24 Jul 2008 11:52
FINAL RESULTS M&G High Income Investment Trust P.L.C.
Chairman's Statement and Management Report
Performance during the year
The Company's revenue earnings per Package Unit were 7.08p. In respect of theyear, the Company declared three interim dividends of 1.2p per Income Share anda fourth interim of 2.2p per Income Share, bringing the total for the year to5.8p.This represents an increase of 2.6% over the total of 5.65p in respect ofthe previous year. The rate of increase was below the latest annual rate ofinflation of 4.6% as measured by the Retail Prices Index (RPI) and reflects acautious outlook for dividends from the important financial sector. The totaldividend declared will however be boosted as the Company declared a specialdividend of 0.6p per Income Share, reflecting reimbursement of earlier VATpayments. As at the year end, the yield on the Company's Package Units(mid-market price) was 4.4%, compared with the yield of 3.7% on the FTSEAll-Share Index.On a net asset value (NAV) basis, each Package Unit produced a negative totalreturn of 14.8% over the year to 31 May 2008. This was below negative returnsof 7.1% and 11.9% from the FTSE All-Share Index and the FTSE 350 Higher YieldIndex respectively over the same period. The performance of many of theCompany's bond holdings in the financial sector was a major disappointmentafter many years of stable contribution. This was a result of the widening ofspreads after the emergence of the credit crunch resulted in unusually widediscounts to par despite the high and stable income which continues to begenerated by these bonds.At the year end, there was a market price discount of 4.0% to the NAV, comparedwith a premium of 3.4% on 31 May 2007, the midmarket price at the year endbeing 131.5p and the NAV 137.05p. Reflecting this shift on a mid-market pricebasis, the total negative return on the Company's Package Units was 21%.
Long term performance
The Company continues to meet its income objectives. Total Ordinary dividendsfor the year were increased by 2.6%, maintaining the record of uninterruptedincome growth since the Company's launch in 1997. However, this rate of growthwas below the level of RPI inflation and the Board takes a cautious view ofdividend prospects over the next two years in view of the turmoil in thefinancial sector. While the underlying dividend growth has been reduced, thetotal dividend will be substantially ahead of last year because of the specialVAT related dividend mentioned above. As at the year end, the dividend yield of4.4% on the Company's Package Units was above the yield on the FTSE All-ShareIndex.There can be no hiding the disappointment over the shortfall in the return onthe Company's Package Unit NAV relative to that on the FTSE All-Share Index.This can be attributed both to the impact of the stunning rise in thelow-yielding mining sector (now over 12% of the index) and to the heavy lossesincurred by banks and other traditional high yield sectors. The Company'sincome objective left us little room for manoeuvre in this regard. Inevitably,the poor outcome over the year has also had a detrimental impact on thelong-term performance record of the Company's NAV. Although the annualisedreturn on the Company's NAV since launch remains above that on the FTSEAll-Share Index, most of the outperformance of the earlier years has beenundone by the shortfall during a period of severe underperformance by highyielding shares.
Share buy back
At the 2007 Annual General Meeting, shareholders approved resolutions to enablethe Company to buy back its own shares. During the review period, any discounton the Company's Package Units remained within the guidelines set by the Boardand these powers were not therefore exercised. However, the Board remains ofthe view that the existence of these powers may allow it to take advantage ofsignificant discounts, which may from time to time emerge, with a view toenhancing the Company's NAV. Accordingly, the Board is seeking shareholderapproval at the forthcoming Annual and Special General Meetings of the Companyfor their renewal. This is explained fully in the Directors' Report.
Winding-up
As an investment company with a limited life, the Company will wind-up on or immediately before 17 March 2017.
M&G Income Investment Company Limited
The Company recently released the following announcement to the London StockExchange concerning proposals which, if approved, will we believe be of benefitto shareholders.
"Participation in the proposed reconstruction of M&G Income Investment Company Limited
The Board of M&G High Income Investment Trust (`M&G High') is in discussion with the Board of M&G Income Investment Company
(`M&G Income') which is intending to put forward proposals to coincide with its wind-up date of 31 October 2008.
Under the proposals, M&G Income will be wound up and its shareholders will beoffered the choice of a tax and cost efficient rollover into new shares to beissued by M&G High, a full cash exit (at liquidation value) and at least oneopen-ended investment company managed by M&G, the manager of M&G High and M&GIncome.
M&G Income currently has gross assets of ‚£206 million whilst M&G High has gross assets of ‚£69 million and has a wind-up date of
17 March 2017. Both companies are managed by the same investment team at M&G, have similar investment objectives and are split capital investment companies.
Precise details of the proposals will be announced this summer."
Effect on dividends for year ending 2009
The Board is reviewing its usual dividend distribution pattern for the comingyear in view of the fact that issuing new shares under the above proposalswould result in the dilution of the revenue reserves attributable to eachIncome Share. If the proposals are approved, dividend payments will beaccelerated so as to distribute substantially all of the revenue reserves ofthe Company for the benefit of the current Income Shareholders.As a consequence of the expected higher dividend in the first half, dividendpayments in respect of the second half of the year could be well below thecorresponding payments in respect of the same period in the year just ended.This is a particular risk given the current market conditions.
Outlook
The outlook for the UK economy seems to grow darker by the day, with growthforecast to slow to around 1.5% in 2008 and with many commentators ruling outan early recovery. Weakness is emerging on a broad front, with little tosuggest it will be short-lived. Unemployment is starting to rise and pessimismabout the economy (and the Government's management of it) among the public andthe business community is high (and growing). There is a risk thatinappropriate measures are taken as the Government desperately tries to secureits re-election and there is no telling whether controlling inflation orstimulating economic growth will take precedence, or whether the Government'spropensity for indecision, followed by an ill thought out knee-jerk reactionwill cause them to attempt both.Pressure on household incomes is set to intensify, with higher taxes andborrowing costs, together with increasing fuel and food prices outstrippinggrowth in wages and salaries. The CBI predicts that consumer spending willincrease by less than 1% in 2009, the lowest rate since 1992. Restrictions onthe availability of mortgage finance are unlikely to ease in the short term anda further fall in house prices seems unavoidable. Exports could well receive aboost if sterling continues to drift lower, but these benefits may be limitedby slower growth among our trading partners, particularly in continental Europeand the US. Crucially there is little scope for remedial action to prevent aslowdown. Public finances are stretched following imprudent management at atime when the public sector's finances should have been strengthened inanticipation of more difficult times ahead. The Bank of England has recentlysignalled that, with Consumer Prices (CPI) inflation likely to approach 4% inthe second half of 2008, it will need to maintain a tight monetary policy toanchor inflation expectations and to prevent an inflationary spiral developing.In short, the outlook is for slower growth, coupled with above-trend inflation,an unhealthy combination which is often termed `stagflation.'The deteriorating economic outlook is certain to make life much more difficultfor companies, particularly those with heavy exposure to vulnerable domesticactivities such as financial services, consumer spending and the housingmarket. Most companies will be unable to recover the full amount of rapidlyincreasing costs, resulting in intense pressure on profit margins. Theconsensus forecast is for corporate earnings to increase by 6% in 2008 butthere is a significant risk of downgrades, even allowing for buoyant growthfrom mining and oil companies. Moreover, further cuts in dividends are possibleso the immediate outlook for investors remains difficult with the full solvencyimplications from the credit crunch yet to be appreciated.One commentator recently described the UK stockmarket as `an elastic bandmarket,' an allusion to the extreme contrast between the buoyant oil & gas andmining sectors (now over 30% of the FTSE All- Share Index) and the extremepessimism of investors towards banks and other out-of-favour sectors. Theoverall valuation of the UK stockmarket is reasonably undemanding (little morethan at the depths of the bear market in March 2003), suggesting that plenty ofbad news is already priced in. Moreover, valuations of out-of-favour sectorsare very depressed, with plenty of shares in well managed, financially securecompanies offering yields in excess of base rates (5%). There is an uncannyresemblance to the position at the peak of the dotcom boom in 2000, thoughresource sectors are nothing like as overvalued as technology stocks were in2000. Any reduction of the current high level of uncertainty is likely toprompt a return of buying interest in undervalued high yielding shares.Well managed portfolios of good quality high yielding shares have an impressiverecord for delivering above-average long term returns. The main drawback tothis strategy is that there will inevitably be periods of disfavour andunderperformance. Past experience suggests that it would be foolish to changethe strategy now in the belief that the laws of investment have changed.Rather, we will take advantage of the opportunities presented by recent marketweakness to strengthen the recovery potential of the portfolio to meet itsobjectives. A particular priority in the coming year will be to maintain theCompany's underlying dividend.
Responsibility statements
To the best of my knowledge and belief:
a ) this statement includes a fair review of the development and performance ofthe business and the position of the Company together with a description of theprincipal risks and uncertainties that the Company faces; and
b ) the financial statements, prepared in accordance with United Kingdom Accounting Standards, give a true and fair view of the assets, liabilities, financial position and losses of the Company.
F C Carr(Chairman)Income statement (audited) for the year ended 31 May 2008 2007 Revenue Capital Total Revenue Capital Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 -------------- ------------- --------------
-------------- -------------- --------------
Net (losses) / gains on - (16,816) (16,816) - 12,507 12,507investments Income 3,965 - 3,965 3,646 - 3,646 Investment management fee (42) (83) (125) (326) (661) (987) Other expenses (130) - (130) (118) - (118) -------------- ------------- -------------- -------------- ------------- -------------- Net return before finance 3,794 (16,900) (13,106) 3,202 11,846 15,048cost and tax Finance costs: - (2,495) (2,495) - (2,297) (2,297)Appropriations Finance costs: Dividends (3,107) - (3,107) (2,919) - (2,919) -------------- ------------- --------------
-------------- ------------- --------------
Net return on ordinary 686 (19,394) (18,708) 283 9,549 9,832activities before tax Tax on ordinary activities - - - - - - -------------- ------------- --------------
-------------- ------------- --------------
Net return on ordinary 686 (19,394) (18,708) 283 9,549 9,832activities after tax -------------- ------------- --------------
-------------- ------------- --------------
Return per Zero Dividend - 4.66p 4.66p - 4.29p 4.29pPreference Share
Revenue earnings per Income 7.08p - 7.08p
5.98p - 5.98pShare Return per Capital Share - (36.22)p (36.22)p - 17.83p 17.83p
Total return per Income and 7.08p (36.22)p (29.14)p
5.98p 17.83p 23.81pGrowth Unit Total return per Package 7.08p (31.56)p (24.48)p 5.98p 22.12p 28.10pUnit
The total column of this statement is the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the period.
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.
Statement of movements in net assets attributable to shareholders (audited)
For the year ended 31 May 2008 2007 ‚£000 ‚£000 -------------- --------------
Return on ordinary activities (18,708)
9,832after tax
Finance costs: Appropriations 2,495
2,297 -------------- -------------- Net movement in net assets (16,213) 12,129
attributable to shareholders Opening net assets attributable 89,604
77,475to shareholders (all non-equity) -------------- --------------
Closing net assets attributable 73,391
89,604to shareholders (all non-equity) -------------- --------------Balance sheet (audited) As at 31 May 2008 2007 ‚£000 ‚£000 -------------- -------------- Fixed assets Portfolio of investments 69,192 88,311 -------------- -------------- Current assets Debtors 1,434 706 Cash at bank and short-term 2,814 630deposits -------------- -------------- 4,248 1,336 -------------- -------------- Total financial assets 73,440 89,647
Creditors: Amounts falling due (49)
(43)within one year -------------- -------------- Net assets attributable to 73,391 89,604
shareholders (all non-equity)
-------------- -------------- Net assets attributable to Shareholders (audited) 2008 2007 ‚£000 ‚£000 -------------- -------------- Zero Dividend Preference 29,641 27,065Shareholders Income Shareholders 40,121 39,435 Capital Shareholders 3,629 23,104 -------------- -------------- Net assets attributable to 73,391 89,604
shareholders (all non-equity)
-------------- --------------
Net asset value per Zero 55.35p
50.54p
Dividend Preference Share Net asset value per Income 74.92p
73.64pShare
Net asset value per Capital 6.78p
43.14pShare
Net asset value per Income & 81.70p
116.78pGrowth Unit
Net asset value per Package 137.05p 167.32pUnit Cash flow statement (audited) for the year ended 31 May 2008 2008 2007 2007 ‚£000 ‚£000 ‚£000 ‚£000 -------------- -------------- -------------- -------------- Net cash inflow from 2,655 2,385operating activities Servicing of finance Dividends paid (non-equity) (3,107) (2,919) Financial investment Capital distributions 215 837 Purchase of investments (12,073) (17,548) Sale of investments 14,494 17,309 -------------- -------------- 2,636 598 -------------- -------------- Net increase in cash 2,184 64 -------------- --------------
Notes to the Financial Statements
1 Accounting policies
a ) Basis of accounting: These financial statements have been prepared in accordance with the historical cost convention, as modified by the revaluation of investments, in accordance with applicable United Kingdom Accounting and Financial Reporting Standards and the Statement of Recommended Practice for Financial Statements of Investment Trust Companies (SORP) issued by the Association of Investment Companies in December 2005.
b ) Adoption of New Accounting Standard: FRS 29, Financial Instrument Disclosures has been adopted by the Company in 2008. FRS 29 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and/or valuation of the Company's financial instruments. The additional disclosures provided in accordance with the requirements of the standard are set out in note 18 to the accounts.
c ) Portfolio of investments: All investments have been designated as `at fairvalue through profit or loss'. Purchases of investments are initiallyrecognised on the trade date at fair value, being the consideration paid, andsubsequently valued at their fair value, excluding any accrued interest, at thebalance sheet date. The fair value for listed investments is deemed to be bidvalue. Investments are derecognised on the trade date of the sale.d ) Recognition of Income: Income from quoted equity shares is recognised netof attributable tax credits when the security is quoted ex-dividend. Intereston debt securities and income from preference shares is accounted for on aneffective yield basis. Bank interest and underwriting commission are accountedfor on an accruals basis.e ) Stock dividends: The ordinary element of stocks received in lieu of cashdividends is recognised as revenue. Any enhancement above the cash dividend istreated as capital.
f ) Special dividends: These are recognised as either revenue or capital depending upon the nature and circumstances of the dividend receivable.
g ) Investment management fees: These have been charged 33% to the revenueaccount and 67% to capital reserve - realised. This is in line with the Board'sexpected long term split of returns in the form of capital gains and incomerespectively from the investment portfolio of the Company. The charge to thecapital reserve - realised allows for corporation tax relief on thatproportion. Relief on expenses charged to the capital account has been allowedfor at the corporation tax rate for the Company.
h ) Other expenses: All expenses (other than those incidental to the purchase or sale of investments) are charged against revenue on an accruals basis.
i ) Appropriations: Appropriations for premiums payable on redemption are accounted for as finance costs and transferred from capital reserves - realised. They represent an apportionment of the increase in the redemption value of Zero Dividend Preference Shares over the amounts originally subscribed.
j ) Dividends payable to Income Shareholders: Dividends approved by the boardand declared after the balance sheet date, in respect of the net revenue forthe period, are recognised as a finance cost when the shareholders' right toreceive them is established.k ) Capital reserves: Gains and losses on the realisation of investmentstogether with finance costs, expenses and appropriations in accordance with theabove policies are accounted for in capital reserves - realised. Increases anddecreases in the valuation of investments held at the balance sheet date areaccounted for in capital reserves - unrealised.l ) Share capital: All classes of the Company's shares meet the definition of afinancial liability under FRS 29 therefore the Company has no equity shares andappropriations in respect of Zero Dividend Preference Shares and dividendspayable to Income Shareholders are accounted for as finance costs. Theappropriations are charged 100% to capital and dividends are charged 100% torevenue to reflect the rights and benefits of the different classes of share inissue.
m ) Taxation: The charge for taxation is based upon the revenue for the year and is allocated according to the marginal basis between revenue and capital.
n ) Deferred taxation: This is provided for in respect of all timingdifferences. Any liability is provided at the average rate of tax expected toapply. Deferred tax assets and liabilities are not discounted to reflect thetime value of money.o ) Foreign currency transactions: These are translated at the rate of exchangeruling on the date of the transaction. Assets and liabilities denominated inforeign currencies are translated into sterling at the rate of exchange rulingat the balance sheet date.
p ) Functional and presentation currency: The functional and presentation currency of the Company is pounds sterling because that is the currency of the primary economic environment in which the Company operates.
2 Investments: At fair value through profit or loss 2008 2007 Capital Capital a) Net (losses) / gains on ‚£'000 ‚£'000investments -------------- -------------- Realised (losses) / gains on (109) 6,846sales of investments (Decrease) / increase in (16,922) 5,034unrealised appreciation Capital distributions 215 627 -------------- -------------- Net (losses) / gains on (16,816) 12,507investments -------------- --------------b) Investments -------------- -------------- Opening book cost 69,372 62,467
Opening unrealised appreciation 18,939
13,905 -------------- -------------- Opening valuation 88,311 76,372 Movements in the year: Effective yield adjustments (2) (25) Purchases - at cost 12,026 17,096 - transaction charges 47 97 Sales - proceeds (14,367) (17,223) - transaction charges 11 10
- realised (losses) / gains on (109)
6,846sales of investments Stock dividends 197 104 (Decrease) / increase in (16,922) 5,034unrealised appreciation -------------- -------------- Closing valuation 69,192 88,311 -------------- -------------- Closing book cost 67,175 69,372
Closing unrealised appreciation 2,017
18,939 -------------- -------------- Portfolio of Investments 69,192 88,311 -------------- --------------3 Income 2008 2007 Revenue Revenue Income from investments ‚£'000 ‚£'000 -------------- -------------- Interest on debt securities 118 191 Overseas dividends 27 12 Stock dividends 197 104 UK dividends 3,447 3,286 -------------- -------------- 3,789 3,593 -------------- -------------- Other income -------------- -------------- Bank interest 85 51
HM Revenue & Customs interest [a] 91
- Underwriting commission - 2 -------------- -------------- 176 53 -------------- -------------- Total income 3,965 3,646 -------------- --------------Total income comprises -------------- -------------- Dividends 3,671 3,402 Interest 294 242 Other income - 2 -------------- -------------- 3,965 3,646 -------------- --------------
[a] Interest in relation to the VAT recoverable as disclosed in Note 4.
4 Investment management fee 2008 2007 Revenue Capital Total Revenue Capital Total ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 -------------- ------------- --------------
-------------- -------------- --------------
Investment management fee 264 537 801 277 563 840 Irrecoverable VAT thereon 26 49 75 49 98 147[a] -------------- ------------- -------------- -------------- ------------- -------------- 290 586 876 326 661 987 -------------- ------------- -------------- -------------- ------------- -------------- VAT Recoverable[a] (248) (503) (751) - - - -------------- ------------- --------------
-------------- ------------- --------------
42 83 125 326 661 987 -------------- ------------- --------------
-------------- ------------- --------------
The name of the investment manager and the terms and duration of its appointment are disclosed in the Directors' Report. The basis of allocating the investment management fee to revenue and capital is dealt with in note 1g.
[a] Following the decision of the European Court of Justice and the BusinessBrief issued by HMRC in 2007 the Company has reached an agreement with theinvestment manager and has therefore recognised this recoverable VAT. Witheffect from 7 November 2007, VAT is no longer charged on the investmentmanagement fee.5 Other expenses 2008 2007 Revenue Revenue ‚£'000 ‚£'000 -------------- -------------- Annual listing fee 4 4 Auditors' fees[a] 24 24 Bank charges and safe custody 1 1fees Directors' remuneration 50 50 FSA fees 4 4 Registrar's fees 14 14 The Association of Investment 9 7Companies fees Other fees 24 14 -------------- -------------- 130 118 -------------- --------------
[a] No non-audit fees were paid during the year (2007: same).
6 Finance costs: Appropriations
2008 2007 Appropriations for premium ‚£'000 ‚£'000payable on redemption -------------- --------------
Zero Dividend Preference Shares 2,495
2,297 -------------- --------------
This constitutes an appropriation of reserves in respect of the premium to issue proceeds payable to holders of Zero Dividend Preference Shares on redemption. The appropriation of the year represents an apportionment of the increase in redemption value of the amounts originally subscribed.
7 Finance costs: Dividends 2008 2007 Dividends (payable to Income ‚£'000 ‚£'000Shareholders) -------------- -------------- Fourth interim: 2.2p paid 24 1,178 1,071August 2007 (2006: 2p) First interim: 1.2p paid 23 643 616November 2007 (2006: 1.15p) Second interim: 1.2p paid 25 643 616February 2008 (2007: 1.15p)
Third interim: 1.2p paid 23 May 643
6162008 (2007: 1.15p) -------------- -------------- 3,107 2,919 -------------- --------------
On 22 July 2008 the Board declared a fourth interim dividend of 2.2p (2007:2.2p) per Income Share totalling ‚£1,178,000 (2007: ‚£1,178,000), payable on 22August 2008 to Income Shareholders on the register at the close of business on1 August 2008. The ex-dividend date is 30 July 2008.The Board also announced a special dividend of 0.6p per Income Share totalling‚£321,000 in respect of the VAT refund received above. This dividend will alsobe payable on 22 August 2008 to Income Shareholders on the register at theclose of business on 1 August 2008. The ex-dividend date is 30 July 2008.The dividends will also be payable to holders of Income & Growth Units &Package Units.8 Tax on ordinary activities 2008 2007 Revenue Capital Total Revenue Capital Total a) Analysis of the charge ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000in the year -------------- ------------- --------------
-------------- -------------- --------------
Corporation tax - - - - - - -------------- ------------- --------------
-------------- ------------- --------------
Total current tax charge - - - - - -(note 8b) Deferred tax (note 8c) - - - - - - -------------- ------------- -------------- -------------- ------------- -------------- Tax on profit on ordinary - - - - - -activities -------------- ------------- -------------- -------------- ------------- --------------b) Factors affecting the tax charge for the year -------------- ------------- --------------
-------------- ------------- --------------
Net return on ordinary 686 (19,394) (18,708) 283 9,549 9,832activities before tax -------------- ------------- --------------
-------------- ------------- --------------
Corporation tax at 30% 204 (5,754) (5,550) 85 2,865 2,950 Effects of: Finance costs: - 740 740 - 689 689Appropriations[a] Finance costs: Dividends[a] 922 - 922 875 - 875 Capital returns[a] - 4,989 4,989 - (3,752) (3,752) Stock dividends[a] (58) - (58) (31) - (31) UK dividends[a] (1,023) - (1,023) (986) - (986) Overseas tax - - - - - - Income taxable in different 3 - 3 (3) - (3)periods Current year expenses not - 25 25 60 198 258utilised Prior period expenses (48) (48) - - -utilised -------------- ------------- --------------
-------------- ------------- --------------
Current tax charge (note - - - - - -8a) -------------- ------------- --------------
-------------- ------------- --------------
c) Provision for deferred tax
There is no provision for deferred tax at the start or end of the year (2007:same)d) Deferred tax asset not recognised -------------- ------------- --------------
-------------- ------------- --------------
Resulting from 235 1,138 1,373 296 1,193 1,489unutilised expenses [c] -------------- ------------- --------------
-------------- ------------- --------------
[a] The standard rate of corporation tax changed from 30% to 28% with effect from 1 April 2008.
[b] As an investment trust company these items are not subject to corporation tax.
[c] These expenses will not be utilised unless the tax treatment of UK dividends or the nature of capital gains changes.
9 Earnings / returns per share
2008 2007 Capital Capital a) Return per Zero Dividend ‚£'000 ‚£'000Preference Share -------------- -------------- Appropriations ‚£2,495,000 ‚£2,297,000 Shares in issue throughout the 53,552,179 53,552,179year -------------- -------------- Return per share 4.66p 4.29p -------------- --------------
b) Revenue earnings per Income 2008
2007Share -------------- --------------
Net revenue return on ordinary ‚£686,000
‚£283,000activities after tax Finance costs: Dividends ‚£3,107,000 ‚£2,919,000 -------------- -------------- Revenue return attributable to ‚£3,793,000 ‚£3,202,000shareholders Shares in issue throughout the 53,552,179 53,552,179year -------------- -------------- Revenue earnings per share 7.08p 5.98p -------------- -------------- c) Revenue per Capital Share 2008 2007 -------------- -------------- Net revenue return on ordinary ‚£(19,394,000) 9,549,000activities after tax Shares in issue throughout the 53,552,179 53,552,179year -------------- -------------- Return per share (36.22)p 17.83p -------------- --------------
d) Income & Growth Units and Package units
The earnings and returns per Income & Growth Unit and Package Unit are calculated by reference to their component shares.
10 Debtors 2008 2007 ‚£'000 ‚£'000 -------------- -------------- Amounts due from brokers - 138 Bank interest receivable 16 9
Debt security interest receivable 114
27 Dividends receivable 462 532
HM Revenue & Customs interest 91
-receivable VAT Recoverable 751 - -------------- -------------- 1,434 706 -------------- --------------
11 Creditors: Amounts falling due within one year
2008 2007 ‚£'000 ‚£'000 -------------- -------------- Fees payable 49 43 -------------- -------------- 49 43 -------------- --------------
12 Capital and reserves attributable to shareholders
2008 2007 As at 31 May ‚£'000 ‚£'000 -------------- -------------- Called up share capital 1,607 1,607 Capital redemption reserve 15,555 15,555 Appropriation reserve 18,593 16,098 Special reserve 37,170 37,170 Capital reserves - realised (4,185) (1,713) - unrealised 2,017 18,939 Revenue reserve 2,634 1,948 -------------- -------------- Net assets attributable to 73,391 89,604shareholders (all non-equity) -------------- --------------In addition to the appropriation of ‚£2,495,000 (2007: ‚£2,297,000) in respect ofZero Preference shareholders, included in the Appropriation Reserve above is abalance of ‚£81,000 (2007: ‚£48,000) included within the Share Capital Reserveand the Special Reserve.Under the terms of the Company's Articles of Association sums standing to thecredit of the Special Reserve are available for distribution only by way ofredemption or purchase of any of the Company's own shares. The Company may onlydistribute accumulated `realised' profits.The Institute of Chartered Accountants of England and Wales has issued guidance(TECH 01/08), stating that profits arising out of a change in fair value ofassets, recognised in accordance with the Accounting Standards may bedistributed provided the relevant assets can be readily converted into cash.Securities listed on recognised stock exchanges are generally regarded as beingreadily convertible into cash and hence unrealised profits in respect of suchsecurities currently included within Capital Reserves - Unrealised may beregarded as distributable under Company Law.
At 31 May 2008 the Company had unrealised gains amounting to ‚£2,017,000 (2007: gains of ‚£18,939,000) in respect of such securities.
13 Share capital (all non-equity)
2008 % of total 2007 % of total ‚£'000 share capital ‚£'000 share capital ------------- -------------- -------------- -------------- 53,552,179 (2007: 536 33.33% 536 33.33%53,552,179) Zero Dividend Preference Shares of 1p each 53,552,179 (2007: 536 33.33% 536 33.33%53,552,179) Income Shares of 1p each 53,552,179 (2007: 536 33.33% 536 33.33%53,552,179) Capital Shares of 1p each ------------- -------------- ------------- --------------
Each class of the Company's shares meets the definition of a liability under FRS 29 and therefore the Company has no equity shares.
The holders of Income Shares are entitled to receive revenue profits of the Company by way of dividends. Holders of Zero Dividend Preference Shares and Capital Shares are not entitled to receive dividends out of the revenue or any other profits of the Company.
On the basis that the Company is wound-up on 17 March 2017, as planned, the holders of Zero Dividend Preference Shares will be entitled to a capital payment of 122.83224p per share or such a lesser sum as remains. Holders of Income Shares will become entitled to a return of capital of 70p per share, subject to the prior entitlement of the Zero Dividend Preference Shareholders, plus any balance standing to the revenue reserve. Capital shareholders will then become entitled to the balance of net assets after payment to Zero Dividend Preference and Income Shareholders.
Where voting rights apply, holders of Zero Dividend Preference, Income andCapital Shares are, on a show of hands, each entitled to one vote at generalmeetings of the Company and on a poll are entitled to one vote for each shareheld.
Voting rights are subject to certain restrictions. Holders of Zero Dividend Preference Shares generally have no entitlement to vote other than in the exceptional circumstances prescribed in the Articles of Association.
The Company has an authorised share capital of ‚£29,850,000 (2007: ‚£29,850,000) consisting of 995,000,000 (2007: 995,000,000) shares of each class.
14 Revenue and capital reserves
Revenue Capital reserves reserve realised unrealised ‚£'000 ‚£'000 ‚£'000 --------------
-------------- --------------
Opening balance as previously 1,948 (1,713) 18,939reported at 31 May 2007 Net gains / (losses) on - 106 (16,922)investments Income 3,965 - - Expenses (172) (83) - Finance costs: - (2,495) -Appropriations Finance costs: Dividends (3,107) - - --------------
------------- --------------
Balance reported as at 2,634 (4,185) 2,01731 May 2008 Fourth interim dividend: (1,178) - -2.2p payable to Capital Shareholders on 22 August 2008 -------------
------------- --------------
Reserves adjusted for 1,456 (4,185) 2,017dividend declared -------------
------------- --------------
15 Called up share capital and capital redemption
Called Capital redemption up share reserve capital ‚£'000 ‚£'000 -------------- --------------
Opening / closing balance as at 1,607
15,55531 May 2007 / 2008 -------------- --------------16 Other reserves Zero Dividend Special Share appropriation reserve reserve ‚£'000 ‚£'000 -------------- --------------
Opening balance as at 31 May 2007 16,098
37,170
Zero Dividend Preference Share 2,495
-appropriation -------------- --------------
Closing balance as at 31 May 2008 18,593
37,170 -------------- --------------The Zero Dividend Preference Share appropriation reserve, together with theamounts originally subscribed, represent the asset entitlement for the ZeroDividend Preference Shares set out in the Net Assets Attributable toShareholders.17 Cash flow 2008 2007 Capital Capital
a) Reconciliation of net return ‚£'000
‚£'000on ordinary activities before tax to net cash inflow from operating activities: -------------- --------------
Net return on ordinary activities (18,708)
9,832before tax Net losses / (gains) on 16,816 (12,507)investments
Finance costs: Appropriations 2,495
2,297 Finance costs: Dividends 3,107 2,919
Effective interest adjustment 2
25 Stock dividends (197) (104) Increase in other debtors (866) (74)
Increase / (decrease) in other 6
(3)creditors -------------- --------------
Net cash inflow from operating 2,655
2,385activities -------------- --------------
b) Reconciliation of net cash ‚£'000
‚£'000
inflow to movements in net debt:
-------------- -------------- Net cash inflow 2,184 64 Net funds brought forward 630 566 -------------- -------------- Closing net funds 2,814 630 -------------- -------------- c) Comprising: ‚£'000 ‚£'000 -------------- -------------- Cash at bank and in hand 2,184 630 -------------- --------------18 Financial instruments
In pursuing the Company's objective, as set out on page 1, the Company accepts market price risk and interest rate risk, in relation to the portfolio of investments. Since the Company's investment objective is to deliver returns over the long term, transactions with the sole intention of realising short-term returns are not undertaken.
The risk policies below and in the Directors' Report along with the Company'scapital management policies (described in the Directors' Report) have beenconsistently applied throughout both this and the preceding financial year andthe quantitative data disclosed is representative of the Company's exposure torisk throughout the year.Fair value of financial assets and financial liabilities: All financial assetsand liabilities are either included in the balance sheet at fair value or at areasonable approximation of fair value.Market price risk: The investment manager has the responsibility for monitoringthe existing portfolio selected in accordance with the overall asset allocationparameters, described in the investment policy, and seeks to ensure thatindividual stocks also meet an appropriate risk / reward profile. Theportfolio's relative exposure to the FTSE All-Share Index is also monitoredwith the sector and individual stock variances kept within reasonable levels.At its quarterly meetings, the Board reviews the asset allocation of theCompany's portfolio having regard to the risks associated with particularindustry sectors whilst continuing to follow the investment objectives. TheCompany's exposure to changes in market prices on quoted equity investments at31 May 2008 is ‚£58,702,000 (2007: ‚£79,690,000).Price risk sensitivity: The following table illustrates the sensitivity ofrevenue and capital return on ordinary activities after tax and net assetsattributable to shareholders to an increase or decrease of 10% in the fairvalue of the Company's quoted equity investments. This level of change isconsidered to be reasonably possible based on observation of market conditionsand historic trends. The sensitivity analysis is based on the Company'sequities at each balance sheet date, with all other variables held constant. Increase in fair value Decrease in fair value Income Statement 2008 2007 2008 2007 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ------------- --------------
-------------- --------------
Revenue return (20) (27) 20 27 Capital return 5,831 7,916 (5,831) (7,916) ------------- --------------
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Total change to net 5,811 7,889 (5,811) (7889)return on ordinary activities after tax ------------- --------------
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Change to net assets 5,811 7,889 (5,811) (7889)attributable to shareholders ------------- --------------
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Credit risk associated with the portfolio of investments: The bond portfolio is structured so as to provide the Company with a high level of revenue but without exposing the Company to an undue risk to capital. This is achieved through direct investment in investment grade corporate bonds, or those considered by the investment manager to have an equivalent grade.
The investment manager considers the credit rating of each security togetherwith its yield and its maturity in order to ensure that the yield fullyreflects any perceived risk and invests in bonds issued by a broad spread ofcompanies and institutions to reduce credit risk and the impact of default byany one user. The credit rating of each bond is shown in the Portfolio ofInvestments.Interest rate risk associated with the portfolio of investments: The bondswithin the portfolio are mainly fixed rate securities, and accordingly whilstchanges in interest rates will not, in the short term, affect earnings, boththe capital value of these securities and the ability to acquire securities onsimilar terms may be affected.
The level of exposure to interest rate risk is shown below.
Amount of exposure 2008 2007 ‚£'000 ‚£'000 -------------- -------------- Cash at bank 2,814 630 Fixed rate bonds 8,814 7,662 Floating rate bonds 6,020 11,284 -------------- -------------- Total exposure 17,648 19,576 -------------- --------------
Interest receivable on cash balances is at base rate minus 0.25%.
The following table illustrates the sensitivity of revenue and capital returnon ordinary activities after tax and net assets attributable to shareholders toan increase or decrease of 2% in interest rates. This level of change isconsidered to be reasonably possible based on observation of market conditionsand historic trends. The sensitivity analysis is based on the Company's bondholdings at each balance sheet date, with all other variables held constant. Increase in fair value Decrease in fair value Income Statement 2008 2007 2008 2007 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ------------- --------------
-------------- --------------
Revenue return 7 8 (11) (13) Capital return (2,112) (2,318) 3,313 3,886 ------------- --------------
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Total change to net (2,105) (2,310) 3,302 3,873return on ordinary activities after tax ------------- --------------
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Change to net assets (2,105) (2,310) 3,302 3,873attributable to shareholders ------------- --------------
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Currency risk: The Company's exposure to currency risk is immaterial as the Company does not hold assets denominated in currency other than sterling (2007: same).
Liquidity risk: The Company's assets comprise securities that can be readily realised to meet obligations arising on the redemption of Zero Dividend Preference Shares, Income Shares and Capital Shares on 17 March 2017, as planned. Cash balances are kept to a minimum.
A maturity analysis of financial liabilities is provided below.
Carry value Fair value As at 31 May 2008 2007 2008 2007 Maturity profile of ‚£'000 ‚£'000 ‚£'000 ‚£'000financial liabilities ------------- --------------
-------------- --------------
Less than 3 months 49 43 49 43 More than 3 months - - - -but not more than one year More than one year 73,391 89,604 72,965 92,110 ------------- --------------
------------- --------------
73,440 89,647 73,014 92,153 ------------- --------------
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Each class of the Company's shares meets the definition of a liability and is included in the profile of the financial liabilities above.
Details of related parties and transactions are included in notes 4, 5, 11 and also within the Directors' Report and Directors' Remuneration Report.
Portfolio of investmentsAs at 31 May 2008Oil & gas producers 14.21 BP 5,168 7.04 Royal Dutch Shell 'B' 5,263 7.17 Chemicals 0.75 Johnson Matthey 403 0.55 Yule Catto 148 0.20 Mining 2.34 Anglo American 340 0.46 Lonmin 1,382 1.88 Aerospace & defence 0.35 Rolls-Royce Group 254 0.35 Construction & materials 0.55 Marshalls 400 0.55 Electronic & electric equipment 0.97 Acal 193 0.26 Halma 524 0.71 General industrials 2.15 Smith (D.S.) 439 0.60 Smiths Group 552 0.75 Tomkins 587 0.80 Industrial engineering 2.04 IMI 436 0.59 Rotork 567 0.77 Vitec Group 500 0.68 Industrial transportation 0.87 Wincanton 638 0.87 Support services 2.58 Davis Service Group 419 0.57 Electrocomponents 258 0.35 Filtrona 79 0.11 Premier Farnell 246 0.34 Rentokil Initial 499 0.68 Smiths News 389 0.53 Automobiles & parts 0.44 GKN 320 0.44 Beverages 0.94 Diageo 689 0.94 Food producers 2.60 Tate & Lyle 232 0.32 Unilever 1,671 2.28 Household goods 0.57 Bovis Homes Group 270 0.37 Persimmon 144 0.20 Tobacco 1.80 British American Tobacco 1,322 1.80 Pharmaceuticals & biotechnology 5.37 AstraZeneca 882 1.20 GlaxoSmithKline 3,062 4.17 General retailers 1.01 Carpetright 593 0.81 Topps Tiles 147 0.20 Media 1.66 Pearson 580 0.79 Reed Elsevier 350 0.48 Trinity Mirror 284 0.39 Travel & leisure 2.43 Compass Group 750 1.02 Holidaybreak 509 0.69 Marston's 144 0.20 William Hill 379 0.52 Fixed line telecommunications 2.42 BT Group 1,776 2.42 Mobile telecommunications 5.31 Vodafone Group 3,894 5.31 Electricity 2.71 British Energy Group 660 0.90 Scottish & Southern Energy 1,325 1.81 Gas, water & multi-utilities 6.93 National Grid 933 1.27 Northumbrian Water Group 822 1.12 Pennon Group 1,297 1.77 Severn Trent 729 0.99 United Utilities 1,310 1.78 Banks 10.14 Alliance & Leicester 532 0.72 Barclays 1,125 1.53 HSBC Holdings 4,451 6.06 Lloyds TSB Group 1,344 1.83 Equity investment instruments 1.73 Ecofin Water & Power Opportunities 352 0.48 Black Rock (formerly Merrill Lynch Commodities 914 1.25Income Investment Trust) General financial 0.89 Close Brothers Group 289 0.39 Provident Financial 367 0.50 Life insurance 3.44 Aviva 696 0.95 Friends Provident 545 0.74 Legal & General Group 569 0.78 Old Mutual 293 0.40 Prudential 416 0.57 Non-life insurance 2.17 Catlin Group 316 0.43 Jardine Lloyd Thompson Group 474 0.65 Royal & Sun Alliance 801 1.09 Real estate investment trusts 0.62 Alpha Pyrenees Trust 209 0.28 Segro 251 0.34 Non-convertible preference shares 7.91 Aviva 8.75% Cum. Irrd. Pref. 1,800 2.45 General Accident 8.875% Cum. Irrd. Pref. 887 1.21 HBOS 6.475% Non-cum. Pref. 878 1.20 HBOS 9.25% Non-cum. Irrd. Pref. 723 0.99 HBOS 9.75% Non-cum. Irrd. Pref. 697 0.95
Royal & Sun Alliance 7.375% Cum. Irrd. Pref. 259 0.35
Standard Chartered 7.375% Non-cum. Irrd. Pref. 560 0.76
'AA' credit rated bonds 1.32 E.ON International Finance 6.375% 2012 494 0.67
Land Securities Capital Markets Var. Rate 2013 476 0.65
'A' credit rated bonds 2.32 Deutsche Telekom 7.125% 2012 497 0.68 France Telecom 5.5% 2012 478 0.65 London Merchant Securities 6.5% 2026 240 0.33 National Grid Gas 6% 2017 486 0.66 'BBB' credit rated bonds 2.30 British Telecommunications 8% 2016 530 0.72 DWR Cymru Financing Var. Rate 2036 714 0.97 Imperial Tobacco Finance 6.25% 2018 451 0.61 Bonds with no credit rating 0.44 320 0.44Shaftesbury 8.5% 2024 69,192 94.28Total investments 4,199 5.72Net other assets 73,391 100.00 Net assets attributable to shareholders (all non-equity) NoteThe results for 2007 are based on financial statements filed with the Registrarof Companies which carry an audit report which is unqualified and includes nomatters of adverse comment.
The 2008 figures have been extracted from the audited financial statements which will be filed with the Registrar of Companies with an unqualified audit report with no matters of adverse comment.
The Annual Report and Financial Statements will be posted to shareholders on orbefore 05 August 2008 and will be available on the M&G website, www.mandg.co.uk. The Annual General Meeting will be held at 09.15 am on 05 September 2008 atLaurence Pountney Hill, London EC4R 0HH.J. P. McClellandSecretary22 July 2008
M & G HIGH INCOME INVESTMENT TRUST PLC