Annual Financial Report

RNS Number : 3596G

Monks Investment Trust PLC

28 June 2012

 



 THE MONKS INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT

Copies of the Annual Report and Financial Statements for the year ended 30 April 2012 of The Monks Investment Trust PLC have been submitted electronically to the National Storage Mechanism 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 2012 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 2012 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 2012

 

CHAIRMAN'S STATEMENT

Performance

The year to 30 April 2012 was a difficult and frustrating one: difficult because of the external environment and frustrating because, while we anticipated some of the problems that materialised, and took steps to mitigate their impact, we suffered from unexpected knock-on effects in places far from the epicentre of events. The net asset value total return, with borrowings at fair value, was minus 4.5% and the share price total return was minus 6.2% while the FTSE World Index in sterling terms returned minus 2.6%. For both our portfolio and the markets in which we invest the second half of the year was better than the first. For the first half of the year the net asset value total return was minus 9.9% and the share price total return was minus 9.8% while the comparative index returned minus 8.8%. For the second half the net asset value total return was 6.0%, the share price total return was 4.0% and the index returned 6.8%. The share price ended the Company's year at 338.5p, 7.0% lower than at the end of the previous year.  Over the five years to 30 April 2012 the net asset value total return was 19.8% and the share price total return was 20.4% while the comparative index returned 18.6%.

There were a number of notable events during the Company's year. These included political stalemate in the United States that inhibited progress on resolving that country's structural budget deficit and at one point threatened a default of the US government, a disruption to oil supplies as a result of events in Libya and the continuation of the crisis in the eurozone. It is tempting to attribute the weakness of markets to these developments, but there were quite a number of equally dramatic events, including the Japanese earthquake, tsunami and nuclear accident which disrupted industrial production around the world, in the previous twelve months, and despite this most markets rose during that period.

Monetary policy changes may explain the different response of markets to events. The ending of the second round of quantitative easing by the US Federal Reserve was followed shortly by a sharp fall in markets as the European crisis entered a new phase and the global financial system once again tottered as European banks found it hard to secure funding. Markets then stabilised and recovered some of the lost ground following the decision of the European Central Bank to offer unlimited amounts of low cost three year funding to European banks.

For sterling based investors the US equity market produced the best returns of the major markets helped by the strength of company profits, the safe haven status of the US dollar and some signs of improvement in the performance of the American economy. Unsurprisingly, most European markets fared less well. For example, the Greek market more than halved in value and there were also large falls in Italy and Spain. Many emerging markets also suffered from the withdrawal of European bank funding and the negative impact of this on their currencies. The Brazilian currency was particularly adversely affected, depreciating by nearly 15% against sterling over the year.

The Managers' Report contains more detail on the individual investments that made the greatest positive and negative contributions to performance. Of particular note are the positive contribution made by IP Group and the negative contribution made by our holdings of gold miners. The difference between the net asset value total return and that of the comparative index over the year arises largely from a lower contribution to total return from the re-investment of income. Another way of looking at this is that our portfolio did not generate sufficiently superior capital performance to offset the lower level of income generated when compared to the FTSE World Index. Our relatively high exposure to Emerging Markets and relatively low exposure to the United States contributed to this outcome.

Earnings and Dividend

Earnings per share were 5.35p compared with 4.06p last year, an increase of 31.8%. The most significant factors behind this increase were a rise in dividend income and a modest fall in total expenses. 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 3.45p, which together with the interim (0.50p) already paid, would make the total dividend for the year 3.95p, an increase of 31.7% from the 3.00p paid last year.

Long Term Borrowing

The 11% debenture stock matured on 1 June 2012 and has been repaid. This has reduced long term borrowing since the Company's year end by £40m. It was partly in anticipation of the maturity of this debenture and partly in recognition of the low level of current interest rates in an historical context that we took out additional borrowings of £80m during the previous two years. There have been no additional borrowings since then.

Investment Activity

Over the course of the year there was a small net disinvestment of £1.2m, comprising a net investment of £11.0m in equities and net sales of £12.2m of bonds. There were net purchases of equities in North America, United Kingdom and Japan and net sales elsewhere, notably in Emerging Markets.

The level of gearing is managed in various ways, including through the sale of futures and the purchase of options. This is less costly than buying and selling individual shares. In early July gearing was reduced by the sale of equity index futures. At the same time potential losses on these futures positions were capped by the purchase of call options. The purpose of these transactions was to provide some protection against a big fall in markets. The indices chosen in July were those measuring the US, eurozone and UK markets. In February the position in US futures was closed and replaced with positions in indices covering the Brazilian market and Chinese shares listed in Hong Kong in order to achieve a better match between the distribution of our investments and the hedge. In the Managers' Report on page 6 of the Annual Report there is a graph that shows the impact of hedging on the net asset value and illustrates how this has had the effect of reducing the magnitude of the decline in net asset value during periods of general market weakness.

At the year end holdings of equities amounted to 104.6% of shareholders' funds and holdings of equities and bonds together to 112.0% but when the effects of holding options and selling futures are taken into account the effective gearing was equivalent to 93% of shareholders' funds.

Discount and Buybacks

The discount (at fair value) widened to 11.6% from 9.9% 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.

During the year to 30 April 2012 £15.3m was spent on the repurchase of 4,640,000 shares. Since the power to buy back shares was first granted in 1999, 131.8m shares have been bought back and cancelled, representing 34% of the share capital at the start of that period. The Board will continue to buy back shares if suitable opportunities appear.

Outlook

Companies are generally enjoying high levels of profitability and balance sheets are strong. Interest rates are low and expected to stay low for the foreseeable future. Overall growth in the global economy is reasonable and technological breakthroughs such as the unlocking of gas and oil from shale prove that innovation can overcome supposed limitations to growth. If current levels of profitability can be sustained, shares in most markets around the world look reasonably valued, especially when compared to the prospective returns from government bonds. Corporate bonds are also priced to offer a decent premium over government bonds and cash. If we could end the list of factors likely to affect future investment returns here the outlook would appear rosy.

Unfortunately, the mirror image of the healthy corporate balance sheets can be found in the form of unsustainable public debt burdens and budget deficits not only in Europe and the United Kingdom but also in the United States. The financial system is also far from healthy in these major economies and, as we saw both in 2008 and on a smaller scale in 2011, problems in one part of the world economy tend to be rapidly transmitted through the global banking system with adverse effects even on those countries with more robust public finances, low levels of household debt and high sustainable growth rates.

By printing money and engaging in a range of unconventional policies, central banks have bought time for other participants to put their houses in order. Companies operating outside the financial sector seem to have generally used this breathing space well but many banks remain undercapitalised and overleveraged. It is far from clear that politicians will instigate necessary but unpopular reforms in Europe, Japan or the United States and, even if they do, that the public at large will accept them. So, notwithstanding the attractions of many individual investment opportunities, significant risks remain of a systemic nature. This is reflected in our lack of gearing and desire to maintain some protection against a significant fall in markets rather than in the selection of individual investments, where the focus remains on potential returns rather than perceived defensive characteristics. There is sufficient excitement in our portfolio of investments without adding gearing.

AGM

I hope shareholders will come to the Annual General Meeting, which will be held on 7 August 2012 at 11.00am at the Hotel Russell (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

15 June 2012

 

MANAGERS' PORTFOLIO REVIEW

This year we have slightly altered the way in which we present information about the geographical distribution of assets, grouping together Asian Emerging Markets with other Emerging Markets instead of with the developed markets of the Asia Pacific region excluding Japan as in previous years. We hope this gives a clear picture of exposure of the portfolio to Emerging and Developed Markets. In terms of changes made over the year there was a net reduction in our exposure to Emerging Markets as sales of equities in these countries exceeded purchases and there were also reductions in Europe and Developed Asia (including Australia). These net sales were more than offset by net purchases of equities in North America, the United Kingdom and Japan. Our already small position in bonds was reduced, mainly as a result of profit taking in our holding of the Athena Debt Opportunities Fund.

In early July 2011 we decided to hedge part of the portfolio against the rising risk of a sharp fall in markets owing to the unhealthy combination of mounting concerns about the ability of Europe's politicians to find a solution to the crisis in the eurozone, deadlock in the US Congress over the issuance of debt and the ending of support for the markets from quantitative easing in America. We did this through sales of futures contracts based on the S&P 500, FTSE 100 and Eurostoxx 50 indices, representing the US, UK and European markets respectively, in order to provide a proxy for shares in general around the world and at the same time protected ourselves against the possibility of a large rise in markets by purchasing call options on the same indices. This strategy proved effective in July and August when markets around the world suffered large declines but it did have the by-product of reducing our already relatively small effective exposure to the US further and it was not a perfect match for our portfolio as it did not include any Emerging Market indices in the hedge. For this reason we adjusted the position in February 2012 by closing the S&P 500 futures and options and replacing them with corresponding positions on the Brazilian Bovespa Index and the Hang Seng China Enterprises Index, an index made up from Chinese companies listed in Hong Kong. The hedge provides some mitigation of losses in the event of market falls at a modest cost in terms of potential upside forgone. Had it not been in place the net asset value per share would have been 1.2% lower at the year end.

The graph on page 6 of the Annual Report shows the impact of hedging on our net asset value, starting in November 2010 when we first used futures to offset gearing.

A less successful strategy was our addition to holdings of shares of gold mining companies made in September and October 2011. The gold price had been rising up to that point but the shares of gold miners had not followed suit - with funds flowing instead into exchange traded funds. We took the view that the divergence between the growing profits and cash flow of the miners and their falling share prices would ultimately be corrected as it was cheaper to buy gold reserves in the stock market than to explore for them on the ground. Instead the gap has widened as the prices of a number of the shares we bought in September have subsequently greatly underperformed the falling price of bullion.

Performance was also adversely affected by the weakness of a number of Emerging Market currencies, notably the Brazilian real, following the withdrawal of European banks from their previous role as recyclers of global savings into Emerging Markets. On a more positive note a number of our holdings produced excellent results during the year while the set-backs for Emerging Markets are likely to prove temporary given their lower levels of debt and superior growth prospects.

The ten largest positive and negative individual stock contributors to performance are described below. In aggregate the top ten positive contributions outweighed the top ten negative contributions even though for the portfolio as a whole the balance was tilted in the other direction. Two of the largest positive contributors to performance, Aggreko and Seadrill, were also in the top ten positive contributors last year. One of this year's largest negative contributors, Renhe, was also on the list of largest negative contributors for the previous year and another of the largest negative contributors, Digital Garage, was on the list of last year's largest positive contributors.

Largest positive contributors to performance:

IP Group is a venture fund listed on the London Stock Exchange. It has partnerships with departments of twelve leading United Kingdom universities to commercialise discoveries made by their researchers. A notable recent success has been Oxford Nanopore, a currently unlisted company that has developed a highly promising new approach to the analysis of DNA that should dramatically reduce the cost of gene sequencing. The share price has reacted favourably to announcements made by Oxford Nanopore but we believe that it still represents excellent value given the potential of both Oxford Nanopore and its broader portfolio of investments.

Seadrill is the owner of one of the world's largest fleets of deepwater drilling rigs and vessels and has more of the most modern types of equipment than any other company. Seadrill has benefited from the global trend towards drilling for oil and gas in ever deeper water and more difficult environments as sources of more accessible oil are exhausted. It has also benefited from the greater focus on safety following the Gulf of Mexico disaster as oil companies have been willing to pay more to use the most modern rigs.

Aggreko is a leading electrical generator and cooling equipment rental company. It operates in more than 100 countries around the world and supplies temporary power generating equipment to a wide range of different customers including utility companies and organisers of sporting events. In aggregate, demand for temporary generating equipment displays reasonably steady growth but it is irregular at the level of individual customers and locations. Aggreko's great skill has been in managing its inventory of equipment, predicting changes in demand ahead of time and responding flexibly to unexpected events. As a result it has exceeded expectations for sales and earnings for several years in succession.

O'Reilly Automotive sells car parts, tools and accessories through a network of stores throughout the United States. Demand for replacement parts and tools from both professional mechanics and owners who carry out their own repairs is closely related to the average age of cars and this has been rising. Competition from franchised dealers has also diminished following the pruning of sales networks in the wake of the 2008 financial crisis and the company has also successfully integrated an earlier acquisition in California.

TJX sells discounted clothing and home furnishings. It includes the T.K.Maxx and HomeSense chains in Europe as well as T.J.Maxx, Marshalls and HomeGoods in the United States. Its offering of discontinued designer label products appeals to cost conscious shoppers and it has been able to expand during what has been a difficult time for many other retailers.

Samsung Electronics is well-known as one of the world's leading consumer electronics companies but it is also the world's largest manufacturer of some of the most important types of computer memory chips and a significant manufacturer of microprocessor logic chips. It is a key supplier to Apple as well as a competitor to it in mobile phones and tablets. Its significant investment in research and development, manufacturing capacity and brand advertising make it a formidable competitor and should help to keep it at the forefront of developments in the industry.

The Biotech Growth Trust is an investment trust that invests in emerging biotechnology companies, most of which are listed in the United States. The biotechnology sector returned to favour following a period of poor performance triggered by a combination of the confounding of previous unrealistic expectations and concerns about the impact of healthcare reforms in the United States. The development of new tools and techniques and greater understanding of the genetic basis of many disorders suggest that the best period for biotechnology companies may be ahead of us rather than in the past and valuations are now much more reasonable than during earlier periods of hype and excessive valuations. We also own a number of direct holdings in this area.

Credicorp is a Peruvian financial conglomerate. It owns the largest Peruvian bank, Banco de Credito del Peru. It also has insurance and brokerage businesses in Peru and has recently announced an acquisition that will expand its operations into Chile. It can trace its origins back to 1889 and has a reputation as a well managed and prudent institution. We see considerable potential for loan growth in Peru and we used the opportunity provided by the election of a radical president to take a holding at a depressed price. Post the election the business environment proved to be more favourable than many feared and the share price rose.

EOG Resources is an oil and gas company that pioneered the production of gas from shale formations using the techniques of horizontal drilling and hydraulic fracturing ("fracking") in the United States. Since then it has successfully applied the same approach to the production of oil from similar shale formations and its production of oil has been rising rapidly. We had sold out of EOG Resources several years ago as it and others had been so successful in developing new gas fields in the United States that the gas price was in danger of collapsing. We bought it back in October 2011 when the share price fell back sharply to its 2005 level despite a significant increase in its reserves. The shares were subsequently sold at a higher price.

Quanta Computer is the world's largest manufacturer of notebook, or laptop, computers. It makes notebooks for many leading brands, including Apple. The notebook market has suffered from the explosive growth of tablet computers, notably Apple's iPad, which is not made by Quanta. Concerns about the decline of the notebook business created an attractive opportunity for us to take a holding in a well run and adaptable Taiwanese company that has been developing new products rather than standing still in the face of this development. It has established a strong position in bespoke servers for use in cloud computing applications and also now manufactures Amazon's Kindle tablet. Its notebook sales are also proving more resilient than many had feared and these factors contributed to a rise in the share price.

Largest negative contributors to performance:

Sino-Forest is a Chinese forestry company listed in Canada. The shares collapsed in value following a report from a short seller that publishes reports under the name Muddy Waters. The specific allegations in the initial Muddy Waters report related to overstatement of the value of the company's forestry assets in China and irregularities in its relationships with intermediaries, but did not back up the headline claims that the entire company was a fraud. An investigation ordered by the company's independent directors failed to get to the bottom of the murky world of forestry rights and transfers in China and establish the truth of the matter. This in turn led to the company being unable to file accounts on time and so breaching covenants on its bonds. The shares have been suspended from trading and the value of the holding has been written off in its entirety as it is unlikely that the equity holders will receive anything in a liquidation involving the fire sale of assets.

Research in Motion is the maker of the Blackberry smart phones popular with both Chief Executives and urban rioters. It has been losing market share to Apple's iPhone and Android based smart phones produced by companies such as Samsung Electronics in North America but it has continued to grow rapidly in many other markets, including some of the most populous and rapidly growing countries of the world. Our investment case was premised on this growth outside North America and the United Kingdom continuing to be driven by a combination of network effects from the Blackberry messenger system, superior battery life and reception and low handset cost in markets where these are not subsidised by network operators. The company seems to have badly misjudged the introduction of a new operating system and failed to introduce features to attract and retain customers in a world dominated by Apple and Android. The shares were sold during the year.

Aixtron is a German manufacturer of equipment which is mainly used to make light emitting diodes (LEDs). LEDs are used in a variety of products but the most important are televisions, computer displays and low-energy lighting. Demand for low-energy lighting in particular should result in a demand for a large amount of new LED manufacturing capacity. China has ambitious plans to introduce low-energy lighting and this resulted in a big rise in demand for Aixtron. This came to a sudden stop when it became clear that Chinese buyers had more machines than they had trained operators and progress in other markets has been limited by the high cost of low energy bulbs. While these are likely to be temporary factors, as changes are driven by legislation, we are concerned that the management has blamed all of the shortfall in demand on these factors while it appears that competition is also a factor, both from their main established competitor and from potential new entrants. As a result we sold the holding.

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 Twitter Inc, the US unquoted parent company. The share price is influenced by changing perceptions of the value of the stake in Twitter and tends to be somewhat volatile. In the previous year it was one of the largest positive contributors to performance but it reversed almost all of those gains for a sterling investor in the last year, not helped by raising capital without giving a convincing reason. It remains a holding.

Dart Energy is an Australian oil and gas company that extracts gas from coal seams. It was spun out of Arrow Energy when this was taken over by Shell and Petrochina and had been for a while a successful investment. They have possibly over expanded by acquiring coal bed methane assets in countries with widely differing regulatory regimes thus stretching management resources and their operations in China have been disappointing. The final straw was a change in the regulatory environment in Australia that will raise costs substantially and at that point we sold the holding.

Eldorado Gold is a Canadian gold mining company with operations in a number of countries the most important of which are in China and Turkey. In common with our other gold mining holdings, it has massively underperformed the price of gold, failing to rise with it to its record high in September 2011 and then falling by far more than the price of gold in the subsequent correction. The size of the holding increased when it acquired one of our other gold mining holdings, European Goldfields, largely for shares and has been reduced since the year end.

Samsung Heavy Industries is a leading Korean shipbuilder with a particularly strong position in sophisticated drill ships needed for oil exploration in extremely deep water. It is also one of the leading producers of very large container ships. Demand in both of these segments has been strong, in line with our investment case, but management fear that their competitive advantages are eroding rapidly and this is leading to questionable attempts to diversify the business.  The holding was sold during the year.

Renhe develops and operates underground shopping centres in Chinese cities. It has a unique business model that involves building defence shelters that double up as shopping malls. This enables Chinese cities to fulfil government requirements for bomb shelters while giving Renhe prime sites for only the cost of construction. The company sells the units in these centres to wealthy private investors who are attracted to the rental yields available and this provides financing for further expansion. These investors are feeling the effects of the slowdown in the Chinese property market and some of them are finding it difficult to pay for their purchases. Renhe guarantees the loans made to purchase the units and there is a risk of downward spiral which could threaten the viability of the company. We therefore sold the holding.

IAM Gold is a Canadian gold mining company with assets in a number of regions including West Africa and the Americas. In addition to experiencing the same underperformance of the gold price exhibited by our other gold mining holdings it has also fallen short of expectations operationally and has indicated that it is looking to make a major acquisition. In the light of these operational failings and questionable strategy the holding was sold.

Jain Irrigation Systems is an Indian company that sells micro-irrigation systems to the country's farmers. Indian agriculture is very inefficient, farmers can make significant productivity gains by installing micro-irrigation systems and there are government subsidies to encourage its adoption. Jain has found it necessary to provide credit to its customers as subsidies are slow in coming and the benefits to farmers' cash flow only materialise at the time of the next harvest. This has created a working capital problem for the company. The bulk of the holding had been sold at the year end leaving only an insignificant rump.

Gerald Smith

Baillie Gifford & Co

15 June 2012

DISTRIBUTION OF ASSETS*

at 30 April 2012

 

		At 30 April 2012			At 30 April 2011
		Total Assets %	Effective Exposure* %		Total Assets %	Effective Exposure* %
Equities:	North America	21.2	25.4		17.4	14.5
	United Kingdom	24.6	21.6		16.6	13.5
	Emerging Markets	23.1	19.2		31.5	32.4
	Developed Asia	1.5	1.8		3.0	3.0
	Continental Europe	13.4	8.8		16.3	13.1
	Japan	6.4	11.4		5.3	13.4
		90.2	88.2		90.1	89.9
Bonds:		6.3	7.6		7.7	7.8
Net liquid assets		3.5	4.2		2.2	2.3
		100.0	100.0		100.0	100.0

* The effective exposure takes into account the exposure of derivative holdings which may differ substantially from their market value. The Trust's derivative holdings include sales of index futures and purchases of index call options.

THIRTY LARGEST EQUITY HOLDINGS at 30 April 2012
			2012		2011
Name	Region	Business	Value £'000	% of total assets	Value £'000
IP Group	United Kingdom	Venture fund	34,741	3.0	-
Aggreko	United Kingdom	Temporary power units	31,849	2.8	30,298
Seadrill	Continental Europe	Contract drilling services	29,597	2.6	33,461
Eldorado Gold	North America	Gold mining	22,916	2.0	17,316
Odontoprev	Emerging Markets	Health care providers and services	18,935	1.6	18,337
Samsung Electronics	Emerging Markets	Electronic goods	17,492	1.5	-
Petrofac	United Kingdom	Oilfield services company	16,528	1.4	17,480
The Biotech Growth Trust	United Kingdom	Investment trust	16,181	1.4	11,195
Quanta Computer	Emerging Markets	Electronic equipment	15,517	1.4	7,298
Mercadolibre	Emerging Markets	Online trading	15,463	1.3	5,386
TJX	North America	Clothing store	15,360	1.3	9,608
McDonald's	North America	Fast food restaurants	15,117	1.3	12,722
O'Reilly Automotive	North America	Auto parts supplier	15,086	1.3	9,043
Credicorp	Emerging Markets	Banking	15,078	1.3	10,826
Naspers	Emerging Markets	Media company	14,696	1.3	14,211
BIM Birlesik Magazalar	Emerging Markets	Discount food and consumer goods	14,346	1.2	11,645
MMX	Emerging Markets	Port royalties	14,290	1.2	-
Dragon Oil	Emerging Markets	Oil and gas exploration and production	13,905	1.2	15,495
Genus	United Kingdom	Agricultural services	13,897	1.2	9,867
Yingde Gases Group	Emerging Markets	Industrial gases	13,589	1.2	-
Harley-Davidson	North America	Motorcycle manufacturer	13,578	1.2	-
Kone	Continental Europe	Lifts	13,561	1.2	13,387
Kunlun Energy Company	Emerging Markets	Oil and gas company	13,461	1.2	13,184
National Oilwell Varco	North America	Drilling equipment manufacturer	13,460	1.2	15,958
Vale	Emerging Markets	Diversified mining group	13,397	1.2	21,014
IHS	North America	Information services	12,812	1.1	-
Seek	Developed Asia	Online recruitment	12,678	1.1	-
Drax Group	United Kingdom	Electricity	12,487	1.1	12,016
Doric Nimrod Air Two	United Kingdom	Aircraft leasing	12,480	1.1	-
YOOX	Continental Europe	Online apparel sales	12,444	1.1	7,962
			494,941	43.0	317,709

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:

	2012 £'000		2011 £'000
Investment management fee	5,087		5,075

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 2012	Investments £'000	Cash and Deposits £'000	Forward currency contracts £'000	Loans and Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	256,812	10,080	(47,596)	-	(10,821)	208,475
Euro	93,634	18,154	(21,709)	-	3,075	93,154
Japanese yen	72,360	-	(14,241)	-	923	59,042
Brazilian real	87,004	5,159	(20,204)	-	9,030	80,989
Other overseas currencies	274,171	217	-	-	2,333	276,721
Total exposure to currency risk	783,981	33,610	(103,750)	-	4,540	718,381
Sterling	324,899	5,909	106,836	(159,647)	(6,659)	271,338
	1,108,880	39,519	3,086	(159,647)	(2,119)	989,719

*    Includes non-monetary assets of £43,000.

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.

Currency Risk Sensitivity

At 30 April 2012, 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 2011.

	2012 £'000		2011 £'000
US dollar	10,424		11,245
Euro	4,658		5,000
Japanese yen	2,952		2,687
Brazilian real	4,049		4,057
Other overseas currencies	13,836		20,060
	35,919		43,049

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). The Company has a £40m 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	2012			2011
	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	1,194	8.5%	15 years	7,281	8.2%	8 years
European bonds	10,641	12.6%	5 years	1,199	15.7%	4 years
US bonds	11,407†	0.4%	3 years	7,142	3.5%	2 years
UK swap rate linked note*	4,291	7.2%	5 years	4,001	7.2%	6 years
Floating rate:
UK bonds (interest rate linked to sterling LIBOR)	-	-	-	7,369	1.7%	2 years
European bonds (interest rate linked to Euro LIBOR)	5,272	21.4%	3 years	4,038	4.4%	5 years
Brazilian bonds (interest rate linked to Brazilian CPI)	20,211	9.2%	33 years	18,962	10.3%	34 years
UK swap rate linked note*	10,124	n/a	5 years	12,614	n/a	6 years
Fixed interest collective investment schemes:
UK fund	-	-	-	2,652	-	n/a
US dollar denominated funds	21,420	5.1%	n/a	28,046	0.9%	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 £6.25m (fair value - £4.3m) and the redemption value of the interest rate swap element (fair value - £10.1m) 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.

†  Represents a convertible security which has been classified as an equity holding.

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	2012 £'000	2011 £'000
Fixed rate - sterling	159,647	159,614

Maturity Profile	2012 Within 1 year £'000	2012 Between 1 and 5 years £'000	2012 More than 5 years £'000	2011 Within 1 year £'000	2011 Between 1 and 5 years £'000	2011 More than 5 years £'000
Repayment of loans and debentures	80,000	40,000	40,000	40,000	80,000	40,000
Interest on loans and debentures	6,914	11,385	16,575	9,100	15,029	19,125
Interest rate swap payments	927	3,707	21,330	1,250	5,000	30,021
	87,841	55,092	77,905	50,350	100,029	89,146

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond/swap yields as at 30 April 2012 would have increased total net assets and total return on ordinary activities by £17,636,000 (2011 - £15,255,000) and would have increased the net asset value per share (with borrowings at fair value) by 8.7p (2011 - 7.8p). A decrease of 100 basis points would have decreased total net assets and total return on ordinary activities by £10,256,000 (2011 - £12,115,000) and would have decreased net asset value per share (with borrowings at fair value) by 5.8p (2011 - 6.6p).

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. 103.7% of the Company's net assets are invested in listed equities (2011 - 103.0%). 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 listed equity valuations at 30 April 2012 would have increased total assets and total return on ordinary activities by £41,777,000 (2011 - £53,385,000). 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:

	2012 £'000	2011 £'000
Bank loan	40,000	40,000
11% debenture stock 2012	40,000	-
	80,000	40,000

At 30 April 2012 the Company had a £40m three year fixed rate loan facility and a £40m one year floating rate facility, both with Scotiabank Europe PLC. Both of the Scotiabank Europe PLC facilities were fully drawn down in sterling at 30 April 2012. 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 4.8%. 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	2012 £'000	2011 £'000
Debenture stocks:
£40 million 11% debenture stock 2012	1/6/2012	11.0%	11.0%	-	40,000
£40 million 6 3/8% debenture stock 2023	1/9/2023	6.375%	6.5%	39,647	39,614
Bank loans:
Scotiabank Europe PLC	28/2/2014	3.57%	3.57%	40,000	40,000
				79,647	119,614

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 £353,000 (2011 - £386,000). 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% (2011 - 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:

	2012 £'000	2011 £'000
Fixed interest investments	73,153	93,304
Cash and short term deposits	39,519	18,912
Debtors and prepayments	37,107	20,789
	149,779	133,005

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 Company's borrowings are shown below.

	2012			2011
	Nominal value £'000	Book value £'000	Fair value £'000	Nominal value £'000	Book value £'000	Fair value £'000
11% debenture stock 2012	40,000	40,000	41,008	40,000	40,000	43,584
6 3/8% debenture stock 2023	40,000	39,647	46,732	40,000	39,614	43,024
Short term bank loan	40,000	40,000	40,000	40,000	40,000	40,000
Long term bank loan	40,000	40,000	41,181	40,000	40,000	40,544
	160,000	159,647	168,921	160,000	159,614	167,152

Gains and Losses on Equity Index Futures Sales

The following equity index futures sales were in position at 30 April:

At 30 April 2012 Description	Expiration date	Notional amount	Position	Counterparty	Fair value £'000
FTSE 100 June 2012	15/6/12	(£115,996,970)	Sale	UBS	1,754
Euro STOXX 50 June 2012	15/6/12	(€93,634,038)	Sale	UBS	6,814
Brazilian Bovespa June 2012	15/6/12	(R$58,477,963)	Sale	UBS	943
Hang Seng China Enterprises May 2012	30/5/12	(HK$58,532,823)	Sale	UBS	(882)
					8,629

At 30 April 2011 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:

At 30 April 2012 Description	Number of contracts	Strike price	Expiration date	Premium paid  £'000	Fair value £'000
Nikkei 225 call	907	9,500	13/12/12	4,048	4,093
Nikkei 225 call	530	10,000	13/12/12	1,381	1,410
Nikkei 225 call	300	11,000	13/12/12	761	266
FTSE 100 call	1,300	5,500	21/12/12	4,734	5,512
Euro STOXX 50 call	2,900	2,500	21/12/12	4,272	1,562
Brazilian Bovespa call	2,700	70,000	12/12/12	4,581	1,304
Hang Seng China Enterprises call	1,350	12,000	28/12/12	5,030	2,175
				24,807	16,322

At 30 April 2011 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	13/12/12	1,159	1,470
Nikkei 225 call	300	11,000	13/12/12	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 2012 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	($77,280,000)	sterling	£48,850,000	17/5/12	1,254
Euro	(€26,630,000)	sterling	£22,300,000	17/5/12	591
Japanese yen	(¥1,846,000,000)	sterling	£14,324,000	17/5/12	82
Brazilian real	(R$62,360,000)	sterling	£21,363,000	17/5/12	1,159
					3,086

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

Gains and losses on interest rate swaps

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

At 30 April 2012 Notional amount	Payments received	Payments made	Termination date	Counterparty	Fair value £'000
£40,000,000	6 months sterling LIBOR	3.71%	20/1/2040	Royal Bank of Scotland plc	(3,994)

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%	20/1/2040	Royal Bank of Scotland plc	(1,243)

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

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 2012	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	1,007,796	2,076	-	1,009,872
Listed equity index options	16,322	-	-	16,322
Listed debt securities	10,133	21,913	34,927	66,973
Unlisted equities	-	-	9,533	9,533
Unlisted debt securities	-	-	6,180	6,180
Total financial asset investments	1,034,251	23,989	50,640	1,108,880
Comprising:
Fixed asset investments	1,023,698	23,989	50,640	1,098,327
Current asset investments	10,553	-	-	10,553
	1,034,251	23,989	50,640	1,108,880

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

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 tables provide 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 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 Managers have 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. 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

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 prepared 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 net return 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 net return 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

15 June 2012

 

INCOME STATEMENT

	For the year ended 30 April 2012			For the year ended 30 April 2011
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments	-	(61,063)	(61,063)	-	94,317	94,317
Currency (losses)/gains	-	(890)	(890)	-	1,042	1,042
Income (note 2)	31,424	-	31,424	27,366	-	27,366
Investment management fee	(5,087)	-	(5,087)	(5,075)	-	(5,075)
Other administrative expenses	(1,013)	-	(1,013)	(1,172)	-	(1,172)
Net return before finance costs and taxation	25,324	(61,953)	(36,629)	21,119	95,359	116,478
Finance costs of borrowings	(10,434)	-	(10,434)	(9,374)	-	(9,374)
Net return on ordinary activities before taxation	14,890	(61,953)	(47,063)	11,745	95,359	107,104
Tax on ordinary activities	(1,001)	-	(1,001)	(1,145)	-	(1,145)
Net return on ordinary activities after taxation	13,889	(61,953)	(48,064)	10,600	95,359	105,959
Net return per ordinary share (note 3)*	5.35p	(23.86p)	(18.51p)	4.06p	36.56p	40.62p
Dividends per share paid and payable in respect of the year (note 4)	3.95p			3.00p

The total column of this Income Statement represents 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 2012		30 April 2011
		£'000		£'000
Fixed assets
Investments held at fair value through profit or loss		1,098,327		1,193,261
Current assets
Debtors		37,107		20,789
Investments held at fair value through profit or loss		10,553		-
Cash and deposits		39,519		18,912
		87,179		39,701
Creditors
Amounts falling due within one year (note 5)		(116,140)		(52,469)
Net current liabilities		(28,961)		(12,768)
Total assets less current liabilities		1,069,366		1,180,493
Creditors
Amounts falling due after more than one year (note 5)		(79,647)		(119,614)
Total net assets		989,719		1,060,879
Capital and Reserves
Called up share capital		12,806		13,038
Share premium		11,100		11,100
Capital redemption reserve		6,592		6,360
Capital reserve		915,546		992,780
Revenue reserve		43,675		37,601
Shareholders' funds		989,719		1,060,879
Net asset value per ordinary share (after deducting borrowings at fair value)		382.8p		403.9p
Net asset value per ordinary share (after deducting borrowings at par)		386.3p		406.7p
Ordinary shares in issue (note 6)		256,124,859		260,764,859

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 April 2012

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 May 2011	13,038	11,100	6,360	992,780	37,601	1,060,879
Net return on ordinary activities after taxation	-	-	-	(61,953)	13,889	(48,064)
Shares purchased for cancellation	(232)	-	232	(15,281)	-	(15,281)
Dividends paid during the year	-	-	-	-	(7,815)	(7,815)
Shareholders' funds at 30 April 2012	12,806	11,100	6,592	915,546	43,675	989,719

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 2012		For the year ended 30 April 2011
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities		24,825		5,270
Servicing of finance
Interest paid	(10,498)		(9,461)
Net cash outflow from servicing of finance		(10,498)		(9,461)
Taxation
Overseas tax incurred	(972)		(1,188)
Total tax paid		(972)		(1,188)
Financial investment
Acquisitions of investments	(448,147)		(491,755)
Disposals of investments	477,577		463,417
Forward currency contracts	(1,518)		2,329
Net cash inflow/(outflow)  from financial investment		27,912		(26,009)
Equity dividends paid		(7,815)		(2,609)
Net cash inflow/(outflow) before financing		33,452		(33,997)
Financing
Shares purchased for cancellation	(10,478)		(807)
Bank loans drawn	-		40,000
Net cash (outflow)/inflow from financing		(10,478)		39,193
Increase in cash		22,974		5,196
Reconciliation of net cash flow to movement in net debt
Increase in cash in the year		22,974		5,196
Translation difference		(2,367)		(733)
Net cash inflow from bank loans		-		(40,000)
Other non-cash changes		(33)		(32)
Movement in net debt in the year		20,574		(35,569)
Net debt at 1 May		(140,702)		(105,133)
Net debt at 30 April		(120,128)		(140,702)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation		(36,629)		116,478
Losses/(gains) on investments		61,063		(94,317)
Currency losses/(gains)		890		(1,042)
Amortisation of fixed interest book cost		(986)		(988)
Decrease/(increase) in accrued income		398		(312)
Decrease/(increase) in debtors		175		(14,716)
(Decrease)/increase in creditors		(86)		167
Net cash inflow from operating activities		24,825		5,270

 

NOTES

1.	The financial information within this preliminary announcement has been extracted from the unaudited financial statements for the year to 30 April 2012 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 30 April 2011.
			2012					2011
			£'000					£'000
2.	Income
	Income from investments and interest receivable		31,415					27,134
	Other income		9					232
			31,424					27,366
			2012					2011
3.	Net return per ordinary share
	Revenue return		5.35p					4.06p
	Capital return		(23.86p)					36.56p
	Total return		(18.51p)					40.62p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £13,889,000 (2011 - £10,600,000) and on 259,692,291 (2011 - 260,870,338) 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 loss for the financial year of £61,953,000 (2011 - gain of £95,359,000) and on 259,692,291 (2011 - 260,870,338) 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.
		2012		2011		2012 £'000			2011 £'000
4.	Ordinary Dividends
	Amounts recognised as distributions in the year:
	Previous year's final (paid 5 August 2011)	2.50p		0.50p		6,519			1,305
	Interim  (paid 30 January 2012)	0.50p		0.50p		1,296			1,304
		3.00p		1.00p		7,815			2,609
	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 £13,889,000 (2011 - £10,600,000).

		2012		2011		2012 £'000		2011 £'000
4.	Ordinary Dividends (Ctd)
	Dividends paid and payable in respect of the financial year:
	Interim  (paid 30 January 2012)	0.50p		0.50p		1,296		1,304
	Proposed final (payable 13 August 2012)	3.45p		2.50p		8,836		6,519
		3.95p		3.00p		10,132		7,823
	If approved the recommended final dividend will be paid on 13 August 2012 to shareholders on the register at the close of business on 13 July 2012.  The ex-dividend date is 11 July 2012. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for elections for this dividend is 23 July 2012.
5.	At 30 April 2012, the Company's bank loans comprised a £40m loan drawn down under a one year floating rate loan facility and a £40m three year fixed rate loan repayable in February 2014. The Company's debentures comprise a £40m 11% stock, repaid on 1 June 2012, and a £40m 6 3/8% stock repayable in 2023. The fair value of borrowings at 30 April 2012 was £168.9m (30 April 2011 - £167.2m).
6.	In the year to 30 April 2012 the Company bought back 4,640,000 ordinary shares with a nominal value of £232,000 at a total cost of £15,281,000. At 30 April 2012 the Company had authority to buy back a further 34,448,652 ordinary shares, being 13.4% of the shares in issue at the year end.
7.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 30 April 2012.  The financial information for 2011 is derived from the statutory accounts for 2011 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2011 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 2012 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.
8.	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.

- ends -

 

END

 

 

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