in which weaker players would exit. Our hypothesis has played out. Healthcare reforms were less revolutionary than was feared and Healthspring has been able to grow fast, gaining market share and picking up some good value acquisitions. Alongside rapid earnings growth, the stock has re-rated.

Aggreko is a global provider of temporary power systems. It is benefitting from strong growth due to increasing demand for electricity supply, especially in emerging markets, and this looks set to continue over the long term. Management continue to execute well in terms of expansion.

Odontoprev is a Brazilian dental plan company that is consolidating an immature market. It has acquired its main large but ineffectual competitors, owned by two of Brazil's biggest banks, and should now be able to grow both rapidly and profitably. Average monthly charges for its plans are very modest at present and there is scope to increase profitability by raising prices. Financial characteristics are exceptional and we expect nearly all of the profits to be paid out as dividends.

Cetip is a depositary and registrar that lies at the heart of the Brazilian financial system, and it is a legal requirement that it participates in all financial transactions. The number of such transactions is growing and likely to increase further as credit expands, corporate bonds are more widely issued and over the counter derivatives evolve from the present very low level. We expect to see both rapid growth and substantial cash generation.

Digital Garage is a Japanese internet incubator company. Its main assets are cash and quoted investments, including a large stake in Japan's leading price comparison website, plus stakes in Twitter Japan and its US unquoted parent company, Twitter Inc. The company participated in early stage funding rounds for Twitter Inc, the world's leading micro-blogging service, which at the time we acquired our holding, appeared to contribute nothing to Digital Garage's share price as its market capitalisation was exceeded by other public and liquid assets. From this point, following some share price appreciation, the debate revolves more around the potential worth of Twitter.

Seadrill is the owner of the world's largest modern fleet of deepwater drilling rigs and vessels. John Fredriksen timed his entry into this market with great skill during the last big downturn and now has both a peerless fleet and an unrivalled set of contracts with the best funded major global oil companies. We expect there to be some further consolidation in the market, with Seadrill playing some part in that, and for capital allocation to distinguish Seadrill significantly and favourably from its competitors. Seadrill is a beneficiary of the increasingly hard work that has to go into finding and recovering oil as global exploration moves further offshore.

SINA is a Chinese language social networking and gaming website that has attracted a large and loyal following worldwide. The shares appreciated dramatically and, eventually, to a point where we felt that prospects were over represented and so sold our holding.

OGX obtained very valuable offshore exploration licences in key Brazilian basins before most other bidders were aware of their potential worth. The shares did extremely well subsequently and we steadily cut back our position. We maintain a holding, albeit a smaller one.

National Oilwell Varco is the leading global supplier to the oil services industry. A long industry drought spread over two decades or more afforded the group the chance to put together, by acquisition, a uniquely strong portfolio of businesses and build unrivalled global distribution and customer support. As the industry now enjoys benign conditions and a strong oil price, the group is able to exploit its carefully constructed strengths.

Athena Debt Opportunities Fund is a fund that we commissioned to try to exploit the revulsion markets were showing towards securitized mortgage backed securities of various types. The premise was simply that these had become significantly undervalued and that, by buying senior tranches at a large discount, we might hope to recover most of our book cost from cash flows relatively rapidly. This would leave a potentially very cheap option on further recoveries within widely diverse residential and commercial property portfolios.

Largest negative contributions to performance:

Mediatek designs and sells semiconductor chipsets predominantly for mobile phone handsets. We bought it to benefit from growth in the quantity and sophistication of mobile phones and Mediatek's strong market position, especially in China. While its position is very strong in 2G phones, this market is now declining, having been superseded by 3G and smart phones. It is finding these new markets more competitive but we believe that the market is underestimating the ability of Mediatek to develop new product lines.

Vision Opportunity China is a closed-end fund listed in London but which invests in a clearly defined range of Chinese growth businesses. Typically, these are family owned and unquoted, require funding to assist them to exploit an immature opportunity and offer VOC the chance to negotiate attractive investment terms prior to listing the businesses, mainly in the US. Unfortunately, some of these businesses have encountered significant problems and major questions have arisen over capital allocation, business practices and cash flows. Despite investing at what appeared to be a large discount, subsequent events have led to large falls in net asset values. Much work remains to be done here to bring about improvement but, with a substantial proportion of its market value held in the form of cash, we believe there is the potential to recover more of the value of the investment through active engagement than through selling in the market.

Allied Irish Banks operates retail and business banking franchises in Ireland and the UK. When we bought it, we recognised that it was a high risk investment that could either go up several times or go to zero. Unfortunately Ireland's woes and AIB's exposure to them appear to be worse than feared, so we have sold out.

Marfin Investment Group is a Greek holding company. Its main businesses are in food, healthcare and transport and are heavily exposed to the Greek economy. With Greece's economy continuing to go through a severe recession, all of the core businesses have struggled and their valuations have been written down sharply. The management have failed to explain their strategy and this has also hurt sentiment towards the company. In spite of this we have continued to hang on as the businesses appear to be stabilising and look well positioned should things improve.

LG Electronics is a manufacturer of consumer electronics, most notably mobile phones and TVs. Its products looked well designed and good value, and the company seemed to be building a decent brand. Unfortunately, LG missed out on the growth in smart phones and has fallen badly behind as a result. With the mobile division the largest contributor to sales, the loss of position and collapse in profitability severely dented the investment case. The holding was sold during the year.

Renhe operates a unique and highly profitable business model developing and operating underground shopping centres in Chinese cities. Over the past year, the company has continued to expand rapidly, building up a strong development pipeline for the future, and selling on some of its completed developments at high prices. In spite of solid progress, Renhe's shares have performed poorly due to concerns of a bubble in Chinese real estate. We think these concerns are overdone, with tightening measures directed at residential real estate, while commercial property looks more sensibly priced. We also take comfort from the large management ownership of the shares, the dividend and recent buybacks and added to the holding.

Aldar Properties is a state-backed property development company in Abu Dhabi. Following the financial crisis and problems in neighbouring Dubai, the property market has remained weak. Aldar was heavily indebted and while there was little doubt that the government of Abu Dhabi has both the means and the will to assist the company with its forthcoming refinancing requirements, we decided to sell out near the end of 2010 as we were concerned that the terms might well be unfavourable to minority shareholders.

Sevan Marine owns an innovative technology that allows for greater stability and improved uptime in the oil rig industry. Unfortunately, their attempts to capitalise upon this technology have led the company to excessive leverage from a base of what now looks like naive optimism. We have sold out of our holdings as any value creation from here will most likely accrue to bondholders and not equity owners.

Petrobras is the Brazilian national oil company. Following many years of exciting and favourable news flow as discoveries multiplied upon one another, the Brazilian government has changed local oil laws and altered the terms on which Petrobras will be able to exploit their reserves and potential reserves. The group's capital expenditure programme will be of a size never previously undertaken even in the oil industry and doubts relate to the rate of return that will ultimately emerge from this. We sold our remaining holdings in a group that has made the Company a good deal of money over the years.

OSX is a related company to OGX, being the shipyard that intends to build the equipment required by OGX to exploit its considerable reserves. OSX has run into a series of problems with planning permissions. Time is important for the business model, too, as a good deal of leverage is intended to be applied. Increased unpredictability of timing and funding with regard to OGX's drilling campaigns, therefore, has led to share price weakness.

Gerald Smith

Baillie Gifford & Co

13 June 2011

DISTRIBUTION OF ASSETS*

at 30 April 2011

 

				30 April 2011 %		30 April 2010 %
Equities:	United Kingdom			16.6		13.1
	Continental Europe			16.3		15.1
	North America			17.4		22.1
	Japan			5.3		2.8
	Asia Pacific			16.8		16.7
	Other Emerging Markets			17.7		20.8
				90.1		90.6
Bonds:                 United Kingdom				2.8		2.9
Overseas				4.9		4.3
Net liquid assets				2.2		2.2
Total assets (before deduction of borrowings)				100.0		100.0

* More information on geographical exposures is given in the Managers' Portfolio Review above.

THIRTY LARGEST EQUITY HOLDINGS at 30 April 2011
			2011		2010
Name	Region	Business	Value £'000	% of total assets	Value £'000
Seadrill	Continental Europe	Contract drilling services	33,461	2.7	18,804
Aggreko	United Kingdom	Temporary power units	30,298	2.5	21,773
OGX	Other Emerging Markets	Oil and gas exploration and production	24,040	2.0	46,533
Vale	Other Emerging Markets	Diversified mining group	21,014	1.7	12,321
Cetip	Other Emerging Markets	Investment services	19,412	1.6	4,675
Odontoprev	Other Emerging Markets	Health care providers and services	18,337	1.5	10,253
Petrofac	United Kingdom	Oilfield services company	17,480	1.4	13,162
Eldorado Gold	North America	Gold mining	17,316	1.4	13,271
Healthspring	North America	Health maintenance organization	16,335	1.3	12,290
National Oilwell Varco	North America	Drilling equipment manufacturer	15,958	1.3	9,975
Novozymes	Continental Europe	Enzyme producer	15,759	1.3	13,042
Dragon Oil	Other Emerging Markets	Oil and gas exploration and production	15,495	1.3	13,419
Sino Forest	North America	Forestry and paper	14,822	1.2	8,602
Samsung Heavy	Asia Pacific	Shipbuilding	14,762	1.2	-
Nikkei 225 Index Call   Options	Japan	Equity index call options	14,357	1.2	-
Naspers	Other Emerging Markets	Media company	14,211	1.2	10,530
Atlas Copco	Continental Europe	Industrial compressors and mining equipment	13,992	1.1	11,271
Digital Garage	Japan	Software	13,411	1.1	-
Kone	Continental Europe	Lifts	13,387	1.1	-
Kunlun Energy Company	Asia Pacific	Oil and gas company	13,184	1.1	10,937
Iamgold	North America	Gold mining	13,107	1.1	-
McDonalds	North America	Fast food restaurants	12,722	1.0	19,158
Taiwan Semicon   Manufacturing	Asia Pacific	Semiconductor manufacturer	12,299	1.0	10,340
Deutsche Telekom	Continental Europe	Telecommunications services	12,298	1.0	4,718
Verizon Communications	North America	Telecommunications services	12,261	1.0	-
Nestlé	Continental Europe	Food and consumer products	12,192	1.0	10,524
Solera Holdings	North America	Transactional software	12,066	1.0	12,501
Drax Group	United Kingdom	Electricity	12,016	1.0	6,355
Telstra	Asia Pacific	Telecommunications services	11,912	1.0	-
Chungwa Telecom	Asia Pacific	Fixed line telecommunications	11,834	1.0	-
			479,738	39.3	294,454

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 6 months' notice. The fee in respect of each quarter is 0.1125% of the total assets less current liabilities. The management fee is levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co. However, the class of shares in OEICs held by the Company does not attract a management fee.  The details of the management fee are as follows:

	2011 £'000		2010 £'000
Investment management fee	5,075		4,186

PRINCIPAL RISKS AND UNCERTAINTIES

As an investment trust, the Company invests in equities and makes other investments so as to secure its investment objective of capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to a variety of risks that cause short term variation in the Company's net assets and could result in either a reduction in the Company's net assets or a reduction in the profits available for dividend.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent reduction in the Company's net assets rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board reviews and agrees policies for managing these risks and the Company's Investment Manager both assesses the exposure to market risk when making individual investment decisions and monitors the overall level of market risk across the investment portfolio on an ongoing basis.

Details of the Company's investment portfolio are shown below and in note 9 in the Annual Report. Details of derivative financial instruments open at the balance sheet date are shown below.

Currency Risk

Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.

The Investment Manager monitors the Company's exposure to foreign currencies and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the currency in which a company's share price is quoted is not necessarily the one in which it earns its profits.

The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the share price of the company is quoted.

Foreign currency borrowings and forward currency contracts are used periodically to limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments. Where appropriate, they are used also to achieve the portfolio characteristics that assist the Company in meeting its investment objectives.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 30 April 2011	Investments £'000	Cash and Deposits £'000	Forward currency contracts £'000	Loans and Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	270,585	6,663	(56,665)	-	4,316	224,899
Euro	109,503	5,259	(18,462)	-	3,710	100,010
Japanese yen	65,267	441	(11,965)	-	(12)	53,731
Brazilian real	106,918	1,666	(28,012)		565	81,137
Other overseas currencies	400,081	2,318	-	-	(1,205)	401,194
Total exposure to currency risk	952,354	16,347	(115,104)	-	7,374	860,971
Sterling	240,907	2,565	115,195	(159,614)	855	199,908
	1,193,261	18,912	91	(159,614)	8,229	1,060,879

*    Includes non-monetary assets of £57,000.

At 30 April 2010	Investments £'000	Cash and Deposits £'000	Forward currency contracts £'000	Loans and Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	310,074	4,858	(49,669)	-	9,821	275,084
Euro	74,913	-	(12,963)	-	219	62,169
Japanese yen	29,546	-	(4,484)	-	536	25,598
Brazilian real	99,245	826	(23,665)		(1,302)	75,104
Other overseas currencies	301,828	7,029	-	-	651	309,508
Total exposure to currency risk	815,606	12,713	(90,781)	-	9,925	747,463
Sterling	238,397	1,736	91,426	(119,582)	(1,104)	210,873
	1,054,003	14,449	645	(119,582)	8,821	958,336

*      Includes non-monetary assets of £30,000.

Currency Risk Sensitivity

At 30 April 2011, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2010.

	2011 £'000		2010 £'000
US dollar	11,245		13,754
Euro	5,000		3,108
Japanese yen	2,687		1,280
Brazilian real	4,057		3,755
Other overseas currencies	20,060		15,476
	43,049		37,373

Interest Rate Risk

Interest rate movements may affect directly:

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

• the level of income receivable on cash deposits;

• the fair value of derivative instruments linked to interest rates;

• the fair value of the Company's fixed-rate borrowings; and

• the interest payable on any variable rate borrowings which the Company may take out.

Interest rate movements may also impact upon the market value of the Company's investments other than its fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements. The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments. The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

Movements in interest rates, to the extent that they affect the fair value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value (assuming that the Company's share price is unaffected by movements in interest rates). During the year the Company drew down a £40 million three year fixed rate bank loan. The Company also has a £40m one year floating rate bank loan and a 30 year interest rate swap for £40m, the net effect of which is that part of the cost of borrowings over the next thirty years has been locked in but the smaller element that is determined by the additional margin banks charge non-bank customers has only been fixed for a year (see below for further details).

The interest rate risk profile of the Company's financial assets and liabilities at 30 April is shown below.

Financial assets	2011			2010
	Fair value £'000	Weighted average interest rate	Weighted average period until maturity	Fair value £'000	Weighted average interest rate	Weighted average period until maturity
Fixed rate:
UK bonds	7,281	8.2%	8 years	7,147	8.3%	9 years
European bonds	1,199	15.7%	4 years	2,297	6.7%	5 years
US bonds	7,142	3.5%	2 years	3,515	12.7%	3 years
UK swap rate linked note*	4,001	7.2%	6 years	3,732	7.2%	7 years
Floating rate:
UK bonds (interest rate linked to sterling LIBOR)	7,369	1.7%	2 years	3,960	1.6%	2 years
European bonds (interest rate linked to Euro LIBOR)	4,038	4.4%	5 years	2,769	3.6%	7 years
Brazilian bonds (interest rate linked to Brazilian CPI)	18,962	10.3%	34 years	17,217	6.1%	35 years
US bonds (interest rate linked to US dollar LIBOR)	-	-	-	3,176	4.1%	28 years
UK swap rate linked note*	12,614	n/a	6 years	13,143	n/a	7 years
Fixed interest collective investment schemes:
UK fund	2,652	-	n/a	2,736	-	n/a
US dollar denominated fund	28,046	0.9%	n/a	20,590	2.9%	n/a

*  This instrument comprises a zero coupon note issued by Credit Suisse and an option on sterling interest rate swaps. The zero coupon element has a redemption value of £6.25 million (fair value - £4.0 million) and the redemption value of the interest rate swap element (fair value - £12.6 million) is based on a formula linked to thirty year sterling interest swap rates with higher amounts payable as rates rise. Prior to redemption, the value of the interest rate swap element will vary depending on several factors such as the level of swap rates and the implied volatility of interest rate swap options.

The interest rate risk profile of the Company's bank loans and debentures (at amortised cost) and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 30 April are shown below.

Interest Rate Risk Profile	2011 £'000	2010 £'000
Fixed rate - sterling	159,614	119,582

Maturity Profile	2011 Within 1 year £'000	2011 Between 1 and 5 years £'000	2011 More than 5 years £'000	2010 Within 1 year £'000	2010 Between 1 and 5 years £'000	2010 More than 5 years £'000
Repayment of loans and debentures	40,000	80,000	40,000	40,000	40,000	40,000
Interest on loans and debentures	9,100	15,029	19,125	7,746	16,800	21,675
Interest rate swap payments	1,250	5,000	30,021	1,342	5,369	33,578
	50,350	100,029	89,146	49,088	62,169	95,253

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond/swap yields as at 30 April 2011 would have increased total net assets and total return on ordinary activities by £15,255,000 (2010 - £14,867,000) and would have increased the net asset value per share (with borrowings at fair value) by 7.8p (2010 - 7.4p). A decrease of 100 basis points would have decreased total net assets and total return on ordinary activities by £12,115,000 (2010 - £12,252,000) and would have decreased net asset value per share (with borrowings at fair value) by 6.6p (2010 - 6.4p).

Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objective and investment policy.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 12 to 16 of the Annual Report. In addition, a geographical analysis of the portfolio (shown above), an analysis of the portfolio by broad industrial or commercial sector and a list of the 30 largest equity investments (shown above) are contained in the Managers' Portfolio Review section of the Annual Report. Details of derivative financial instruments open at the balance sheet date are shown below. 103.0% of the Company's net assets are invested in quoted equities (2010 - 101.8%). The sensitivity of the Company's equity investments to general movements in equity markets has been adjusted by the use of the equity derivatives instruments detailed below, with the sales of equity index futures reducing sensitivity to market movements and the purchase of equity index call options increasing it. Further details of the impact of these instruments on the portfolio are set out in the Investment Activity section of the Chairman's Statement and in the Managers' Portfolio Review. After taking into account the impact of the equity index futures and options open at the balance sheet date, a 5% increase in quoted equity valuations at 30 April 2011 would have increased total assets and total return on ordinary activities by £53,385,000 (2010 - £48,801,000). A decrease of 5% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board also sets parameters for the degree to which the Company's net assets are invested in quoted equities. The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's current borrowing facilities are detailed below and the maturity profile of its borrowings is set out above.

Borrowings falling due within one year:

	2011 £'000	2010 £'000
Bank loan	40,000	40,000

During the year the Company took out a new £40m three year fixed rate loan facility with Scotiabank Europe PLC and, on expiry, replaced its one year £40m multi-currency floating rate facility with Lloyds TSB with a similar £40m one year floating rate facility with Scotiabank Europe PLC. Both of the Scotiabank Europe PLC facilities were fully drawn down in sterling at 30 April 2011. Since March 2010, the Company has had in place a 30 year interest rate swap for £40m which locks in the rate banks charge to each other. The net effect of the floating rate facility and the interest rate swap is that part of the cost of borrowings over the next thirty years has been locked in but the smaller element that is determined by the additional margin banks charge non-bank customers has only been fixed for a year; the effective interest rate at the year end on the floating rate loan/swap is 5.1%. More details on the interest rate swap are shown below.

The main covenants relating to the loans are that total assets shall not fall below £550m and the ratio of adjusted total net assets to debt shall not exceed 3:1. There were no breaches of loan covenants during the year.

Borrowings falling due after more than one year:

	Repayment date	Nominal rate	Effective rate	2011 £'000	2010 £'000
Debenture stocks:
£40 million 11% debenture stock 2012	1/6/2012	11.0%	11.0%	40,000	40,000
£40 million 6 3/8% debenture stock 2023	1/9/2023	6.375%	6.5%	39,614	39,582
Bank loans:
Scotiabank Europe PLC	28/2/2014	3.57%	3.57%	40,000	-
				119,614	79,582

The debenture stocks are stated at amortised cost (see note 1 on page 32 of the Annual Report); the cumulative effect is to decrease the carrying amount of borrowings by £386,000 (2010 - £418,000). The debenture stocks are secured by a floating charge over the assets of the Company. Under the terms of the Debenture Agreement, total borrowings should not exceed net assets and the Company cannot undertake share buy-backs if this would result in total borrowings exceeding 66.67%.

The weighted average interest rate of the debenture stocks is 8.7% (2010 - 8.7%).

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·    where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

·    the Company's listed investments are held on its behalf by Bank of New York Mellon, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board;

·    investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily done on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager; and

·    cash is only held at banks that have been identified by the Managers as reputable and of high credit quality.

Credit Risk Exposure

The exposure to credit risk at 30 April was:

	2011 £'000	2010 £'000
Fixed interest investments	93,304	77,985
Cash and short term deposits	18,912	14,449
Debtors and prepayments	20,789	26,589
	133,005	119,023

None of the Company's financial assets are past due or impaired.

Fair value of financial assets and financial liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet with the exception of the long term borrowings which are stated at amortised cost in accordance with FRS 26. The fair values of the long term borrowings are shown below.

	2011			2010
	Nominal £'000	Book £'000	Fair £'000	Nominal £'000	Book £'000	Fair £'000
11% debenture stock 2012	40,000	40,000	43,584	40,000	40,000	46,500
6 3/8% debenture stock 2023	40,000	39,614	43,024	40,000	39,582	41,084
Long term bank loan	40,000	40,000	40,544	-	-	-
	80,000	119,614	127,152	80,000	79,582	87,584

All short term borrowings are stated at fair value.

Gains and Losses on Equity Index Futures

The following equity index futures were in position at 30 April 2011 (2010 - nil):

Description	Expiration date	Notional amount	Position	Counterparty	Fair value £'000
FTSE 100 June 2011	17/6/11	(£39,971,000)	Sale	UBS	(1,596)
Euro STOXX 50 June 2011	17/6/11	(€47,049,000)	Sale	UBS	(1,664)
S&P 500 June 2011	16/6/11	($64,502,000)	Sale	UBS	(2,142)
					(5,402)

Gains and Losses on Purchased Equity Index Options

The following purchased equity index options were in position at 30 April 2011 (2010 - nil):

Description	Number of contracts	Strike price	Expiration date	Premium paid  £'000	Fair value £'000
Nikkei 225 call	1,137	9,500	9/12/11	6,246	6,721
Nikkei 225 call	1,302	10,000	9/12/11	4,847	5,002
Nikkei 225 call	173	9,500	14/12/12	1,159	1,470
Nikkei 225 call	300	11,000	14/12/12	761	1,164
				13,013	14,357

Gains and Losses on Forward Currency Contracts

The following forward currency contracts were in position at 30 April:

At 30 April 2011 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	($94,500,000)	sterling	£58,222,000	12/5/11	1,557
Euro	(€20,760,000)	sterling	£17,886,000	12/5/11	(576)
Japanese yen	(¥1,619,000,000)	sterling	£12,132,000	12/5/11	166
Brazilian real	(R$73,490,000)	sterling	£26,956,000	19/5/11	(1,056)
					91

At 30 April 2010 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	($76,020,000)	sterling	£50,075,000	20/5/10	406
Euro	(€14,920,000)	sterling	£13,521,000	20/5/10	558
Japanese yen	(¥645,000,000)	sterling	£4,701,000	20/5/10	217
Brazilian real	(R$63,030,000)	sterling	£23,129,000	27/5/10	(536)
					645

Gains and losses on interest rate swaps

The following interest rate swap was in position at 30 April:

At 30 April 2011 Notional amount	Payments received	Payments made	Termination date	Counterparty	Fair value £'000
£40,000,000	6 months sterling LIBOR	4.2025%	19/1/2040	Royal Bank of Scotland plc	(1,243)

At 30 April 2010 Notional amount	Payments received	Payments made	Termination date	Counterparty	Fair value £'000
£40,000,000	6 months sterling LIBOR	4.2025%	19/1/2040	Royal Bank of Scotland plc	(648)

Hedge accounting has not been adopted for the Company's derivatives.

Capital Management

The capital of the Company is its share capital and reserves as set out in note 15 of the Annual Report together with its borrowings (see above). The objective of the Company is to invest internationally to achieve capital growth, which takes priority over income and dividends. The Company's investment policy is set out on page 19 of the Annual Report. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on page 22 of the Annual Report. The Company has the ability to buy back its shares (see page 24 of the Annual Report) and changes to the share capital during the year are set out in note 14 of the Annual Report. The Company does not have any externally imposed capital requirements other than the covenants on its loans and debentures which are detailed above.

Investments

As at 30 April 2011	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	1,078,016	-	-	1,078,016
Listed equity index options	14,357	-	-	14,357
Listed debt securities	17,075	20,161	50,138	87,374
Unlisted equities	-	-	7,584	7,584
Unlisted debt securities	-	-	5,930	5,930
Total financial asset investments	1,109,448	20,161	63,652	1,193,261

As at 30 April 2010	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	973,719	-	-	973,719
Listed convertible securities	2,297	-	-	2,297
Listed debt securities	13,398	18,205	43,232	74,835
Unlisted equities	-	-	2	2
Unlisted debt securities	-	-	3,150	3,150
Total financial asset investments	989,414	18,205	46,384	1,054,003

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with FRS 29 'Financial Instruments: Disclosures', the above table provides an analysis of these investments based on the fair value hierarchy described below which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 (formerly section 842 of the Income and Corporation Taxes Act 1988) could lead to the Company being subject to tax on capital gains.

The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1158 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose unnecessary compliance burdens on the Company or threaten the viability of the investment company structure. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the Reports by other third party providers are reviewed by the Managers on behalf of the Board.

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards, (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they 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 judgements and accounting estimates that are reasonable and prudent;

• state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; 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 are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section of the Annual Report confirm that, to the best of their knowledge:

• the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Directors' Report 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.

By order of the Board

JGD FERGUSON

Chairman

13 June 2011

 

INCOME STATEMENT

	For the year ended 30 April 2011				For the year ended 30 April 2010
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	94,317	94,317		-	305,723	305,723
Currency gains/(losses)	-	1,042	1,042		-	(11,670)	(11,670)
Income (note 2)	27,366	-	27,366		23,887	-	23,887
Investment management fee	(5,075)	-	(5,075)		(4,186)	-	(4,186)
Other administrative expenses	(1,172)	-	(1,172)		(1,062)	-	(1,062)
Net return before finance costs and taxation	21,119	95,359	116,478		18,639	294,053	312,692
Finance costs of borrowings	(9,374)	-	(9,374)		(7,483)	-	(7,483)
Net return on ordinary activities before taxation	11,745	95,359	107,104		11,156	294,053	305,209
Tax on ordinary activities	(1,145)	-	(1,145)		(587)	-	(587)
Net return on ordinary activities after taxation	10,600	95,359	105,959		10,569	294,053	304,622
Net return per ordinary share (note 4)*	4.06p	36.56p	40.62p		4.02p	111.99p	116.01p
Dividends per share paid and payable in respect of the year (note 5)	3.00p				3.00p

The total column of the Income Statement is the profit and loss account of the Company.

All revenue and capital items in this 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.

BALANCE SHEET

		30 April 2011		30 April 2010
		£'000		£'000
Fixed assets
Investments held at fair value through profit or loss		1,193,261		1,054,003
Current assets
Debtors		20,789		26,589
Cash and deposits		18,912		14,449
		39,701		41,038
Creditors
Amounts falling due within one year		(52,469)		(57,066)
Net current liabilities		(12,768)		(16,028)
Total assets less current liabilities		1,180,493		1,037,975
Creditors
Amounts falling due after more than one year (note 6)		(119,614)		(79,582)
Provisions for liabilities and charges
Deferred taxation		-		(57)
Total net assets		1,060,879		958,336
Capital and Reserves
Called-up share capital		13,038		13,051
Share premium		11,100		11,100
Capital redemption reserve		6,360		6,347
Capital reserve		992,780		898,228
Revenue reserve		37,601		29,610
Shareholders' funds		1,060,879		958,336
Net asset value per ordinary share		403.9p		364.1p
(after deducting borrowings at fair value)
Net asset value per ordinary share		406.7p		367.0p
(after deducting borrowings at par)
Ordinary shares in issue (note 7)		260,764,859		261,014,859

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 April 2011

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 May 2010	13,051	11,100	6,347	898,228	29,610	958,336
Net return on ordinary activities after taxation	-	-	-	95,359	10,600	105,959
Shares purchased for cancellation	(13)	-	13	(807)	-	(807)
Dividends paid during the year	-	-	-	-	(2,609)	(2,609)
Shareholders' funds at 30 April 2011	13,038	11,100	6,360	992,780	37,601	1,060,879

For the year ended 30 April 2010

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 May 2009	13,182	11,100	6,216	611,487	38,771	680,756
Net return on ordinary activities after taxation	-	-	-	294,053	10,569	304,622
Shares purchased for cancellation	(131)	-	131	(7,312)	-	(7,312)
Dividends paid during the year	-	-	-	-	(19,730)	(19,730)
Shareholders' funds at 30 April 2010	13,051	11,100	6,347	898,228	29,610	958,336

 

CASH FLOW STATEMENT
	For the year ended 30 April 2011			For the year ended 30 April 2010
	£'000	£'000		£'000	£'000
Net cash inflow from operating activities		5,270			19,921
Net cash outflow from servicing of finance		(9,461)			(6,990)
Taxation
Corporation tax paid	-			(2,332)
Overseas tax incurred	(1,188)			(1,278)
Income tax incurred	-			(35)
Total tax paid		(1,188)			(3,645)
Financial investment
Acquisitions of investments	(491,755)			(493,377)
Disposals of investments	463,417			398,939
Forward currency contracts	2,329			(6,161)
Currency losses	(733)			(3,900)
Net cash outflow from financial investment		(26,742)			(104,499)
Equity dividends paid		(2,609)			(19,730)
Net cash outflow before use of liquid resources and financing		(34,730)			(114,943)
Liquid resources
Decrease in short term deposits	-			43,924
Net cash inflow from use of liquid resources		-			43,924
Financing
Shares purchased for cancellation	(807)			(7,312)
Bank loans drawn	40,000			40,000
Net cash inflow from financing		39,193			32,688
Increase/(decrease) in cash		4,463			(38,331)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease)/ in cash in the year		4,463			(38,331)
Decrease in short term deposits		-			(43,924)
Exchange movement on short term deposits		-			(2,254)
Net cash inflow from bank loans		(40,000)			(40,000)
Other non-cash changes		(32)			(33)
Movement in net debt in the year		(35,569)			(124,542)
Net (debt)/funds at 1 May		(105,133)			19,409
Net debt at 30 April		(140,702)			(105,133)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation		116,478			312,692
Gains on investments		(94,317)			(305,723)
Currency (gains)/losses		(1,042)			11,670
Amortisation of fixed interest book cost		(988)			(2,348)
(Increase)/decrease in accrued income		(312)			3,172
(Increase)/decrease in debtors		(14,716)			40
Increase in creditors		167			418
Net cash inflow from operating activities		5,270			19,921

 

NOTES

1.	The financial information within this preliminary announcement has been extracted from the unaudited financial statements for the year to 30 April 2011 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 30 April 2010.
			2011					2010
			£'000					£'000
2.	Income
	Income from investments and interest receivable		27,134					23,842
	Other income		232					45
			27,366					23,887
3.	Recoverable VAT
	In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then, HMRC has accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. During the year ended 30 April 2009 the Company received a reimbursement of £2,902,000 in this regard together with interest thereon of £1,078,000. A case has been recently brought against HMRC to seek to recover the amounts relating to the intervening period, 1997 to 2000, together with interest on a compound basis. The Company's Auditors, PwC, have provided services in connection with this case for a fee of £35,000. Additional fees may become payable to PwC in the event of a successful outcome to the case. No amounts have been accrued in this regard. The potential recoveries of VAT and interest would be a significant multiple to the potential additional fees payable to PwC. No VAT or related interest recovery has been accrued or recognised as a contingent asset, as the outcome of the case is expected to remain uncertain for several years.
			2011					2010
4.	Net return per ordinary share
	Revenue return		4.06p					4.02p
	Capital return		36.56p					111.99p
	Total return		40.62p					116.01p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £10,600,000 (2010 - £10,569,000) and on 260,870,338 (2010 - 262,582,039) ordinary shares of 5p, being the weighted average number of ordinary shares in issue during the year. Capital return per ordinary share is based on the net capital gain for the financial year of £95,359,000 (2010 -  £294,053,000) and on 260,870,338 (2010 - 262,582,039) ordinary shares, being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
		2011		2010		2011 £'000			2010 £'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the year:
	Previous year's final (paid 6 August 2010)	0.50p		5.00p		1,305			13,182
	Interim (paid 31 January 2011)	0.50p		0.50p		1,304			1,310
	Second interim	-		2.00p		-			5,238
		1.00p		7.50p		2,609			19,730
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered.  The revenue available for distribution by way of dividend for the year is £10,600,000 (2010 - £10,569,000).

		2011		2010		2011 £'000		2010 £'000
5.	Ordinary Dividends (Ctd)
	Dividends paid and payable in respect of the financial year:
	Interim  (paid 31 January 2011)	0.50p		0.50p		1,304		1,310
	Second interim	-		2.00p		-		5,238
	Proposed final (payable 5 August 2011)	2.50p		0.50p		6,519		1,305
		3.00p		3.00p		7,823		7,853
	If approved the final dividend will be paid on 5 August 2011 to shareholders on the register at the close of business on 8 July 2011.  The ex-dividend date is 6 July 2011. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for elections for this dividend is 15 July 2011.
6.	The fair value of borrowings falling due after more than one year at 30 April 2011 was £127,152,000 (2010 - £87,584,000).
7.	In the year to 30 April 2011 the Company bought back 250,000 ordinary shares with a nominal value of £12,500 at a total cost of £807,000. At 30 April 2011 the Company had authority to buy back a further 38,876,127 ordinary shares, being 14.91% of the shares in issue at the year end.
8.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 30 April 2011.  The financial information for 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2010 accounts; their report was unqualified and it did not contain a statement under section 498(2) or (3) of the Companies Act 2006.  The statutory accounts for 2011 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

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