TIDMCHY
City Merchants High Yield Trust plc
Annual Financial Report Announcement
For the year ended 31 December 2010
Financial Information
Performance Statistics
At At
31 December 31 December %
2010 2009 Change
Total Return*
Total return per ordinary share +15.5
FTSE All-Share Index +14.5
FTSE Government Securities - All Stocks +7.2
Capital Return
Net asset value per ordinary share 168.98p 156.69p +8.0
Mid-market price per ordinary share 173.00p 158.00p +9.5
Premium per ordinary share 2.4% 0.8%
FTSE All-Share Index +10.9
FTSE Government Securities - All Stocks Index +12.8
Gearing
Asset gearing 91 101
Actual gearing 100 110
Total expense ratio 1.1% 1.2%
* Source Thomson Reuters Datastream
Chairman's Statement
After the extreme volatility experienced in the last two years, 2010 was a year
of relative stability. The Manager's Investment Report reviews the Company's
performance during the year and gives further details of the strategy and
outlook for your Company.
In the year under review the Company achieved a total return of 15.5%. This
compares with the average return of 7.4% from the funds in the Investment
Management Association Sterling Strategic Bond sector, comprised of funds with
similar objectives. Your Company is again the top performing fund compared to
this sector over the year to 31 December 2010 and over the last 5 years. A very
satisfactory performance.
Since the merger with `old' City Merchants in 2005, the Company's surplus
management expenses have reduced the tax charge to a negligible amount,
increasing the income available to be distributed as dividend.
As anticipated in my Statement last year and as will be seen in the Revenue
Account, this situation came to an end in 2010. Your Board paid dividends of
11p per ordinary share by meeting the tax charge from Revenue Reserve.
As a result of lower world interest rates and the steps taken to reduce the
risk of the Company's portfolio, referred to in the Manager's Investment
Report, the current portfolio would produce revenue in 2011 approximately 1p
less per ordinary share compared to the revenue per share produced in 2010.
Your Board can, therefore, only target dividends of 10p per ordinary share for
2011. Actual dividends will depend on revenue receipts during the year. The tax
charge is again expected to be met from Revenue Reserve.
Your Board is investigating options intended to ensure that the Company's tax
charge is minimised in the future to enable the net revenue to continue to be
available to pay to shareholders in dividends.
The Board believes the portfolio remains well-positioned to continue to provide
opportunities for modest growth while producing an attractive level of income
for shareholders.
Annual General Meeting (`AGM')
As special business at the AGM, two Ordinary Resolutions and three Special
Resolutions will be proposed as follows:
1. Continuation of the Company
With Ordinary Resolution 4 the Directors seek to be released from their
obligation under the Company's Articles of Association to convene an
Extraordinary General Meeting of the Company to be held by 30 June 2011 at
which an extraordinary resolution would be proposed to wind up the Company.
2. Issuance of New Shares and Disapplication of Pre-emption Rights
With Ordinary Resolution 5 the Board is seeking to renew its authority to issue
up to 10% of the Company's issued ordinary share capital. With Special
Resolution 6 the Directors are seeking authority to issue new ordinary shares
for cash pursuant to the authority sought by Resolution 5, disapplying
pre-emption rights, up to an aggregate nominal amount of GBP145,598 (being
approximately 10% of the Company' issued ordinary share capital). This will
allow shares to be issued to new shareholders without having to be offered to
existing shareholders first, thus broadening the shareholder base of the
Company.
The two Resolutions provide the Directors with a degree of flexibility to
increase the size of the Company by the issue of new shares should any
favourable opportunities arise to the advantage of shareholders. The Directors
will not use the authority so as to dilute the interests of existing
shareholders by issuing shares at a price which is less than the NAV
attributable to the shares. These authorities will expire at the AGM in 2012.
3. Share Buybacks
With Special Resolution 7 your Board seeks to renew the authority to buy back
up to 14.99% of the Company's issued ordinary shares. Acquisitions under this
authority will be subject to restrictions referred to in the Notice of AGM.
Again, the interests of existing shareholders will be protected and the
authority will expire at the AGM in 2012.
4. Calling General Meetings at 14 days' Notice
New UK legislation implementing the EU Shareholder Rights Directive has, with
effect from 3 August 2009, increased the notice period for a general meeting
from 14 days to 21 days. However, companies are able to pass a special
resolution each year permitting them to continue to call general meetings
(other than AGMs) on 14 days' notice if they allow voting by electronic means.
With Special Resolution 8 the Board is therefore asking for the authority to
call any general meetings other than AGMs on 14 days' notice, should that be
necessary.
Your Directors have carefully considered all the resolutions proposed in the
Notice of Annual General Meeting and believe them to be in the best interests
of the Company and its shareholders. The Directors therefore recommend that
shareholders vote in favour of each resolution.
I look forward to seeing shareholders at the Annual General Meeting of the
Company on 26 May 2011 when they will have an opportunity to meet members of
the Board and the portfolio managers.
Clive Nicholson
Chairman
30 March 2011
Managers Investment Report
Market Background
Corporate bond markets delivered positive returns despite bouts of volatility
as the focus switched from concern over corporate balance sheets to worries
about governments. The period commenced with further gains from high-yield
bonds, driven by positive sentiment and demand for income generating assets.
Despite continuing concerns over sovereign debt, credit spreads tightened
further with a rise in investor risk appetite leading to better performance
from lower quality bonds. According to data from Merrill Lynch, euro high-yield
spreads began the year at 755bps, falling to 592bps by April. However, moving
into the spring, markets became increasingly volatile as the sovereign crisis
in Europe intensified, with Greece in particular in the spotlight. Spreads
widened back out to 824bps during June and core government bonds benefitted
from a flight to quality. Bank debt weakened on concerns over issuers' exposure
to peripheral Eurozone government bonds. However, following the results of the
European Bank stress tests which included provisions for a "sovereign risk
shock" and the Basel Committee's new bank capital requirements, there were
renewed gains from subordinated bank debt as well as the wider corporate bond
market. There was a further bout of sovereign-induced weakness in November,
this time with Ireland unsettling markets, which saw corporate bond markets
suffer additional falls. However, the final month of the year saw a further
improvement, with euro high-yield spreads ending the year at 603bps. The strong
performance of core government bonds over the year as a whole meant that,
despite corporate spreads widening, euro high-yield delivered a return of
14.3%.
There was a continued fall in the 12-month European high-yield default rate to
2% in November, down significantly from the same period in 2009 when the rate
was 11.5%. The UK's Monetary Policy Committee held interest rates at 0.5%
throughout the period. However, from June onwards, the decision was no longer
unanimous with one member voting for a rate increase. The voting followed a
similar pattern until October, when there was a three-way split, with another
member since voting for an increase in QE. UK inflation remained more than 1%
above the 2% target throughout the year, ending at 3.3% on the annual CPI
measure.
As of 21 March 2011, high-yield corporate bonds and subordinated bank debt have
seen further gains, outperforming better quality investment-grade bonds, while
core government bonds have seen yields increase. According to data from Merrill
Lynch, European high-yield spreads have fallen to 494bps, dropping below 500bps
for the first time since December 2007. Globally, there were no new high-yield
defaults in January. This is the first month since June 2007 when not a single
default was recorded among Moody's-rated corporate issuers. Spreads on
subordinated bank debt continued to narrow: sterling Tier 1 by a further 112bps
to 529bps and euro Tier 1 by 125bps to 544bps. Reflective of this was news that
Credit Suisse saw huge demand for a 7.875% hybrid bond which ranks above equity
but below existing debt. Demand totalled US$22 billion for the US$2 billion of
notes on offer. The bonds, known as contingent capital (or CoCos), are designed
to convert into equity at a preset level of financial stress and are similar in
structure to the Lloyds ECNs held in the portfolio.
The outlook for UK interest rates has received increased attention in 2011. As
predicted by the Bank of England's Monetary Policy Committee UK inflation has
increased further, with the annual CPI measure rising to 4.0% in January,
double the Government's 2% target. The main factors for the increase were the
increase in the rate of VAT and the rise in the price of crude oil. In his
explanatory letter to the Chancellor, the Governor's comment that "under the
assumption that Bank Rate increases in line with market expectations" led some
to believe that a rate hike would occur shortly. However, February's Quarterly
Inflation Report suggested that policy tightening would be small, gradual and
still potentially subject to delay. Underlining the balancing act required was
news, on the one hand, that the second estimate of Q4 GDP was unexpectedly
revised down to -0.6% quarter-on-quarter from its initial weak estimate of
-0.5% and, on the other, that February's CPI outturn of 4.4% means that
inflation has now been 1% or more above the 2% target for 15 months.
Portfolio strategy
The Company's NAV started the year at 156.69p, rose to 172.70p until the Greek
induced risk aversion saw it fall back to a low of 157.76p in June and then
recover to 168.98p at the end of the year. The Company reduced its gearing to
nil and at the end of the year had a net cash position of circa 5%, providing
flexibility to take advantage of opportunities as they arise.
The Company's portfolio managers believe that, despite having rallied
considerably from their lows, high-yield corporate bonds continue to offer
attractive opportunities, particularly from better quality (typically BB and B
rated) issuers. Although spreads have clearly narrowed considerably from their
distressed levels, in general yields are still attractive in comparison to the
alternatives available. At the end of 2010, aggregate yields on euro B rated
corporates were above 9%, compared with 3.3% for euro A rated corporates and
below 3% for 10-year Bunds. Furthermore both markets and issuers are still in a
recovery phase. Demand for high-yield paper remains strong, the default rate is
already low, and set to decline further, and 2010 was a record year for
issuance, much of which was in the form of senior secured bonds.
The portfolio managers continue to see value in banks and other financials. In
particular the Company has significant positions in both subordinated and
senior debt of predominately larger northern European banks. The managers
believe that the combination of structural reform, conservative interpretations
of Basel III and rising capital levels will be a powerful support for
subordinated bank debt for years to come. Aggregate yields on this type of debt
still offer real value even in the context of their higher volatility -
sterling Tier 1 bank debt yields on aggregate 9.3% according to Merrill Lynch
data, compared with 4-5% on the more defensive areas of investment grades.
Overall, the managers believe that a prolonged period lies ahead of
deleveraging for state, personal and bank balance sheets. This will cause a
headwind for economic recovery and means that there is likely to be low growth
and with it very low interest rates for the next couple of years. In such
conditions banking could become a more utility-like, low risk, low return
business. This is viewed as very supportive for bond holders. The portfolio's
exposure to bank debt was increased over the year from 12.3% to 21.9%.
Portfolio activity saw a reduction in the number of holdings from 195 to 148 as
the managers sought to reduce risk slightly. Several of the positions sold were
new issues from 2009, as well as a number made earlier in 2010 which were
trading above par and where yields had subsequently become less attractive. A
number of other sales were in positions that had rallied strongly from their
lows of early 2009 but where the managers felt there was limited scope for
further improvement. A number of equity positions were also sold such as
Independent News and mining companies Ausdrill and Australasian Resources,
while Gate Gourmet was reduced. Wind (telecom) concluded a debt refinancing
which saw the 11% bond due in 2015 maturing early and VNU (media) redeemed a 9%
bond due in 2014.
Elsewhere, a record year for high-yield issuance allowed a number of new
positions with attractive coupons to be added to the portfolio. These included
Abengoa (construction) 8.5%, Kerling (chemical) 10.625%, DFS (retail) 9.75%,
Nalco (chemical) 6.875%, Convatec (medical) 7.375%, Codere (leisure) 8.25%,
Care UK (healthcare) 9.75% and Mark IV (autos) 8.875%. Corporate hybrids issued
by utility providers RWE 4.625%, Scottish & Southern 5.025% and Suez 4.82% were
also added.
Outlook
Looking ahead, fixed interest markets are likely to be subject to further bouts
of volatility. Both government and corporate bonds issued by members of the
peripheral Eurozone countries, as well as European banks holding significant
positions in them, may come under further pressure. Contagion fears may at
times also spread into the wider market. Nonetheless, the European Central Bank
and core European governments are not likely to remain inactive if confidence
evaporates further. The ECB has a number of options at its disposal such as
purchases of government bonds and the use of repo facilities.
With headline inflation remaining above target, a modest increase in short-term
interest rates remains possible. The MPC's central view remains that the
persistence of spare capacity will reduce underlying price pressures and "cause
CPI inflation to fall back as the impact of temporary factors wane". The
portfolio managers agree that it is hard to be too bearish about inflation
unless there is a strong improvement in aggregate demand. The economy is still
in the midst of a prolonged period of deleveraging for state, personal and bank
balance sheets. Fiscal tightening and weak real income growth will continue to
create headwinds for growth in 2011. As long as this remains the case, monetary
policy adjustments should be slow and drawn out. On the other hand, it could be
argued that an early modest change in monetary policy might be a good thing as
it would prevent a build up of inflation worries and would help flatten, or
even invert, the yield curve.
However, while the focus remains on governments with excessive debt levels, it
should be remembered that there are reasons to be positive. Corporate balance
sheets remain generally robust, cash balances are good, leverage low and
management strong - a far stronger position than the asset class was in 18
months ago. Although returns in 2011 are likely to be based on yield and
therefore more modest, there are sections of the market that have reasonably
attractive spreads and improving credit profiles. Consequently, the managers
believe the portfolio remains an attractive proposition as an income-producing
vehicle.
Invesco Asset Management Limited
Managers
Paul Read Paul Causer
Portfolio Managers
30 March 2011
Investments in Order of Valuation
at 31 December 2010
Market
Moody/S& Sector Country of Value % of
P
Issuer Issue Rating Incorporation GBP'000 Portfolio
LBG Capital 7.975% Sep 15 Ba3/BB- Financial UK 3,153 2.83
24
6.385% May 12 Ba2/BB 347 0.31
20
9% Dec 15 19 Ba2/BB 930 0.83
16.125% Dec Ba2/BB 126 0.11
10 24
6.439% May 23 Ba3/BB- 691 0.62
20
7.869% Aug 25 Ba3/BB- 869 0.78
20
6,116 5.48
Ford Motor 7.45% Jul 16 Ba3/B Consumer USA 4,121 3.70
31 Goods
Societe 8.875% FRN Baa2/ Financial France 3,928 3.52
Generale Perpetual BBB+
Premier Pfd 89.2P Cum NR/NR Industrials UK 3,550 3.19
Farnell Cnv
General Motors PFD USD50.00 NR/NR Consumer USA 1,072 0.96
Goods
Motors
liquidation
8.375% Jul 5 WR/NR 1,894 1.70
33
Motors
liquidation
8.375% Jul 15 WR/NR 452 0.41
33
3,418 3.07
Citigroup PFD USD100 Equity Financial USA 1,000 0.90
FRN Jun 28 67 Ba1/BB+ 1,624 1.46
Common Stock Equity 61 0.05
2,685 2.41
Aviva 6.125% A3/BBB+ Financial UK 2,498 2.24
Perpetual
Intergen 9.5% Jun 30 Ba3/BB- Oil & Gas Holland 2,170 1.95
17
8.5% Jun 30 Ba3/BB- 230 0.21
17
2,400 2.16
Virgin Media 8.875% Oct 15 Ba3/B+ Consumer UK 1,131 1.01
Finance 19 Services
7% Jan 15 18 Ba1/BB+ 1,060 0.95
2,191 1.96
Ecclesiastical 8.625% Non NR/NR Financial UK 2,170 1.95
Cum Irrd Prf
Cemex Sab 4.875% Cnv NR/NR Consumer USA 2,104 1.89
Mar 15 15 Goods
Balfour Beatty Prf 10.75P NR/NR Industrials UK 2,077 1.86
Gross
American 8.625% FRN Ba2/BBB Financial USA 982 0.88
International May 22 68
Group
4.875% FRN Ba2/BBB 401 0.36
Mar 15 67
8.175 May 15 Ba2/BBB 675 0.61
68
2,058 1.85
Credit 7.589% FRN A3/A- Financial France 1,944 1.74
Agricole Perpetual
Unity Media 9.625% Dec 01 B3/B- Consumer Germany 1,884 1.69
19 Services
First Hydro 9% Jul 31 21 NR/NR Utilities UK 1,848 1.66
Finance
Catlin 7.249% FRN NR/BBB+ Financial USA 1,767 1.59
Perpetual
Santos Finance 8.25% Sep 22 NR/BB Financial Australia 1,679 1.51
70
Scottish & 5.025% Baa2/BBB Utilities UK 1,666 1.49
Southern Perpetual
Energy
RWE 4.625% FRN Baa1/ Utilities Germany 1,653 1.48
Perpetual BBB+
Santander 11.3% FRN Baa2/A- Financial Spain 1,583 1.42
Perpetual
REA Finance 9.5% Dec 31 NR/NR Consumer Holland 1,560 1.40
17 Goods
BAC Capital 5.25% Aug 10 Baa3/BB+ Financial USA 1,543 1.38
Trust 35
Legrand 8.5% Deb Feb Baa2/BBB Industrials France 1,490 1.34
15 25
DFS 9.75% Jul 15 B1/B Consumer UK 1,485 1.33
17 Goods
Market
Moody/S& Country of Value % of
P
Issuer Issue Rating Sector Incorporation GBP'000 Portfolio
Wind 11.75% Jul 15 B2/B+ Consumer Italy 715 0.64
Acquisition 17 Services
7.375% Feb 15 Ba2/BB- 672 0.60
18
1,387 1.24
Gategroup Chf5 Equity Consumer Goods Switzerland 1,258 1.13
Reynolds 7.75% Oct 15 Ba3/BB Industrials USA 897 0.80
16
9.5% Jun 15 Caa1/B- 353 0.32
17
1,250 1.12
Suez 4.82% FRN Baa2/NR Utilities France 1,240 1.11
Perpetual
General 8.875% Cum NR/NR Financial UK 1,225 1.10
Accident Irrd Prf
C10 Capital 6.277% FRN NR/B- Financial UK 1,164 1.04
Perpetual
Rexam 6.75% FRN Jun Ba2/BB Industrials UK 1,153 1.03
29 67
Hertz 10.5% Jan 01 B3/B- Consumer Goods USA 676 0.61
16
7.875% Jan 01 B2/B- 433 0.39
14
1,109 1.00
Iron Mountain 6.75% Oct 15 B1/B+ Support Services USA 1,073 0.96
18
Novae 8.375% Apr 27 Ba1/NR Financial UK 1,062 0.95
17
Siemens 6.125% Sep 14 A3/BBB+ Telecommunications Holland 1,034 0.93
66
Bank of 6.125% Sep 15 A2/A Financial USA 962 0.86
America 21
Standard FRN Perpetual Baa1/NR Financial UK 375 0.34
Chartered
9.5% FRN A3/BBB+ 349 0.31
Perpetual
8.125% FRN Baa3/BBB 199 0.18
Perpetual
923 0.83
Cie Gen 7.75% May 15 Ba3/BB- Oil & Gas France 920 0.83
Geophysique 17
MWB 9.75% Jun 30 NR/NR Financial UK 900 0.81
12
Cedc 8.875% Dec 01 B1/B+ Consumer Services USA 897 0.80
16
Royal & Sun 8.5% FRN Baa1/ Financial UK 891 0.80
Alliance Perpetual BBB+
Tereos 6.375% Apr 15 B1/BB Basic Materials France 891 0.80
14
Heating 7.875% Mar 31 B2/B Financial UK 887 0.80
Finance 14
Nielsen 11.125% Aug Caa1/B- Consumer Services Holland 878 0.79
01 16
Sl Finance 6.75% A3/A- Financial UK 871 0.78
Perpetual
Convatec 10.875% Dec Caa1/B Consumer Services Luxembourg 866 0.78
15 18
Northern Rock 9.375% Oct 17 Caa3/BB Financial UK 845 0.76
21
Peabody 4.75% Cnv Dec Ba3/B+ Basic Materials USA 832 0.75
15 66
Intesa 8.375% FRN Baa1/ Financial Italy 821 0.74
Perpetual BBB+
Unicredit 8.125% FRN Baa3/BBB Financial Luxembourg 821 0.74
Perpetual
Abengoa 8.5% Mar 31 NR/B+ Industrials Spain 810 0.73
16
Kabel 10.75% Jul 01 B1/BB- Consumer Services Germany 603 0.54
Deutschland 14
10.625% Jul B1/BB- 78 0.07
01 14
681 0.61
Ashtead 9% Aug 15 16 B2/B+ Industrials USA 668 0.60
Capital
UBI Banca 8.75% Oct 29 NR/NR Financial Italy 667 0.60
12
International
Ashtead 8.625% Aug 01 B2/B+ Industrials UK 332 0.30
Holdings 15
8.625% Aug 01 B2/B+ 332 0.30
15
664 0.60
Vedanta 4% Cnv Mar 30 NR/BB Basic materials UK 659 0.59
17
Stena 6.125% Feb 01 Ba3/BB+ Financial Sweden 653 0.59
17
Fortis Bank FRN Cnv Ba3/BB Financial Belgium 644 0.58
Perpetual
UBS Capital 8.836% FRN Baa3/ Financial UK 619 0.56
Securities perpetual BBB-
Expro Fin 8.5% Dec 15 B2/B Oil & Gas UK 612 0.55
16
Luxembourg
Market
Moody/S& Country of Value % of
P
Issuer Issue Rating Sector Incorporation GBP'000 Portfolio
Old Mutual 8% Baa3/NR Financial UK 607 0.54
Perpetual
Phoenix Life 7.25% Baa3/BBB Financial UK 592 0.53
Perpetual
Axa 6.379% FRN Baa1/BBB Financial France 579 0.52
Perpetual
Rhodia 7% May 15 B1/BB Basic Materials France 453 0.41
18
FRN Oct 15 B1/BB 105 0.09
13
558 0.50
Boats 11% Mar 31 NR/NR Financial Holland 539 0.48
Investments 17
Taylor Wimpey 10.375% Dec B2/B+ Consumer Services UK 523 0.47
31 15
William Hill 7.125% Nov Ba1/BB+ Consumer Services UK 519 0.47
11 16
Care UK 9.75% Aug B2/B+ Health Care UK 516 0.46
01 17
Pipe 9.5% Nov 01 B3/B- Basic Materials UK 515 0.46
15
Peel 8.375% Apr NR/NR Financial UK 512 0.46
30 40
Alcatel 6.5% Jan 15 B1/B Technology USA 510 0.46
28
IFCO Systems 10% Jun 30 Ba3/BB- Industrials Holland 509 0.46
16
Alcatel-Lucent 6.45% Mar B1/B Technology USA 507 0.45
15 29
ISS Finance 11% Jun 15 NR/B Financial UK 473 0.42
14
HeidelbergCement 8.5% Oct 31 Ba3/BB- Industrials Germany 472 0.42
19
Kerling 10.625% Feb B3/B Basic Materials UK 469 0.42
01 17
Ineos 9.25% May B1/B Basic Materials UK 458 0.41
15 15
SPCM 8.25% Jun B3/BB- Basic Materials France 451 0.40
15 17
Nalco 6.875% Jan Ba2/BB- Basic Materials USA 443 0.40
15 19
Travelport 10.875% Sep Caa1/CCC Industrials USA 442 0.40
01 16
Campofrio 8.25% Oct B1/BB- Consumer Goods Spain 441 0.40
31 16
Cirsa Finance 8.75% May B3/B+ Consumer Goods Czech 439 0.39
15 18
Mark IV 8.875% Dec Ba3/BB- Industrials Luxembourg 435 0.39
15 17
Codere 8.25% Jun B2/B Consumer Services Luxembourg 430 0.39
15 15
Legal & General 6.385% FRN Baa2/ Financial UK 427 0.38
Perpetual BBB+
Nara Cable 8.875% Dec B2/B- Financial Ireland 411 0.37
01 18
Parpublic 3.25% Cnv A1/BBB Oil & Gas Portugal 386 0.35
M&G Finance 7.5% FRN NR/NR Industrials Luxembourg 361 0.32
Perpetual
Sunrise 7% Dec 31 Ba3/BB Financial Luxembourg 270 0.24
17
8.5% Dec 31 B3/B 90 0.08
18
360 0.32
Wells Fargo 9.75% FRN Baa3/A- Financial USA 357 0.32
Perpetual
Inmarsat 7.375% Dec Ba2/BB+ Telecommunications USA 335 0.30
01 17
Pregis 12.375% Oct Caa2/CCC Basic Materials USA 315 0.28
15 13
Novasep 9.625% Dec B3/B Basic Materials France 301 0.27
15 16
Nexans 1.5% Cnv NR/BB+ Industrials France 291 0.26
Jan 01 13
Rothschilds FRN NR/NR Financial UK 281 0.25
Perpetual
Petroplus 4% Cnv Oct NR/B Financial Switzerland 275 0.25
Finance 16 15
HTM Sport & 10% Aug 01 NR/CCC+ Consumer Goods Austria 254 0.23
Freizeit 12
Pfleiderer 7.125% FRN WR/NR Industrials Holland 252 0.23
Finance Perpetual
Brazilian Common Equity Oil & Gas Canada 244 0.22
Resources Stock
Skipton 10% Dec 12 Ba2/NR Financial UK 230 0.21
18
Korreden 11% Aug 01 NR/NR Financial France 200 0.18
14
Timberwest Stapled Equity Basic Materials Canada 166 0.15
Unit
Investec 7.075% B1/NR Financial UK 146 0.13
Perpetual
Corporate 10% Apr 29 NR/NR Support Services UK 119 0.11
Services 11
Pittards Ord Equity Consumer Goods UK 116 0.10
Pearl 6.5864% FRN NR/NR Financial UK 111 0.10
Perpetual
Market
Moody/S&P Country of Value % of
Issuer Issue Rating Sector Incorporation GBP'000 Portfolio
Rivington 8% Cnv Jun 30 NR/NR Financial UK 100 0.09
15
0% Cnv Dec 13 NR/NR 6 0.01
13
106 0.10
Corero Ord Equity Technology UK 84 0.08
Cattles 8.125% Jul 05 C/NR Financial UK 73 0.07
17
7.875% Jan 17 C/NR 1 0.00
14
74 0.07
Head Ord Equity Consumer Holland 73 0.07
Goods
Chesapeake 7% Dec 15 14 WR/NR Basic USA 30 0.03
Materials
10.375% Nov WR/NR 15 0.01
15 11
45 0.04
GMA Resources Ord Equity Basic UK 31 0.03
Materials
Welsh Power `C' Shares Equity Utilities UK 23 0.02
(Unquoted)
Hollandwide 0% Aug 01 14 NR/NR Financial Holland 16 0.01
Advanced NPV Equity Industrials Australia 5 0.00
Magnesium
Ziggo 6.125% Nov 15 Ba2/BB Financial Holland 856 0.77
17
111,445 100.0
Abbreviations used in the above valuation:
Cnv: Convertible
FRN: Floating Rate Note
Irrd: Irredeemable
NPV: Nil Par Value
Ord: Ordinary Share
Pfd: Preferred
Pref: Preference
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be divided into the
following areas:
Investment Policy (incorporating the Investment Objective) and Process
The Company's investment objective is described on page 1 of the Annual
Financial Report. There is no guarantee that the Company's investment objective
will be achieved or will provide the returns sought by the Company.
Portfolio performance is substantially dependent on the performance of
fixed-interest and high-yielding stocks in the UK and elsewhere in the
Company's investment universe. These stocks are particularly influenced by
prevailing interest rates, government monetary policy and by demand for income.
The portfolio managers strive to maximise both capital growth and high income
from the investments and the Board naturally recognises the external influences
on portfolio performance.
As part of the Company's overall strategy, the Board continues to seek to
manage the Company's affairs so as to maximise returns for shareholders. The
longer-term aim is to continue to increase the size of the Company by a
combination of growth in underlying asset values and by the issue of additional
equity capital. The Directors believe that this should continue to make the
Company's shares attractive to a broad spectrum of investors and improve
liquidity.
Risk management is an integral part of the investment management process. The
Manager effectively controls risk by ensuring that the Company's portfolio is
appropriately diversified. In-depth and continual analysis of the fundamentals
of all holdings should give the Manager a full understanding of the financial
risks associated with any particular stock.
Market Movement and Portfolio Performance
The majority of the Company's investments are traded on a number of the world's
major securities markets. The principal risk for investors in the Company is of
a significant fall in the markets and/or a prolonged period of decline in the
markets relative to other forms of investment. The value of investments held
within the portfolio is influenced by many factors including the general health
of the world economy, interest rates, inflation, government policies, industry
conditions, political and diplomatic events, tax laws and environmental laws
and by changing investor demand. The Manager strives to maximise the return
from the investments held but these investments are influenced by market
conditions and the Board acknowledges the effects of external influences on
portfolio performance.
The performance of the Manager is carefully monitored by the Board and the
continuation of the Manager's mandate is reviewed each year. The Board has
established guidelines to ensure that the investment policy that has been
approved is pursued by the Manager. The Board and the Manager maintain an
active dialogue with the aim of ensuring that the market rating of the
Company's shares reflects the underlying NAV and that buy back and issuance
facilities help the management of this process.
For a fuller discussion of the economic and market conditions facing the
Company and the current and future performance of the portfolio of the Company,
see both the Chairman's Statement and Manager's Investment Report.
High-Yield Fixed-Interest Securities
High-yield fixed-interest securities are subject to credit, interest rate and
liquidity risks. Adverse changes in the financial position of an issuer or in
general economic conditions may impair the ability of the issuer to make
payments of principal and interest or may cause the liquidation or insolvency
of an issuer.
The majority of the Company's portfolio currently consists of
non-investment-grade securities. To the extent that the Company invests in
non-investment-grade securities, the Company may realise a higher current yield
than the yield offered by investment-grade securities. On the other hand,
investments in such securities involve a greater volatility of price and a
greater risk of default by the issuers of such securities, with consequent loss
of interest payment and principal. Non-investment-grade securities are likely
to have greater uncertainties of risk exposure to adverse conditions and will
be speculative with respect to an issuer's capacity to meet interest payments
and repay principal in accordance with its obligations. A lack of liquidity in
non-investment-grade securities may make it difficult for the Company to sell
those securities at or near their purported value.
Further details of the risk management policies and procedures as they relate
to the financial assets and liabilities of the Company are explained on pages
61 to 68 in note 18 to the financial statements in the Annual Financial Report.
Gearing
Performance may be geared by means of a bank credit facility. There is no
guarantee that the Company's credit facility would be renewable at maturity on
terms acceptable to the Company. If it were not possible to renew this facility
or replace it with another, the amounts owing by the Company would need to be
funded by the sale of investments.
Gearing levels may change from time to time in accordance with the Manager's
and the Board's assessment of risk and reward. As a consequence, any reduction
in the value of the Company's investments may lead to a correspondingly greater
percentage reduction in its net asset value (which is likely to affect the
Company's share price adversely). Any reduction in the number of shares in
issue (for example, as a result of buy backs) will, in the absence of a
corresponding reduction in borrowings, result in an increase in the Company's
gearing.
Derivatives
The Company may enter into derivative transactions for efficient portfolio
management. Derivative instruments can be highly volatile and expose investors
to a high risk of loss. There is a risk that the return on a derivative does
not exactly correlate to the returns on the underlying investment, obligation
or market sector being hedged against. If there is an imperfect correlation,
the Company may be exposed to greater loss than if the derivative had not been
entered into.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue of its status
as a company registered under s833 of the Companies Act 2006 as an investment
trust and its listing on the London Stock Exchange. A breach of s1158 CTA
(previously s842 ICTA) could lead to the Company being subject to capital gains
tax on the profits arising from the sale of its investments. A serious breach
of other regulatory rules may lead to suspension from the London Stock
Exchange, a fine or a qualified Audit Report. Other control failures, either by
the Manager or any other of the Company's service providers, may result in
operational or reputational problems, erroneous disclosures or loss of assets
through fraud as well as breaches of regulations.
The Manager reviews the level of compliance with s1158 CTA and other financial
regulatory requirements on a regular basis. All transactions, income and
expenditure are reported to the Board. The Board regularly considers all
perceived risks and the measures in place to control them. The Board ensures
that satisfactory assurances are received from service providers. The Manager's
Compliance and Internal Audit Officers produce regular reports for review by
the Company's Audit Committee.
Resources: Reliance on Third Party Providers
The Company is an investment company which outsources its management, company
secretarial and administrative functions. It has no employees and the Directors
are all non-executive. The Company is therefore reliant on other parties for
the performance of its functions and the quality of its operations. Through the
contractual arrangements in place the full range of services required is
available to the Company. The most significant contracts are with the Manager,
to whom responsibility both for the management of the Company's portfolio and
for the provision of company secretarial and administrative services are
delegated. The Manager in turn has contractual arrangements with third parties
to act as Custodian and Registrars respectively.
Failure by any service provider to carry out its obligations in accordance with
the terms of its appointment could have a materially detrimental impact on the
effective operation of the Company and on the ability of the Company to pursue
its investment policy successfully. Such failure could also expose the Company
to reputational risk. In particular, the Manager may be exposed to the risk
that litigation, misconduct, operational failures, negative publicity and press
speculation, whether valid or not, will harm its reputation. Any damage to the
reputation of the Manager could result in
potential counterparties and third parties being unwilling to deal with the
Manager and by extension the Company. That could also have an adverse impact on
the ability of the Company to pursue its investment policy successfully.
The Board seeks to manage these risks in a number of ways. In particular the
Board reviews the performance of the Manager formally at every board meeting
and otherwise as appropriate. The day-to-day management of the portfolio is the
responsibility of the portfolio managers to whom the Board has given wide
discretion to operate within set guidelines. Any proposed variation outside
those guidelines is referred to the Board and the guidelines themselves are
reviewed at every board meeting. The risk that one of the portfolio managers
might be incapacitated or otherwise unavailable is mitigated by the fact that
they work within and are supported by the wider Invesco Fixed Interest team.
The Board has power to replace the Manager and reviews the management contracts
formally once a year.
The Manager reviews the performance of all third party providers regularly
through formal and informal meetings, the results of which are reported to and
reviewed by the Board. The contractual arrangements which govern relationships
with third party providers, including the Registrars and the Custodian, and
with the Corporate Broker are also reviewed by the Board in relation to agreed
service standards on a regular basis and, more formally, on an annual basis.
The Ordinary Shares
The market price of, and the income derived from, the Company's ordinary shares
can fluctuate and may go down as well as up. The market value may not always
reflect the NAV per ordinary share. The market price of an ordinary share may
therefore trade at a discount to its NAV which is published daily. As at 31
December 2010, the ordinary shares of the Company traded at a premium of 2.4%.
Past performance of the Company is not necessarily indicative of future
performance.
The market value of the ordinary shares will be affected by a number of
factors, including their dividend yield from time to time, prevailing interest
rates and supply and demand for those shares, along with wider economic factors
and changes in law, including tax law, and political factors. The market value
of an ordinary share may therefore vary considerably from its underlying NAV.
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.
Although the ordinary shares are listed on the Official List and admitted to
trading on the London Stock Exchange's main market for listed securities, it is
possible that there may not be a liquid market in the ordinary shares and
shareholders may have difficulty in selling them.
Shareholder Relationships
Through the annual and half-yearly financial reports, interim management
statements, monthly factsheets, the publication of a daily net asset value, the
Company's website, the AGM and other methods, the Board endeavours to ensure
that shareholders understand the Company's investment policy and objective and
that the Board, both independently and through the Manager, reviews its policy
and objective in the light of feedback from shareholders. The Board monitors
and reviews shareholder communications on a regular basis.
Related-party Transactions
Invesco Asset Management Limited, a wholly-owned subsidiary of Invesco Ltd,
acts as Manager and Company Secretary to the Company. Details of Invesco Asset
Management Limited's services and fees are given in notes 3 and 4 to the
financial statements in the Annual Financial Report. Full details of Directors'
interests are set out in the Report of the Directors in the Annual Financial
Report.
Statement of Directors' Responsibilities
in respect of the preparation of financial statements
The Directors are responsible for preparing the annual financial report 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 elected to prepare financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable law). Under
company law, the Directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and on the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent; and
* state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records which are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and which
enable them to ensure that the accounts comply with company law. 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.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report, a Directors' Remuneration Report and a Corporate
Governance Statement that comply with that law and those regulations.
Each of the Directors of the Company, whose names are shown on page 15 of the
Annual Financial Report, confirms that to the best of his/her knowledge:
* the accounts, which have been prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
* this annual financial report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal tasks and uncertainties that it faces.
Clive Nicholson
Chairman
Signed on behalf of the Board of Directors
30 March 2011
Electronic Publication
The Annual Financial Report is published on www.invescoperpetual.co.uk/
investmenttrusts, a website maintained by the Company's Manager. The work
carried out by the Auditors does not involve consideration of the maintenance
and integrity of this website and, accordingly, the Auditors accept no
responsibility for any changes that have occurred to the financial statements
since they were initially presented on the website. Visitors to the website
need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in their jurisdictions.
Income Statement
for the year ended 31 December
2010 2009
Notes Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains on investments - 9,790 9,790 - 32,293 32,293
Foreign exchange profits - 986 986 - 2,260 2,260
Revenue 2 9,371 - 9,371 7,566 - 7,566
Investment management fee 3 (562) (304) (866) (371) (200) (571)
VAT recoverable on 3 - - - 16 9 25
management fees
Liquidation distribution 3 - - - - 469 469
Other expenses (448) (2) (450) (441) (285) (726)
Net return before finance 8,361 10,470 18,831 6,770 34,546 41,316
costs and
taxation
Finance costs (109) (70) (179) (225) (121) (346)
Return on ordinary 8,252 10,400 18,652 6,545 34,425 40,970
activities before
taxation
Tax on ordinary activities (2,215) 1,122 (1,093) 2,421 - 2,421
Return on ordinary 6,037 11,522 17,559 8,966 34,425 43,391
activities after tax for
the financial year
Return per ordinary share - 4 8.3p 15.8p 24.1p 14.5p 55.5p 70.0p
basic
The total column represents the Company's profit and loss account. The
supplementary revenue and capital columns are presented for information
purposes as recommended by the guidance note issued by the Association of
Investment Companies. All items in the above statement derive from continuing
operations and the Company has no other gains or losses; therefore, no
statement of recognised gains or losses is presented. No operations were
acquired or discontinued in the year.
Reconciliation of Movements in Shareholders' Funds
for the year ended 31 December
Capital
Share Share Special Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 31 1,175 119,663 11,644 8,410 (89,173) 5,540 57,259
December 2008
Return for the year - - - - 34,425 8,966 43,391
from the
income statement
Dividends paid in the - - - - - (7,209) (7,209)
year -
note 5
Issue of new shares 281 20,348 - - - - 20,629
Balance at 31 1,456 140,011 11,644 8,410 (54,748) 7,297 114,070
December 2009
Return for the year
from the
income statement - - - - 11,522 6,037 17,559
Dividends paid in the - - - - - (8,617) (8,617)
year -
note 5
Balance at 31 1,456 140,011 11,644 8,410 (43,226) 4,717 123,012
December 2010
Balance Sheet
as at 31 December
2010 2009
Notes GBP'000 GBP'000
Fixed assets
Investments at fair value through profit or loss 111,445 114,652
Current assets
Debtors 6,416 7,988
Cash at bank 5,894 2,859
12,310 10,847
Creditors: amounts falling due within one year (743) (11,429)
Net current assets/(liabilities) 11,567 (582)
Total assets less current liabilities 123,012 114,070
Capital and reserves
Share capital 6 1,456 1,456
Share premium 140,011 140,011
Special reserve 11,644 11,644
Capital redemption reserve 8,410 8,410
Capital reserve (43,226) (54,748)
Revenue reserve 4,717 7,297
Shareholders' funds 123,012 114,070
Net asset value per ordinary share 7 168.98p 156.69p
These financial statements were approved by the Board of Directors and
authorised for issue on 30 March 2011.
Clive Nicholson
Chairman
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial statements.
Cash Flow Statement
for the year ended 31 December
2010 2009
Notes GBP'000 GBP'000
Net cash inflow from operating activities 8,202 5,360
Servicing of finance (201) (437)
Net inflow/(outflow) from financial investment 12,997 (12,673)
Equity dividends paid 5 (8,617) (7,209)
Cash inflow/(outflow) before financing 12,381 (14,959)
Management of liquid resources (3,334) -
Financing (11,108) 10,040
Increase/(decrease) in cash (2,061) (4,919)
Reconciliation of net cash flow to movement in net funds/(debt)
Notes GBP'000 GBP'000
Decrease in cash (2,061) (4,919)
Cash flow from movement in liquid resources 3,334 -
Cash outflow from decrease in debt 11,108 3,925
Change in funds/(debt) resulting from cash flows 12,381 (994)
Translation difference - exchange profits 1,762 1,886
Movement in net funds/(debt) in the year 14,143 892
Net debt at beginning of the year (8,249) (9,141)
Net funds/(debt) at end of the year 5,894 (8,249)
Notes to the Financial Statements
1. Principal Accounting Policies
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the year and the preceding year, unless otherwise stated.
(a) Basis of Preparation
Accounting Standards applied
The financial statements have been prepared in accordance with applicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice) and with the Statement of Recommended Practice (`SORP')
`Financial Statements of Investment Trust Companies and Venture Capital
Trusts', issued by the Association of Investment Companies in 2009. The
financial statements are prepared on a going concern basis. The disclosures on
going concern in the Report of the Directors on page 35 of the Annual Financial
Report form part of the financial statements.
2. Income
2010 2009
GBP'000 GBP'000
Income from listed investments
UK dividends 525 851
UK unfranked investment income - interest 2,754 1,644
Overseas interest 5,912 4,920
Overseas dividends 83 35
Scrip dividends 76 83
9,350 7,533
Other income
Interest on VAT recovered on management fees - 14
Deposit interest 21 19
21 33
Total income 9,371 7,566
Total income comprises:
Dividends 684 969
Interest 8,687 6,597
9,371 7,566
3. Investment Management Fee
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 562 304 866 371 200 571
Details of the Management Agreement are disclosed in the Report of the
Directors. At 31 December 2010 GBP220,000 (2009: GBP199,000) was due for payment in
respect of investment management fees.
In the year ended 31 December 2009, the Company recovered the following VAT
paid on management fees:
- GBP25,000 for the period 2004 to 2007, together with GBP14,000 of interest; and
- GBP469,000 for VAT paid on management fees suffered by the old CMHYT to the
merger in 2005; this was paid as a liquidation distribution by that company.
No amounts were received in the year ended 31 December 2010.
4. Return per Ordinary Share
Total return per ordinary share is based on the total return on ordinary
activities after tax. Revenue return per ordinary share is based on the revenue
return on ordinary activities after tax. Capital return per ordinary share is
based on the capital return on ordinary activities after tax.
All three returns are based on 72,799,105 (2009: 62,018,845) ordinary shares,
being the weighted average number of ordinary shares in issue during the year.
5. Dividends on Ordinary Shares
Dividends paid and recognised in the year:
2010 2009
Pence GBP'000 Pence GBP'000
Interim paid in respect of previous period 4 2,793 3 1,779
First interim paid 2 1,456 3 1,779
Second interim paid 3 2,184 3 1,823
Third interim paid 3 2,184 3 1,828
12 8,617 12 7,209
Set out below are the dividends that have been declared in respect of the
financial year ended 31 December:
2010 2009
Pence GBP'000 Pence GBP'000
First interim paid 2 1,456 3 1,779
Second interim paid 3 2,184 3 1,823
Third interim paid 3 2,184 3 1,828
Fourth interim, payable on 28 February 2011 3 2,184 - -
Fourth interim, paid on 26 February 2010 - - 1 609
Fifth interim, paid on 26 February 2010 - - 2 1,456
Sixth interim, paid on 28 May 2010 - - 1 728
11 8,008 13 8,223
Dividends declared but not paid at the balance sheet date are not included as a
liability in that year's financial statements.
6. Share Capital
2010 2009
GBP'000 GBP'000
Authorised
5,174,116,742 ordinary shares of 2p (2009: 5,174,116,742) 103,482 103,482
2010 2009
GBP'000 GBP'000
Allotted and fully paid
72,799,105 ordinary shares of 2p (2009: 72,799,105) 1,456 1,456
During the year the Company issued no ordinary shares (2009: 14,039,819
ordinary shares).
7. Net Asset Value per Ordinary Share
The net asset value per ordinary share at 31 December 2010 is based on net
assets of GBP123,017,000 (2009: GBP114,070,000) and on 72,799,105 (2009:
72,799,105) shares being the number of ordinary shares in issue at the
year-end.
8. This announcement does not constitute the Company's statutory accounts. It
is an abridged version of the audited Annual Financial Report of the Company
for the year ended 31 December 2010. The opinion of the auditors on the 2010
Annual Financial Report is unqualified, and the auditors have not drawn
attention to any matter, nor have they sought to make a statement under section
498 of the Companies Act 2006. Information relating to the year ended 31
December 2009 is taken from the audited Annual Financial Report for that year
which has been delivered to the Registrar of Companies. The Annual Financial
Report for 2010, once approved by shareholders, will be delivered to the
Registrar in due course.
9. The audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, 30 Finsbury Square, London, EC2A 1AG. A copy of the
Annual Financial Report will be available from Invesco Perpetual on the
following website:
http://investmenttrusts.invescoperpetual.co.uk/portal/site/iptrust/
investmentrange/investmenttrusts/citymerchants
The Annual General Meeting of the Company will be held at 2.30pm on 26 May 2011
at 30 Finsbury Square, London, EC2A 1AG.
By order of the Board
Invesco Asset Management Limited - Company Secretary
30 March 2011
END
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