Interim Results
Schroder Income Growth Fund PLC
30 April 2008
Schroder Income Growth Fund plc
Half-Yearly Report 29 February 2008
Investment Objective
The Company's principal investment objectives are to provide real growth of
income, being growth of income in excess of the rate of inflation, and capital
growth as a consequence of the rising income.
Directors
Sir Paul Judge (Chairman)
Peregrine Banbury
Ian Barby
Keith Niven
Peter Readman
Advisers
Investment Manager Auditors
Schroder Investment Management Limited Deloitte & Touche LLP
31 Gresham Street Stonecutter Court
London EC2V 7QA 1 Stonecutter Street
London EC4A 4GTR
Secretary and Registered Office
31 Gresham Street Bankers
London EC2V 7QA Schroder & Co. Limited
Telephone: 020 7658 6501 31 Gresham Street
London EC2V 7QA
Registrar
Equiniti Limited Solicitors
PO Box 28448 Slaughter and May
Finance House One Bunhill Row
Orchard Brae London EC1Y 8YY
Edinburgh EH4 1WQ
Stockbrokers
Shareholder Helpline Landsbanki Securities (UK) Limited
0871 384 2451* Beaufort House
www.shareview.co.uk 15 St Botolph Street
London EC3A 7QR
*Calls to this number are charged at 8p per minute from a BT landline.
Other telephone providers' costs may vary.
Custodian
JP Morgan Chase
1 Chaseside
Bournemouth
Dorset BH7 7DB
Financial Highlights
29 February 31 August 2007 % Change
2008
Net asset value ('NAV') per ordinary share 199.88p 235.71p (15.2)
Share price 181.00p 212.50p (14.8)
Share price discount 9.4% 9.8%
Shareholders' funds (£'000) 137,291 168,975 (18.8)
Shares in issue ('000) 68,688 71,687 (4.4)
Six months Six months ended
ended
29 February 28 February 2007 % Change
2008
Revenue return per ordinary share 2.74p 2.03p 35.0
Dividends per share declared in respect of the period 3.20p 3.00p 6.7
Total return per ordinary share (31.96p) 14.62p
NAV total return* (12.4%) 7.7%
FTSE Actuaries All-Share Total Return Index* (6.6%) 7.4%
FTSE Actuaries 350 Higher Yield Total Return Index* (12.0%) 5.1%
Share price total return* (12.7%) 8.1%
*Sources: Fundamental Data, Datastream.
Ten Largest Investments
As at 29 February 2008
Market Percentage of
Value of
Holding Shareholders'
Company and Activity £'000 Funds
Royal Dutch Shell 'B' 13,046 9.50
Integrated oil company
BP 8,157 5.94
Integrated oil company
GlaxoSmithKline 7,191 5.24
Global pharmaceutical company
HSBC 6,490 4.73
Banking and financial services group
Vodafone 6,063 4.42
Global mobile telephone provider
Astrazeneca 5,657 4.12
Global pharmaceutical company
Lloyds TSB 5,497 4.00
Banking and financial services group
Rexam 5,303 3.86
Consumer packaging group
Aviva 4,786 3.49
International insurance and financial services group
National Grid 4,623 3.37
Operator and developer of electricity and gas networks
Total 66,813 48.67
At 31 August 2007, the ten largest investments represented 45.95% of
shareholders' funds.
Chairman's Statement
Investment Performance
During the six month period ended 29 February 2008, the Company earned revenue
of 2.74 pence per share compared with 2.03 pence per share earned in the six
months ended 28 February 2007.
During the period, net assets per share decreased by 15.2%, dropping to 199.9
pence at the period end. As a result, the Company had a negative net asset total
return of 12.4% (source: Fundamental Data), compared to a negative total return
of 6.6% for the FTSE Actuaries All-Share Index (source: Schroders and
Fundamental Data) and a negative total return of 12.0% for the FTSE Actuaries
350 Higher Yield Index over the same period (source: Schroders and Datastream).
The key underlying contributors to the Company's performance during the period
are discussed in the Investment Manager's Review.
The share price total return for the six months under review was a negative
12.7%. The share price discount to net asset value narrowed during the period,
falling from 9.8% at 31 August 2007 to 9.4% at 29 February 2008. Since the
period end, the discount has widened to 10.9% as at 25 April 2008.
Dividends
The Company paid a first interim dividend for the year ending 31 August 2008 of
1.6 pence per share on 31 January 2008. The Board has since declared the payment
of a second interim dividend for the year of 1.6 pence per share, which will be
paid on 30 April 2008 to shareholders who were on the register at the close of
business on 4 April 2008. This compares with first and second interim dividends
of 1.5 pence per ordinary share for last year, an increase of 6.7% on the
previous year's first and second interim dividends.
Share Purchases
The Company has continued to pursue its share buy-back programme during the
period under review, purchasing a total of 2,999,000 ordinary shares for
cancellation at a cost of £5,803,065. Your Board will continue the buy-back
programme as a way of managing the volatility of the discount.
VAT on Management Fees
As the result of a legal action brought against HM Revenue & Customs the
European Court of Justice has recently ruled that investment management fees
paid to investment managers by investment trust companies should be exempt from
VAT, thereby bringing them into line with unit trusts, open ended investment
companies and similar investment funds.
New UK legislation is expected to be introduced specifically exempting UK
investment trusts from paying VAT on management fees and allowing the Company to
reclaim VAT previously paid to its Investment Manager from 2001 onwards. The
recent Conde Nast ruling has further introduced the possibility of reclaims
extending to the period from the Company's inception in March 1995 to 1996. The
interim period from 1996 to 2001 has however yet to be tested. The potential for
the recovery of interest on reclaimed amounts is presently uncertain.
As yet we have been unable fully to quantify the likely impact on the Company
but your Board will continue to monitor the situation to achieve a successful
outcome.
Electronic Communications
At the Annual General Meeting held in December, revised Articles of Association
were adopted by the Company. These allow the Company to send certain information
relating to it (for example notices and accounts) by electronic means or by
placing this information on a website. Shareholders will receive a letter with
the printed Half-Yearly Report, offering them three options:
1. to view shareholder communications on the Company's website; or
2. to have notifications sent by email by registering online at
www.shareview.co.uk; or
3. to continue to receive hard copies of shareholder communications by post. To
receive shareholder communications in this way, you must complete and return the
form by 5 p.m. on 31 May 2008.
We believe that this approach to communication with shareholders will help to
reduce the cost of administration.
Sir Paul Judge
Chairman
30 April 2008
Investment Manager's Review
In the six months to 29 February 2008, the Company's net asset value had a
negative total return of 12.4%. This compares to a negative total return from
the FTSE Actuaries All-Share Index of 6.6% (source: Schroders and Fundamental
Data) and a negative total return from the FTSE Actuaries 350 Higher Yield Index
of 12.0% (source: Schroders and Datastream).
Market Background
The UK stock market has struggled through a turbulent period since the summer of
2007 as the global credit crunch has deepened and there have been signs that the
US economy is possibly going into recession. Such negative sentiment is having a
knock-on effect on UK share prices, with investors factoring in the possibility
of contagion, especially as the UK property market is beginning to weaken.
Against this background, the Bank of England has started easing interest rates
and has injected much-needed liquidity into the financial system. Meanwhile,
inflation edged higher as oil and metal prices rose to record high levels.
The change in the FTSE Actuaries All-Share Index was dominated by the resources
sector, on the back of higher commodity prices, and M&A activity. Mining stocks
were easily the best performers within this group. Utilities and other
non-cyclical sectors also held up relatively well as investors grew more
risk-averse and companies with more stable earning profiles came back into
favour given the outlook for slowing economic growth. In contrast, cyclical
consumer goods shares produced the weakest returns due to their exposure to
discretionary consumer spending that looks increasingly susceptible to
disappointment. The cyclical services and finance sectors also underperformed
significantly.
While the Company benefited from its holdings in stable earnings generating
companies such as Unilever, British American Tobacco and Scottish & Newcastle,
its lack of exposure to mining stocks detracted greatly from performance. In
fact, this accounted for over half of the underperformance versus the FTSE
Actuaries All-Share Index. Mining shares pay low dividend yields and do not meet
our dividend yield requirements. The finance sector was the other area in which
the Company suffered, in particular from a holding in mortgage lender Northern
Rock, an investment that, with hindsight, clearly did not meet expectations.
Other banking shares also fell as credit conditions deteriorated, even though
Barclays and Royal Bank of Scotland were able to raise their dividends in the
period.
Investment Approach
The Company follows a transparent and straightforward investment approach. We
focus on companies that offer an attractive income profile and a promising
business model. The emphasis is the balance between current payout and
reinvestment, as we believe that a disciplined use of capital should have a
beneficial impact on the operational results in the long term. This in turn will
provide the scope for above-average and above-inflation growth in dividends.
We acknowledge that the performance in these six months has been disappointing,
but it partly reflects the lack of popularity in the stock market of the
Company's chosen strategy. Income strategies in general have underperformed the
overall market. This has been due largely to the same factors that have affected
the Company's performance - low-yielding stocks driven higher by a narrow band
of companies, particularly resource stocks, while high-yielding stocks,
including banks, were among the weakest. The underperformance by most income
funds goes against a 20-year trend of higher-yielding shares in aggregate
providing the best returns and lower-yielding shares in aggregate the worst.
Outlook
We believe there could be further swings in stock markets during 2008 given that
the outlook for both the US and UK economies remains uncertain. With this in
mind, we believe investors will increasingly favour companies that can
demonstrate more defensive characteristics such as stable earnings prospects,
sustainable and visible cashflows and a commitment to paying dividends. We have
seen this trend developing since the end of 2007 and believe it will continue.
We expect the Company to benefit from this environment. Our focus is on
assessing the strength of company balance sheets, with the aim of ensuring that
the growth in the Company's dividend payments to shareholders in the coming year
will at least match inflation. We remain confident that this approach has the
ability to reward investors with steady returns over the long term.
Schroder Investment Management Limited
30 April 2008
Income Statement
Notes (Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year
ended 29 February 2008 ended 28 February 2007 ended 31 August 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains
on investments held
at fair value - (24,237) (24,237) - 9,215 9,215 - 10,405 10,405
Income 2 2,231 349 2,580 1,901 41 1,942 6,730 428 7,158
Investment
management fee 3 (233) (233) (466) (337) (337) (674) (693) (693) (1,386)
Performance fee - 61 61 - 170 170 - 172 172
rebate
Administrative (102) - (102) (97) - (97) (198) - (198)
expenses
Net return/
(losses)
before finance
costs and taxation 1,896 (24,060) (22,164) 1,467 9,089 10,556 5,839 10,312 16,151
Interest payable
and
similar charges 3 - - - - - - (7) - (7)
Net return/
(losses) on
ordinary
activities
before taxation 1,896 (24,060) (22,164) 1,467 9,089 10,556 5,832 10,312 16,144
Taxation credit/
(charge)
on ordinary 4 - 4 - - - (4) - (4)
activities
Net return/
(losses) on
ordinary
activities after
taxation
attributable
to equity 1,900 (24,060) (22,160) 1,467 9,089 10,556 5,828 10,312 16,140
shareholders
Net return/
(losses) per
ordinary share 4 2.74p (34.70)p (31.96)p 2.03p 12.59p 14.62p 8.10p 14.34p 22.44p
The Total column of this statement is the profit and loss account of the
Company. The Revenue and Capital columns are both provided in accordance with
guidance issued by The Association of Investment Companies. The Company has no
recognised gains or losses other than those disclosed in the Income Statement
and the Reconciliation of Movements in Shareholders' Funds. Accordingly no
Statement of Total Recognised Gains and Losses is presented.
All revenue and capital items in the above statement derive from continuing
operations.
Reconciliation of Movements in Shareholders' Funds
For the six months ended 28 February 2007 (Unaudited)
Called up Capital Share Share Warrant
share redemption premium purchase exercise Capital Revenue
capital reserve account reserve reserve reserves reserve* Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 7,269 1,611 7,404 42,979 1,596 94,140 5,196 160,195
August 2006
Net return from
ordinary
activities - - - - - 9,089 1,467 10,556
Ordinary - - - - - - (3,038) (3,038)
dividends paid
Purchase of
shares for
cancellation (100) 100 - (2,172) - - - (2,172)
At 28 February 7,169 1,711 7,404 40,807 1,596 103,229 3,625 165,541
2007
For the six months ended 31 August 2007 (Audited)
Called up Capital Share Share Warrant
share redemption premium purchase exercise Capital Revenue
capital reserve account reserve reserve reserves reserve* Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 7,269 1,611 7,404 42,979 1,596 94,140 5,196 160,195
August 2006
Net return from
ordinary
activities - - - - - 10,312 5,828 16,140
Ordinary - - - - - - (5,188) (5,188)
dividends paid
Purchase of
shares for
cancellation (100) 100 - (2,172) - - - (2,172)
At 31 August 7,169 1,711 7,404 40,807 1,596 104,452 5,836 168,975
2007
For the six months ended 29 February 2008 (Unaudited)
Called up Capital Share Share Warrant
share redemption premium purchase exercise Capital Revenue
capital reserve account reserve reserve reserves reserve* Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 August 7,169 1,711 7,404 40,807 1,596 104,452 5,836 168,975
2007
Net return from
ordinary
activities - - - - - (24,060) 1,900 (22,160)
Ordinary - - - - - - (3,680) (3,680)
dividends paid
Purchase of
shares for
cancellation (300) 300 - (5,844) - - - (5,844)
At 29 February 6,869 2,011 7,404 34,963 1,596 80,392 4,056 137,291
2008
* The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
Balance Sheet
At 29 February At 28 February At 31 August
2008 2007 2007
(Unaudited) (Unaudited) (Audited)
Note £'000 £'000 £'000
Fixed assets
Investments held at fair value through
profit or loss 135,112 161,323 166,572
135,112 161,323 166,572
Current assets
Debtors 905 585 1,491
Cash at bank and short-term deposits 1,622 4,033 1,357
2,527 4,618 2,848
Current liabilities
Creditors - amounts falling due within one (348) (400) (445)
year
Net current liabilities 2,179 4,218 2,403
Net assets 137,291 165,541 168,975
Capital and reserves
Called up share capital 6 6,869 7,169 7,169
Capital redemption reserve 2,011 1,711 1,711
Share premium account 7,404 7,404 7,404
Share purchase reserve 34,963 40,807 40,807
Warrant exercise reserve 1,596 1,596 1,596
Capital reserves 80,392 103,229 104,452
Revenue reserve 4,056 3,625 5,836
Equity shareholders' funds 137,291 165,541 168,975
Net asset value per ordinary share 7 199.88p 230.92p 235.71p
Cash Flow Statement
(Unaudited) (Unaudited) (Audited)
For the six For the six For the
months ended months ended year ended
29 February 2008 28 February 2007 31 August 2007
£'000 £'000 £'000
Net cash inflow from operating 2,563 2,045 5,589
activities
Net cash outflow from servicing of (1) - (7)
finance
Total tax received/(paid) 4 - (4)
Net cash inflow/(outflow) from 7,223 3,173 (885)
investment activities
Equity dividends paid (3,680) (3,038) (5,188)
Net cash inflow/(outflow) before 6,109 2,180 (495)
financing
Net cash outflow from financing (5,844) (2,161) (2,162)
Net cash inflow/(outflow) 265 19 (2,657)
Reconciliation of net cash flow to
movement in net debt
For the six For the six
months ended months ended For the year ended
29 February 2008 28 February 2007 31 August 2007
£'000 £'000 £'000
Net cash inflow/(outflow) 265 19 (2,657)
Net funds brought forward 1,357 4,014 4,014
Net funds at period end 1,622 4,033 1,357
Notes to the Accounts
1. Accounting Policies and Responsibility Statement
Directors confirm that, to the best of their knowledge, this set of condensed
financial statements has been prepared in accordance with the United Kingdom
Generally Accepted Accounting Practice (UK GAAP) and with the Statement of
Recommended Practice: Financial Statements of Investment Trust Companies (SORP)
issued in January 2003 and revised in December 2005 and the Interim Management
Report in the form of the Chairman's Statement and Investment Manager's Review
includes a fair review of the information required by DTR 4.2.7 and 4.2.8 of the
FSA's Disclosure and Transparency Rules.
The financial information for each of the six month periods ended 29 February
2008 and 28 February 2007 comprises non-statutory accounts within the meaning of
Section 240 of the Companies Act 1985. The financial information for the year
ended 31 August 2007 has been extracted from published accounts that have been
delivered to the Registrar of Companies and on which the report of the auditors
was unqualified. The interim accounts have been prepared on the same basis as
the annual accounts.
The Company's accounting policies have not varied from those described in the
Report and Accounts for the year to 31 August 2007.
2. Income
(Unaudited) (Unaudited) (Audited)
For the six For the six For the
months ended months ended year ended
29 February 2008 28 February 2007 31 August 2007
£'000 £'000 £'000
Income from investments:
UK dividend income 2,080 1,731 6,467
UK unfranked dividend income - - 39
Interest on deposits 151 170 224
2,231 1,901 6,730
Allocated to capital :
UK special dividend income 349 41 428
2,580 1,942 7,158
3. Management fees and interest payable
The investment management fee and any finance costs on borrowings for investment
purposes are apportioned 50% to the revenue return and 50% to the capital
return.
4. Return per ordinary share
(Unaudited) (Unaudited) (Audited)
For the six For the six For the
months ended months ended year ended
29 February 2008 28 February 2007 31 August
2007
£'000 £'000 £'000
Revenue return 1,900 1,467 5,828
Capital return (24,060) 9,089 10,312
Total return (22,160) 10,556 16,140
Weighted average number of ordinary shares in issue 69,343,862 72,187,343 71,935,288
Revenue return 2.74p 2.03p 8.10p
Capital return (34.70)p 12.59p 14.34p
Total return (31.96)p 14.62p 22.44p
5. Dividends
The second interim dividend of 1.60 pence per Ordinary share will be paid on 30
April 2008 to shareholders on the register at 10 April 2008. A first interim
dividend of 1.60 pence per Ordinary Share was paid on 31 January 2008. In total
dividends of 3.20 pence per share have been declared for the six months ended 29
February 2008.
6. Called up share capital
(Unaudited) (Unaudited) (Audited)
At 29 February At 28 February At 31 August
2008 2007 2007
£'000 £'000 £'000
Authorised:
312,500,000 ordinary shares of 10p each 31,250 31,250 31,250
Allotted, Called up and Fully paid:
Opening balance 71,687,343 (28 February 2007 and
31August 2007: 72,687,343) ordinary shares of 10p each 7,169 7,269 7,269
Transfer to capital redemption reserve on purchase of
2,999,000 (28 February 2007 and 31 August 2007: 1,000,000)
shares for cancellation (300) (100) (100)
Closing balance 68,688,343 (28 February 2007 and
31 August 2007: 71,687,343) ordinary shares of 10p each. 6,869 7,169 7,169
7. Net asset value per ordinary share
(Unaudited) (Unaudited) (Audited)
29 February 28 February 2007 31 August 2007
2008
£'000 £'000 £'000
Net assets attributable to ordinary shareholders 137,291 165,541 168,975
Ordinary shares in issue at end of period 68,688,343 71,687,343 71,687,343
Net asset value per ordinary share 199.88p 230.92p 235.71p
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