TIDMSR.
SR EUROPE INVESTMENT TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2010
The full Annual Report and Accounts can be accessed via the Company's website
at www.sreit.co.uk or by contacting the Company Secretary on telephone 01392
412122.
Investment Objective
SR Europe Investment Trust plc invests in an actively managed portfolio of
quoted companies and debt instruments in the United Kingdom and continental
Europe, including emerging Europe, Russia and Turkey with the objective of
generating capital growth without neglecting income.
Capital structure
Issued share capital at 31 December 2010 GBP
29,327,234 Ordinary shares of 10 pence each 2,932,723
5,937,927 Subscription shares of 1 pence each 59,379
The Articles of Association of SR Europe Investment Trust plc (the `Company' or
`SREIT') provide that at the Annual General Meeting (`AGM') of the Company held
to approve the Company's financial statements in respect of the financial year
ending 31 December 2011, the Directors will propose an Ordinary Resolution for
the continuation of the Company in its current form. If this resolution is
passed, a similar resolution will be proposed at every third AGM thereafter.
If such a resolution is not passed, a General Meeting of the Company will be
convened within the following four months to consider proposals for the
liquidation, reorganisation or reconstruction of the Company.
Subscription shares
Registered holders of Subscription shares will have the opportunity to convert
their Subscription shares at a rate of 1 Ordinary share per Subscription share
and a conversion price of 244p in the thirty days preceding the AGMs in both
2011 and 2012.
FINANCIAL SUMMARY
for the year ended 31 December 2010
Year ended Year ended
31 December 31 December
2010 2009
Revenue:
Net return after taxation GBP842,000 GBP1,503,000
Return per Ordinary share - basic and fully 2.86p 5.06p
diluted
Dividends declared and proposed in respect of 2.40p 4.25p
year
Capital:
Net return after taxation GBP(2,442,000) GBP19,599,000
Return per Ordinary share - basic and fully (8.29)p 66.00p
diluted
As at As at
31 December 31 December
2010 2009
Assets:
Net assets GBP68,362,000 GBP72,003,000
Net asset value per Ordinary share (`NAV')
- basic and fully diluted 233.10p 242.47p
Middle market quotation:
Ordinary shares 194.50p 208.00p
Subscription shares 9.0p 23.50p
Discount to basic NAV:
Ordinary shares 16.56% 14.22%
SR Europe Total Return* (2.21)% 41.31%
MSCI Europe (including UK) Total Return Index 8.22% 23.48%
* Includes dividends reinvested as at the ex-dividend date.
INVESTMENT POLICY
SR Europe Investment Trust plc invests in an actively managed portfolio of
quoted companies and, occasionally, debt instruments in the United Kingdom and
continental Europe, including emerging Europe, Russia and Turkey.
The objective is to generate capital growth without neglecting income rather
than holding a portfolio of shares to try to outperform the European equity
indices.
The portfolio will be made up of stocks priced mainly in Euros and Sterling,
but also in a variety of other currencies. The Investment Managers are
authorised to hedge against anticipated weakness in any of these currencies,
including Sterling, the currency in which we report.
Asset allocation and risk diversification
The Company's investment policy is to concentrate on sectors, investment themes
and individual companies that have a pan-European perspective, but including
companies operating outside Europe. The Investment Managers' initial
consideration is to identify reasonable absolute upside on any individual
investment, whilst also paying particular attention to possible absolute
downside risks, irrespective of potential return relative to an index.
Limited attention is paid to geographical weightings of the portfolio, either
in absolute terms or relative to the MSCI Europe (including UK) Total Return
Index. However, for risk purposes, the Investment Managers monitor individual
country allocations to ensure that these do not become unreasonably high.
Whilst there is no prescribed single country limit, outside of the core markets
of the UK, Germany and France, exposure to any single country would normally
not exceed 30% of the portfolio at the time of investment. In the case of
emerging markets, the comparable figure would be 20%.
Up to 5% of Shareholders' funds at the time of investment may be committed to
companies quoted outside of Europe, as defined above. Some of the companies
selected in this category may not have substantial interests in Europe.
The Investment Managers' aim is to capture the upside in European equity
markets over longer time periods, whilst trying to avoid major loss of value
when medium-term market prospects are poor. They believe that risk reduction
and the delivery of attractive absolute returns over time are best achieved by
finding several independent and uncorrelated investment themes where valuations
look attractive. Whilst not specifically proscribed, it is unlikely that
exposure to any single investment sector will exceed 30% of the portfolio at
the time of acquisition.
The portfolio is invested across the full spectrum size of individual
companies, from small, higher risk emerging businesses up to the largest quoted
European multinationals. Maximum exposure to any single share is capped at 15%
of gross assets at the time of investment, though in practice it would not
normally exceed 7%.
Gearing
The Investment Managers enjoy a high degree of flexibility in balance sheet
deployment, individual stock choices and size of positions in the Company's
portfolio. They may reduce the exposure to equities, if they believe that
prospects for equity markets are unfavourable, by one or more of: increasing
the cash position, investing in bonds and using appropriate hedging strategies.
Investors should note that hedging activities may not be perfectly correlated
to the underlying portfolio's equity positions; hence undertaking hedging
positions is not a `risk free' exercise and can result in further losses if
both positions were to move in opposite directions. This ought to be a rare
event as the Investment Managers seek to use hedging instruments that
realistically match the portfolio and generally hedging positions are used only
at irregular intervals.
The Investment Managers try to be pragmatic in their balance sheet positioning,
taking into account the general global outlook and liquidity environment. The
Company has authority to borrow up to a maximum of 50% of shareholders' funds,
but the Directors and Investment Managers have for the time being agreed a
maximum figure of 22% at the time the borrowings are made (though any cash
margin held may be offset against borrowings).
Even in negative market conditions a minimum gross level of equity exposure of
at least 40% is likely to be maintained, although the net exposure could be
reduced by, for example, hedging in extreme circumstances. Shareholders will
not be immune to weak markets and currencies, or to poor stock selection, but
the overall aim is to cushion the worst effects.
CHAIRMAN'S STATEMENT
Background
SR Europe Investment Trust Plc (the Company) was established on 15 August 2001
as the successor Company to SR Pan European Investment Trust Plc. The Company
invests in the UK and Continental Europe including emerging Europe, Turkey and
Russia. The portfolio consists mainly of equities but may also, from time to
time, include various debt instruments. In addition shareholders gave their
approval at the last Annual General Meeting to allow up to 5% of net assets at
the time of investment to be committed to companies quoted outside of Europe as
defined above.
The objective is to achieve absolute returns rather than hold a portfolio of
shares to outperform the European equity indices. If prospects for markets are
unfavourable the Company is prepared to reduce its exposure to equities by
increasing the cash position, investing in bonds or hedging. However, the
Company is likely to maintain significant exposure to equities and our assets
therefore will not be immune to falling markets.
Change of Portfolio Manager
In August 2010 Sloane Robinson LLP informed your Directors that Rupert Dyson
had decided to take a break from the investment industry and that his
resignation had been accepted. Rupert was the named manager of our portfolio
since the Company's inception in 2001 and the Board are grateful for his
successful results over nine years.
Michael Hufton was appointed the new named portfolio manager of the Company,
assisted by Nathan Wong. Michael is a linguist and worked in European equities
both with Cazenove & Co and Bruce Nelson Capital before joining Sloane Robinson
in 2008.
Review of Investment Performance
The NAV of our Ordinary shares fell by 2.2% on a total return basis in the year
under review, substantially underperforming the MSCI Europe (including UK)
index, (the Index) which rose by 8.2% on the same basis. 2010 was a volatile
year in Europe for both the equity indices and the value of the Euro against
Sterling and our Managers were wrong footed in the five months from May to
September.
At the end of April we were 85% committed to equities at a net level and our
NAV per share was up 2.5% in the year to date, ahead of the Index. The bailout
of Greece in April failed to quell wider uncertainties about sovereign debt in
other parts of the Eurozone and during May European equity markets fell,
recovered and fell again with the Index down 7.4% in the month. Our Managers
sold equities and hedged reducing net exposure to 45% at the end of May, but
this did not prevent our NAV per share underperforming a falling market in May
and June and left the Company poorly positioned for the rally in the third
quarter of the year.
Since his appointment in August, our new portfolio manager has rebuilt exposure
to equities to 92.5% at the year end with a further 3.2% in bonds and no
derivative overlay. Performance in the final quarter of the year was stable
with a recovery in our NAV per share equalling the rise in the Index despite
the under exposure to equities. There has been no change of policy but the
current portfolio has a greater emphasis on larger companies, many with markets
in the faster expanding economies in the Far East and South America. As a
result the portfolio as a whole is more liquid than previously.
At 31 December 2010 the Ordinary share price was 194.5p, a discount of 16.6% to
the NAV. This compares with a price of 208.0p on 31 December 2009 when the
discount was 14.2%. With the discount widening marginally the Ordinary shares
fell by 6.5% over the year.
Earnings and Dividend
Net revenue after tax in 2010 was GBP842,000 (GBP1,503,000 in 2009) equating to
earnings of 2.86p (5.06p in 2009) per Ordinary share. The Company paid an
interim dividend of 1p per Ordinary share on 30 September 2010 and your
Directors are recommending a final dividend of 1.4p in respect of the year
2010. If approved by shareholders this final dividend will be paid on 31 May to
those Ordinary shareholders on the register at 15 April 2011.
Revenues in 2009 were boosted by both the reimbursement of VAT on past
management and performance fees and by substantial interest received on
holdings of corporate bonds. This latter element diminished in 2010 as
corporate bonds were sold and is likely to be lower again in 2011. Generating a
net income and paying dividends remains part of our investment objective, but
the main aim is to invest for capital growth.
Prospects
Our Investment Manager in his review points to the modest valuation of the
European equity markets in relation to their longer term averages. The current
emphasis in the portfolio has moved towards larger more liquid companies with
prospects of earnings growth from both domestic and overseas markets.
At the Annual General Meeting ("AGM") in 2006, Shareholders voted in favour of
a resolution to continue the life of the Company and on that occasion extended
the period to the next such vote to six years to give the Company a more
certain life in line with the duration of the Subscription shares. At the AGM
to be held in 2012 to approve the 2011 financial statements, your Directors
will propose an Ordinary Resolution for the continuation of the Company in its
current form. If this resolution is passed, a similar resolution will be
proposed at every third AGM thereafter and on a rolling three year renewal
basis.
Shareholders will be asked at the AGM to renew the authority of the Directors
to buy back shares, and your Directors intend to use these powers if they
consider this to be in the interests of the Company. Over the course of 2010
the Company bought back a total of 368,000 Ordinary shares for cancellation.
Child Health Research Appeal Trust
In 1980 Leolin Price CBE, QC, Chairman of the Institute of Great Ormond Street
Hospital for Sick Children and responsible for this charity, helped launch the
Child Health Research Investment Trust plc with an innovative tax structure
that enabled the charity to earn extraordinary interest over a period of seven
years on the loan capital it invested. The founding shareholders also prospered
and have seen a number of changes in the share structure, culminating in the
present SR Europe Investment Trust. This year Leo thinks it no longer necessary
to repeat his customary appeal which for many years has appeared on the last
page of our Annual Report. I am very grateful to Leo for the support he has
given to the Company and its predecessors over so many years and I would like
to remind Shareholders of this deserving cause which furthers the work of the
Great Ormond Street Hospital for Sick Children.
Annual General Meeting
We hope to see as many shareholders as possible at the AGM, which will be held
at the offices of J.P. Morgan Cazenove, 20 Moorgate, London EC2R 6DA at 2.30pm
on Tuesday 24 May 2011. In addition to the formal business of the meeting, the
fund manager, Michael Hufton, will make a presentation reviewing the past year
and commenting on the outlook.
Martin Riley
Chairman
6 April 2011
INVESTMENT MANAGER'S REVIEW
The net asset value per share ('NAV') of the Company on a total return basis fell
by 2.2% in 2010 compared with an 8.2% increase in the MSCI Europe (including
UK) Total Return Index in Sterling terms over the same period. Clearly this was
a very disappointing performance and a large contributor related to FX
translation losses. We simply did not anticipate that the crisis in the
Eurozone would cause such a precipitous decline in the Euro/Sterling rate and
so did not adequately hedge the large Euro exposure back into the Sterling base
currency of the Company.
2010 was a year of two halves which included a change in the named manager
running the Company in August. Over the first period the NAV declined by 13.2%
against a 3.3% decline in the index. In the second period the index rallied
11.9% and NAV increased by 10.8%, on a net equity exposure which started at 47%
and ended the year at 93%. This performance was encouraging in light of a
change to the portfolio mix which was de-risked, exiting the majority of our
smaller cap positions and refocusing on a group of core large and mid cap
holdings where we have high conviction and feel we can hold large positions on
a long term time horizon.
Looking forward we feel cautiously positive as to the outlook in 2011. Caution
is necessary as the macro concerns which took centre stage in 2010 have not
gone away. Sovereign debt in Europe's periphery and a shortage of bank funding
remain major problems to which convincing and politically acceptable solutions
have not yet been found. But on the other hand there is much cause for
optimism. At a macro level, Germany, Scandinavia & Switzerland, are positively
booming, with confidence levels (German IFO) at 20 year highs and bond yields
near 20 year lows. GDP growth is strong and unemployment is falling, absorbing
spare capacity. This group represents a third of European GDP, in contrast to
Greece, Ireland & Portugal which account for just 5% combined. At a micro
level, companies appear in good shape. They have made use of the crisis to
restructure, cut costs aggressively and repay debt. As a result balance sheets
are strong, profitability and cash flow generation is high and growth prospects
are good. Many of the world's leading businesses with strong positions in the
growth economies of the Emerging world are European quoted and in addition they
are also now benefitting from an improvement in their home markets. However,
these contrasting risks and opportunities will likely lead to another year of
volatility as newsflow and market concerns ebb and flow. As a result we will
need to be pragmatic and willing to move our balance sheet in response to
events.
As to stocks, we have several core holdings where we feel excited as to
prospects in the year ahead. Examples would include:
Edenred in France, the global market leader in payment vouchers, a rapid growth
business benefitting from formalisation of the economies and trends to
urbanisation in Asia & Latin America.
International Power in the UK, which, post merger with GDF Suez International,
will be the world's leading independent power producer, with strong growth
prospects, high visibility of earnings and potential for substantial synergy
benefits to come through from the merger.
Amadeus in Spain, a software company which is the world's leading ticketing
distribution system and IT software supplier to the aviation industry. The
excitement here is from their Altea software business which provides leading
edge ERP-type solutions to airlines enabling them to cut costs and increase
topline.
Alcatel Lucent in France, the market leading supplier of fixed line & wireless
telecommunications equipment, benefitting from both a resurgent equipment
market, (driven by the US as networks are upgraded to cope with higher data
demand as smartphone penetration increases), and from internal restructuring as
costs are cut.
Roche in Switzerland, a global leading pharmaceutical & biotech company with a
number one position in oncology, trading at a multi-year low in valuation
terms. Things look likely to turn for the better in 2011, with modest topline
growth augmented by a new cost-cutting plan scheduled to deliver CHF 2.4bn of
savings, a new CFO as of March & the first signs of good news from the
late-stage R&D pipeline with strong phase 3 trial results in malignant
melanoma.
The European equity market currently trades on a fwd PE of 9.0x, a 40% discount
to the long run average 15x multiple, and offers a dividend yield of 4.5%. In a
world where earnings are growing and interest rates are at 1%, this is a
compelling proposition.
Sloane Robinson LLP
6 April 2011
PORTFOLIO OF INVESTMENTS
at 31 December 2010*
Market
Rank Rank Value % of Country of
(2010) (2009) Company GBP'000 Portfolio Listing Sector
1 (-) Edenred 3,316 5.07 France Industrials
2 (-) International 3,256 4.98 UK Utilities
Power
3 (-) Swatch Group 2,794 4.27 Switzerland Consumer
Discretionary
4 (4) Heidelbergcement 2,693 4.12 Germany Materials
5 (1) Fresenius 2,585 3.95 Germany Healthcare
6 (2) Roche Holdings 2,575 3.94 Switzerland Healthcare
7 (-) Lanxess 2,412 3.69 Germany Materials
8 (-) Michelin 2,402 3.67 France Industrials
9 (68) Telefonica 2,272 3.48 Spain Telecommunications
10 (12) Compass Group 2,187 3.34 UK Consumer
Discretionary
11 (5) Man Group 11% 2,179 3.33 UK Fixed income
12 (-) Volkswagen 2,101 3.21 Germany Industrials
13 (-) Nokia 2,098 3.21 Finland Consumer
Discretionary
14 (-) Publicis Groupe 2,077 3.18 France Media
15 (-) Amadeus Global 2,062 3.15 Spain Information
Technology
16 (-) Adidas 2,050 3.14 Germany Consumer
Discretionary
17 (-) Assa Abloy 2,047 3.13 Sweden Industrials
18 (6) Vodafone 2,012 3.08 UK Telecommunications
19 (-) Alcatel 1,999 3.06 France Information
Technology
20 (-) Anheuser-Busch 1,995 3.05 Belgium Consumer Staples
Top Twenty investments 47,112 72.05
21 (13) Novo-Nordisk 1,985 3.04 Denmark Healthcare
22 (23) Temenos Group 1,971 3.01 Switzerland Information
Technology
23 (-) Antofagasta 1,814 2.77 UK Materials
24 (-) Tullow Oil 1,753 2.68 UK Energy
25 (-) Svenska 1,574 2.41 Sweden Financials
26 (7) Wirecard 1,563 2.39 Germany Information
Technology
27 (-) Richemont 1,410 2.16 Switzerland Consumer
Discretionary
28 (-) Rio Tinto 1,395 2.13 UK Materials
29 (-) BNP Paribas 1,391 2.13 France Financials
30 (-) Kuehne & Nagel 1,371 2.10 Switzerland Industrials
31 (-) Prudential 1,353 2.07 UK Financials
32 (49) Premier Oil 617 0.94 UK Energy
33 (50) Poweo 76 0.12 France Utilities
Total company portfolio 65,385 100.00
Frankrate (Subsidiary Company)
Total Subsidiary portfolio - -
Fixed and current asset 65,385 100.00
investments
* Based on country of quotation.
Futures and options are not included in this classification
Included in the above are fixed interest holdings of GBP2,179,000 (2009: GBP
6,729,000).
PORTFOLIO ANALYSIS
at 31 December 2010
Geographical breakdown*
Country % of portfolio
UK & Ireland 25
Germany 21
France 17
Switzerland 15
Spain 7
Sweden 6
Belgium 3
Finland 3
Denmark 3
100
* Based on country of quotation.
Sector breakdown
Sector % of portfolio
Industrials 17
Consumer Discretionary 16
Materials 13
Information Technology 12
Healthcare 11
Financials 7
Telecommunication Services 6
Utilities 5
Energy 4
Media 3
Consumer Staples 3
Fixed Income 3
100
BUSINESS REVIEW
The business review is intended to enhance shareholders' understanding of the
development, performance and position of the Company through a combination of
narrative and financial performance measures. It should be read in conjunction
with the Chairman's statement, Investment Manager's review, Portfolio of
investments, Portfolio analysis and historical record.
Principal activity and status
The principal activity of the Company is to carry on business as an investment
trust. Frankrate Limited is a wholly owned subsidiary undertaking of the
Company whose principal activity is to carry on business as an investment
dealing company. The Directors do not envisage any changes in these activities
in the foreseeable future.
The Company was incorporated and registered in England and Wales on 29 May 2001
with registration number 04223875. It is registered as a public limited company
and is currently an investment company in accordance with the provisions of
Section 833 of the Companies Act 2006. The Company is a member of the
Association of Investment Companies (`AIC').
The Company has received written approval from HM Revenue & Customs as an
authorised investment trust under Sections 1158/9 of the Corporation Tax Act
2010 (`Sections 1158/9'), formerly Section 842 of the Income and Corporation
Taxes Act 1988 (`Section 842'), for the year ended 31 December 2009. This
approval is subject to there being no subsequent enquiry under corporation tax
self-assessment. The Company has been approved as an investment trust for all
previous years. On 1 April 2010 Section 842 was superseded by Sections 1158/9
following the modernisation of the investment trust tax rules. There was no
change to the substance of the wording. It is the opinion of the Directors that
the Company has subsequently directed its affairs so as to enable it to
continue to qualify for such approval and the Company will continue to seek
approval under Sections 1158/9 each year.
The Company's status as an investment trust allows it to obtain an exemption
from paying capital gain taxes on the profits made from the sale of its
investments. Investment trusts offer a number of advantages for investors,
including access to investment opportunities that might not be open to private
investors and to professional stock selection skills at low cost.
The Company's Ordinary shares and Subscription shares are eligible investments
for inclusion in Individual Savings Accounts.
The Company's investment objective is to generate capital growth, without
neglecting income, from an actively managed portfolio of quoted companies and
debt instruments in the United Kingdom and continental Europe, including
emerging Europe, Russia and Turkey. When conditions are favourable, the Company
seeks to enhance capital returns for shareholders by utilising gearing in the
form of a flexible credit facility. Up to 5% of Shareholders' funds at the time
of investment may be committed to companies quoted outside of Europe, as
defined above. Some of the companies selected in this category may not have
substantial interests in Europe. Full details of the current investment policy
can be found above.
The Company's Articles of Association provide that at the AGM of the Company to
be held to approve the Company's financial statements in respect of the
financial year ending 31 December 2011, the Directors will propose an Ordinary
Resolution for the continuation of the Company in its current form. If this
resolution is passed, a similar resolution will be proposed at every third AGM
thereafter. If such a resolution is not passed, a General Meeting of the
Company will be convened within the following four months to consider proposals
for the liquidation, reorganisation or reconstruction of the Company.
Net asset valuation
The basic net asset value (`NAV') per Ordinary share at 31 December 2010 was
233.10p (2009: 242.47p).
Results and dividend
The Chairman's statement and the Investment Manager's review above give details
of the Company's activities, performance and position during the period under
review.
The results for the year and the proposed transfer to the revenue reserve are
set out in the consolidated income statement below.
The following net dividends have been paid/proposed by the Directors:
Pence (net)
Payment per Ordinary
date share
First interim 30/09/2010 1.00p
dividend
Final dividend 31/05/2011 1.40p
2.40p
The Directors recommend that a final dividend in respect of the year ended 31
December 2010 of 1.4p per Ordinary share be paid on 31 May 2011 (2009: second
interim 3.25p).
Total expense ratio
The Company's total expense ratio to average Shareholders' funds (`TER') was
1.27% (2009: 1.26%).
Share capital
As at 31 December 2010, the Company's issued share capital comprised 29,327,234
Ordinary shares of 10p each and 5,937,927 Subscription shares of 1p each. Both
classes of share are listed and traded on the London Stock Exchange. During the
year the Company has bought back 368,000 Ordinary shares for cancellation, with
a nominal value of GBP36,800 and representing 1.24% of issued Ordinary shares, at
a total cost of GBP783,000. No shares were held in Treasury during the year or at
the year end.
Subsequent to the year end and up to the date of this report, a further 28,301
Ordinary 10p shares were purchased by the Company for cancellation, with a
nominal value of GBP2,830 and representing 0.1% of issued Ordinary shares at a
total cost of GBP58,000.
Further details of the rights attaching to each class of share can be found in
note 13 to the financial statements.
Key performance indicators ('KPIs')
The Directors use the following key performance indicators to measure the
progress of the Company:
* NAV.
* The movement in the Company's share price and the resultant discount/premium
of the share price in relation to the NAV.
* Despite the Company's aim for capital growth irrespective of the movement of
indices, the Directors also monitor the Company's NAV performance against
relevant indices.
Shareholders can compare the KPIs as at 31 December 2010 and 2009 above.
Principal risks faced by the Company
Risks faced by the Company include, but are not limited to, liquidity/
marketability risk, interest rate risk, gearing risk, currency risk, maturity
risk, market price risk, risks associated with non-compliance with Section 1158
/9, risks associated with hedging, credit risk and risks associated with the
engagement of third parties.
Liquidity/marketability risk
The Company's portfolio consists mainly of quoted equity securities. However,
the Company does from time to time invest in debt instruments and other
investment vehicles which, by their very nature, are less readily marketable
than, for example, blue-chip UK equities. The Board closely monitors the
performance of the Company through quarterly Board meetings and the review of
monthly investment management reports. The Investment Manager monitors the
value of the Company's underlying securities on a daily basis.
Gearing risk
As at 31 December 2010 and as at the date of this report, the Company has the
potential to borrow in the form of an overdraft facility with Morgan Stanley
based upon a percentage of assets, which the Company utilises primarily for the
purpose of purchasing securities. The use of gearing can cause both gains and
losses in the asset value of the Company to be magnified.
Currency risk
The Company makes significant investments in currencies outside the Company's
base currency of Sterling. The Company from time to time also hedges its
currency exposure, including its exposure to Sterling. This means that any
significant fluctuations in exchange rates between currencies can have a
detrimental impact on the Company's value. The most important exchange rate is
Sterling relative to the Euro.
Market price and discount volatility risk
Since the Company invests in financial instruments, market price risk is
inherent in these investments.
Being a closed-ended fund, the Company's shares generally trade at a discount
to net asset value. The magnitude of this discount fluctuates daily and can
vary significantly. Thus, for a given period of time, it is possible that the
market price could decrease despite an increase in the Company's net asset
value. The Directors review the Company's discount levels regularly and can use
the Company's powers to buy back shares should it be thought appropriate to do
so.
Compliance with Sections 1158/9
If the Company did not comply with the provisions of Sections 1158/9, it would
lose its investment trust status. In order to minimise this risk, the
Investment Manager and the Company Secretary monitor the Company's compliance
with the key criteria of Sections 1158/9 on a monthly basis. On a quarterly
basis, compliance with these provisions is discussed in detail between the
Board and the Investment Manager and, furthermore, the Investment Manager
provides the Board with a quarterly assurance that, to the best of its
knowledge, the provisions of Sections 1158/9 relating to investments have been
adhered to during the period.
Risks associated with the engagement of thirdparties
Like most investment trust companies, the Company has no employees and the
Directors are all non-executive. Accordingly, the Company relies upon the
services and performance of Sloane Robinson LLP as Investment Manager, Capita
Sinclair Henderson Limited, who provide company secretarial and accounting
services, and Morgan Stanley & Co. International plc (`Morgan Stanley'), the
Company's Custodian. Details of the terms of the Investment Management
Agreement are set out below.
There are a number of potential operational risks associated with the fact that
third parties undertake the Company's administration and custody of assets,
such as the risk that they could fail to ensure that statutory requirements,
such as the Companies Act, Tax legislation and the Listing Rules, are complied
with.
Morgan Stanley uses a number of sub-custodians to hold the non-UK assets of the
Company, some of which are not affiliated to Morgan Stanley, and there is a
potential risk associated with this. Under FSA rules, Morgan Stanley is
required to exercise due skill, care and diligence in the selection and
monitoring of sub-custodians and to maintain an appropriate level of
supervision over them. Morgan Stanley also has arrangements in place to ensure
that client securities are segregated from the sub-custodians' assets.
Under the terms of the agreement with Morgan Stanley, Morgan Stanley may
borrow, lend or otherwise use the Company's investments for its own purposes
(rehypothecation) and may take such investments as collateral. Such investments
then become the property of Morgan Stanley and, in the event of an insolvency
of Morgan Stanley, may be available to its creditors. In such an instance, the
Company would become an unsecured creditor in relation to any assets which are
rehypothecated and may not be able to recover such investments in full. The
ability of Morgan Stanley to use the Company's investments in this way is
limited to 120% of the Company's liabilities (which includes debit cash
balances together with any other obligation owed to Morgan Stanley) outstanding
with them at any time, an enhancement of the existing prime brokerage terms
with Morgan Stanley which was reduced in May 2010 from the previous level of
140%.
As at 31 December 2010, although the Company had GBP0.4 million held in positive
cash balances with Morgan Stanley and no overdraft.
Further information on risk
Further information regarding the principal risks that the Company faces in its
portfolio management activities and the policies for managing these risks and
the policy and practice with regard to financial instruments is included in
note 18 to the financial statements: Analysis of financial assets and
liabilities. Information regarding the Company's risk review procedures may
also be found under `Internal control assessment process' in the Directors'
report included in the Annual Report and Financial Statements.
Future developments
A review of the year to 31 December 2010 and the prospects for the coming year
can be found in the Chairman's statement and the Investment Manager's review
above.
Corporate social responsibility
The Company has no employees and the Board is comprised entirely of
non-executive Directors. As an investment trust, the Company has no direct
impact on the community or environment, and as such has no policies in this
area. In carrying out its activities and in relationships with suppliers, the
Company aims to conduct itself responsibly, ethically and fairly.
EXTRACTS FROM THE DIRECTORS' REPORT
Management agreements
The Group's investments are managed by Sloane Robinson LLP under an agreement
dated 15 March 2007.
The base investment management fee is 0.8% per annum of total assets less
current liabilities and current period revenue, payable quarterly in arrears.
The performance fee arrangement is set over a 5¼ year period. The performance
fee is 15% of the amount by which the fully diluted NAV per Ordinary share at
29 June 2012 exceeds the NAV at 8 March 2007 increased by 5% per annum
compound, multiplied by a maximum of the number of Ordinary shares in issue at
8 March 2007. The performance fee payable will be less than 4.8% of the net
assets of the Company at the date of the calculation set for 29 June 2012.
There are no specific provisions contained within the Investment Management
Agreement relating to compensation payable in the event of termination of the
agreement other than the entitlement to fees, including performance fees, which
would be payable within any notice period. The agreement is terminable by three
months' written notice.
The Board keeps under review the performance of the Investment Manager. In view
of the satisfactory longer-term performance of the assets, the Board believes
that it is in the interests of shareholders to retain Sloane Robinson LLP as
Investment Manager and that providing an appropriate incentive to Sloane
Robinson LLP for the future is in the interests of all shareholders.
Under an agreement dated 11 July 2001, company secretarial and administrative
services are provided by Capita Sinclair Henderson Limited. The administration
agreement may be terminated by six months written notice.
The full Annual Report contains the following statements regarding
responsibility for the financial statements and management report/ business
review included therein (references in the following statements are to pages in
the Annual Report).
Management Report and Statement of Directors' responsibilities in respect of
the financial statements
Management Report
Listed companies are required by the FSA's Disclosure and Transparency Rules,
(the "Rules") to include a management report within their Annual Report and
Financial Statements.
The information required to be included in the management report for the
purpose of these Rules is included in the Chairman's statement, the Investment
Manager's review, the Portfolio analysis and the Business review above.
Therefore no separate management report has been included.
Statement of Directors' responsibilities in respect of financial statements
The Directors are responsible for preparing this report and the financial
statements in accordance with applicable United Kingdom law and those
International Financial Reporting Standards (`IFRS') adopted by the European
Union.
Company law requires the Directors to prepare financial statements for each
financial period which present fairly the financial position of the Company and
of the Group and the financial performance and cash flows of the Company and of
the Group for that period.
In preparing those 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;
* present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
* state whether applicable IFRS have been followed, subject to any material
departures disclosed and explained in the financial statements;
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and Company will continue in business;
and
* provide additional disclosures when compliance with the specific requirements
in IFRS is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the Company`s financial position
and financial performance.
The Directors are responsible for keeping adequate accounting records which
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
Regulations. The Directors are responsible for ensuring that the Directors'
report and other information in the annual report is prepared in accordance
with Company law in the United Kingdom. They are also responsible for ensuring
that the annual report includes information required by the Listing Rules of
the Financial Services Authority. They also have responsibility for
safeguarding the assets of the Group and for taking such steps as are
reasonably open to them to prevent and detect fraud and other irregularities.
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
affairs and profit or loss of the Company and Group.
The Directors, to the best of their knowledge, state that:
* the financial statements, prepared in accordance with International Financial
Reporting Standards as adopted by the European Union, give a true and fair view
of the assets, liabilities, financial position and return of the Company and
the subsidiary undertaking included in the consolidation taken as a whole; and
* the Chairman's statement, Investment Manager's review and Directors' report
include a fair review of the development and performance of the business and
the position of the Company and the subsidiary undertaking included in the
consolidation taken as a whole, together with a description of the principal
risks and uncertainties that they face.
The Directors confirm that, so far as they are each aware, there is no relevant
audit information of which the Group's Auditor is unaware; and each Director
has taken all the steps that ought to have been taken as a Director to make
himself aware of any relevant audit information and to establish that the
Company's Auditor is aware of that information.
The financial statements will be published on the Company's website,
www.sreit.co.uk. The work carried out by the Auditor does not involve
consideration of the maintenance and integrity of this website and accordingly,
the Auditor accepts no responsibility for any changes that have occurred to the
financial statements when they are 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 other jurisdictions.
On behalf of the Board
M R Riley
Chairman
6 April 2011
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the years ended 31 December 2010 and 2009 but is derived
from those accounts. Statutory accounts for 2009 have been delivered to the
Registrar of Companies, and those for 2010 will be delivered in due course. The
Auditors have reported on those accounts; their report was (i) unqualified,
(ii) did not include a reference to any matters to which the Auditors drew
attention by way of emphasis without qualifying their report and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The
text of the Auditor's report can be found in the Company's full Annual Report
and Accounts at www.sreit.co.uk.
Consolidated income statement
for the year ended 31 December 2010
2010 2009
Revenue Capital Total Revenue Capital Total
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments
(Losses)/gains on 9 - (2,020) (2,020) - 22,226 22,226
investments at fair
value through
profit or loss
Foreign exchange - 1,586 1,586 - (1,652) (1,652)
gains/(losses) on
capital items
Losses on forward - (1,719) (1,719) - (1,073) (1,073)
foreign exchange
contracts
Net investment - (2,153) (2,153) - 19,501 19,501
result
Income
Income from 1,588 - 1,588 2,003 - 2,003
investments
Other income (19) - (19) 141 - 141
Total income 2 1,569 - 1,569 2,144 - 2,144
Expenses
Investment 3 (272) (272) (544) (251) (251) (502)
Manager's fee
VAT refund on - - - 181 181 362
Investment
Manager's fees
Other expenses 4 (307) - (307) (243) - (243)
Interest payable 5 (26) (26) (52) (40) (40) (80)
and similar charges
Total expenses (605) (298) (903) (353) (110) (463)
Net return before 964 (2,451) (1,487) 1,791 19,391 21,182
taxation
Taxation 6 (122) 9 (113) (288) 208 (80)
Net return after
taxation
for the year 842 (2,442) (1,600) 1,503 19,599 21,102
pence pence pence pence pence pence
Return per Ordinary 7
share
- Basic 2.86 (8.29) (5.43) 5.06 66.00 71.06
- Diluted 2.86 (8.29) (5.43) 5.06 66.00 71.06
The Group does not have any income or expenses that are not included in net
return for the year, and therefore the `Net return after taxation for the year'
is also the `Total comprehensive income for the year', as defined in
International Accounting Standard (`IAS') 1 (revised). All of the net return
for the year and the total comprehensive income for the year is attributed to
the Shareholders of the Group.
The total column of this statement is the statement of comprehensive income of
the Group which incorporates the trading subsidiary, Frankrate Limited. The
supplementary revenue and capital return columns are presented under guidance
issued by the Association of Investment Companies (`AIC').
All revenue and capital items in the above statement derive from continuing
operations.
These financial statements have been prepared under International Financial
Reporting Standards (`IFRS').
The notes are an integral part of these financial statements.
Company income statement
for the year ended 31 December 2010
2010 2009
Revenue Capital Total Revenue Capital Total
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments
(Losses)/gains on 9 - (2,020) (2,020) - 22,126 22,126
investments at fair
value through
profit or loss
Foreign exchange - 1,586 1,586 - (1,652) (1,652)
gains/(losses)on
capital items
Losses on forward - (1,719) (1,719) - (1,073) (1,073)
foreign exchange
contracts
Net investment - (2,153) (2,153) - 19,401 19,401
result
Income
Income from 1,588 - 1,588 1,976 - 1,976
investments
Other income 19 - 19 92 - 92
Total income 2 1,607 - 1,607 2,068 - 2,068
Expenses
Investment 3 (272) (272) (544) (251) (251) (502)
Manager's fee
VAT refund on - - - 181 181 362
Investment
Manager's fees
Other expenses 4 (306) - (306) (241) - (241)
Interest payable 5 (26) (26) (52) (40) (40) (80)
and similar charges
Total expenses (604) (298) (902) (351) (110) (461)
Net return before 1,003 (2,451) (1,448) 1,717 19,291 21,008
taxation
Taxation 6 (116) 9 (107) (242) 166 (76)
Net return after
taxation
for the year 887 (2,442) (1,555) 1,475 19,457 20,932
The Company does not have any income or expenses that are not included in net
return for the year, and therefore the `Net return after taxation for the year'
is also the `Total comprehensive income for the year', as defined in IAS 1
(revised).
The total column of this statement is the statement of comprehensive income of
the Company. The supplementary revenue and capital return columns are presented
under guidance issued by the AIC.
All revenue and capital items in the above statement derive from continuing
operations.
The notes are an integral part of these financial statements.
Consolidated statement of changes in equity
for the year ended 31 December 2010
Share Share Capital Capital Retained Total
capital premium redemption reserve earnings
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
For the year ended
31 December 2010
31 December 2009 3,028 26,127 - 40,441 2,407 72,003
Total comprehensive - - - (2,442) 842 (1,600)
income for the year
Shares purchased for (36) - 36 (783) - (783)
cancellation
Dividends paid:
Second Interim dividend - - - - (965) (965)
for the year ended 31
December 2009 (3.25p)
First interim dividend - - - - (293) (293)
for the year ended 31
December 2010 (1.00p)
31 December 2010 2,992 26,127 36 37,216 1,991 68,362
Share Share Capital Capital Retained Total
capital premium redemption reserve earnings
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
For the year ended
31 December 2009
31 December 2008 3,028 26,127 - 20,842 2,730 52,727
Total comprehensive - - - 19,599 1,503 21,102
income for the year
Dividends paid:
Final dividend for the - - - - (1,529) (1,529)
year ended 31 December
2008 (5.15p)
Interim dividend for - - - - (297) (297)
the year ended 31
December 2009 (1.00p)
31 December 2009 3,028 26,127 - 40,441 2,407 72,003
The notes are an integral part of these financial statements.
Company statement of changes in equity
for the year ended 31 December 2010
Share Share Capital Capital Retained Total
capital premium redemption reserve earnings
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
For the year ended
31 December 2010
31 December 2009 3,028 26,127 - 40,298 1,539 70,992
Total comprehensive - - - (2,442) 887 (1,555)
income for the year
Shares purchased for (36) - 36 (783) - (783)
cancellation
Dividends paid:
Second Interim dividend - - - - (965) (965)
for the year ended 31
December 2009 (3.25p)
First interim dividend - - - - (293) (293)
for the year ended 31
December 2010 (1.00p)
31 December 2010 2,992 26,127 36 37,073 1,168 67,396
Share Share Capital Capital Retained Total
capital premium redemption reserve earnings
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
For the year ended
31 December 2009
31 December 2008 3,028 26,127 - 20,841 1,890 51,886
Total comprehensive - - - 19,457 1,475 20,932
income for the year
Dividends paid:
Final dividend for the - - - - (1,529) (1,529)
year ended 31 December
2008 (5.15p)
First interim dividend - - - - (297) (297)
for the year ended 31
December 2009 (1.00p)
31 December 2009 3,028 26,127 - 40,298 1,539 70,992
The notes are an integral part of these financial statements.
Consolidated balance sheet
as at 31 December 2010
2010 2009
Note GBP'000 GBP'000
Non-current assets
Investments
Fair value through profit or loss 9 65,385 84,120
Current assets
Amounts due on derivative financial 435 1,028
instruments
Other receivables 11 2,764 1,365
Cash and cash equivalents 391 2,106
3,590 4,499
Total assets 68,975 88,619
Current liabilities
Amounts due on derivative financial (424) (417)
instruments
Other payables 12 (189) (16,199)
Current and total liabilities (613) (16,616)
Net assets 68,362 72,003
Shareholders' equity
Share capital 13 2,992 3,028
Share premium 26,127 26,127
Capital redemption reserve 36 -
Capital reserves 37,216 40,441
Retained earnings 1,991 2,407
Total Shareholders' equity 68,362 72,003
pence pence
Net asset value per Ordinary share
- Basic 14 233.10 242.47
- Fully diluted 14 233.10 242.47
Shares in issue:
Ordinary shares 14 29,327,234 29,695,234
Subscription shares 14 5,937,927 5,937,927
The consolidated balance sheet incorporates the trading subsidiary, Frankrate
Limited.
These financial statements were approved by the Board of Directors on 6 April
2011.
M R Riley, Chairman
SR Europe Investment Trust plc
Company Number: 04223875
The notes are an integral part of these financial statements.
Company balance sheet
as at 31 December 2010
2010 2009
Note GBP'000 GBP'000
Non-current assets
Investments
Fair value through profit or loss 9 65,385 84,120
Investment in subsidiary undertaking 10 907 907
66,292 85,027
Current assets
Amounts due on derivative financial 435 1,028
instruments
Other receivables 11 2,762 1,364
Cash and cash equivalents 383 2,098
3,580 4,490
Total assets 69,872 89,517
Current liabilities
Amounts due on derivative financial (424) (417)
instruments
Other payables 12 (2,052) (18,108)
Current and total liabilities (2,476) (18,525)
Net assets 67,396 70,992
Shareholders' equity
Share capital 13 2,992 3,028
Share premium 26,127 26,127
Capital redemption reserve 36 -
Capital reserves 37,073 40,298
Retained earnings 1,168 1,539
Total Shareholders' equity 67,396 70,992
These financial statements were approved by the Board of Directors on 6 April
2011.
M R Riley, Chairman
The notes are an integral part of these financial statements.
Consolidated statement of cash flows
for the year ended 31 December 2010
2010 2009
GBP'000 GBP'000
Cash flows from operating activities
Net return before taxation (1,487) 21,182
Adjustments to reconcile:
Less: losses/(gains) on investments 2,020 (22,226)
Less: dividends reinvested (35) (312)
Realised exchange (gains)/losses (1,586) 1,652
Losses on forward foreign exchange 1,719 1,073
contracts
Unrealised exchange losses on income 2 5
Plus: finance costs 52 80
Decrease/(increase) in other receivables 214 (122)
Increase in other payables 2 29
Tax deducted from unfranked income (227) (123)
Cash generated from operations 674 1,238
Overdraft interest paid (62) (72)
Tax credits recovered on unfranked 8 -
investment income
Corporation tax paid (6) -
Net cash flows generated from operating 614 1,166
activities
Cash flows from/(used in) investing
activities
Purchases of investments (126,555) (144,302)
Sales of investments 142,751 116,874
Exchange gains/(losses) on settlement 6 (64)
Exchange losses on currency (375) (1,897)
Exchange losses on futures contracts (54) (108)
Losses on index futures contracts (1,081) (198)
Open futures and option contracts deposits 540 (423)
Net cash flows from/(used in) investing 15,232 (30,118)
activities
Cash flows from financing activities
Equity dividends paid (1,258) (1,826)
Shares purchased for cancellation (783) -
Net cash flows used in financing activities (2,041) (1,826)
Net increase/(decrease) in cash and 13,805 (30,778)
equivalents
Cash and cash equivalents at the start of (13,414) 17,364
the year
Cash and cash equivalents at the end of the 391 (13,414)
year
Cash and cash equivalents at 31 December
comprise:
Cash at bank 391 2,106
Bank overdraft - (15,520)
391 (13,414)
The notes are an integral part of these financial statements.
Company statement of cash flows
for the year ended 31 December 2010
2010 2009
GBP'000 GBP'000
Cash flows from operating activities
Net return before taxation (1,448) 21,008
Adjustments to reconcile:
Less: losses/(gains) on investments 2,020 (22,126)
Less: dividends reinvested (35) (312)
Realised exchange (gains)/losses (1,586) 1,652
Losses on forward foreign exchange 1,719 1,073
contracts
Unrealised exchange losses on income 2 5
Plus: finance costs 52 80
Decrease/(increase) in other receivables 214 (122)
Increase in other payables 2 29
Tax deducted from unfranked income (227) (116)
Cash generated from operations 713 1,171
Overdraft interest paid (62) (72)
Tax credits recovered on unfranked 8 -
investment income
Net cash flows generated from operating
activities 659 1,099
Cash flows from/(used in) investing
activities
Purchases of investments (126,555) (144,402)
Sales of investments 142,751 116,874
Exchange gains/(losses) on settlement 6 (64)
Exchange losses on currency (375) (1,897)
Exchange losses on futures contracts (54) (108)
Losses on index futures contracts (1,081) (198)
Open futures and option contracts deposits 540 (423)
Net cash flows from/(used in) investing 15,232 (30,218)
activities
Cash flows from financing activities
Movement in amounts due from subsidiary (45) 167
Equity dividends paid (1,258) (1,826)
Shares purchased for cancellation (783) -
Net cash flows used in financing activities (2,086) (1,659)
Net increase/(decrease)in cash and 13,805 (30,778)
equivalents
Cash and cash equivalents at the start of (13,422) 17,356
the year
Cash and cash equivalents at the end of the 383 (13,422)
year
Cash and cash equivalents at 31 December
comprise:
Cash at bank 383 2,098
Bank overdraft - (15,520)
383 (13,422)
The notes are an integral part of these financial statements.
Notes to the financial statements
at 31 December 2010
1. Accounting policies
Basis of preparation/statement of compliance
The financial statements of the Company and the Group have been prepared in
conformity with International Financial Reporting Standards (`IFRS'), which
comprise standards and interpretations approved by the International Accounting
Standards Board (`IASB'), and International Accounting Standards and Standing
Interpretations Committee interpretations approved by the International
Accounting Standards Committee (`IASC') that remain in effect, and to the
extent that they have been adopted by the European Union. They have also been
prepared in conformity with the applicable requirements of United Kingdom
company law and reflect the following policies which have been adopted and
applied consistently. All accounting policies are consistent with the policies
used in the previous financial statements.
Accounting convention
The financial statements are presented in Sterling, being the functional
currency of the primary environment in which the Group operates, rounded to the
nearest GBP'000.
The financial statements have been prepared on a going concern basis under the
historical cost convention except for the measurement at fair value of
investments classified as `fair value through profit or loss' and derivative
financial instruments and in accordance with applicable accounting standards
and the Statement of Recommended Practice regarding the Financial Statements of
Investment Trust Companies and Venture Capital Trusts (as issued in January
2009) (`SORP'), to the extent it is not in conflict with IFRS.
Basis of consolidation
The consolidated financial statements incorporate the results, assets and
liabilities of the Company and its subsidiary, drawn up to 31 December 2010.
Accounting estimates and judgements
The preparation of accounts in conformity with IFRS requires management to make
judgements, estimates and assumptions that affect the application of policies
and reported amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects both current and future periods.
There were no accounting estimates in the current period.
Standards, amendments and interpretations that are not yet effective and are
relevant for the Group's operations
The IASB and IFRIC have issued a number of standards and interpretations which
are not effective for the year ended 31 December 2010 but are relevant for the
Group's operations. The Directors have therefore chosen not to early adopt
these standards and interpretations as they do not anticipate that they would
have a material impact on the Group's financial statements.
* IFRS 9 Financial Instruments (effective 1 January 2013);
* IAS 24 (Revised 2009) Related Party Disclosures (effective 1 January 2011);
* Amendment to IAS 32 Classification of Rights Issues (effective 1 February
2010);
* Improvements to IFRS issued May 2010 (some changes effective 1 July 2010,
others effective 1 January 2011);
* Deferred Tax: Recovery of Underlying Assets - Amendments to IAS 12 Income
Taxes (effective 1 January 2012).
InvestmentsAll investments held by the Company are designated as `fair value through
profit or loss', on initial recognition. Investments are initially recognised
at the fair value of the consideration given.
After initial recognition, investments are measured at fair value, with holding
gains and losses on investments recognised in the income statement and
allocated to capital. Gains and losses on the disposal of investments are
calculated as the difference between sales proceeds and the fair value on
initial recognition.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to stock exchange quoted market bid prices at
the close of business on the balance sheet date, without adjustment for
transaction costs necessary to realise the asset.
Investments are derecognised when the Company loses control over the
contractual rights.
Investments held as current assets by the subsidiary undertaking are classified
as `held for trading' and are shown at fair value. There are no investments
held by the subsidiary at either 31 December 2010 or 31 December 2009.
The Company's investment in the subsidiary undertaking is valued at cost.
Fair value of derivative financial instruments
The Group's activities expose it primarily to the financial risks of changes in
market prices, foreign currency exchange rates and interest rates. Derivative
transactions which the Company may enter into comprise forward foreign exchange
contracts (the purpose of which is to manage currency risks arising from the
Company's investing activities), quoted options on shares held within the
portfolio, or on indices appropriate to sections of the portfolio (the purpose
of which is to provide protection against falls in the capital values of the
holdings) and futures contracts on indices appropriate to sections of the
portfolio (one purpose for which may be to provide protection against falls in
the capital values of the holdings). The Group does not use derivative
financial instruments for speculative purposes.
The use of financial derivatives is governed by the Group's policies as
approved by the Board, which has set written principles for the use of
financial derivatives.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise. If capital in nature, the associated change in value is presented as a
capital item in the income statement.
Foreign currency
Transactions denominated in foreign currencies are converted to Sterling at the
actual exchange rate as at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
reported at the rate of exchange ruling at that date. Any gain or loss arising
from a change in exchange rate subsequent to the date of the transaction is
included as an exchange gain or loss in the income statement and depending on
the nature of the gain or loss, is allocated to either revenue or capital.
Trade date accounting
All `regular way' purchases and sales of financial assets are recognised on the
`trade date' i.e. the day that the Company commits to purchase or sell the
asset. Regular way purchases, or sales, are purchases or sales of financial
assets that require delivery of the asset within a timeframe generally
established by regulation or convention in the market place.
Income recognition
Dividends receivable on quoted equity shares are taken into account on the
ex-dividend date. Where no ex-dividend date is quoted, they are brought into
account when the Company's right to receive payment is established. Income
arising on fixed-interest securities is recognised on an effective interest
rate basis. Other investment income and interest receivable are included in the
financial statements on an accruals basis. Dividends received from UK
registered companies are accounted for net of imputed tax credits.
Expenses
All expenses are accounted for on an accruals basis. Transaction costs incurred
on the acquisition or disposal of an investment classified as fair value
through profit or loss are charged through the income statement and allocated
to capital. Transaction costs are included within gains/(losses) on investments
at fair value. The Company's investment management and administration fees,
finance costs and all other expenses are charged through the income statement.
These expenses are allocated to revenue with the exception of 50% of the
Investment Manager's fee, 50% of finance costs and 100% of the provision for
the Investment Manager's performance fee, all of which are allocated to
capital.
Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible
to known amounts of cash and subject to insignificant risk of changes in value.
Bank overdrafts that are repayable on demand, which form an integral part of
the Group's cash management, are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Taxation
Taxation on the net return for the period comprises current tax and
deferred tax. Tax is recognised in the income statement except to the extent
that it relates to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable income for the period,
using tax rates enacted or substantively enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years. The tax effect of
different items of expenditure is allocated between revenue and capital on the
same basis as the particular item to which it relates, using the Company's
effective rate of tax, as applied to those items allocated to revenue, for the
accounting period.
Deferred corporation tax is provided, using the liability method, on all
temporary differences at the balance sheet date between the tax basis of assets
and liabilities and their carrying amount for financial reporting purposes.
Deferred corporation tax liabilities are measured at the tax rates that are
expected to apply to the period when the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the
balance sheet date.
Capital redemption reserve
The nominal value of ordinary share capital purchased and cancelled is
transferred out of called-up share capital and into the capital redemption
reserve, which is a non-distributable reserve, on the trade date.
Capital reserves
Capital reserve - arising on investments sold
The following are accounted for in this reserve:
* 50% of management fees and finance costs as set out in notes 3 and 5;
* performance fees as set out in note 3;
* gains and losses on the disposal of fixed asset investments and derivative
financial instruments;
* realised foreign exchange differences of a capital nature;
* costs of professional advice, including related irrecoverable VAT, relating
to the capital structure of the Company;
* dividends receivable which are capital in nature;
* other capital charges and credits charged or credited to this account in
accordance with the above policies; and
* costs of purchasing ordinary share capital.
Capital reserve - arising on investments held
The following are accounted for in this reserve:
* increases and decreases in the valuation of fixed asset investments and
derivative financial instruments held at the year end; and
* unrealised foreign exchange differences of a capital nature.
Dividends payable to Shareholders
Dividends to Shareholders are accounted for in the period in which they are
paid or approved in general meetings. Dividends payable to Shareholders are
recognised in the statement of changes in equity when they are paid, or have
been approved by Shareholders in the case of a final dividend and become a
liability of the Company.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business, being investment business. The Group invests in companies listed
in the United Kingdom and continental Europe, including emerging Europe, Russia
and Turkey.
2. Income
Group Company
2010 2009 2010 2009
GBP'000 GBP'000 GBP'000 GBP'000
Income from listed fixed asset
investments is analysed as
follows:
UK dividend income 322 366 322 366
UK dividends reinvested 35 234 35 234
European dividends reinvested - 78 - 78
Dividends from other European
equity and
preference shares 865 472 865 445
Fixed interest 366 853 366 853
1,588 2,003 1,588 1,976
Other income
Bank interest receivable 21 28 21 28
Exchange losses on income (9) (21) (2) (9)
Dealing (losses)/gains of (31) 61 - -
subsidiary
Interest on VAT refund on
Investment
Manager's fees - 38 - 38
Other income - 35 - 35
Total income 1,569 2,144 1,607 2,068
Total income comprises:
Dividends 1,222 1,150 1,222 1,123
Interest 387 919 387 919
Other income (40) 75 (2) 26
1,569 2,144 1,607 2,068
3. Investment Manager's fee & performance fee
2010 2009
Group and Company Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment Manager's 272 272 544 251 251 502
fee
272 272 544 251 251 502
The base investment management fee is 0.8% per annum of total assets less
current liabilities and current period revenue, payable quarterly in arrears.
The performance fee arrangement is set over a 5¼ year period. The performance
fee is 15% of the amount by which the fully diluted NAV per Ordinary share
exceeds the NAV at 8 March 2007 increased by 5% per annum compound, multiplied
by a maximum of the number of Ordinary shares in issue at 8 March 2007. The
performance fee payable will be less than 4.8% of the net assets of the Company
at the date of the calculation set for 29 June 2012.
4. Other expenses
Group Company
2010 2009 2010 2009
GBP'000 GBP'000 GBP'000 GBP'000
Revenue
Administration and secretarial 67 60 67 60
fees
Auditor's remuneration (see 22 29 21 28
below)
Directors' remuneration 80 71 80 71
Legal and professional fees 13 4 13 4
Custodian services 20 21 20 21
Other 105 58 105 57
307 243 306 241
Group
2010 2009
GBP'000 GBP'000
Auditor's remuneration
Fees payable to the Company's Auditor 21 20
for the audit of the annual financial
statements
Fees payable to the Company's Auditor
and its associates for other
services:
- audit of the financial statements 1 1
of the Company's subsidiary pursuant
to legislation
- taxation services - 5
- other non-audit services - 3
29
Fees payable to the Company's Auditor, Grant Thornton UK LLP, and its
associates for non-audit services to the Company itself are not disclosed in
the individual financial statements of the Company because the Company's Group
financial statements are required by the Companies (Disclosure of Auditor
Remuneration and Liability Limitation Agreements) Regulations 2008, regulation
6(1), to disclose such fees on a consolidated basis. All fees disclosed above
are exclusive of VAT.
5. Interest payable
2010 2009
Group and Company Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Interest payable on 26 26 52 40 40 80
overdraft
26 26 52 40 40 80
6. Taxation
a) Analysis of the charge for the year
2010 2009
Group Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
UK Corporation Tax 9 (9) - 321 (208) 113
Overseas taxation 107 - 107 80 - 80
Prior year adjustment 6 - 6 - - -
Double taxation - - - (58) - (58)
relief
Brought forward - - - (55) - (55)
overseas tax utilised
122 (9) 113 288 (208) 80
2010 2009
Company Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
UK Corporation Tax 9 (9) - 272 (166) 106
Overseas taxation 107 - 107 76 - 76
Double taxation - - - (54) - (54)
relief
Brought forward - - - (52) - (52)
overseas tax utilised
116 (9) 107 242 (166) 76
b) Factors affecting the current tax charge for the year
The tax charge for the period is higher than the standard rate of Corporation
Tax in the UK. The differences are explained below:
2010 2009
Group Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net return before 964 (2,451) (1,487) 1,791 19,391 21,182
taxation
Theoretical tax at UK 270 (686) (416) 501 5,429 5,930
Corporation Tax rate
of 28% (2009: 28%)
Effects of:
UK dividends that are (100) - (100) (168) - (168)
not taxable
Post 1 July 2009 (152) - (152) (41) - (41)
foreign dividends
that are not taxable
Other income - - - 29 - 29
Non-taxable - 677 677 - (5,460) (5,460)
investment losses/
(gains)
Overseas taxation not 107 - 107 22 - 22
recovered
Utilisation of losses - - - - (177) (177)
bought forward
Unrelieved excess (9) - (9) - - -
expenses
Brought forward - - - (55) - (55)
unrelieved overseas
taxation now
recovered
Adjustment in respect 6 - 6 - - -
of prior period
122 (9) 113 288 (208) 80
2010 2009
Company Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net return before 1,003 (2,451) (1,448) 1,717 19,291 21,008
taxation
Theoretical tax at UK 281 (686) (405) 481 5,401 5,882
Corporation Tax rate
of 28% (2009: 28%)
Effects of:
UK dividends that are (100) - (100) (168) - (168)
not taxable
Post 1 July 2009 (152) - (152) (41) - (41)
foreign dividends
that are not taxable
Non-taxable - 677 677 - (5,432) (5,432)
investment losses/
(gains)
Overseas taxation not 107 - 107 22 - 22
recovered
Brought forward - - - (52) - (52)
unrelieved overseas
taxation now
recovered
Utilisation of losses - - - - (135) (135)
brought forward
Excess management (20) - (20) - - -
expenses of current
period
116 (9) 107 242 (166) 76
C) Factors that may affect future tax charges
Investment trust companies are exempt from taxation on capital gains if they
meet the HM Revenue & Customs criteria set out in Sections 1158-1165 of the
Corporation Tax Act 2010.
The Company has unrelieved excess expenses of GBP264,000 (2009: GBPnil) and
unrelieved loan relationship expenses of GBP319,000 (2009: GBP319,000). It is
unlikely that the company will generate sufficient taxable profits in the
future to utilise these amounts and therefore no deferred tax asset has been
recognised.
7. Return per Ordinary share
Basic and diluted 2010 2009
Weighted Weighted
average average
number of number of
Net Ordinary Per Net Ordinary Per
return shares share return shares share
Group GBP'000 pence GBP'000 pence
Revenue
Return per share 842 29,443,221 2.86 1,503 29,695,234 5.06
Capital
Return per share (2,442) 29,443,221 (8.29) 19,599 29,695,234 66.00
Total (1,600) 29,443,221 (5.43) 21,102 29,695,234 71.06
There is no dilution for either the year ended 31 December 2010 or 31 December
2009, due to the 5,937,927 Subscription shares in issue being `out of the
money' (the average market value of an Ordinary share was lower than the
conversion price of 244p). The dilutive effect on the return per share from the
Subscription shares is also disclosed on the face of the income statement.
8. Dividends on Ordinary shares
2010 2009
GBP'000 GBP'000
Amounts recognised as distributions to Ordinary
Shareholders in the year
Second dividend for the year ended 31 December 2009 of 965 1,529
3.25p (2008: 5.15p) per Ordinary share
First interim dividend for the year ended 31 December 293 297
2010 of 1.00p (2009: 1.00p) per Ordinary share
1,258 1,826
Distribution to Ordinary Shareholders after the period end
The Directors have proposed a final dividend for the year ended 31 December
2010 of 1.40p (2009: second interim dividend of 3.25p) which, if approved, will
be paid on 31 May 2011 at a total cost of GBP410,000.
9. Investments
2010 2009
Group Company Group Company
GBP'000 GBP'000 GBP'000 GBP'000
Fair value
investments - listed
in Europe, including
emerging Europe,
Russia and Turkey 65,385 65,385 84,120 84,120
Analysis of
investment portfolio
movements
2010 2009
Group Company Group Company
GBP'000 GBP'000 GBP'000 GBP'000
Opening book cost 75,911 76,011 49,501 49,501
Opening investment
holding gains/
(losses) 8,209 8,109 (14,977) (14,977)
Opening valuation 84,120 84,120 34,524 34,524
Movements in the
period:
Purchases at cost 126,109 126,109 144,817 144,917
Sales - proceeds (144,244) (144,244) (117,688) (117,688)
Sales - gains/
(losses) on sales 99 (1) (719) (719)
Movement in
investment holding
(losses)/gains (699) (599) 23,186 23,086
Closing valuation 65,385 65,385 84,120 84,120
Closing book cost 57,875 57,875 75,911 76,011
Closing investment
holding gains 7,510 7,510 8,209 8,109
65,385 65,385 84,120 84,120
Analysis of capital gains and 2010 2009
losses
Group Company Group Company
GBP'000 GBP'000 GBP'000 GBP'000
Gains/(losses) on sales of
investments 99 (1) (719) (719)
Movement in fair value of
investments (699) (599) 23,186 23,086
Losses on derivatives contracts (1,420) (1,420) (241) (241)
(Losses)/gains on investments (2,020) (2,020) 22,226 22,126
Further analysis of the investment portfolio is given in the portfolio of
investments above.
Transaction costs
During the year, the Company incurred transaction costs of GBP366,000 (2009: GBP
327,000) and GBP251,000 (2009: GBP118,000) on purchases and sales of investments
respectively totalling GBP617,000 (2009: GBP445,000). These amounts are included in
(losses)/gains on investments at fair value, as disclosed in the income
statement.
10. Investment in subsidiary undertaking
The subsidiary undertaking, Frankrate Limited, is valued at cost and is engaged
in investment dealing and underwriting. It is wholly owned, incorporated in
England and operates in the United Kingdom.
2010 2009
GBP'000 GBP'000
Cost of subsidiary 907 907
11. Other receivables
2010 2009
Group Company Group Company
GBP'000 GBP'000 GBP'000 GBP'000
Due from brokers 2,307 2,307 809 809
Prepayments and 90 90 304 304
accrued income
Other debtors 367 365 252 251
2,764 2,762 1,365 1,364
12. Other payables
2010 2009
Group Company Group Company
GBP'000 GBP'000 GBP'000 GBP'000
Bank overdraft (see - - 15,520 15,520
note 16)
Due to brokers - - 481 481
Due to subsidiary - 1,864 - 1,909
undertaking
Other creditors and 189 188 198 198
accruals
189 2,052 16,199 18,108
13. Share Capital
2010 2009
GBP'000 GBP'000
Issued, allotted and fully paid
29,327,234 Ordinary shares of 10p each 2,933 2,969
(2009: 29,695,234)
5,937,927 Subscription shares of 1p each 59 59
(2009: 5,937,927)
2,992 3,028
During the year, the Company purchased 368,000 Ordinary shares for cancellation
at a cost of GBP783,000, and representing 1.24% of the Company's Ordinary Share
Capital.
Since the year end the Company has purchased 28,301 Ordinary shares for
cancellation at a cost of GBP58,000 and representing 0.1% of the Company's issued
Ordinary share capital.
The balance of Ordinary shares that can be bought back under the current
shareholder authority is 4,055,014 shares.
Subscription shares
Registered holders of Subscription shares will have the opportunity to convert
their Subscription shares at a rate of 1 Ordinary share per Subscription share
and a conversion price of 244p in the thirty days preceding the Annual General
Meeting in any of the years between 2011 and 2012 (inclusive).
Subscription shares carry no right to any dividend or other distributions by
the Company and have no right to be redeemed.
Except in certain circumstances as set out in the Articles of Association of
the Company, the Subscription shares carry no right to receive any payment out
of the assets of the Company on a return of capital on liquidation (whether for
the purpose of reorganisation, amalgamation or dissolution) or otherwise.
Voting rights
Ordinary shareholders have unrestricted voting rights at all general meetings
of the Company. Subscription shareholders are not entitled to attend or vote at
general meetings of the Company.
Duration of the Company
The Articles of Association of the Company provide that at the Annual General
Meeting of the Company held to approve the Company's financial statements in
respect of the financial year ending 31 December 2011, the Directors will
propose an Ordinary Resolution for the continuation of the Company in its
current form. If this resolution is passed, a similar resolution will be
proposed at every third Annual General Meeting thereafter.
If such a resolution is not passed, a General Meeting of the Company will be
convened within the following four months to consider proposals for the
liquidation, reorganisation or reconstruction of the Company.
14. Net asset value (`NAV') per share
2010 2009
pence pence
Ordinary share
- Basic 233.10 242.47
- Fully diluted 233.10 242.47
The NAVs per share have been calculated in accordance with the Articles of
Association and are based on:
2010 2009
GBP'000 GBP'000
Net assets attributable to Ordinary Shareholders 68,362 72,003
Number of Ordinary shares in issue at the year 29,327,234 29,695,234
end
Subscription shares outstanding at the year end 5,937,927 5,937,927
The fully diluted NAVs for 2010 and 2009 are shown as the same figure as the
basic NAV because the conversion price of the Subscription shares of 244p is
above the basic NAV per Ordinary share.
15. Commitments and contingent liabilities
There were no capital commitments or contingent liabilities at 31 December
2010.
16. Secured debt
The Company has a secured overdraft with the Custodian, Morgan Stanley & Co.
International plc. At 31 December 2010, the amount drawn down was GBPnil (2009:
GBP15.5 million).
The undrawn amount available to the Company was GBP46.0 million (2009: GBP9.7
million). The overdraft facility is secured against investments held with
Morgan Stanley & Co. International plc.
17. Related party transactions
The compensation payable to key management personnel in respect of short term
employment benefits was GBP80,000 (2009: GBP71,000). In practice this disclosure
relates wholly to the fees payable to the Directors in respect of the year; the
Directors are all non-executive and receive no other compensation. The
Directors' Remuneration Report in the Annual Report and Financial Statements
for the year ended 31 December 2011 provides details. The Company has no
employees.
The Investment Manager, Sloane Robinson LLP, is regarded as a related party of
the Company. The amounts paid to the Investment Manager are disclosed in note
3.
Amounts payable to the Investment Manager as at 31 December 2010 for Investment
Manager's fees totalled GBP139,000 (2009: GBP146,000). Amounts payable in respect
of the performance fee totalled GBPnil (2009: GBPnil).
The Company's wholly owned UK subsidiary, Frankrate Limited, is also regarded
as a related party. During the year there were no purchases or sales of
investments between the Company and Frankrate Limited (2009: GBP1,418,000).
At 31 December 2010 the amount the Company owed to its subsidiary was
GBP1,864,000 (2009: GBP1,909,000).
18. Financial instruments
This note focuses on the significant risks of the Group, however the Board does
not consider that the risks associated with the subsidiary are significant. The
subsidiary realised GBP31,000 in dealing losses solely from trading equities
during the period, with no substantial amounts due or payable at the end of the
period. For that reason this note outlines significant risks that are found
within the Company.
Background
The investment objective of the Company is to generate capital growth without
neglecting income by investing in an actively managed portfolio of quoted
companies and debt instruments in the United Kingdom and continental Europe,
including emerging Europe, Russia and Turkey. The Company's financial
instruments may comprise investments, derivative instruments used for hedging
and investment purposes, foreign exchange contracts used to manage the foreign
exchange risk of the portfolio against Sterling, borrowings for investment
purposes or for settlement purposes, cash balances and debtors and creditors
that arise directly from its operations.
The principal risks the Company faces in its portfolio management activities
are:
? Market risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument used by the Company because of changes in
market prices. Market risk comprises three types of risk: currency risk,
interest rate risk and other price risk:
? Currency risk - arising from the value of future transactions, recognised
monetary assets and liabilities denominated in other currencies fluctuating due
to changes in foreign exchange rates;
? Interest rate risk - arising from fluctuations in the fair value or future
cash flows of a financial instrument because of changes in market interest
rates;
? Other price risk - arising from fluctuations in the fair value of its equity
investments due to changes in market prices;
? Liquidity risk - arising from any difficulties in meeting obligations
associated with financial liabilities; and
? Credit risk - arising from financial loss for the Company where the other
party to a financial instrument fails to discharge an obligation.
Policy
The Company's investment policy is to concentrate on sectors, investment themes
and individual companies with a pan-European perspective. Limited attention is
paid to consequent geographical weightings of the portfolio either in absolute
terms or relative to the MSCI Europe (including UK) Total Return Index. The
Investment Manager believes that the best way to put these strategies into real
equity investments is to find several independent and uncorrelated investment
themes where valuations look attractive. This diversification is designed for
risk to be reduced whilst delivering attractive absolute returns over time.
As required by IFRS 7, `Financial Instruments: Disclosures', an analysis of
financial assets and liabilities, which identifies the risk of the Group of
holding such items, is given below.
1. Currency risk
The Company's monetary assets may be invested in securities and other
investments that are denominated in currencies other than the functional
currency which is Sterling. Accordingly, the value of an investment may be
affected favourably or unfavourably by fluctuations in exchange rates,
notwithstanding any efforts made to hedge such fluctuations. The Company may
utilise foreign exchange contracts to hedge against currency fluctuations, but
there can be no assurance that such hedging transactions will be effective or
beneficial. The Investment Manager monitors currency positions on a daily basis
and currency exposure on a regular basis and reports to the Board on a regular
basis. The Investment Manager measures the risk to the Company of the foreign
currency exposure by considering the effect on the Company's net asset value
and income of a movement in exchange rates to which the Company's assets,
liabilities, income and expenses are exposed.
Currency exposure
The base currency (Sterling) equivalents of the financial assets and
liabilities held in currencies other than Sterling at 31 December 2010 and 2009
were as follows:
2010 2009
Currency Investments Other Investments Other
GBP'000 GBP'000 GBP'000 GBP'000
Euro (EUR) 33,093 1,512 34,978 1,260
Norwegian Krone (NOK) - 31 7,785 495
Swiss Franc (CHF) 10,120 61 10,271 (1,543)
US Dollar (USD) 2,179 35 4,770 (6,842)
Swedish Krona (SEK) 3,621 10 2,197 9
Danish Krone (DKK) 1,985 5 1,904 1,199
At 31 December 2010, if Sterling had strengthened/weakened by 10% against the
currencies listed above, with all other variables held constant, the net return
after taxation for the year would have increased or decreased by the amounts
shown below:
2010 2009
Currency Strengthening Weakening Strengthening Weakening
GBP'000 GBP'000 GBP'000 GBP'000
Euro (EUR) (3,147) 3,846 (3,294) 4,026
Norwegian Krone (NOK) (3) 3 (753) 920
Swiss Franc (CHF) (926) 1,131 140 (171)
US Dollar (USD) (201) 246 188 (230)
Swedish Krona (SEK) (330) 403 (201) 245
Danish Krone (DKK) (181) 221 (282) 345
(4,788) 5,850 (4,202) 5,135
2. Interest rate risk
The Company finances its operations through Shareholders' funds and overdraft
facilities which are reviewed annually. It may hold interest bearing securities
and cash. Interest rate movements may affect the level of income receivable on
cash deposits and cash equivalents and interest payable on borrowing as they
are subject to fluctuating rates of interest.
Derivative contracts are not used to hedge against the exposure to interest
rate risk.
The following table shows the effect of a change in bank interest rates with
all other variables held constant. The calculations are based on funds invested
in cash deposits, bank overdrafts and debt securities held as at 31 December
2010 and 2009:
Sensitivity
of
Sensitivity changes in
of interest fair value
of
income investments
% increase/ increase/
increase (decrease) (decrease)
GBP'000 GBP'000
31 December 2010
Sterling (GBP) 0.5 1 -
Euro (EUR) 0.5 1 -
Norwegian Krone (NOK) 0.5 - -
Swiss Franc (CHF) 0.5 - -
US Dollar (USD) 0.5 - 11
Swedish Krona (SEK) 0.5 - -
Danish Krone (DKK) 0.5 - -
31 December 2009
Sterling (GBP) 0.5 (33) -
Euro (EUR) 0.5 2 10
Norwegian Krone (NOK) 0.5 2 -
Swiss Franc (CHF) 0.5 (10) -
US Dollar (USD) 0.5 (34) 24
Swedish Krona (SEK) 0.5 - -
Danish Krone (DKK) 0.5 6 -
If interest rates had been lower throughout the year by 0.5% (2009: 0.5%) there
would have been an equal and opposite effect in the interest income and in the
changes in fair value of investments.
Interest exposure
An analysis of the Company's interest rate risk at 31 December 2010 and 2009 is
shown below:
31 December 2010
No 1 month Non-
maturity Less than to 1 1-5 interest
Total date 1 month year years bearing
Assets GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Designated at fair
value through profit
or loss upon initial
recognition
Equity shares 63,206 - - - - 63,206
including warrants
Debt securities 2,179 2,179 - - - -
Held for trading
Derivative financial 435 - - 435 - -
instruments
Loans and
receivables
Balances due from 2,307 - - - - 2,307
brokers
Cash and cash 383 - 383 - - -
equivalents
Interest, dividends 455 - - - - 455
and other
receivables
Total assets 68,965 2,179 383 435 - 65,968
31 December 2010
No 1 month Non-
maturity Less than to 1 1-5 interest
Total date 1 month year years bearing
Liabilities GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Held for trading
Derivative financial (424) - - (424) - -
instruments
Financial
liabilities measured
at amortised cost
Balance due to (1,864) - - - - (1,864)
subsidiary
undertaking
Accrued expenses and (188) - - - - (188)
other creditors
Total liabilities (2,476) - - (424) - (2,052)
Total interest 2,179 383 11 -
sensitivity gap
31 December 2009
No 1 month Non-
maturity Less than to 1 1-5 interest
Total date 1 month year years bearing
Assets GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Designated at fair
value through profit
or loss upon initial
recognition
Equity shares 77,391 - - - - 77,391
including warrants
Debt securities 6,729 4,702 - - 2,027 -
Held for trading
Derivative financial 1,028 - - 1,028 - -
instruments
Loans and
receivables
Balances due from 809 - - - - 809
brokers
Cash and cash 2,098 - 2,098 - - -
equivalents
Interest, dividends 555 - - - - 555
and other
receivables
Total assets 88,610 4,702 2,098 1,028 2,027 78,755
31 December 2009
1 month Non-
maturity Less than to 1 1-5 interset
Total date 1 month year years bearing
Liabilities GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Designated at fair
value through profit
or loss upon initial
recognition
Derivative financial (417) - (278) (139) - -
instruments
Financial
liabilities measured
at amortised cost
Balances due to (481) - - - - (481)
brokers
Balance due to (1,909) - - - - (1,909)
subsidiary
undertaking
Bank overdraft (15,520) - (15,520) - - -
Accrued expenses (198) - - - - (198)
Total liabilities (18,525) - (15,798) (139) - (2,588)
Total interest 4,702 (13,700) 889 2,027
sensitivity gap
3. Other price risk
All securities investments present a risk of loss of capital. Market price risk
can be moderated in a number of ways by the Investment Manager through:
? careful selection of securities and other financial instruments and
assessment of the exposure to market risk when making each investment decision;
? the Investment Manager's investment strategy, which is designed to help
identify uncorrelated themes which can be used as the basis of a suitably
diversified portfolio; and
? the use of derivatives to hedge exposure. However, perfect correlation may
not be obtained between the hedging instrument and portfolio holdings being
hedged. This imperfect correlation may prevent the intended hedge or expose the
Company to risk of loss.
The Investment Manager monitors the prices of financial instruments held by the
Company on a daily basis and reviews target prices on equity positions, which
are set as part of the investment decision process, macro economic viewpoint,
size of positions, hedging policy, derivatives, exposure to main thematic risks
and overall balance sheet exposure on a regular basis.
The Board reviews the values of the portfolios' holdings and investment
performance at its quarterly meetings. Further information on the portfolio of
investments is set out above.
The portfolio of investments is valued at bid price, which represents fair
value. If the value of investments fell by 10% at 31 December 2010 the impact
on net return after taxation for the year and net assets would have been
negative GBP6,539,000. If the value of investments rose by 10% at 31 December
2010 the impact on net return after taxation for the year and net assets would
have been positive GBP6,539,000.
4. Liquidity risk
Market illiquidity or disruption could result in losses to the Company.
Liquidity risk also arises because assets may be invested in equities in
emerging markets which may be less liquid and volatile but such positions are
not significant. The Company may periodically invest in derivatives contracts
and debt securities that are traded over the counter. The Company is exposed to
the daily settlement of margin calls on derivatives. Accordingly, liquidity
risk is not significant as the Company's assets mainly comprise readily
realisable quoted securities that can be sold to meet funding commitments if
necessary. Short-term flexibility is achieved through the use of overdraft
facilities. The liquidity of positions is reviewed on a regular basis by the
Investment Manager; the Board of Directors review it on a quarterly basis
5. Credit risk
The Company is subject to the risk of the inability of the bankers and
custodians to perform with respect to transactions, whether due to insolvency,
bankruptcy, rehypothecation of the Company's assets or other cause and the
credit worthiness of any counterparties it deals with from time to time. The
main concentration to which the Company is exposed arises from its investment
in debt securities. The Company is also exposed to counterparty credit risk on
trading derivative products.
The Company seeks to manage credit risk by adhering to the limits on position
size in the Prospectus and only undertaking transactions with reputable and
approved counterparties and by ensuring that the majority of transactions are
settled on delivery. The Company assesses the credit worthiness of its debtors
from time to time to ensure they are neither past, due or impaired.
Derivative positions are marked to market and exposure to counterparties is
monitored on a daily basis by the Investment Manager; the Board of Directors
review it on a quarterly basis.
At the reporting date, the Company's financial assets exposed to credit risk
amount to the following:
2010 2009
GBP'000 GBP'000
Debt securities 2,179 6,729
Cash and cash equivalents 383 2,098
Derivative assets 435 1,028
Other assets 2,341 868
5,338 10,723
None of the Company's financial assets are past due or impaired.
Fair value hierarchy
All financial assets and financial liabilities of the Group and Company are
carried in the balance sheet at fair value or as a reasonable approximation of
fair value. The Company has adopted the amendment to IFRS 7, effective 1
January 2009. This requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the inputs used
in making the measurements.
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset as follows:
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs
other than quoted prices included within Level 1, either directly (that is, as
prices) or indirectly (that is, derived from prices).
Level 3 - valued by reference to valuation techniques using inputs that are not
based on observable market data.
The valuation techniques used by the Group and Company are explained in note 1.
There have been no transfers during the year between Levels 1 and 2. The Level
2 financial
instruments refer to open B-Class call options in a variety of stocks. These
are tradeable securities.
The table below sets out fair value measurements using the IFRS 7 fair value
hierarchy:
31 December 2010 Total Level 1 Level 2
Assets GBP'000 GBP'000 GBP'000
Financial assets designated at fair
value
through profit or loss
Equity securities 63,206 63,206 -
Debt securities 2,179 2,179 -
Financial assets held for trading
Derivatives 435 - 435
Total assets 65,820 65,385 435
Total Level 1 Level 2
Liabilities GBP'000 GBP'000 GBP'000
Financial liabilities held for
trading
Derivatives (424) - (424)
Total liabilities (424) - (424)
31 December 2009 Total Level 1 Level 2
Assets GBP'000 GBP'000 GBP'000
Financial assets designated at fair
value
through profit or loss
Equity securities 77,391 77,391 -
Debt securities 6,729 6,729 -
Financial assets held for trading
Derivatives 1,028 1,028 -
Total assets 85,148 85,148 -
Total Level 1 Level 2
Liabilities GBP'000 GBP'000 GBP'000
Financial liabilities held for
trading
Derivatives (139) (139) -
Forward currency contracts (278) (278) -
Total liabilities (417) (417) -
Capital management policies
The Company's capital management objectives are:
? to ensure that it will be able to continue as a going concern; and
? to maximise the income and capital return to its equity Shareholders through
an appropriate balance of equity capital and `debt'.
As stated in the investment policy, the Company has authority to borrow up to
50% of Shareholders funds, but the Directors and Investment Manager have for
the time being agreed a maximum figure of 22%. There were no borrowings as at
31 December 2010.
The Company's capital at 31 December comprises:
2010 2009
GBP'000 GBP'000
Shareholders' funds
Share capital 2,992 3,028
Share premium 26,127 26,127
Capital redemption reserve 36 -
Capital reserves 37,073 40,298
Retained earnings 1,168 1,539
Total Shareholders' funds 67,396 70,992
The Board with the assistance of the Investment Manager monitors and reviews
the broad structure of the Company's capital on an ongoing basis. This review
includes:
? the planned level of gearing, which takes into account the Investment
Manager's view of the market;
? the need to buy back shares for cancellation or treasury, which takes account
of the difference between the net asset value per share and the share price
(i.e. the level of share price discount or premium);
? the need for new issues of equity shares; and
? the extent to which revenue in excess of that which is required to be
distributed should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
ANNUAL GENERAL MEETING
The Company's AGM will be held at the offices of J.P. Morgan Cazenove Limited,
20 Moorgate, London EC2R 6DA, on Tuesday, 24 May 2011 at 2.30pm.
The notice of this meeting can be found in the Annual Report and Accounts at
www.sreit.co.uk.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: www.hemscott.com/nsm.do.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
END
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