TCL - Final Results Announcement
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The City of London Investment Trust Plc (TCL) | 8:26 am, Tuesday 9 September 2008 | TCL | 5.800 |
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(+0.00%) |
8 September 2008
This announcement contains regulated information
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
30 June 2008 30 June 2007
Revenue return per ordinary share +16.7% +13.9%
Dividends per ordinary share +12.6% +10.0%
Total Returns:
Net asset value per ordinary share ("NAV") # -18.3% +21.0%
FTSE All-Share 4% Capped Index (benchmark) + -14.0% +20.3%
FTSE All-Share Index # -13.0% +18.4%
Ordinary share price # -18.0% +17.2%
UK Growth & Income Sector Average # -20.8% +20.6%
Minimum dividend forecast increase for year to 30 June 2009 6.2%
Sources:
AIC Information Services Limited
Thomson Financial, Datastream
MANAGEMENT REPORT
Chairman's Statement
For the year ended 30 June 2008, City of London's revenue return per share
increased by 16.7%, the dividend increased by 12.6% and the net asset value
total return declined by 18.3%.
Performance for the year to 30 June 2008
Earnings and dividends
Revenue return per share was 13.53p, an increase of 16.7%. A fourth interim
dividend of 2.96p was paid on 29 August 2008, making a total for the year of
11.60p, an increase of 12.6% over the previous year. This is the
forty-second consecutive year that City of London has increased its dividend,
the longest record of any investment trust. ?4.7 million was added to the
revenue reserve.
The minimum quarterly dividend for the year ahead will be 3.08p, a further
minimum increase of 6.2% on an annual basis. The quarterly rate will next be
considered when the third interim dividend is declared in March 2009, by
which time the Board will be able to assess better the trend in income
performance of the portfolio.
Net asset value total return
Market conditions have created a difficult environment for active fund
managers who have an income requirement in their portfolios. Our Managers
could have been better positioned for the credit crunch that I mentioned in
last year's report. Whilst we were underweight in bank shares, we did suffer
from their poor share price performance. The stellar share price performance
of mining and commodity related shares only partially offset losses in other
areas, because our Managers felt that prices were too high and yields were
unacceptably low.
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
MANAGEMENT REPORT (continued)
Chairman's Statement (continued)
Against this background, I have to report a negative net asset value total
return of 18.3%. This is behind our benchmark but I am pleased to say that we
have done better than most of our competitor companies.
Our gearing has been low during this credit crunch sell off, but naturally
any gearing in a falling market has negatively affected asset value
performance.
City of London's net asset value total return was a negative 18.3% which
compares with a positive 21.0% in the previous year. The FTSE All-Share 4%
Capped Index produced a negative total return of 14.0% and therefore City of
London underperformed its benchmark by 4.3%. The average performance of the
UK Growth & Income investment trust sector was a negative total return of
20.8% and therefore City of London outperformed the average of its
competitors by 2.5%.
City of London's share price discount to net asset value (with debt at market
value) slightly increased from 10.9% to 11.5% over the year. However, this
was an improvement from the discount of 13.5% at 31 December 2007. At the
end of August, the discount had narrowed to 7.2%.
Performance for the five years to 30 June 2008
Earnings and dividends
The Company's annual dividend has grown by 43.7% over the last five years
from 8.07p to 11.60p per share and revenue reserves have increased from 5.2p
to 12.5p per share.
Net asset value total return
Shareholders' net asset value total return has increased by 67.9% over the
last five years, which compares with 62.1% for the average of the UK Income
and Growth investment trust sector, 77.2% for the FTSE All-Share 4% Capped
Index and 71.0% for the FTSE All-Share Index.
Expenses
The total expense ratio (TER), which is the investment management fee and
other non interest expenses as a percentage of shareholders' funds, was
0.37%. The TER has been reduced from 0.42% announced last year by not having
to pay VAT on the investment management fee as a result of a decision in the
European Court of Justice. The Board is concerned about the delay by HMRC in
paying the reclaims submitted by our Managers, and is pressing for payments
to be made in the near future.
Outlook
We are faced with a market where one can argue that much of the bad news is
anticipated and discounted. Even though most banks have raised new capital
there is still likely to be a continuing shortage of bank finance available
and the effect of the banks' problems will create continuing problems for
companies in other sectors. There is bound to be volatility and sector
performance disparity and we do face a more uncertain year on the revenue
front. On the other hand, markets are lower, commodity prices have started to
come off and alternative investment assets, such as bonds, make equities look
relatively cheap on a longer term basis. In addition, our portfolio
companies earn more than half of their profits outside the UK and with
sterling weakening against the dollar this is a definite plus. Our shares
are on a prospective yield of 4.9% (at the end of August) and are backed by
revenue reserves of ?25.9 million.
MORE -
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
MANAGEMENT REPORT (continued)
Chairman's Statement (continued)
Investment opportunities will arise and there are reasons to be more positive
in a market that is bound to surprise.
Simon de Zoete
Chairman
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
MANAGEMENT REPORT (continued)
Principal Risks and Uncertainties
The Board has drawn up a matrix of risks facing the Company and has put in
place a schedule of investment limits and restrictions, appropriate to the
Company's investment objective and policy, in order to mitigate these risks
as far as practicable. The principal risks which have been identified and
the steps taken by the Board to mitigate these are as follows:
- Portfolio and market
Although the Company invests almost entirely in securities that are quoted on
recognised markets, share prices may move rapidly. The companies in which
investments are made may operate unsuccessfully, or fail entirely. A fall in
the market value of the Company's portfolio would have an adverse effect on
shareholders' funds. The Board reviews the portfolio each month and
mitigates this risk through diversification of investments in the portfolio.
- Investment activity and performance
An inappropriate investment strategy (for example, in terms of asset
allocation or the level of gearing) may result in underperformance against
the Company's benchmark index and the companies in its peer group. The Board
monitors investment performance at each Board meeting and regularly reviews
the extent of its borrowings.
- Tax and regulatory risks
A breach of Section 842 of the Income and Corporation Taxes Act 1988 could
lead to a loss of investment trust status, resulting in capital gains
realised within the portfolio being subject to corporation tax. A breach of
the UKLA Listing Rules could result in suspension of the Company's shares,
while a breach of the Companies Acts 1985 and 2006 could lead to criminal
proceedings, or financial or reputational damage. The Company must also
ensure compliance with the listing rules of the New Zealand Stock Exchange.
The Manager has contracted to provide investment, company secretarial,
administration and accounting services through qualified professionals. The
Board receives internal control reports produced by the Manager on a
quarterly basis, which confirm regulatory compliance.
- Financial
By its nature as an investment trust, the Company's business activities are
exposed to market risk (including currency risk, interest rate risk and other
price risk), liquidity risk, and credit and counterparty risk. Further
details of these risks and how they are managed are contained in the notes to
the financial statements in the annual report.
- Operational
Disruption to, or failure of, the Manager's accounting, dealing or payment
systems or the Custodian's records could prevent the accurate reporting and
monitoring of the Company's financial position. The Company is also exposed
to the operational risk that one or more of its suppliers may not provide the
required level of service. The Board monitors the services provided by the
Manager and its other suppliers.
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
MANAGEMENT REPORT (continued)
Related Party Transactions
The Company has appointed subsidiaries of Henderson Group plc ("Henderson")
to provide investment management, accounting, company secretarial and
administration services. In addition, Henderson has provided the Company with
share plan administration and marketing services. During the year there have
not been any material transactions with these related parties affecting the
financial position or performance of the Company.
Statement of Directors' Responsibilities
In accordance with Disclosure and Transparency Rule 4.1.12, the directors
state, to the best of their knowledge, that:
- the financial statements, prepared in accordance with UK Accounting
Standards give a true and fair view of the assets, liabilities, financial
position and net revenue of the Company; and
- the Report of the Directors includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principal risks and uncertainties that it faces.
Signed on behalf of the Board of directors
S M de Zoete
Chairman
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
PORTFOLIO MANAGER'S REPORT
Investment Background
UK Equity Market Performance
During the year under review, the UK stockmarket produced a disappointing
negative return of 14% as measured by the FTSE All-Share 4% Capped Index.
There were two key global economic factors that caused the downward move in
share prices.
First, the crisis in the banking system emanating from imprudent lending to
US consumers for house purchases. Bad US mortgage debts were spread across
the international banks. As a result, banks became reluctant to lend to each
other, leading to problems for banks, such as Northern Rock, who relied on
borrowing in the wholesale markets to fund their lending to customers. The
overall reduction in credit available had significant deflationary
implications for the economy that are continuing to be felt.
The second key negative economic factor was the rise in the oil price from
$70 to $141 a barrel. This was caused by the increased demand for oil from
the emerging countries, such as China, and the difficulty in finding and
extracting oil to meet the increased demand. Given the wide uses of oil, for
example in transportation, electricity and plastics, the doubling of the oil
price had a marked impact on inflation and put pressure on consumers'
expenditure which was also being adversely affected by the rise in food
prices.
Gearing at the start of the financial year was 5.5%. As share prices fell,
the gearing was increased by buying into companies that, in our opinion,
offered potential for medium term share price appreciation. By the end of the
financial year the gearing had increased to 10.1%. Overall, gearing had a
negative effect on performance after having been a positive factor in the
previous four years.
Interest Rate, Fixed Interest and Equity Yields
The combination of the banking crisis and the rise in the price of oil and
other commodities was a particularly difficult one for the Bank of England.
After a 25 basis point rise in July 2007 to 5.75%, the base rate was cut in
three stages to 5.0% by April 2008 to counter the effect of the banking
crisis. However, it was not possible to cut further due to the effect on
inflation of the oil price. Ten year yields of British Government bonds
declined in the first nine months of the period but then rose to 5.13% by the
end of June 2008 on concern about inflation.
Equity dividend yields rose due to the fall in share prices and dividend
growth from the majority of the companies. The average increase in the
dividend rate in companies in which City of London has shares was 12.3%
(excluding special dividends) over the twelve months.
Performance of Higher Yielding compared with Lower Yielding Shares Lower
yielding shares did significantly better than higher yielding shares over the
year. City of London's portfolio has a bias towards higher yielding shares in
order to achieve its income objectives. There was a significantly below
average exposure to the low yielding mining sector which was costly in terms
of performance relative to the benchmark index. On the other hand, the
exposure to the oil sector grew to slightly above the benchmark and the
holdings in ENI and Statoil were particularly positive contributors to
performance.
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
PORTFOLIO MANAGER'S REPORT (continued)
Portfolio Review
The problems of the banks and their implications for other companies and the
economy in general was the single most important investment theme during the
period under review. The worst performers in the sector were those banks
dependent on wholesale funding, such as Northern Rock, Alliance & Leicester
and Bradford & Bingley. These stocks were not held in City of London's
portfolio. In contrast, our largest holding HSBC, which has a very strong
deposit base, was an outperformer relative to the sector. In addition, HSBC
benefited from having around half of its business in the Far East and
Emerging markets.
The second largest bank holding in the portfolio, Lloyds TSB, was also a
sector outperformer benefiting from conservative lending in recent years and
no exposure to US subprime debt. Barclays, the third largest bank holding in
the portfolio, suffered from concerns about the performance of its investment
banking subsidiary, Barclays Capital, although its operating performance was
good when compared with most of its competitors. The smallest bank holdings
in the portfolio, Royal Bank of Scotland and HBOS, were the worst performers
and both announced dividend cuts at the same time as they raised new equity.
Although a slightly lower than average index weighting was maintained in the
banks sector throughout the year, and the portfolio was biased towards the
better performing banks, it would have been beneficial to have had less
overall exposure to the sector.
The tightening of conditions for credit had a marked effect on companies with
a high level of debt. Four companies in the portfolio that had high levels of
debt, ENEL (electricity utility), Mitchells & Butlers (pubs group), Johnston
Press (regional newspaper publisher) and Wolseley (builders' merchant) were
sold. Subsequently their share prices fell significantly from the levels at
which they had been sold.
Takeover activity was much reduced due to the difficulty in financing deals.
However, the holding in brewer Scottish & Newcastle was taken over at a good
price by a consortium of Heineken and Carlsberg. On the other hand, Imperial
Tobacco took over Altadis, the Spanish/French tobacco company, at what seemed
to be, in our opinion, an expensive price and therefore the holding was sold.
The credit crisis had an adverse effect on the shares of housebuilding
companies and retailers which fell sharply as investors anticipated a
downturn in their profitability. A holding in Marks & Spencer was purchased
after the shares had declined some 40% from their peak. Although trading is
currently tough for the company, the shares seem underrated given the
strength of its franchise in the UK and the fact that it owns many of the
stores from which it operates. In addition, a holding was purchased in
William Morrison, which also is a significant owner of its stores, and has
been increasing its market share within the UK supermarket sector.
Medium-sized and small companies were notable underperformers over the twelve
month period relative to companies in the FTSE 100. Given the portfolio's
overall bias towards larger companies, we felt there was an opportunity to
buy into the share price weakness of a select number of good quality
medium-sized companies. The holdings that were purchased were: BBA Aviation
(international airport services), Hays (recruitment agency), Holidaybreak
(leisure sector), Inchcape (international motor retailer), Interserve
(building services and PFI work), Prosafe (oil services) and Renishaw
(specialist manufacturer of high precision measuring equipment).
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
PORTFOLIO MANAGER'S REPORT (continued)
Another area for new investment was the pharmaceutical sector where shares
had been derated to levels which, in our view, more than discounted the
problems with defending patents on existing medicines and discovering new
drugs. In addition, demand for healthcare products and services should hold
up relatively well in an economic downturn. New holdings were purchased in
AstraZeneca and Novartis.
Value also emerged, in our opinion, in the technology sector. Two new
holdings were purchased. Sage develops accounting software and provides
support services for many of its customers. Misys also has a strong installed
base of customers for its banking software with growth opportunities in
emerging markets.
Although valuations of the mining companies looked reasonable if commodity
prices maintained existing levels, there was considerable downside risk if
commodity prices fell. This was certainly possible if the downturn in global
economic activity led to a reduced demand for commodities. Overall, the
strategy in the mining sector was to take some of the significant profits on
our holdings. In addition, the return from our holdings was improved through
some successful selling of option premia. One new holding was purchased,
ENRC, which is the world's largest producer of ferrochrome and is based in
Kazakhstan, next to its key markets of China and Russia.
In the electricity sector, profits were taken in British Energy and Fortum
which had benefited from the strength of the electricity price. Some of the
proceeds were reinvested in RWE which offered, in our view, better relative
value.
In the fixed line telecommunications sector, British Telecom was a
disappointing holding having been a strong performer the previous year. This
was due to a general derating of telecommunications stocks as well as
specific concerns about BT's competitive position and pension fund
liabilities. We believe that the likely profits progression of BT's global
services division was being overlooked and maintained the holding given its
attractive dividend. In addition, a new holding was purchased in Deutsche
Telekom where there is substantial scope for cost cutting in its fixed line
operation in Germany as well as growth opportunities for its international
mobile division.
In the media sector, we avoided stocks, such as regional newspaper companies,
exposed to the decline in advertising revenue due to the economic downturn
and the move by advertisers away from traditional media towards the internet.
A new holding was purchased in BSkyB where the revenues are predominantly
based on the subscriptions to its services. We believe that BSkyB has a very
strong franchise in the UK and Ireland for satellite TV as well as growth
opportunities in broadband.
In the real estate sector, exposure was reduced through the sale of Corio,
the European shopping centre owner, which had held up relatively well.
Outlook
Given the amount of new equity capital raised by banks in the UK and overseas
and the actions taken by central banks in the UK, Europe and the USA to help
bank funding, it is hoped that the worst of the crisis for the banking sector
is over. However, the downturn in economic activity will lead to an increased
level of bad debts for banks. Overall, there is considerable recovery
potential in the share prices of the stronger banks which can take market
share on improved profit margins.
THE CITY OF LONDON INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 June 2008
PORTFOLIO MANAGER'S REPORT (continued)
The wider effects of the credit crisis are still being felt with reduced
availability of mortgage finance leading to a significant downturn in the
housing market. Consumer spending also faces pressure from the rise in the
prices of oil, electricity, gas and food. The portfolio is therefore biased
towards companies which have, in our view, sales that will hold up well in an
economic downturn, such as those in the electricity, utility and telecoms
sectors as well as the beverages, tobacco and food retail sectors.
Large holdings have also been maintained in the oil companies, BP and Royal
Dutch Shell. These companies will remain highly profitable and cash
generative even after the recent decline in the oil price to $115 a barrel.
This reflects market concern about the future reduced demand for oil,
especially in developed economies. If the recent decline in the oil price is
maintained, it will reduce inflationary pressure and allow the Bank of
England to cut interest rates. This could trigger a rally in those cyclical
stocks that are already discounting profit downgrades. There is scope going
forward to increase exposure to good quality cyclical companies at attractive
valuations.
Job S Curtis
