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16 Oct 2012 15:23
Manchester & London Investment Trust Plc
Announcement of the Audited Group ResultsFor the year ended 31st July 2012
Enquiries:
Manchester & London Investment Trust PlcB S SheppardTel: 0161 228 1709Midas Investment Management LtdM B SheppardTel: 0161 228 1709
ANNOUNCEMENT OF THE AUDITED GROUP RESULTS
The Directors Announce the Audited Figures for the year ended 31st July 2012 Company Registered Number: 01009550
Financial SummaryTotal Return Year to Year to Percentage 31st July 31st July increase/ 2012 2011 (decrease)Total Return (£'000) (19,945) 15,691 (227.1)
Return per 25p ordinary share - fully (88.8)p 69.9p (227.0) diluted Total Revenue Return per 25p ordinary
14.3p 11.1p 28.8
share
Cash dividend per 25p ordinary share 13.0p 12.5p 4.0Capital At At Percentage 31st July 31st July increase/ 2012 2011 (decrease)Net assets attributable to equity 75,515 98,267 (23.2)shareholders (£'000)Net asset value per 25p ordinary share - 336.3p 437.6p (23.1)fully dilutedFTSE All-Share Index 2,927.3 3,026.0 (3.3)Performance versus FTSE All-Share Index (19.8)Ongoing Charges Year to Year to 31st July 31st July 2012 2011 Ongoing charges as a percentage ofaverage net assets 0.86% 0.51%Financial CalendarYear ended: 31st July 2012Results announced: 16th October 2012
Report and Accounts made available to shareholders: 16th October 2012 Annual General Meeting to be held in Manchester: 22nd November 2012 Expected final dividend payment:
30th November 2012
Chairman's Statement
Results for the year ended 31st July 2012
Our 2012 financial year was a year marked by high volatility and the re-emergence of the Eurozone crisis. After falling from around 6,000 in July 2011 to around 5,000 in August 2011; the market then rallied back to 6,000 in March 2012 to drop again to around 5,200 in May 2012. The market then crept back to finally close at around 5,600 at the end of the period.
It has been a disappointing period for the fund, as although the index effectively traded within a fairly narrow range, the movements within the subsectors of the index were more marked. In essence, the period was a risk off period with strong reallocations into fixed income and developed market defensive equities paying reasonable dividend yields, even if these latter stocks were at best low growth, if not ex-growth. Within equities, Tobacco, Utilities, Alcoholic Beverages etc did well, but cyclicals such as Miners, Oil & Gas and Industrial Engineering performed badly. Unfortunately, the majority of the fund is exposed to the latter rather than the former and hence we performed very poorly, both absolutely and relatively. More details regarding our performance can be found in the Investment Manager's report.
It is our view that the issues regarding the Eurozone are insurmountable unless the richer countries of the North wish to sanction a constant transfer of wealth across to the Southern states. None of us here believe that this will be their collective desired future. The issues with the Eurozone are not to do with liquidity or a blockage in the monetary transmission mechanism as we are constantly told, but actually lie in uncompetitiveness, over-regulation , far too much debt and a feeble banking system. As we have said numerous times before, there are three ways for the situation to be solved: a transfer of wealth from North to South (we don't see this "continuing" to happen); the South becomes competitive (unlikely without the quick route via currency devaluation) or mass money printing which is unsterilised (this may happen and Draghi is certainly moving that way, but against Bundesbank protestations). In conclusion, we are swayed by Capital Economics' conclusion that the overwhelmingly logical outcome is that we see some periphery countries exit the Eurozone.
Turning to the market itself, it is miraculous to see that we are entering the Q3 2012 reporting season as the first reporting season for three years with forecast negative earnings growth and yet the market remains buoyant. The reason for this is the monetary printing being undertaken by almost all significant central banks which, in the Federal Reserve's case, is unlimited in scope. The big question is which card outweighs the other and when does the miracle balm effect of printing wear thin?
It is all very well herding into low growth yield plays but in time all but the most inexpensive investments do require some growth to provide rewards. In addition, growth shares can not continue to devalue against their earnings growth forever. In the longer term, we believe investors will be drawn back to globally exposed, well established, cash generative growth stocks which is where we are positioned. We do not intend to try to switch out of these only to try to time our return before the herd. In time our portfolio will see the rewards of being positioned to gain advantage from the benefits of global population growth, productivity gains, urbanisation and the growth of the middle classes.
Over the last financial year, Manchester & London's net asset per share decreased by 23.1 per cent, which is an underperformance against the FTSE All-Share Index which generated a return of minus 3.3 per cent. As at the end of July 2012, we have materially outperformed the FTSE-All Share index over the last ten years and we have performed in line with the market over the last five years (even after such a disappointing year).
The Directors are proposing a Final Dividend of 7.8p making a total of 13.0p per share for the year, an increase of 4 per cent for the year. This total payment compares with the Total Revenue Return per ordinary share for the year of 14.3p. The Company has carried forward distributable reserves of £27.2m, representing over £1.21 per share, which puts us in a strong position to pursue a flexible distribution policy, should the Directors believe this to be in shareholders' best interests.
Annual General Meeting
I look forward to welcoming shareholders to our fortieth Annual General Meeting to be held in the Lancaster Suite, The Midland Hotel, Peter Street, Manchester M60 2DS, at 12.45 pm on Thursday 22nd November 2012.
Mr P H A StanleyChairmanPortfolio InvestmentsAs at 31st July 2012 Valuation % of NetListed investments Sector £'000 AssetsPZ Cussons plc Personal Goods 13,880 18.4Smith & Nephew plc Healthcare Services 7,630 10.1Weir Group plc Industrial Engineering 7,292 9.7Xstrata plc Mining 6,942 9.2Standard Chartered plc Banking 6,184 8.2Diageo plc Beverages 5,748 7.6BG Group plc Oil & Gas Producers 5,676 7.5Rio Tinto plc Mining 5,535 7.3BP plc Oil & Gas Producers 5,356 7.1Syngenta AG Chemicals 5,182 6.9Unilever plc Food Producers 4,652 6.1Burberry Group plc Personal Goods 4,169 5.5Jardine Matheson Holdings Ltd General Industrial 4,003 5.3Smith Group plc General Industrial 3,775 5.0Aberdeen Asset Management plc Financial Services 2,409 3.2Afren plc Oil & Gas Producers 2,403 3.2Schroders plc Financial Services 2,296 3.0
HMS Hydraulic Machines & Systems Industrial Engineering 2,216 2.9 Group plc Vedanta Resources plc
Mining 1,965 2.6Millennium & Copthorne Hotels plc Travel & Leisure 1,333 1.8Sportingbet plc Travel & Leisure 1,331 1.7BlackRock Greater Europe Inv Trust Equity Investment 957 1.3plc InstrumentsGlencore International plc Mining 754 1.0Lloyds Banking Group plc Banking 653 0.8Walter Energy Inc Oil & Gas Producers 592 0.8Heritage Oil plc Oil & Gas Producers 284 0.4Joy Global Inc Mining 66 0.1Listed investments 103,283 136.7Unlisted at Director's valuation 126 0.2Cash and net current (27,894) (36.9)assets/(liabilities)Net assets 75,515 100
All investments listed above are equities (unless otherwise stated), denominated in Sterling (save for Syngenta that is denominated in CHF and Jardine Matheson, HMS Hydraulic Machines & Systems, Walter Energy and Joy Global in USD), that have been issued by companies registered in England (save for Syngenta, Jardine Matheson, HMS Hydraulic Machines & Systems, Glencore International, Walter Energy, Heritage Oil and Joy Global that are registered in Switzerland, Bermuda, Cyprus, Jersey, USA, Jersey and USA respectively).
Portfolio Sector AnalysisAs at 31st July 2012Sector % of PortfolioPersonal Goods 17.5Mining 14.8Oil & Gas Producers 13.8Industrial Engineering 9.2General Industrial 7.5Healthcare Services 7.4Banking 6.6Beverages 5.6Chemicals 5.0Financial Services 4.5Food Producers 4.5Travel & Leisure 2.6Equity Investment Instruments 0.9Unlisted Investments 0.1 100.0
Investment Objective and Policy
Investment objective
The investment objective of the Company is to achieve capital appreciation together with a reasonable level of income.
Investment policy
Asset allocation and risk diversification
The Company's investment objective is sought to be achieved through a policy of actively investing in a diversified portfolio, comprising UK and overseas equities and fixed interest securities. The Company seeks to invest in companies whose shares are admitted to trading on a regulated market. However, it may invest in a small number of equities and fixed interest securities of companies whose capital is not admitted to trading on a regulated market. Investment in overseas equities is utilised by the Company to increase the risk diversification of the Company's portfolio and to reduce dependence on the UK economy in addressing the growth and income elements of the Company's investment objective. There are no maximum exposure limits to any one particular classification of equity or fixed interest security. The Company's investments are not limited to any one industry sector and its current investment portfolio is spread across a range of sectors. The Company has no specific criteria regarding market capitalisation or credit ratings in respect of investee companies.
The Company intends to maintain a relatively focused portfolio, seeking capital growth by investing in approximately 20 to 40 securities. The Company will not invest more than 15 per cent of the gross assets of the Company at the time of investment in any one security. However, the Company may invest up to 50 per cent of the gross assets of the Company at the time of investment in an investment company subsidiary, subject always to other restrictions set out in this investment policy and the Listing Rules.
The Company intends to be fully invested whenever possible. However, during periods in which changes in economic conditions or other factors so warrant, the Investment Manager may reduce the Company's exposure to one or more asset classes and increase the Company's position in cash and/or money market instruments.
The Company may invest in derivatives, money market instruments and currency instruments including contracts for differences ("CFDs"), futures, forwards and options. These investments may be used for hedging positions against movements in, for example, equity markets, currencies and interest rates. In addition, these instruments will only be used for efficient portfolio management purposes. For the avoidance of doubt, the use of such instruments to engage in trading transactions is strictly against the Company's investment policy. Any trading transactions will be carried out through dealing subsidiaries of the Company. The Company would not maintain derivative positions should the total underlying exposure of these positions exceed one times the adjusted total capital and reserves.
Gearing
The Company may borrow to gear the Company's returns when the Investment Manager believes it is in shareholders' interests to do so. The Company's investment policy and the Articles permit the Company to incur borrowing up to a sum equal to two times the adjusted total of capital and reserves. Any change to the Company's borrowing policy will only be made with the approval of shareholders by special resolution.
In addition to the above, the Company will observe the investment restrictions imposed from time to time by the Listing Rules which are applicable to investment companies with shares listed on the Official List of the UKLA under Chapter 15.
In accordance with the Listing Rules, the Company will manage and invest its assets in accordance with the Company's investment policy. Any material changes in the principal investment policies and restrictions (as set out above) of the Company will only be made with the approval of shareholders by ordinary resolution.
Investment Objective and Policy (continued)
In the event of any breach of the investment restrictions applicable to the Company, shareholders will be informed of the remedial actions to be taken by the Board and the Investment Manager by an announcement issued through a Regulatory Information Service approved by the FSA.
Benchmark Index
Performance is measured against the FTSE All-Share Index. The Company sources index and price data from Proquote International, which is a division of the London Stock Exchange plc.
Investment Manager's Review
We entered the period geared, focused on growth (and hence cyclicals) and with exposure to emerging markets. The period was marked by a risk off movement into developed market, safe haven fixed income and highly defensive yield paying equities. In effect, there was an unprecedented shift away from cyclicals to defensives hence we suffered materially.
In addition to this, we believe that over fifty per cent of the portfolio by value has the potential to become an `Event Driven' situation over the next five years. In particular, we would highlight PZ Cussons, Burberry, Standard Chartered, Smiths Group, Smith & Nephew, Afren, Weir and BG Group as takeover targets. Last year we didn't mention Xstrata in this list.
We have remained overweight in the consumer goods sector and maintained a high weighting to PZ Cussons. This does cause us many concerns, but we think the medium term opportunities outweigh these concerns. Nigeria and Indonesia may be high risk propositions but their socio-demographics may offer some of the most attractive growth prospects in the world. As has been noted in the Chairman's statement, we don't believe growth and opportunity can be devalued endlessly particularly in an inflationary environment.
We maintain a material exposure to the mining sector as, despite the heavy attention paid to a short term economic slowdown in China, commodities remain an attractive investment in the medium term due to population growth, urbanisation, resource depletion and inflation. In addition many metals now trade at or below their marginal cost, a situation which we do not believe is sustainable for an extended period of time and a factor we do not see adequately reflected in valuations.
We remain underweight in Banks, Financials and Insurance by 8.9 per cent which are leveraged sectors and often involve more risks than are presented fairly to shareholders.
To add to the issues of asset allocation this year, we have been hit by a poor investment in Essar Group and specific adverse issues with PZ Cussons, Standard Chartered, BG and Weir. We can't foresee how any of these specific situations will pan out, but a good company with a decent management team will normally overcome these hurdles in time. This recovery almost always doesn't happen immediately and we shouldn't expect it to do so if we are taking a long-term investment view. If the facts change or become clearer to us, we will change our mind.
The result of all of the above mentioned factors led to a material and disappointing underperformance for the fund as broken down below:
Underperformance of Mining investments 7.0%Underperformance of Industrial Engineering investments 2.9%Underperformance of PZ Cussons plc 2.7%Underperformance of Essar Energy plc (now divested) 2.3%
Underperformance due to entering the period geared and focused on growth stocks rather than defensives
4.9%Total underperformance 19.8%
Market conditions were more fortunate for our trading activities which generated a trading income this year of £934,000 compared with £552,000 last year.
Our strategy remains to be focused on global blue chips which are growing, cash generative and liquid in preference to UK/EU centric value stocks.
Investment Manager
Midas Investment Management Ltd
Principal Portfolio Holdings
PZ Cussons plc ("PZ Cussons")
PZ Cussons operates in the personal goods sector manufacturing and distributing cleansing fluids, soaps, detergents and health & beauty products through their 30 plus brands which include Imperial Leather, Carex, Cussons Baby and Morning Fresh. The company operates from the UK, Africa, Asia, United Arab Emirates, Central Europe and Australia. PZ Cussons is positioning itself as an attractive distributor of personal goods into growth markets across the developing world.
PZ Cussons has endured a challenging year, first with the unrest in Nigeria and then a disappointing trading performance in Australia. This has offset good momentum in Indonesia and the new Beauty division, which is starting to build a strong portfolio of high quality brands. However, we expect a return to growth in 2012/2013 as some stability is regained in Nigeria and cost saving measures bear fruit. PZ Cussons has a five year compound earnings per share ("EPS") growth rate of 8.6 per cent.
Smith & Nephew plc ("Smith & Nephew")
Smith & Nephew is a global medical devices company focusing on orthopaedics, endoscopy and advanced wound management. The company has distribution channels in over 90 countries, generating annual sales of over $4 billion.
Smith & Nephew remains attractively placed to benefit from the changing demographics and personal activity levels across the world. The stock is inexpensive against its historic trading multiples and with further consolidation expected in the sector it is a prime takeover candidate. Smith & Nephew has a five year compound EPS growth rate of 10.5 per cent.
Weir Group plc ("Weir")
Weir is a global leader in the manufacture of specialised pumps. The Minerals division which supplies slurry pump equipment to most major mining companies is the largest, accounting for around 54 per cent of revenues. The Oil & Gas division manufactures pumps and safety-critical equipment with a heavy focus on the US shale industry.
With low gas prices causing a shift in activity from gas to liquids rich shale plays, the US pressure pumping market found itself in transition this year. While oil plays require the same high pressure pumps, the logistics of moving the fleets across the country reduced utilisation rates. While it is unclear how long this will weigh on the market, the long-term picture for shale drilling remains unchanged, with demand for hydrocarbons supported by emerging market urbanisation and global population growth. The Minerals division is also well placed to benefit from the same drivers. Weir has a five year compound EPS growth rate of 36.9 per cent.
Xstrata plc ("Xstrata")
Xstrata is a global, diversified mining group with an attractive portfolio of assets across key commodities such as copper, coal, zinc and nickel. The group is undergoing a transformational growth programme, that should also see it move significantly down the cost curve. A well publicised merger with Glencore is currently on the table which, if successful, should create a global mining and trading champion. Despite this, the group currently trades at a discount to book value.
Standard Chartered plc ("Standard Chartered")
Standard Chartered is engaged in consumer and wholesale banking globally and has a strong focus on the Asia-Pacific, Middle East and African regions which provide approximately 90 per cent of the group's profit. The bank has been a strong historic performer and has delivered 10 successive years of record profits, with a five year compound growth rate of 15.9 per cent.
Though the bank suffered a recent setback with the Iranian payments scandal, underlying earnings momentum remains good, and the current valuation of
Diageo plc ("Diageo")
Diageo is a global alcoholic beverages company, and the world's largest producer of premium spirits. The company holds an enviable portfolio of iconic brands such as Johnnie Walker, Smirnoff, Baileys and Guinness.
Diageo continues to benefit from the growth of the middle class in emerging economies and their increasing demand for premium brands. The company has targeted medium-term organic sales growth of 6 per cent per annum and has a five year compound EPS growth rate of 9.3 per cent.
BG Group plc ("BG")
BG is a global diversified oil & gas E&P company, with key assets in the Santos Basin (Brazil), Australia and the North Sea. The group remains focused on delivering rapid production growth over the next several years, targeting compound volume growth of 6-8 per cent out to 2020. The group's LNG arm also remains an attractive business, capitalising on large global price differences by transporting gas in liquid form from producing nations to high demand regions such as Asia.
BG has a five year compound EPS growth rate of 22.5 per cent and trades at a significant discount to its NAV.
Rio Tinto plc ("Rio Tinto")
Rio Tinto is one of the world's largest producers of high quality iron ore. Its rapidly expanding operations in Pilbara (Australia) combine lowest quartile cash costs with prime locations to serve the Asian markets. Whilst the slower growth outlook for China has taken its toll on the iron ore price, we do not believe the urbanisation and industrialisation story in Asia has fully played out. Furthermore, current spot prices sit well below the cost of production for Rio Tinto's Chinese competitors, a situation which is unsustainable in the longer term.
The company trades on an enterprise value/earnings before interest, tax, depreciation and amortisation ("EV/EBITDA") of just 5x and has a five year compound EPS growth rate of 8.0 per cent.
BP plc ("BP")
BP is an international oil and gas company operating in over 80 different countries. With the full liability related to the 2010 Macondo oil spill not yet quantified, the stock continues to trade at a significant discount to its fair asset value.
Whilst a favourable out of court settlement of these liabilities would be an obvious catalyst to close this valuation gap, a sale of the group's TNK-BP stake also looks to be a good way to release value, which can then be returned to shareholders or used to acquire assets that will give the company more meaningful growth going forward.
Syngenta AG ("Syngenta")
Syngenta is a global agri-science business engaged in crop protection and seeds. Urbanisation and changing dietary preferences across the middle classes of the developing nations is forcing the agricultural industry to increase yields.
The strong sector outlook, the group's technological edge and their enviable product pipeline suggest the shares are attractively valued, particularly if Syngenta achieve their target to increase sales in key crop areas to $25bn by the end of the decade. Syngenta has a five year compound EPS growth rate of 17.0 per cent.
Investment Record of the Last Ten Years
Dividend Return per per Total assets Net Asset Value Total ordinary share ordinary less per 25p share Fully share liabilities Fully Return Basic diluted Basic dilutedYear ended £'000 p p p £'000 p p31st July 2,384 31.79 23.30 9.50 24,238 323.17 237.89200331st July 5,512 73.49 53.15 9.50 28,901 385.35 282.39200431st July 5,426 72.35 52.33 9.50 33,611 448.15 327.34200531st July 3,206 42.75 31.14 9.50 36,107 481.43 351.17200631st July 5,799 41.58 41.58 10.00 52,554 376.80 376.80200731st July (3,490) (25.02) (25.02) 10.00 47,669 341.80 341.80200831st July 645 4.43 4.43 10.50 57,495 328.44 328.44200931st July 13,151 71.75 71.75 11.50 85,203 379.40 379.40201031st July 15,691 69.87 69.87 12.50 98,267 437.60 437.60201131st July (19,945) (88.81) (88.81) 13.00 75,515 336.26 336.262012
In 2006, the Company adopted International Financial Reporting Standards ("IFRS"). As a result, the data has been restated to reflect the change to IFRS. It is not practical to restate 2003 and prior periods for the effect of transaction costs on total return.
Report of the Directors
The Directors present their report and financial statements for the year ended 31st July 2012.
Business Review
The purpose of the business review is to provide an overview of the business of the Company by:
- Analysing development and performance using appropriate key performance indicators ("KPIs").
- Outlining the principal risks and uncertainties affecting the Company.
- Describing how the Company manages these risks.
- Explaining the future business plan of the Company.
- Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company.
- Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business.
Status
The Company is an Investment Company as defined by Section 833 of the Companies Act 2006 and operated as an Investment Trust in accordance with Section 1158 of the Corporation Tax Act 2010.
The Company is also governed by the Listing Rules and Disclosure and Transparency Rules of the Financial Services Authority.
The close company provisions of the Corporation Tax Act 2010 do not apply to the Company.
Company registered number: 01009550.
Principal activities
The Company carries on business as an Investment Company. A review of investment activities for the year ended 31st July 2012 and the outlook for the coming year is given in the Investment Manager's report. The Company's subsidiaries, OSP Limited (formerly Osprey Smaller Companies Income Fund Limited) ("OSP") and Stakeholders' Momentum Investment Limited (formerly Stakeholders' Momentum Investment Trust plc) ("SMIL") carry on business as a dealing subsidiary and as an investment subsidiary, respectively.
OSP, a company incorporated in Guernsey, is the sole branch outside of the United Kingdom.
Performance and key performance indicators
The key measures by which the Board judges the success of the Company are the share price, the net asset value per share and the ongoing charges measure.
The Board considers the most important key performance indicator to be the comparison with its benchmark index, the FTSE All-Share Index.
Total net assets at 31st July 2012 amounted to £75,515,000 compared with £98,267,000 at 31st July 2011, a decrease of 23.2 per cent, whilst the fully diluted net asset value per ordinary share decreased to 336.3p from 437.6p. This decrease of 23.1 per cent compared with a decrease over the period of 3.3 per cent by the FTSE All-Share Index, equated to an underperformance by the Company of 19.8 per cent.
Group net revenue after taxation for the year was £3,221,000, an increase of 28.9 per cent.
The share price during the period under review has been quoted at discounts to net asset value of (0.9) to 16.5 per cent which the Directors consider to be satisfactory in the context of the discounts applicable to other investment trusts and was achieved without using the Company's powers to acquire its own shares in the market.
Ongoing charges is a measure of the total expenses (including those charged to capital) expressed as a percentage of the average net assets over the year. The Board regularly reviews the ongoing charges measure and monitors Group expenses.
Principal risks and uncertainties associated with the Company
An investment in the Company is only suitable for financially sophisticated investors who are capable of evaluating the risks and merits of such an investment, or other investors who have been professionally advised with regard to investment and who have sufficient resources to bear any loss which might result from such an investment. There can be no guarantee that investors will recover their initial investment. The investment may employ gearing and may be subject to sudden and large falls in value. Investors should be aware that movements in the price of the Company may be more volatile than movements in the price of the underlying investments and that there is a risk that investors may lose all their invested money. Investors considering an investment should consult their stockbroker, bank manager, solicitor, accountant and/or other independent financial adviser.
In respect of some of the companies in which the Company may invest:
- the company may be undergoing significant change. Such businesses are usually exposed to greater risks than those not undergoing such change;
- they may have less mature businesses, a more restricted depth of management and accordingly a higher risk profile;
- the quality of the investments' management may have been overestimated;
- the market value of, and income derived from, such shares can fluctuate; and
- there may not be a liquid market for their shares. The fact that a share is traded on a market does not guarantee its liquidity. Accordingly, such shares may be difficult to realise at quoted market prices.
Any change in the tax treatment of dividends paid, or income received by the Company, may reduce the level of yield received by shareholders. Any change in the Company's tax status, or in legislation, could affect the value of the investments held by the Company and its performance.
Investment in the Company should be regarded as long-term in nature. There can be no guarantee that any appreciation in the value of the Company's investments will occur and investors may not get back the full value of their investment. There can be no guarantee that the investment objective of the Company will be met.
The Company is exposed to a range of economic and market risks, liquidity, interest rates, exchange rates and general financial risks.
The market capitalisation of the Company may make the market of the ordinary shares less liquid than would be the case for a larger company.
The Company's policy of charging 65 per cent of the Company's investment advisory fees to the Company's capital account may result in the diminution of the asset value of the Company.
Whilst the use of borrowings by the Company should enhance the net asset value of the ordinary shares when the value of the Company's underlying assets is rising, it will have the opposite effect when the underlying asset value is falling.
Furthermore, should any fall in the underlying assets value result in the Company breaching the financial covenants applicable to the borrowings, the Company may be required to repay such borrowing in whole or in part together with any attendant costs. In order to repay such borrowings, the Company may have to sell assets at less than their quoted market values. A positive net asset value for the ordinary shares will be dependent upon the Company's assets being sufficient to meet any debt.
On a winding-up of the Company, the ordinary shares rank for repayment of capital after repayment of all other creditors of the Company. Ordinary shares are only appropriate for investors who understand that they may receive an amount less than their original investment.
Risk management
The risks with regards to financial instruments, and the Company's policies for management of these risks, are detailed in note 19 to the financial statements - "Risks - Derivatives, other financial instruments and other risks". The Company manages the risks inherent in portfolio management by investing in approximately 20 to 40 securities of companies operating in a range of industrial sectors and varying the extent of cash holdings or gearing in relation to the Investment Manager's assessment of overall market conditions.
The Company does not have any employees and consequently relies upon the services provided by a number of third parties. The Board therefore relies on the control procedures of these third parties which include the Companies Investment Manager, Registrar and Broker. This type of operational structure is not uncommon with Investment Trust companies.
The Board reviews the internal control procedures of its third party service providers and assesses the reliability of these procedures as part of its risk management strategy.
Further details with regards to the Board's risk management procedures are detailed in the "Internal Financial Control" section of the Report of the Directors.
Gearing
The company operates a Flexible Revolving Loan Facility with a limit of £11m with Pershing Securities Limited, a subsidiary of The Bank of New York Mellon Corporation. No arrangement fee is payable on this facility and interest is charged at the Bank of England Base Rate plus three per cent per annum on drawdowns.
By the year end the portfolio had been geared, using this facility and CFDs, to a level whereby gross investments represented 87.9 per cent of net assets. In addition, the weighted average percentage of gearing (calculated as net debt divided by market capitalisation) held by the individual companies in the portfolio on their own balance sheets was 14.3 per cent, resulting in a combined see through gearing in the portfolio of 100.5 per cent.
Management
Details of the Company's management agreement with Midas Investment Management Limited ("the Investment Manager" or "Midas") are contained in note 3 to the financial statements.
Future development
The Company continues to look for strategies to increase shareholders' returns including the dividend and to increase the liquidity of its shares. A commentary on the trends and factors likely to affect the future development, performance and position of the Company, which include market sentiment and the effectiveness of government intervention, is set out in the Chairman's Statement and is released monthly in a fund factsheet published via the Company's website.
Results
The Group's total comprehensive loss for the year, after taxation, amounted to £19,945,000 (2011: £15,691,000 total comprehensive income).
Total net assets at 31st July 2012 amounted to £75,515,000 compared with £98,267,000 at 31st July 2011, whilst the fully diluted net asset value per ordinary share decreased to 336.3p from 437.6p.
Ordinary dividends
An interim dividend of 5.2p per ordinary share was paid on 30th April 2012 (2011: 5.2p) and the Directors are recommending a final dividend of 7.8p per ordinary share (2011: 7.3p), a total for the year of 13.0p per ordinary share (2011: 12.5p).
Subject to shareholders' approval at the Annual General Meeting, the final dividend will be paid on 30th November 2012 to shareholders registered on 9th November 2012. The shares will be declared ex-dividend on 7th November 2012.
Share valuations
On 31st July 2012, the middle market quotation and the net asset value per ordinary 25p share were 292.0p and 336.3p, respectively. This indicates that the discount on the Company's shares was 13.2 per cent. This is not uncommon as the share prices of closed-end funds are often traded at a discount to their net asset values.
Events after the reporting period
There have been no significant events since the end of the reporting period other than the volatility currently experienced in the stock market.
Directors' Responsibilities in Relation to the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report, the Directors Remuneration Report and the Group and Parent Company 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 Group and Parent Company financial statements in accordance with IFRS adopted by the European Union and Article 4 of the EU IAS Regulation. 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 the affairs of the Company and the Group and of the profit or loss of the Company and Group for that period.
In preparing those financial statements, the Directors are required to:
- properly select suitable accounting policies and apply them consistently;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- provide additional disclosure when compliance with the specific requirements of IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance;
- state that the Group and Company have complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and
- make an assessment of the ability of the Group and Company to continue on a going concern basis.
The Directors are responsible for keeping adequate accounting records that show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and of the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. 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 are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
To the best of the knowledge of each of the Directors, whose names are set out on page 6:
(a) the financial statements, prepared in accordance with the IFRS adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
(b) the Directors' Report includes a fair review of the development and performance of the fund and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Each of the Directors accepts responsibility accordingly.
On behalf of the Board of DirectorsMr P H A StanleyChairman16th October 2012
Independent Auditor's Report To The Members of Manchester & London Investment Trust plc
The Company's financial statements for the year ended 31st July 2012 have been audited by CLB Coopers. The entire Auditor's report, which is unqualified, can be found in the Company's Annual Report and Financial Statement at www.manchesterandlondon.co.uk.
Consolidated Statement of Comprehensive IncomeFor the year ended 31st July 2012 2012 2012 2012 2011 2011 2011 Revenue Capital Total Revenue Capital Total Note £'000 £'000 £'000 £'000 £'000 £'000Gains(Losses)/gains oninvestments at fair valuethrough profit or loss 10 - (22,488) (22,488) - 13,809 13,809Trading income 2 934 - 934 552 - 552Investment income 2 2,690 - 2,690 1,984 - 1,984Gross return 3,624 (22,488) (18,864) 2,536 13,809 16,345 ExpensesInvestment management fee 3 (145) (268) (413) (171) (318) (489)Cost of investment (8) (43) (51) - (138) (138)transactionsOther operating expenses 4 (250) - (250) 135 - 135Total expenses (403) (311) (714) (36) (456) (492) Return before finance costsand tax 3,221 (22,799) (19,578) 2,500 13,353 15,853Finance costs 6 - (367) (367) (1) (161) (162)Return on ordinaryactivities before tax 3,221 (23,166) (19,945) 2,499 13,192 15,691Tax expense 7 - - - - - -Return on ordinaryactivities after tax 3,221 (23,166) (19,945) 2,499 13,192 15,691 Earnings per ordinary share(pence)Basic 9 14.34 (103.15) (88.81) 11.13 58.74 69.87Fully diluted 9 14.34 (103.15) (88.81) 11.13 58.74 69.87
The total column of this statement represents the Statement of Comprehensive Income of the Group prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
The Group does not have any Other Comprehensive Income and hence the net return, as disclosed above, is the same as the Group's Total Comprehensive Income/(Loss).
All items in the above statement derive from continuing operations.
Consolidated and Company Statements of Changes in Equity For the year ended 31st July 2012
Group Capital Capital Share Share Other reserve reserve Retained capital premium reserves (unrealised) (realised) earnings Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1st August 5,614 35,132 (79) 17,280 23,756 3,500 85,2032010 Changes in equity for 2011 Total comprehensive - - - - - 15,691 15,691incomeTransfer of capital - - - 9,891 3,301 (13,192) -profitsOrdinary dividend paid - - - - - (2,627) (2,627)(note 8)Balance at 31st July 5,614 35,132 (79) 27,171 27,057 3,372 98,2672011 Changes in equity for 2012 Total comprehensive - - - - - (19,945) (19,945)lossTransfer of capital - - - (19,025) (4,141) 23,166 -lossOrdinary dividend paid - - - - - (2,807) (2,807)(note 8)Balance at 31st July 5,614 35,132 (79) 8,146 22,916 3,786 75,5152012 Company Capital Capital Share Share Other reserve reserve Retained capital premium reserves (unrealised) (realised) earnings Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1st August 5,614 35,295 (79) 16,741 821 26,981 85,3732010 Changes in equity for 2011 Total comprehensive - - - - - 15,092 15,092incomeTransfer of capital - - - 10,430 2,435 (12,865) -profitsOrdinary dividend paid - - - - - (2,627) (2,627)(note 8)Balance at 31st July 5,614 35,295 (79) 27,171 3,256 26,581 97,8382011 Changes in equity for 2012 Total comprehensive - - - - - (19,851) (19,851)lossTransfer of capital - - - (19,092) (4,145) 23,237 -lossOrdinary dividend paid - - - - - (2,807) (2,807)(note 8)Balance at 31st July 5,614 35,295 (79) 8,079 (889) 27,160 75,1802012Consolidated Statement of Financial PositionAt 31st July 2012 Note 2012 2011 £'000 £'000 £'000 £'000 Non-current assetsInvestments at fair value through 10 79,966 102,198profit or loss Derivative financial instruments - 19 23,443 22,074 longs 103,409 124,272Current assetsTrade and other receivables 12 81 203Derivative financial instruments - 19 34,637 - shorts Cash and cash equivalents 13 11,432 7,693 46,150 7,896Gross Assets 149,559 132,168Current liabilitiesBorrowings 14 (9,899) (10,868)Trade and other payables 15 (176) (317)Provisions for other liabilities and 16 (1,876) - charges
Derivative financial instruments 19 (62,093) (22,716)
Net assets 75,515 98,267 Equity attributable to equity holdersOrdinary share capital 17 5,614 5,614Share premium 35,132 35,132Other reservesCapital reserve - realised 22,916 27,057Capital reserve - unrealised 8,146 27,171Goodwill reserve (79) (79)Retained earnings 3,786 3,372Total equity 75,515 98,267 Net asset value per shareOrdinary shares - basic 18 336.3p 437.6p Ordinary shares - fully diluted 18 336.3p 437.6p
The financial statements were approved by the Board of Directors and authorised for issue on 16th October 2012 and are signed on their behalf by:
Mr P H A Stanley (Chairman)Mr B S SheppardDirectorsCompany Statement of Financial PositionAt 31st July 2012 Note 2012 2011 £'000 £'000 £'000 £'000 Non-current assetsInvestments at fair value through 10 79,009 102,198profit or loss Derivative financial instruments - 19 23,443 14,937 longs Investments in subsidiaries 11 2,180 2,180 104,632 119,315Current assetsTrade and other receivables 12 83 1,433Derivative financial instruments - shorts 19 34,637 -Cash and cash equivalents 13 11,336 4,823 46,056 6,256Gross Assets 150,688 125,571 Current liabilitiesBorrowings 14 (9,899) (10,868)Trade and other payables 15 (3,516) (1,552)Derivative financial instruments 19 (62,093) (15,313)Net assets 75,180 97,838 Equity attributable to equity holdersOrdinary share capital 17 5,614 5,614Share premium 35,295 35,295Other reservesCapital reserve - realised (889) 3,256Capital reserve - unrealised 8,079 27,171Goodwill reserve (79) (79)Retained earnings 27,160 26,581Total equity 75,180 97,838
The financial statements were approved by the Board of Directors and authorised for issue on 16th October 2012 and are signed on their behalf by:
Mr P H A Stanley (Chairman)Mr B S SheppardDirectorsConsolidated Statement of Cash FlowsFor the year ended 31st July 2012 2012 2011 £'000 £'000Cash flow from operating activitiesReturn on operating activities before taxation (19,945) 15,691Loss/(profit) on investments 17,288 (14,509)Decrease in receivables 122 137Increase/(decrease) in payables 1,829 (1,508)Decrease in derivative financial instruments 3,371 868Net cash generated from operating activities 2,665 679 Cash flow from investing activitiesPurchase of investments (6,759) (30,886)Sale of investments 11,703 27,540
Net cash generated from/(used in) investing activities 4,944 (3,346)
Cash flow from financing activitiesEquity dividends paid (2,807) (2,627)(Repaid to)/Drawn from loan facility (969) 10,868Net cash (used in)/generated from financing activities (3,776) 8,241 Net increase in cash and cash equivalents 3,833 5,574Cash and cash equivalents at beginning of year 7,599 2,025Cash and cash equivalents at end of year 11,432 7,599Company Statement of Cash FlowsFor the year ended 31st July 2012 2012 2011 £'000 £'000 Cash flow from operating activitiesReturn on operating activities before taxation (19,851) 15,092Loss/(profit) on investments 17,596 (14,185)Decrease/(increase) in receivables 1,350 (1,053)Increase in payables 1,964 879Decrease in derivative financial instruments 3,637 514Net cash generated from operating activities 4,696 1,247 Cash flow from investing activitiesPurchase of investments (4,353) (29,889)Sale of investments 9,946 24,215
Net cash generated from/(used in) investing activities 5,593 (5,674)
Cash flow from financing activitiesEquity dividends paid (2,807) (2,627)(Repaid to)/Drawn from loan facility (969) 10,868Net cash (used in)/generated from financing activities (3,776) 8,241 Net increase in cash and cash equivalents 6,513 3,814Cash and cash equivalents at beginning of year 4,823 1,009Cash and cash equivalents at end of year 11,336 4,823Notes Forming Part of the Financial StatementsFor the year ended 31st July 2012
1. Accounting policies
A summary of the principal accounting policies is set out below.
Manchester & London Investment Trust plc is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31st July 2012 comprise the Company and its subsidiaries (together referred to as the `Group' and individually as `Group entities').
a) Basis of preparation and statement of compliance
In accordance with European Union regulations, these financial statements have been prepared in accordance with IFRS issued by the International Accounting Standards Board ("IASB"), as adopted for use in the EU effective at 31st July 2012.
The financial statements have been prepared on the historical cost basis except where IFRS require an alternative treatment.
To the extent that presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts revised by the Association of Investment Companies ("AIC") is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.
The Group's principal accounting policies are set out below. These accounting policies have been applied consistently to all periods presented in these consolidated financial statements.
b) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31st July each year. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All intra-group balances are eliminated on consolidation.
As permitted by Section 408 of the Companies Act 2006, the parent Company's statement of comprehensive income has not been included in these financial statements. The parent Company's comprehensive loss after tax for the year was £19,851,000 (2011: £15,092,000 comprehensive profit).
The results of subsidiaries or businesses acquired or disposed of during the year are included in the consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal as appropriate.
c) Presentation of Statement of Comprehensive Income
In order to reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the statement of comprehensive income between items of a revenue and capital nature has been presented alongside the statement of comprehensive income. In accordance with the Company's status as a UK investment company under Section 833 of the Companies Act 2006, net capital returns may not be distributed by way of dividend. Additionally, the net revenue is the measure the Directors believe appropriate in assessing the Group's compliance with certain requirements set out in Section 1162 Corporation Tax Act 2010.
d) Intangible assets - goodwill
Goodwill arising on consolidation prior to 1st August 1998 has been written off against reserves on acquisition as a matter of accounting policy.
e) Valuation of investments
Investments held at fair value through profit or loss are initially recognised at fair value, being the consideration given and excluding transaction or other dealing costs associated with the investment.
After initial recognition, investments, which are classified as at fair value through profit or loss, are measured at fair value. Gains or losses on investments designated as at fair value through profit or loss are recognised as a capital item, and material transaction costs on acquisition or disposal of investments are expensed and included in the capital column of the statement of comprehensive income. For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business at the end of the reporting period.
Unlisted investments are valued at the Directors' estimate of fair value by reference to the following valuation guidelines - asset values, earnings, dividends and any other relevant factors.
All purchases and sales of investments are recognised on the trade date i.e. the date that the Group commits to purchase or sell an asset.
Investments in subsidiaries are valued at cost in accordance with IAS 27 and reviewed annually for impairment.
f) Derivative financial instruments
Contracts for Differences are valued with reference to the investment's underlying bid price at the end of the reporting period and are held at fair value through profit or loss.
g) Revenue recognition
Revenue is recognised when it is probable that economic benefits associated with a transaction will flow to the Company and the revenue can be reliably measured.
Income from trading activity includes gains and losses on the trading of options, futures and contracts for difference, net of commissions expensed.
A position is deemed to be trading activity rather than investment if the position has been opened and closed and the duration that the position was open is less than twelve months. Immaterial changes to core holdings will not be classified as trading activities regardless of their duration. Positions opened but not yet closed are deemed to be investments in nature until closed at which point their duration determines if they are classified as trading rather than investment. This policy formalises the approach employed in previous periods.
The group marks to market all open sold call options that are extant at any period end and provides for these as a liability. This liability is set against any trading profits for the period from trading in options that the group has undertaken.
All trading is undertaken through the group's offshore subsidiary OSP Limited.
Dividend income from investments is recognised when the shareholders' right to receive payment has been established, normally the ex-dividend date. Special dividends representing a return of capital are credited to capital reserves.
Fixed returns on non-equity shares are recognised on a time apportionment basis so as to reflect the effective yield on the shares.
Where the Group has elected to receive its dividends in the form of additional shares rather than cash, the amount of cash dividend foregone is recognised as income. Any excess in the value of shares received over the amount of cash dividend foregone is recognised in capital reserves.
h) Expenses
All expenses are accounted for on the accruals basis. In respect of the analysis between revenue and capital items presented within the statement of comprehensive income, all expenses have been presented as revenue items except as follows:
- material transaction costs which are incurred on the purchase or sale of an investment designated as fair value through profit or loss are expensed and included in the capital column of the statement of comprehensive income; and
- expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the investment management charge and related costs have been allocated 35 per cent (2011: 35 per cent) to revenue and 65 per cent (2011: 65 per cent) to capital reserve-realised in order to reflect the Directors' long-term view of the nature of the expected investment returns.
i) Finance costs
Finance costs are accrued at the effective interest rate.
j) Taxation
The tax charge represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from return on operating activities before tax as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Investment Trusts which have approval under Section 1158 Corporation Tax Act 2010 are not liable for taxation on capital gains.
The carrying amount of deferred tax assets is reviewed at each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited through profit and loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
k) Dividends payable to shareholders
No equity dividend is accrued unless the shareholders' right to receive payment is established in the period. Dividends proposed after the end of the reporting period are disclosed in note 8.
l) Cash and cash equivalents
Cash and short-term deposits in the balance sheet comprise cash at bank, short-term deposits with an original maturity of three months or less and cash held in highly liquid investment accounts.
m) Capital reserve
Capital reserve - realised
The following are accounted for in this reserve:
- gains and losses on the realisation of investments; and
- expenses and finance costs, together with the related taxation effect, are charged to this reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
- increases and decreases in the valuation of investments held at the year end.
n) Foreign currencies
In preparing the financial statements, transactions in currencies other than pounds sterling are recorded at the actual rate of exchange prevailing on the dates of the transactions. At each reporting period, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the end of the reporting period.
Foreign exchange gains and losses arising from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities in foreign currencies are recognised through profit or loss.
o) Financial instruments and derivatives used for trading purposes
Derivatives entered into for trading purposes include futures, options and a combination of these. Derivatives used for trading purposes are measured at fair value and any gains or losses are included in the statement of comprehensive income. Fair values are based on quoted market prices in an active market.
p) New standards and interpretations not applied
The IASB and IFRIC have issued the following standards and interpretations with an effective date of adoption after the date of these financial statements:
Accounting Standards Effective dateIFRS 7 Financial Instruments: Disclosures 1st January 2013
IFRS 9 Financial Instruments: Classification and Measurement 1st January 2013 IFRS 10 Consolidated Financial Statements
1st January 2013IFRS 12 Disclosure of Interest in Other Entities 1st January 2013IFRS 13 Fair Value Measurement 1st January 2013IAS 1 Presentation of Financial Statements 1st July 2012IAS 12 Income Taxes 1st January 2012IAS 19 Employee Benefits 1st January 2013
IAS 27 Consolidated and Separate Financial Statements 1st January 2013 IAS 32 Financial Instruments: Presentation
1st January 2013IAS 34 Interim Financial Reporting 1st January 2013The Directors have chosen not to early adopt the above standards andinterpretations and they do not anticipate that they would have a materialimpact on the Company's financial statements in the period of initialapplication.2. Income 2012 2011 £'000 £'000 Trading income 934 552 Income from investmentsDividend income 2,681 1,975 Other incomeDeposit interest 9 9Investment income 2,690 1,984Total income 3,624 2,536 Total income comprisesTrading income 934 552Dividends 2,681 1,975Interest 9 9 3,624 2,536 Income from investmentsListed 2,681 1,975 2,681 1,9753. Investment management fee 2012 2012 2012 2011 2011 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 145 268 413 171 318 489
Midas provides investment services to the Company under a management agreement with a termination period of three months. The annual fee is 0.5 per cent of the total portfolio value including cash and short term deposits, payable quarterly in arrears. The fee is not subject to Value Added Tax ("VAT"). Transactions with Midas during the year are disclosed in note 20.
The investment management fee is chargeable 35 per cent to revenueand 65 per cent to capital.4. Other operating expenses 2012 2011 £'000 £'000 Directors' fees 70 68Staff costs (note 5) - -Auditors' remuneration - audit 28 33Registrar fees 9 6Exchange rate variances 4 10Other expenses 139 (252) 250 (135) Directors' fees - subsidiaries 25 25Directors' fees - Company 45 43 70 68
Fees payable to the Company's auditor for the audit of the parent company and consolidated financial statements 25 25 Fees payable to the Company's auditor for other services:
the audit of the Company's subsidiaries pursuant to 3 8
legislation
other services relating to taxation 8 7 36 40
Other operating expenses include irrecoverable VAT where appropriate.
5. Staff numbers and costs
Excluding Directors, the Group employs no members of staff.
Included in Directors' fees above (note 4) are the emoluments paid to theChairman as follows: 2012 2011 £'000 £'000 P H A Stanley (Chairman) 18 176. Finance costs 2012 2011 £'000 £'000 Interest paid 367 1627. Taxation 2012 2012 2012 2011 2011 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000Current UK corporation tax - - - - - - The charge for the year can bereconciled to the profit perthe income statement as follows:Profit/(loss) before tax 3,221 (23,166) (19,945) 2,499 13,192 15,691 Tax at the UK corporation taxrate of 24% (2011: 27.33%) 773 (5,560) (4,787) 683 3,605 4,288Tax effect of non-taxable UKdividends/unrealised profits (643) - (643) (540) - (540)Income not subject to UK (213) - (213) (146) - (146)corporation taxBrought forward managementexpenses utilised during the - - - 6 - 6periodBrought forward losses utilisedduring the period (1) - (1) - - -Gains and losses on investmentsthat are not taxable - 5,495 5,495 - (3,692) (3,692)Excess management expenses 84 65 149 (3) 87 84Current year tax charge - - - - - -
The Company's taxable income exceeded its management expenses, which include the capital and revenue elements of the management fee. The Company has surplus management expenses at 31st July 2012 of £1,951,000 (2011: £2,395,000).
At 31st July 2012, there is an unrecognised deferred tax asset, measured at the standard rate of 24 per cent, of £468,000 (2011: £623,000). This deferred tax asset relates to surplus management expenses. It is unlikely that the Group will generate sufficient taxable profits in the future to recover these amounts and therefore the asset has not been recognised in the year, or prior years.
As at 31st July 2012, the Company has unrelieved capital losses of £9,330,000 (2011: £9,330,000). There is therefore, a related unrecognised deferred tax asset, measured at the standard rate of 24 per cent, of £2,239,000 (2011: £2,426,000). These capital losses can only be utilised to the extent that the Company does not qualify as an investment trust in the future and, as such, the asset has not been recognised.
8. Dividends 2012 2011 £'000 £'000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31st July 2011 of 7.3p 1,639 1,460 (2010: 6.5p) per share Interim dividend for the year ended 31st July 2012 of 5.2p 1,168 1,167 (2011: 5.2p) per share
2,807 2,627
A final dividend in respect of 2012 of 7.8p per share which, together with the interim dividend, amounts to a total dividend of £2,919,415, is to be proposed at the Annual General Meeting on 22nd November 2012 and has been excluded as a liability in these financial statements in accordance with IFRS.
We also set out below the total dividend payable 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.
2012 2011 £'000 £'000
Interim dividend for the year ended 31st July 2012 of 5.2p 1,168 1,168 (2011: 5.2p) per share Proposed final dividend for the year ended 31st July 2012 of 1,751 1,639 7.8p (2011: 7.3p) per share
2,919 2,8079. Return per ordinary share
The calculation of the basic and fully diluted earnings per ordinary share is based on the following:
2012 2012 2012 2011 2011 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Return:Basic and fully diluted 3,221 (23,166) (19,945) 2,499 13,192 15,691
Basic revenue, capital and total return per ordinary share is based on the net revenue, capital and total return for the period and on the
weighted average number of ordinary shares in issue of 22,457,042 (2011: 22,457,042).
10. Investments at fair value through profit or loss
Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000Investments as below 79,966 102,198 79,009 102,198 Group Group Group Company Company Company Listed Unlisted Total Listed Unlisted Total £'000 £'000 £'000 £'000 £'000 £'000Opening cost at 1st 74,971 56 75,027 74,971 56 75,027August 2011Opening unrealisedappreciation at 1st 27,116 55 27,171 27,116 55 27,171August 2011Opening fair value at1st August 2011 102,087 111 102,198 102,087 111 102,198Purchases at cost 6,759 - 6,759 4,353 - 4,353Sales proceeds (11,703) - (11,703) (9,946) - (9,946)
Realised loss on sales (2,276) - (2,276) (2,517) - (2,517) Increase/(decrease) in unrealised appreciation (15,027) 15 (15,012) (15,094) 15 (15,079)
Closing fair value at 79,840 126 79,966 78,883 126 79,00931st July 2012 Closing cost at 31st 67,751 56 67,807 66,861 56 66,917July 2012Closing unrealisedappreciation at 31stJuly 2012 12,089 70 12,159 12,022 70 12,092 Closing fair value at 79,840 126 79,966 78,883 126 79,00931st July 2012 Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000
Realised (losses)/gains on disposals (2,276) 4,618 (2,517) 3,754 Trading gains on short duration holdings (231) -
- -(Decrease)/Increase in unrealised (15,012) 9,891 (15,079) 10,430appreciation Derivatives movement (4,969) (700) (4,969) (700) (22,488) 13,809 (22,565) 13,48411. Subsidiary undertakings Company 2012 2011 £'000 £'000 Shares at fair value 2,180 2,180
In the opinion of the Directors, there is no material difference between the book value and fair value of these investments.
The Company has investments in the following subsidiaryundertakings:Name of undertaking Principal Country of % of shares held Activity incorporation Ordinary Preference and operation shares shares OSP Limited Trading company Guernsey 100 -Stakeholders' Momentum Investment England 100 -Investment Ltd company Manchester & London Securities Dormant England 100 -Limited Dormant England 100 -Saintclose Limited Dormant England 100 100Beacontree Plaza Limited Dormant England 100* -Beaconbranch Limited Dormant England 100 -Darethrift Limited Dormant England 100 -Fileglow Limited Dormant England 100 -Zealgate Limited
All these subsidiary undertakings are included in the consolidation.
*Beaconbranch Limited is 100 per cent owned by Beacontree Plaza Limited.
12. Trade and other receivables
Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Receivables from subsidiary undertakings - - 8 1,300Dividends receivable 61 26 61 26Other receivables 6 160 - 90Prepayments 14 17 14 17 81 203 83 1,43313. Cash and cash equivalents Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Cash & cash equivalents 11,432 7,693 11,336 4,823
For the purposes of the statements of cash flows, cash and cash equivalents are stated net of overdrafts and other bank borrowings.
Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Cash & cash equivalents 11,432 7,693 11,336 4,823
Overdrafts and other bank borrowings - (94) - (94)
11,432 7,599 11,336 4,729
14. Borrowings
The Company operates a Flexible Revolving Loan Facility with a limit of £11m with Pershing Securities Limited ("Pershing"), a subsidiary of The Bank of New York Mellon Corporation. No arrangement fee is payable on this facility and interest is charged at the Bank of England Base Rate plus three per cent per annum on drawdowns. This facility is secured against the Company's investments.
In respect of this loan Pershing have a floating charge on the assets it holds for the group in custody alongside any margin requirements in respect of group investments.
As at 31st July 2012, the balance on the Loan facility was £9,899,000 (2011:£10,868,000).15. Trade and other payables Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Bank overdrafts - 94 - 94Trade payables and accruals 176 223 171 140
Payables to subsidiary undertakings - - 3,345 1,318
176 317 3,516 1,552
16. Provisions for other liabilities and charges
Group Company 2012 2012 £'000 £'000Balance as at 1st August - -Net payment - -Provisions made/(released) 1,876 -in yearBalance as at 31st July 1,876 -
As at 31st July 2012 OSP Limited had certain sold option positions open. Provision is made to the extent of the Directors' estimation of costs required to cancel such obligations.
17. Share CapitalOrdinary share capital 2012 2011 No. (`000) £'000 No. (`000) £'000AuthorisedOrdinary shares of 25p each 28,000 7,000 28,000 7,000
Non-voting Convertible Preference shares of 1,000 1,000 1,000 1,000 £1 each
Ordinary shares of 25p each issued and fully paid
Balance as at 1st August 22,457 5,614 22,457 5,614 Balance as at 31st July 22,457 5,614 22,457 5,614
Each ordinary share carries the right to one vote in any circumstances and the right to dividends paid.
18. Net asset value per share
Net asset value Net assets per share Attributable 2012 2011 2012 2011 p p £'000 £'000
Ordinary shares: basic and fully diluted 336.3 437.6 75,515 98,267
The basic net asset value per ordinary share is based on net assets at the year end and 22,457,042 (2011: 22,457,042) ordinary shares in issue, adjusted for any shares held in treasury.
19. Risks - Derivatives, other financial instruments and other risks
In order to manage its portfolio efficiently and to enable the Investment Manager to pursue the investment objectives, the Company holds derivatives and other financial instruments. All derivative transactions and financial instruments are accounted for at fair value and comprise securities, cash balances, trade receivables and trade payables arising directly from financial operations.
The main risks arising from the Group's investment strategy is market price risk. There is also exposure to liquidity risk, interest rate risk and currency rate risk.
The Board regularly reviews and agrees policies for managing these risks as summarised below.
Market price risk
Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Group might suffer through holding market positions in the face of price movements. The Investment Manager actively monitors market prices throughout the year and reports to the Board which meets regularly to review investment strategy.
If the price of these investments and the derivative financial instruments had increased by 3 per cent at the reporting date with all other variables remaining constant, the capital return in the statement of comprehensive income and the net assets attributable to equity holders of the Company would increase by £3,098,000.
A 3 per cent decrease in share prices would have resulted in an equal and opposite effect of £3,098,000, on the basis that all other variables remain constant.
At the year end the Group's assets exposed to market price riskwere as follows: Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000
Non-current assets Investments at fair value through profit and 79,966 102,198 81,189 104,378 loss
Derivative financial instruments - longs 23,443 22,074 23,443 14,937
Current assetsDerivative financial instruments - shorts 34,637 - 34,637 - 138,046 124,272 139,269 119,315
During the year the Company transacted in CFDs, and its subsidiaries traded in various derivative investments.
The position held in CFDs as at the year end is as follows:
Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000Non-current assets
Derivative financial instruments - longs 23,443 22,074 23,443 14,937
Current assetsDerivative financial instruments - shorts 34,637 - 34,637 - Current liabilitiesDerivative financial liabilities (62,093) (22,716) (62,093) (15,313) (4,013) (642) (4,013) (376)
Interest rate risk
Interest rate risk arises from uncertainty over the interest rates charges by financial institutions. It represents the potential increased costs of financing for the Group. The Investment Manager actively monitors interest rates and the Group's ability to meet its financing requirements throughout the year and reports to the Board.
At 31st July 2012, there is a flexible loan facility within the Group.
See note 14 for further details.
Liquidity risk
The Directors have minimised liquidity risk by investing in a portfolio of quoted companies that are readily realisable.
The Company's un-invested funds are held almost entirely on interest bearing deposits with UK banking institutions.
As at 31st July 2012 the financial liabilities comprised:
Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000Balance due to brokers 62,093 22,716 62,093 15,313Loan facility 9,899 10,868 9,899 10,868Provisions 1,876 - - -Trade payables and accruals 176 317 171 234 74,044 33,901 72,163 26,415 Group Company 2012 2011 2012 2011 £'000 £'000 £'000 £'000Of the above liabilities the following aredue within one month 72,168 33,901 72,163 26,415
All the above liabilities are stated at fair value.
The Group manages liquidity risk through constant monitoring of the Group's gearing position to ensure the Group is able to satisfy any and all debts within the agreed credit terms.
Currency rate risk
At 31st July 2012, all the Group's financial instruments were mainly denominated in sterling and so there was no significant currency risk. The only material foreign currency holdings are Jardine Matheson stock and HMS Hydraulics stock with market values of £4,003,000 and £2,216,000 respectively, denominated in US Dollars, and Syngenta stock with a market value of £5,182,000, denominated in CHF.
The combined value represents 11.0 per cent of the Group's investments.
The Group manages currency rate risk through maintenance of foreign currency accounts, enabling the Group to translate balances as and when exchange rates are favourable to the Group.
20. Related party transactions
The Investment Manager of the Company is Midas Investment Management Limited ("Midas"), a Company controlled by Mr B S Sheppard and his immediate family. Midas receives a quarterly investment management fee for these services which in the year under review amounted to a total of £413,000 (2011: £489,000) excluding VAT, together with a corporate fee for acting as financial adviser amounting to £30,000 (2011: £30,000) excluding VAT to the Company and commission fees of £100,000 (2011: £132,000) excluding VAT to the Group. The balance owing to Midas at 31 July 2012 was £102,000 (2011: £67,000).
The Company's subsidiaries are listed in note 11. Trading activity is carried on in OSP Limited whilst Stakeholders' Momentum Investment Limited remains an investment company.
To support revenue recognition in line with accounting policy, during the year derivative positions of £2,430,000 (2011: £Nil) were transferred from OSP into MLIT. In addition dividends of £1,050,000 (2011: £625,000) were paid from subsidiaries.
As at 31st July 2012, the Company had the following outstanding interest free loans:
i. £2,837,000 due to OSP Limited (2011: £1,292,000 due from OSP).
ii. £491,000 due to Stakeholders' Momentum Investment Limited (2011: £1,301,000 due to SMIL).
iii. £10,000 due to Saintclose Limited (2011: £10,000).
iv. £8,000 due from Manchester & London Securities Limited (2011: £8,000).
v. £7,000 due to Beacontree Plaza Limited (2011: £7,000).
21. Capital Management
There are no externally imposed capital requirements. The capital managed is noted in the Statements of Changes in Equity and managed in accordance with the Investment Policies and Objectives.
22. Ultimate control
The holding company and ultimate parent throughout the year and the previous year was Manchester & Metropolitan Investment Limited, a company incorporated in England and Wales. This company was controlled throughout the year and the previous year by the immediate family of Mr B S Sheppard.
A copy of the consolidated financial statements of Manchester & Metropolitan Investment Limited can be obtained by writing to The Company Secretary, 2nd Floor, Arthur House, Chorlton Street, Manchester M1 3FH.
23. Annual General Meeting
The Company's fortieth Annual General Meeting will be held at The Midland Hotel, Peter Street, Manchester M60 2DS, on Thursday 22nd November 2012 at 12.45pm.
The notice of this meeting can be found along with the full Annual Report and Financial Statements on the Company's website www.manchesterandlondon.co.uk.
XLON