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Invesco Perpetual Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2009
FINANCIAL INFORMATION
For the year ended 31 May
The Company commenced trading on 23 November 2006
UK Equity Share Portfolio
%
2009 2008 Change
Net asset value - total return -20.0
Share price - total return -20.3
Discount at year end 3.4% 3.0%
FTSE All-Share Index - total return -23.7
Revenue return per share 3.3p 3.3p
Dividend 3.45p 2.7p
Global Equity Share Portfolio
%
2009 2008 Change
Net asset value - total return -16.9
Share price - total return -16.8
Discount at year end 3.6% 3.2%
MSCI World Index (GBP) - total return -19.6
Revenue return per share 2.1p 2.2p
Dividend 2.25p 2.15p
Hedge Fund Share Portfolio
%
2009 2008 Change
Net asset value - total return -20.9
Share price - total return -22.1
Discount at year end 7.7% 4.4%
3 months LIBOR +5% pa - total return +10.1
Managed Liquidity Share Portfolio
%
2009 2008 Change
Net asset value - total return +2.6
Share price - total return +4.8
Discount at year end 0.3% 2.0%
Revenue return per share 3.6p 4.4p
Dividend 4.1p 4.35p
Chairman's Statement
The turbulent and painful investment climate of your Company's year has
provided an opportunity, which I hope never to see again, to stress-test the
Company's structure. We have been able consistently to maintain the discount on
the Managed Liquidity shares at a very narrow level which has underpinned the
ratings of the other classes. The effect on the Hedge Fund class has been least
strong because of the disappointment with the sector as a whole and the
relative lack of liquidity in the underlying assets, which has made the Company
prefer to reduce the capital in the class after notice of an intention to
switch rather than through share buybacks in the market.
The different classes continue to provide an effective way of gaining access to
high quality management with the ability to vary investment objectives without
incurring a tax penalty from the desire to be efficient in the management of
savings.
Performance
The year to 31 May 2009 was one of the most extraordinary ever experienced in
both financial markets and the economic and business world. I commented both in
the Annual Financial Report for last year and at the interim stage but it is
worth attempting to stand back and consider the period as a whole. It is now
clear, to an extent that it wasn't as the smoke of the battlefield lingered,
that there was a much bigger build-up of leverage in many countries, but most
notably in the US, than was appreciated by regulators or most commentators.
This applied to the banking system and its `shadow' but also to households,
particularly in housing finance and credit cards. It is actually less clear,
except perhaps in the US mortgage market, that the lending patterns were more
reckless than in previous credit binges but they were conducted with a much
smaller margin of safety. In autumn 2008 the financial system suffered a
systemic seizure such that all liquidity drained out of the system towards
governments and central banks. The collapse of Lehman Brothers was probably
largely an effect of this though it certainly helped to exacerbate the problem
to a great extent. Meanwhile, in the real world, demand for durables, and
anything to do with houses, collapsed leading to a savage downturn in the
inventory cycle. 2009 has, so far, seen a gradual reversal of these trends.
Liquidity (blood) has been making its way into the financial system, even in
the outer reaches of markets, so that the extraordinary pricing anomalies that
appeared are being eliminated. The process is, however, far from complete.
Final demand for goods and services has recovered somewhat and the inventory
cycle downturn has overshot at least in the short term so that the news flow
from companies is more varied and less dire. Equity and credit markets have
taken heart from this with the MSCI World Index rising 22.8% and the FTSE-All
Share Index rising 16.7% from their lows in early March to the end of May.
Against this background, it proved very hard to preserve capital. The Global
Equity and UK Equity long-only share classes fell by 16.9% and 20.0%
respectively over the period but both outperformed their benchmark indices. In
the case of the UK Equity Portfolio, this outperformance was achieved despite
the use of gearing throughout the year. It is small comfort to report that this
represents good performance against peers and was achieved by emphasis on high
quality companies with strong balance sheets. Performance fees of GBP158,000 and
GBP180,000 were accrued for the Global Equity and UK Equity Portfolios
respectively, and will be paid when previous high watermarks have been
exceeded. When the market began to improve, the UK share class gave up some
relative performance as the market turned to more cyclical companies. The
Global Equity share class, in contrast, benefited from its overweight position
in emerging markets, especially in Asia, even though it did not hold many
cyclical companies. The Hedge Fund class had the most disappointing year with a
return of -20.9%. This did, however, disguise a recovery in the second half of
the year as the specific problems of the sector died away and were gradually
replaced by an environment much more favourable to the survivors. The Managed
Liquidity share class continued to provide stable, cash-like returns.
Outlook
There is a risk that the apocalyptic pessimism of last winter has given way to
a mood that is excessively sanguine and which believes that the recession will
shortly be over and that business as usual will be resumed. At one level there
is some justification for this. Government action to restore the health of the
financial system has clearly been successful and a very steep yield curve at
the short end ensures that it will continue to be. However, it remains the case
that US and many other OECD consumers are still over-indebted and neither
willing nor able to borrow to finance house or durables purchases at previous
levels. Instead they are saving and will continue to do so. This is creating a
serious risk that some equilibrium will indeed be found but at lower than
desirable levels of activity. This can only really be averted if the US (and
incidentally the UK) is allowed to become sufficiently competitive to earn
current account surpluses, now an almost mythical event. Such a change requires
the collaboration of the countries with balance of payments surpluses so that,
for example, Chinese consumers need to have access to credit cards. If this
doesn't happen alternative solutions to global imbalances are likely to be
resolved in a less orderly way at considerable risk for the world economy.
For markets the implications are that the risks remain considerable and a
policy of investing in well-financed companies with a strong franchise, whether
from geography, service or product, is likely to be relatively well rewarded.
Although inflation doesn't appear to be an immediate concern, given the lack of
pricing power, bonds still appear less attractive than equities in many cases,
especially where default risk exists. Our investment managers are very aware of
the climate in which they are investing and I am confident that, both in the
long-only share classes and in the Hedge Fund class, the Company should enjoy
good returns in the medium term.
Dividend Policy
The ability to convert shares of one class into another could lead to dilution
or enhancement of revenue reserves per share for each of the share classes,
depending on whether there are net conversions into or out of any particular
class. In order to minimise the impact of this the Directors intend to
distribute substantially all net revenues earned for each class during the
period between conversion dates. Accordingly, dividends on the UK Equity,
Global Equity and Managed Liquidity Shares will vary from year to year
depending on net portfolio income; the Board aims to declare two dividends
annually on these three share classes. Little or no net income is expected from
the assets underlying the Hedge Fund Shares and, accordingly, no dividends are
expected to be paid on those shares.
Share Class Conversions
The Company enables shareholders to tailor their asset allocation to reflect
their view of prevailing market conditions. Shareholders have the opportunity
to convert their holdings of shares into any other class of shares, without
incurring any tax, on or around 1 May and 1 November of each year. Details of
the share class conversions during the year under review are shown in note 12
(b) of the Annual Financial Report. Further information about the conversion
mechanics can be found in note 12(f) of the Annual Financial Report.
Share Capital Movements
During the year to 31 May 2009, the Company purchased and placed in treasury
1,460,000 UK Equity Shares, 1,809,000 Global Equity Shares, 1,361,000 Hedge
Fund Shares and 2,121,647 Managed Liquidity Shares. In addition, the Company
cancelled 1,654,786 Global Equity Shares and 2,311,552 Managed Liquidity Shares
from Treasury, and a further 3,827,959 Managed Liquidity Shares were bought
back and cancelled.
Since the year end a further 201,250 UK Equity Shares, 143,500 Global Equity
Shares, 188,250 Hedge Fund Shares and 36,000 Managed Liquidity Shares were
purchased and placed in treasury as share price discounts continue to drift.
The Board intends to use the Company's buy back authorities when this will
benefit existing shareholders as a whole, and will ask shareholders to renew
the authorities each year.
Corporate Governance
The Board remains committed to maintaining the highest standards of Corporate
Governance and is accountable to you as shareholders for the governance of the
Company's affairs.
The Directors believe that, during the year to 31 May 2009, they have complied
with the provisions of the AIC Code of Corporate Governance as endorsed by the
Financial Reporting Council, save in respect of matters discussed in the
Corporate Governance statement contained on pages 44 to 49 in the Annual
Financial Report.
Annual General Meeting (`AGM')
At the AGM there are four items of Special Business to be proposed:
Share Issuance
Your Directors are asking for the authority to issue up to GBP1,000,000 in UK
Equity Shares, GBP1,000,000 in Global Equity Shares, GBP1,000,000 in Hedge Fund
Shares and GBP1,000,000 in Managed Liquidity Shares. This will allow Directors to
issue shares within the prescribed limits should any favourable opportunities
arise to the advantage of shareholders. The powers authorised will not be
exercised at a price below NAV of the relevant class share so that the
interests of existing shareholders are not diluted. This authority will expire
at the AGM in 2010.
Pre-emption Rights
Your Directors are also asking for the usual authority to issue new shares in
each class pursuant to a rights issue or otherwise than in accordance with a
rights issue of up to an aggregate nominal amount of GBP46,138 in UK Equity
Shares, GBP35,813 in Global Equity Shares, GBP15,665 in Hedge Fund Shares and GBP
18,949 in Managed Liquidity Shares (10% of the issued share capital of each
share class) disapplying pre-emption rights. This will allow shares to be
issued to new shareholders without having to be offered to existing
shareholders first, thus broadening the shareholder base of the Company. This
authority will expire at the AGM in 2010.
Share Buy Backs
Your Directors are seeking to renew the authority to buy back up to 6,916,902
UK Equity Shares, 5,368,461 Global Equity Shares, 2,348,281 Hedge Fund Shares
and 2,840,470 Managed Liquidity Shares (14.99% of the issued share capital of
each share class) subject to the restrictions referred to in the notice of the
AGM. This authority will expire at the AGM in 2010. Your Directors are
proposing that shares bought back by the Company either be cancelled or,
alternatively, be held as treasury shares with a view to their resale, if
appropriate, or later cancellation. The holding of treasury shares is
restricted to 10% of the Company's issued share capital of each share class and
any resale of them will only take place on terms that are in the best interests
of shareholders as a whole.
Calling General Meetings at 14 Days' Notice
New UK legislation implementing the EU Shareholder Rights Directive will, with
effect from 3 August 2009, increase the notice period for a general meeting to
21 days (at present 14 days). However, companies are able to pass a special
resolution permitting them to continue to call general meetings (other than
AGMs) on a 14 day notice period if they allow voting by electronic means.
Approval of Special Resolution 9 will therefore enable the Board to call any
general meetings other than AGMs on 14 days' notice, should that be necessary.
The Board recommends that shareholders vote in favour of all resolutions as
each of the Directors intend to do in respect of their own shares.
Patrick Gifford
Chairman
20 July 2009
UK Equity Share Portfolio Manager's Report
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders
with an attractive real long-term total return by investing primarily in UK
quoted equities.
Market and Economic Review
In the 12 months to 31 May 2009, slowing UK economic growth coupled with
uncertainty over the health of the banking system weighed on market sentiment.
The mood was reflected by the volatile performance of the UK equity market,
which, despite a strong rally in the final three months of the review period,
registered a decline of 23.7% as measured by the FTSE All-Share index.
One of the most remarkable events in the review period was the decision by the
US government to allow Lehman Brothers to go bankrupt in September 2008. This
led to a paralysis of economic activity around the world and very sharp
declines in financial markets in the last quarter of 2008. Against this
backdrop, policymakers acted to assist banks through nationalisations, capital
injections or the issuance of state guarantees.
The Bank of England's (`BoE') Monetary Policy Committee cut UK interest rates
aggressively during the review period in an attempt to keep the economy from
slowing. At the end of May 2009, the bank rate stood at 0.5%, the lowest level
in the BoE's 315-year history. The UK economy, however, continued to
deteriorate. Gross-domestic-product growth for the fourth quarter of 2008
confirmed that the economy had entered a recession, evidenced by data showing
that unemployment started to rise sharply and that the government's fiscal
position was deteriorating at a much faster pace than expected.
The financial landscape has changed substantially over the last 12 months, with
many of the world's largest financial institutions having disappeared or been
restructured. Within the UK sector, the changes have been no less dramatic:
HBOS was sold to Lloyds TSB following serious concerns about its viability and
Bradford & Bingley's mortgage business was nationalised and its savings assets
sold off to Spain's Santander. The UK government has assumed a much more
prominent role in the financial services industry, part nationalising RBS and
the newly formed Lloyds Banking Group, while Barclays opted not to accept
government assistance, choosing instead to raise additional funding from Middle
Eastern and other private sector investors.
Portfolio Strategy and Review
The Portfolio's net asset value, including reinvested dividends, fell by 20.0%
during the 12 months to the end of May 2009, compared to a fall of 23.7% from
the FTSE All Share index (total return). Borrowings were drawn down throughout
the period reflecting our confidence in positive longer term returns fro the
portfolio, but this has adversely impacted performance for the year.
On a relative basis, the Portfolio recorded resilient performance, although it
is always disappointing to report negative returns to our investors. There were
a number of stocks which showed a positive return during the year, notably
pharmaceutical companies Protherics (which was acquired by specialty
pharmaceuticals company BTG) and AstraZeneca, non-life insurer Hiscox, and
electricity company International Power. Elsewhere, the strong emphasis on
defensive holdings with strong balance sheets and sustainable cashflows,
delivered resilient performance despite the challenging equity-market
environment. By contrast, telecommunications company BT was among the biggest
negative contributors to performance as a result of contractual problems within
its Global Services division.
In terms of portfolio activity, several new positions were introduced into the
Portfolio over the review period, with names such as International Power and
Northumbrian Water now featuring in the portfolio.
The holding in utility company International Power was initiated to take
advantage of its sharply falling share price as a result of concerns towards a
leveraged balance sheet and exposure to weakening electricity demand in its
major markets of the UK, US and Australia. These factors forced the stock to
fall to an attractive valuation from which a position was established in the
portfolio. Elsewhere in the utility sector, Northumbrian Water was purchased as
the water sector suffered in the general market move away from utilities during
the review period, while the position in utility company Centrica was increased
to reflect the view that the company is well-positioned to raise its prices in
response to higher prices for wholesale energy. In addition, improved customer
retention rates should afford Centrica a more stable earnings stream than in
the past.
In terms of disposals, utility company British Energy was acquired by French
electricity company EDF. Retailer Marks & Spencer was sold to reflect our
disappointment with its strategic initiatives, while the position in Bunzl, the
global distribution services company, was sold following a period of strong
performance.
Outlook
During the last three months, the market has staged a strong recovery led by
economically sensitive sectors at the expense of defensive holdings. This rally
has been based on the premise that the rate of decline in the global economy is
slowing. Whilst acknowledging that some economic indicators have illustrated
tentative signs of recovery, these may simply prove to be the reversal of some
of the extreme trends which were witnessed in reaction to the Lehman Brothers
bankruptcy. There are some substantial challenges that remain unresolved as the
process of deleveraging continues and the manager remains sceptical that
developed economies can experience a strong recovery by the end of the current
year. When the recession does end, the recovery is unlikely to feel much more
robust as unemployment will still be rising, the housing market will be subdued
and most importantly the banks will still make borrowing money difficult.
Against this weak economic backdrop, corporate profitability will remain under
pressure, particularly in cyclical areas of the market and sectors which are
exposed to the consumer economy; areas which have been avoided in the recent
past and which will continue to be avoided in the fund. The focus is therefore
on the more defensive parts of the market, on companies that have robust
business models, strong balance sheets, visible cash generation and growing
dividend streams. The recent performance of the market has offered an extremely
attractive opportunity to invest in these kinds of businesses, as a large
valuation gap has opened up further undervaluing some of the strongest, most
resilient and cheapest stocks in the market.
It is not clear when the mood of the market will shift away from its current
cyclical frame of mind but what is certain is that the importance of valuation
in constructing this portfolio and analysing the stockmarket over the long term
will continue to be the best way to generate superior returns from equity
investing.
Mark Barnett
Portfolio Manager
20 July 2009
Global Equity Share Portfolio Manager's Report
Investment Objective
The investment objective of the Global Equity Portfolio is to deliver long-term
capital growth through investing principally in global securities (including UK
equities).
Market and Economic Review
The year under review was widely regarded as the most difficult for at least a
generation. Economic deterioration accelerated as access to funding was
inhibited by problems in the financial sector and companies and consumers cut
back on spending. The financial system in the West laboured after certain bank
assets turned out to be worth much less than had been first estimated. The
assets, primarily linked to the US housing market or to other forms of consumer
debt, were syndicated across the world, with the majority being taken on by
banks in the United States and in Europe. As US house prices crashed, the
market for these assets, which were difficult to price due to their complexity,
dried up. Banks were unable to lend, or were unwilling to for fear of
counterparties defaulting on their loans.
In the United States, some of the most recognised names on Wall Street became
unviable due to bad debts caused by owning these housing-related `toxic' assets
and they either had to be rescued by the US government, taken over by rival
institutions or, as in the case of investment bank Lehman Brothers, left to
file for bankruptcy. The repercussions of Lehman's demise were wide-ranging, as
its dealings touched nearly every area of finance, and credit markets were
paralysed in the immediate aftermath. It was a similar situation in other
developed economies and governments were forced to step in to provide support
to banks and insurance companies, in order to head off a systemic financial
breakdown. Economic stimulus packages, including quantitative easing, were
introduced and interest-rate cuts were made the world over. Some tentative
signs that they may be working appeared towards the end of the review period
and the rate of economic deterioration began to slow.
With a backdrop as difficult as this, global trade diminished, corporate
profitability suffered and stockmarkets fell the world over. Emerging European
and western developed markets were down the most, along with Russia which was
hit by sharply lower oil prices. All sectors finished lower, but defensive
sectors, those which have historically provided more stable and predictable
earnings during the highs and lows of a business cycle - such as
telecommunications, utilities and health care - showed some resilience before
weakening in the end-of-period cyclical rally. Unsurprisingly financials was
the worst performing sector, with basic materials and industrials also lagging.
Portfolio Performance Review
Over the review period the net assets of the Portfolio fell by 16.9%, while the
MSCI World index, measured in sterling (total return), fell by 19.6%. Over the
same period the Portfolio's share price decreased by 16.8%, to 86.5p.
The fall in the net asset value of the Portfolio was comparable to that
suffered by the market in a 12-month period that included extremes of
volatility and sharp changes in market direction. Our position in Wharf
Holdings provided the best real returns to the portfolio. The Hong Kong-based
real estate company, with interests in hotels and shopping malls, benefited
from rising Chinese consumer spending. We bought our holding when its shares
were on a large discount to its Net Asset Value. Other stocks contributing well
to performance were: Far Eastern Textile of Taiwan; Rentokil Initial, the UK
hygiene and facilities management company; Datacraft Asia, an IT services and
solutions company which was taken over at a premium price; and Ping An
Insurance, one of the largest insurance companies in China. Detracting the most
were Unibanco and ING negatively affected by the crisis in financials, and
energy heavyweights Gazprom and Petrobras, the share prices of which suffered
when oil and gas prices fell heavily during the second half of 2008.
Investments chosen for the trust are stock specific, with no regard to sector
or geographical weighting, but as an overview the trust's best real and
relative performances came from the industrial and information technology
sectors, where returns were ahead of the market. The biggest detractors in real
terms were energy companies and financials, but our low exposure and good
relative returns in the latter, when compared to the sector benchmark, helped
to limit losses.
Portfolio Strategy and Major Transactions
The investment strategy of the Portfolio is stock driven, using a pragmatic
investment approach, based on fundamental, valuation-driven analysis. All
holdings in the portfolio reflect conviction in each company and its prospects
as an investment. Our valuation focus means that we tend to reduce exposure to
companies when we believe they are becoming fully valued, and reinvest in names
where we see more upside potential. This may give the portfolio a contrarian
stance as we find value in stocks not favoured by the majority of investors.
We doubled our investment exposure in the US over the year as more
stock-specific opportunities were found in the country. The US's investment
outlook improved from the end of the 2008 calendar year in our view, when
compared to other geographic regions, but our US weighting is still relatively
low. We believe that much of the poor economic news and reductions in earnings
forecasts has been factored into valuations of US cyclical stocks, giving them
greater upside potential and allowing us to become more positive. In other
regions: we have relatively moderate exposures to Japan and continental Europe;
are prominent in Asia and the UK; and have become more modest with our
exposures in Latin America and emerging Europe. We stress that weightings come
as a result of stocks being selected for inclusion in the investment trust,
rather than being set by any geographical or sector allocation process.
Our already high relative weighting towards the Pacific region also increased
over the period, partly because of the region's outperformance, but also due to
the purchases of some large holdings in the region, including Wharf Holdings of
Hong Kong and Samsung Electronics of South Korea. In the Pacific region
generally, we have little cyclical exposure. Most of our holdings in the region
were bought either because we believe they look excessively cheap relative to
their future prospects, they are likely to benefit from industry consolidation
or are what we consider to be the best in their business (or a combination of
these factors). Our investments in the Pacific region take advantage of
attractive valuations in an area which features sound finances and good
potential for growth.
Turning to individual holdings, our largest new addition over the year was the
aforementioned Wharf Holdings but away from Asia we also added large holdings
in Japanese companies Hoya and Nomura. Hoya specialises in the production of
advanced optical-technology products, and its share price had fallen to a
highly attractive level. Similarly, our holding in Japanese broker and wider
financial company Nomura was added after its shares experienced a period of
underperformance which left it with, in our view, an attractive valuation. We
also added holdings in pharmaceuticals companies Roche and Teva to the
portfolio. Teva Pharmaceuticals is a leading generic drug manufacturer, and
looks set to benefit from initiatives to lower health care costs. In the US, we
added new holdings in retail electronic payments company Visa, agro-tech major
Monsanto, and United Technologies. Our largest disposal saw British Energy
leave the portfolio after it was taken over by French power company EDF. We
took up EDF's cash offer.
Outlook
The profound impact of the economic contraction is changing the global
corporate landscape. We expect to see further corporate failures and an upturn
in M&A activity as strong companies take over their competitors. Looking
longer-term, those companies which were well financed and market leading when
entering the slowdown are likely to emerge even stronger as competition is
eroded. They are also likely to benefit from programmes of cost cutting,
improving operating performance and by focusing on profitable parts of their
business.
The impact of the measures introduced to stabilise the financial system, as
well as monetary and fiscal stimulus, is uncertain, but recent global
co-ordination is encouraging and measures to strengthen the IMF and support
trade finance are combining to reduce the likelihood of its collapse. However,
the process of deleveraging is ongoing and we believe that it will subdue
growth for an extended period. With this perspective we continue to assess the
sustainability of companies that we invest into, but we are reassured that we
continue to find companies across the world that are worthy of investment. Many
are less susceptible to the downturn, with resilient businesses, strong
cashflow, low levels of debt and high-quality management. Despite the recent
rally, the sharp declines over the latter part of 2008 and into 2009 have left
many stockmarkets either looking inexpensive or at fair value and we continue
to find high-quality companies trading at attractive levels.
Bob Yerbury
Portfolio Manager
Invesco Asset Management Limited
20 July 2009
Hedge Fund Share Portfolio Manager's Report
Investment Objective
The investment objective of the Hedge Fund Share Portfolio is to achieve an
absolute return of 3-month sterling LIBOR plus 5% per annum over a rolling
5-year period, coupled with low volatility. Capital preservation is a priority.
Performance
For the year to 31 May 2009, Fauchier Allocator Funds I and II (collectively
the `FAF Funds') produced a negative return of 19.5%, net of fees. Since 30
November 2006, they have achieved an average annual compound return of 2.3%,
compared to approximately 5.6% for the three month Sterling LIBOR. Over the
same period the FAF Funds' annualised volatility has been some 11.7% and its
`beta', namely the extent to which its returns are driven by a particular
market or index, to the FTSE All-Share Index has been approximately 0.4 and to
the Citigroup UK Gilt Index -0.3, both of which are very low.
The `credit crisis' provided the backdrop to the year, and the FAF Funds'
performance was dominated by the months of September and October (down 7.9% and
10.1% respectively) at the height of the crisis, during which the global
financial system had to be bailed out by taxpayers and central bank
initiatives. This period has resulted in the FAF Funds experiencing their first
negative twelve month period since launch.
The table below gives details of the FAF Funds' monthly net asset value
performance since the launch of the Company:
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2009 1.18% -1.06% 0.61% 2.23% 4.62% 7.71%*
2008 -1.25% 3.10% -3.42% 1.33% 3.92% 1.26% -3.27% -2.56% -7.90% -10.13% -2.74% -2.09% -22.11%
2007 1.32% 2.48% 1.17% 1.65% 1.73% 1.88% 3.88% -0.53% 1.88% 5.08% -0.16% 1.68% 24.28%
2006 1.50% 1.50%
* 5 months period to 31 May 2009
The Portfolio
It is the policy of the FAF Funds to invest in a diversified portfolio of hedge
funds. As at 31 May 2009 the two funds had holdings in 20 hedge funds, invested
across nine different strategies. During the year one fund was purchased and
one sold.
At year end, the proportion of Absolute Value funds included in the FAF Funds'
portfolio was approximately 75% as at 31 May 2009 compared with 76% a year
earlier.
Market Review
The year under review saw some of the most difficult market conditions in
living memory, with extreme levels of volatility in all asset classes and
Central Bank intervention across the globe on an unprecedented scale. Equities
- as measured by the MSCI World Index - were down by some 31%. Spreads on
high-yield bonds more than trebled to all-time highs of over 1900 basis points
and the VIX Volatility index touched 90 (from mid to low teens earlier in the
year), reflecting the highest level of volatility on record. Having reached
record highs in the summer, commodities were down sharply with the price of
Brent Crude down by almost 50%. After a very volatile year, the price of Gold
ended the period up by just over 10% at around $980. There were extraordinary
swings in currency markets too, with the dollar and yen rising sharply against
the euro and especially sterling.
At the start of the year under review, market conditions initially appeared to
be improving following the earlier bail-out of Bear Stearns in March 2008. Over
the following months, however, conditions became increasingly difficult,
culminating in September and October when almost every market and sector went
into freefall. The market's distress was led by Financials with the prices of
quoted securities of many major banks and other financial institutions gyrating
wildly following the failure of Lehman Brothers. At this point, the viability
of the financial system itself was brought into question. A number of
long-established institutions were unable to withstand the strain; text books
on the Great Depression and the role of the lender of last resort were dusted
down as liquidity evaporated and banks proved unwilling or unable to lend to
one another. To compound these problems, hedge fund managers had to contend
both with severe doubt over the viability of market counterparties and with
restrictions on their short-selling activities.
These months were two of the most volatile for equity markets in recent times,
with many investors selling across the board in a flight to the safe haven of
Government Bonds. The widespread sell-off was punctuated with fierce bear
market rallies, for example, in September following the announcement of the US
Government's plans to purchase mortgage securities from the banking system.
None of these rallies lasted longer than a few days.
There was no solace to be found in commodities which, for much of the previous
twelve months had been strong. Fearing a world wide recession,
commodity-related stocks were sold across the board and suffered significant
diminution in value.
In the last quarter of the period, some rationality started to return to the
markets as much of the forced de-leveraging that had caused so much trouble in
the previous months was completed. The Bank of England and the Federal Reserve
initiated stimulus programmes of `Quantitative Easing' via large buybacks of
government securities, reversing the steep sell-off in government bonds in
January and February from their December highs. Equity markets, having
continued to fall steeply throughout the period rallied strongly in the final
quarter. Equity market volatility subsided somewhat, but still remained at
elevated levels, whilst high yield credit spreads narrowed from their all time
wide levels to stand at around 1500 basis points at the end of May.
Hedge Fund Strategies
This was one of the worst periods ever for hedge fund investing. The
combination of the crisis in the global financial system and the various policy
responses created one of the most hostile environments in which hedge funds
have ever had to operate. The collapse of Lehmans brought into question the
viability of the entire prime broking system, as no bank looked immune, and
highlighted the counterparty risk inherent in hedge fund investing. Managers'
operations were severely tested as they transferred assets to the perceived
stronger counterparties although fortunately the managers in the FAF funds did
not have material exposure. The hastily introduced short-selling ban also
created challenges. Although the `short Financials' theme in the portfolio had
been declining over the period, the short-selling ban inevitably resulted in
some losses. The area most adversely affected was convertible bond arbitrage,
as the price of convertible bonds collapsed in part due to investors' inability
to hedge the equity risk in these securities issued primarily by Financials
companies.
The overall result was that, for the first time since industry statistics have
been compiled, a diversified hedge fund portfolio failed to protect capital in
a bear market.
As can be seen, most strategies included in the portfolio struggled to make
positive contributions to FAF's performance during the year to 31 May 2009 with
the exceptions of Short Bias and Event Driven.
Given the back drop of the equity markets, there were great opportunities for
our Short Bias managers who managed to generate substantial gains despite the
imposition of the temporary short selling ban on Financials and other stocks in
September and the strong rally in equity markets in the final quarter of the
period.
The year saw poor performance by our Macro managers, despite some excellent
opportunities in the Macro space. September and October saw the largest of
their falls as managers were overwhelmed by the extreme market volatility and
violent swings in the technically-driven markets. The bulk of losses came in
equity-related trades as well as Emerging Market debt and commodities. As a
whole our Macro funds have disappointed and we are in the process of making
substantial changes within this strategy.
The sentiment-driven equity markets were particularly hazardous for our
fundamental stock-picking Equity Hedged Managers. September and October were
particularly difficult for the strategy as Financials experienced extreme
volatility following the collapse of Lehman Brothers and the temporary short
selling ban. Prompt de-leveraging by some managers however, reducing both net
and gross exposures, meant that they were able to avoid the worst of the equity
market fall out. The worst hit inevitably were those with higher net exposures
and those invested in small cap stocks that suffered the most from the markets'
sell-off.
The year witnessed some of the worst panic and forced-selling of credit
securities in memory and despite relatively low exposure levels our Specialist
Credit managers struggled to protect capital. Gains tended to come from short
positions, but were more than offset by losses from long positions, especially
from managers with exposure to leveraged loans or commodity-related names.
The Volatility Trading strategy, represented by our solitary Convertible Bond
Arbitrage manager performed extremely poorly. The manager was overwhelmed by
the collapse in the convertible bond market, partly driven by the short-selling
ban and increased concerns about the security of convertible instruments in the
wake of the collapse of certain financial institutions.
Outlook
After several years of concern about the risk/return characteristics of the
opportunities in the area, we are now planning to increase our allocation to
the Specialist Credit strategy. The period of wholesale de-leveraging by
investment banks and other players who employed gearing has meant that there
are some extremely attractive opportunities available. It is still dangerous to
be bullish on corporate debt generically, but our managers believe that
investments in specific instruments will be profitable even in the event of a
severe economic recession resulting in corporate default.
For the past year, share prices have been driven by sentiment, not
fundamentals, making life very difficult for Equity Hedged managers.
Intra-stock correlation has been close to all-time highs but is now beginning
to subside as liquidity improves and investors re-focus on corporate cash
flows, earnings and valuations. This development should present excellent
conditions for fundamental stock pickers.
We are less optimistic than before about the outlook for Macro hedge funds. The
Central Bank policy cycle is mature, with less scope for further cuts in
interest rates in 2009 and beyond. Although major asset classes will likely
remain volatile, we do not expect to see pronounced directional trends of the
magnitude and velocity of last year.
Most importantly, we believe that the systemic issues facing the hedge fund
industry have significantly abated and that excellent returns can be achieved
in each of our favoured areas without the need for substantial balance-sheet
leverage.
Fauchier Partners LLP
Portfolio Manager
20 July 2009
ManagedLiquidityS harePortfolioM anagers' Report
Investment Objective
The investment objective of the Managed Liquidity Share Portfolio is to produce
an appropriate level of income return combined with a high degree of security.
Market and Economic Review
The ongoing credit crisis caused interbank lending rates to remain elevated
throughout much of the period, as banks continued to be wary of lending money
to each other, as well as to other institutions. In an attempt to restore
order, central banks made available billions of dollars worth of loans and cut
interest rates aggressively. The Bank of England's Monetary Policy Committee
(`MPC') cut the bank rate from 5% to just 0.5% by the end of the period, the
lowest ever level. In several countries, including the UK and US, central banks
have commenced quantitative easing by buying up government and corporate bonds.
By doing so, they hope to inject more cash into the system and, crucially,
bring down long-term interest rates. Interbank lending markets improved from
mid October with the margin over the base rate reducing significantly. Sterling
three-month LIBOR fell from 5.87% to 1.28% over the review period, having
peaked at 6.31% in October. Households have also felt the effects as banks and
building societies increased lending rates and tightened their lending
criteria. The UK housing market weakened with both mortgage lending and house
prices falling sharply, although more recently there have been tentative signs
of stabilisation. In terms of inflation, although the annual CPI measure
remained stubbornly above the government set 2% target, ending the period at
2.3%, the RPI measure fell to -1.2% following the impact of sharp falls in
mortgage rates over the past year.
Performance
The Porfolio delivered a net asset value total return of 2.6% and a share price
total return of 4.8%.
Portfolio Strategy and Review
In terms of strategy, we have maintained holdings in floating-rate notes (FRNs)
where yields are reset every three months to reflect changes in the London
Interbank Offered Rate (LIBOR), the rate at which the largest banks lend money
to one another. These holdings should help to increase the investment trust's
return as, although interbank lending rates have been falling, they have been
significantly higher than the underlying bank rate. As UK interest rates are
widely expected to remain near their current low level for a considerable time,
we have added a small number of corporate bonds to the fund. These have higher
interest coupons than those currently available on FRNs. In order to limit risk
exposure, these corporate bonds are both short dated and of high quality.
Outlook
Looking ahead, we expect interest rates to be held close to 0% for sometime as
we expect that economic recovery will be a slow and drawn out process with
inflation remaining under control in the near term. Signs of recovery are only
tentative to date and we do not believe that the MPC world risk derailing this
by raising interest rates. Furthermore, with public finances under pressure
there is no room for former fiscal expansion, leaving the onus on monetary
policy.
As things currently stand, it is difficult to envisage rate increases before
mid 2010. This view appears to coincide with that of the MPC. May's Inflation
Report dampened expectations of interest rate increases in 2009 and 2010 as,
even on the assumption that bank rate is held at 0.5%, the MPC saw inflation
below target in two year's time.
Paul Read and Paul Causer
Portfolio Managers
Invesco Asset Management Limited
20 July 2009
UK Equity Share Portfolio - List of Investments
At 31 May 2009
Ordinary shares listed in the UK unless stated otherwise
Market
Value % of
Company Sector GBP'000 Portfolio
BG Oil and Gas Producers 2,428 6.0
Imperial Tobacco Tobacco 2,247 5.7
AstraZeneca Pharmaceuticals and 2,152 5.3
Biotechnology
BP Oil and Gas Producers 2,100 5.2
British American Tobacco Tobacco 1,951 4.8
Reynolds American
- US common stock Tobacco 1,884 4.7
GlaxoSmithKline Pharmaceuticals and 1,831 4.5
Biotechnology
Vodafone Mobile Telecommunications 1,828 4.5
Tesco Food & Drug Retailers 1,734 4.3
Royal Dutch Shell
- Ordinary B Shares Oil and Gas Producers 1,577 3.9
National Grid Gas, Water and Multiutilities 1,491 3.7
Capita Support Services 1,168 2.9
BT Fixed Line Telecommunications 1,128 2.8
Centrica Gas, Water and Multiutilities 1,123 2.8
Hiscox Non-Life Insurance 1,061 2.6
International Power Electricity 1,055 2.6
Rolls Royce
- Ordinary & C Shares Aerospace and Defence 1,038 2.6
Scottish & Southern Energy Electricity 1,003 2.5
Drax Electricity 943 2.3
Balfour Beatty Construction and Materials 802 2.0
BAE Systems Aerospace and Defence 734 1.8
Pennon Gas, Water and Multiutilities 730 1.8
Provident Financial General Financial 723 1.8
Northumbrian Water Gas, Water and Multiutilities 620 1.5
BTG Pharmaceuticals and 610 1.5
Biotechnology
Sage Software & Computer Services 519 1.3
Homeserve Support Services 510 1.3
Tate & Lyle Food Producers 473 1.2
Beazley Non-Life Insurance 442 1.1
Just Retirement Life Insurance 425 1.1
British Airways Travel and Leisure 407 1.0
Impax Environmental Markets Equity Investment Instruments 383 1.0
UK Coal Mining 376 0.9
Rentokil Initial Support Services 360 0.9
A J Bell - Unquoted General Financial 344 0.8
Vectura Pharmaceuticals and 318 0.8
Biotechnology
ARM Technology Hardware and 272 0.7
Equipment
ITV Media 268 0.7
Barclays Bank - Nuclear
Power Notes 28 February 2019 Electricity 223 0.6
(1)
Climate Exchange Equity Investment Instruments 215 0.5
Ecofin Water & Power
Opportunities -
Ordinary & Subscription Equity Investment Instruments 185 0.5
Shares
Helphire General Financial 145 0.4
Landkom International Food Producers 134 0.3
KCOM Fixed Line Telecommunications 133 0.3
DSG International - Ordinary &
Rights June 2009 General Retailers 103 0.3
Renovo Pharmaceuticals and 87 0.2
Biotechnology
XCounter AB Health Care Equipment and 16 -
Services
40,299 100.0
1. Contingent Value Rights (`CVRs') referred to as Nuclear Power Notes
(`NPNs') were offered by EDF as a partial alternative to its cash bid for
British Energy (`BE'). The NPNs were issued by Barclays Bank. The CVRs
participate in BE's existing business at the time of the takeover.
Global Equity Share Portfolio - List of Investments
At 31 May 2009
Market
Ordinary shares unless stated otherwise Value % of
Company Sector Country GBP'000 Portfolio
Wharf Real Estate Hong Kong 1,153 3.8
GS-United
Phosphorus
P/N 22 May 2011* Materials India 1,127 3.7
Imperial Tobacco Food, Beverage & Tobacco United Kingdom 1,103 3.6
Samsung Electronics Semiconductors &
Semiconductor
Equipment Korea 1,030 3.4
Jardine Matheson Capital Goods Hong Kong 1,029 3.4
GlaxoSmithKline Pharmaceuticals,
Biotechnology and
Life Sciences United Kingdom 1,007 3.3
Novartis Pharmaceuticals,
Biotechnology and
Life Sciences Switzerland 976 3.2
Obrascon Huarte Capital Goods Spain 899 3.0
Lain
Hoya Technology Hardware and Japan 893 3.0
Equipment
Nomura Diversified Financials Japan 848 2.8
Roche Pharmaceuticals,
Biotechnology and
Life Sciences Switzerland 822 2.7
National Grid Utilities United Kingdom 795 2.6
Teva Pharmaceutical Pharmaceuticals,
Biotechnology and
Life Sciences Israel 788 2.6
Murata Technology Hardware and Japan 778 2.6
Equipment
Rentokil Initial Commercial & Professional United Kingdom 755 2.5
Services
Tokyo Electron Semiconductors &
Semiconductor
Equipment Japan 734 2.4
United Technologies Capital Goods United States 727 2.4
Reed Elsevier Media Netherlands 708 2.3
Praxair Materials United States 699 2.3
America Movil Telecommunication Services Mexico 687 2.3
Rolls Royce
- Ordinary & C Capital Goods United Kingdom 686 2.3
Shares
Oracle Software & Services United States 684 2.3
Visa Software & Services United States 645 2.1
Ecolab Materials United States 619 2.0
Wal-Mart Stores Food & Staples Retailing United States 599 2.0
China Insurance Insurance Hong Kong 578 1.9
Monsanto Materials United States 569 1.9
BP Energy United Kingdom 559 1.8
GS-Housing
Development
Finance P/N
18 November 2010* Diversified Financials India 559 1.8
Gazprom Energy Russia 557 1.8
OTE (Hellenic Telecommunication Services Greece 538 1.8
Telecom)
Deere & Co Capital Goods United States 526 1.7
Telekom Austria Telecommunication Services Austria 516 1.7
Hewlett Packard Technology Hardware and United States 515 1.7
Equipment
HKR International Real Estate Hong Kong 503 1.7
Vodafone Telecommunication Services United Kingdom 469 1.5
Schlumberger Energy United States 455 1.5
Home Depot Retailing United States 453 1.5
Far Eastern Textile Capital Goods Taiwan 447 1.5
Zurich Financial Insurance Switzerland 441 1.5
Services
Endesa Utilities Spain 440 1.5
Google Software & Services United States 352 1.2
ABN-Bharti Airtel
P/N 30 June 2011* Telecommunication Services India 331 1.1
Petroleo Brasileiro Energy Brazil 323 1.1
Amvig Capital Goods Hong Kong 252 0.9
Sterling Energy Energy United Kingdom 88 0.3
30,262 100.0
* Participation notes reflecting the performance of the underlying equity.
HEDGE FUND SHARE PORTFOLIO - LIST OF INVESTMENTS
At 31 May 2009
Value % of
Strategy Fund Name GBP'000 Portfolio
Macro Wexford Offshore Spectrum 1,026 7.4
Explorer Global 686 4.9
Drawbridge Global Macro 588 4.2
Drawbridge Global Alpha Fund 379 2.7
V
Clarium Capital 270 1.9
Equity Long Bias Bay Resource Partners 742 5.3
Offshore
CCM Small Cap Value 545 3.9
Equity Hedged High Volatility Visium Balanced Offshore Fund 1,530 11.0
Lansdowne UK Equity 745 5.3
Indus Pacific Smaller 600 4.3
Companies
Criterion Horizons Offshore 383 2.8
Equity Hedged Low Volatility Elm Ridge Value Partners 687 4.9
Offshore
Short Bias Fauchier Partners 461 3.3
CounterPoint
Specialist Credit Plainfield Special Situations 960 6.9
Offshore Feeder
Paulson Advantage Plus 648 4.7
Claren Road Credit Fund 257 1.8
Event Driven Harbinger Capital Partners 882 6.3
Offshore Fund I
OZ Europe Overseas Fund II 669 4.8
Volatility Trading Lydian Global Opportunities 876 6.3
Fund
Multiple Strategy Shepherd Investments 1,019 7.3
Total underlying hedge fund 13,953 100.0
assets
Net current assets 3,171
Total underlying hedge fund 17,124
net asset value
Net amount attributable to (145)
note issuers
Hedge fund fixed assets 16,979
MANAGED LIQUIDITY SHARE PORTFOLIO - LIST OF INVESTMENTS
At 31 May
2009 2008
Market Market
Value % of Value % of
GBP'000 Portfolio GBP'000 Portfolio
Invesco Perpetual Money Fund 14,677 78.2 18,311 82.6
AIM Short-Term Investments Company 4,081 21.8 3,865 17.4
18,758 100.0 22,176 100.0
Principal Risks and Uncertainties
The Board has an ongoing process for identifying, evaluating and managing
significant risks. This process is regularly reviewed by the Board and was in
place throughout the year under review. The principal risk factors relating to
the Company can be divided into various areas:
Investment Policy
There is no guarantee that the Investment Policy of the Company and its
different share classes will provide the returns sought by the Company. There
can be no guarantee, therefore, that the Company or its different share classes
will achieve their investment objectives.
Risks Applicable to the Company
Shares in the Company are designed to be held over the long-term and may not be
suitable as short-term investments. There can be no guarantee that any
appreciation in the value of the Company's investments will occur and investors
may not get back the full value of their investments. Due to the potential
difference between the mid-market price of the shares and the prices at which
they are sold, there is no guarantee that their realisable value will reflect
their market price.
The market value of a share, as well as being affected by its NAV, also takes
into account its dividend yield, where applicable, and prevailing interest
rates. As such, the market value of a share can fluctuate and may not always
reflect its underlying NAV. The market price of a share may therefore trade at
a discount to its NAV.
While it is the intention of the Directors to pay dividends to holders of the
UK Equity, Global Equity and Managed Liquidity Shares, the ability to do so
will depend upon the level of income received from securities and the timing of
receipt of such income by the Company. Accordingly, the amount of dividends
paid to shareholders may fluctuate. Any change in the tax or accounting
treatment of dividends or other investment income received by the Company may
also affect the level of dividend paid on the shares in future years.
Compulsory Conversion of a Class of Shares
The continued listing on the Official List of each class of share is dependent
on at least 25% of the shares in that class being held in public hands. This
means that if more than 75% of the shares of any class were held by, inter
alia, the Directors, persons connected with Directors or persons interested in
5% or more of the relevant shares, the listing of that class of shares might be
suspended or cancelled. The Listing Rules state that the FSA may allow a
reasonable period of time for the Company to restore the appropriate percentage
if this rule is breached, but in the event that the listing of any class of
shares were cancelled the Company would lose its investment trust status.
Liability of a Portfolio for the Liabilities of Another Portfolio
The Directors intend that, in the absence of unforeseen circumstances, each
Portfolio will effectively operate as if it were a stand-alone company.
However, investors should be aware of the following factors:
* As a matter of law, the Company is a single entity. Therefore, in the event
that any of the Portfolios has insufficient funds or assets to meet all of its
liabilities, on a winding-up or otherwise such a shortfall would become a
liability of the other Portfolios and would be payable out of the assets of the
other Portfolios in such proportions as the Board may determine; and
* The Companies Act 2006 prohibits the Directors from declaring any dividends
in circumstances where the Company's assets represent less than one and a half
times the aggregate of its liabilities. If the Company were to incur material
liabilities in the future, a significant fall in the value of the Company's
assets as a whole may affect the Company's ability to pay dividends on a
particular class of shares, even though there are distributable profits
attributable to the relevant Portfolio.
Gearing
Performance may be geared by use of the GBP20 million credit facility. In current
market conditions, there is no guarantee that this facility could be renewed at
maturity or on terms acceptable to the Company. If it were not possible to
renew this facility or replace it with another lender, the amounts owing by the
Company would need to be funded by the sale of securities.
Gearing levels of the different Portfolios will change from time to time in
accordance with the investment managers' assessments of risk and reward. As a
consequence, any reduction in the value of a Portfolio's investments may lead
to a correspondingly greater percentage reduction in its net asset value (which
is likely to affect share prices adversely). Any reduction in the number of
shares in issue (for example, as a result of buy backs) will, in the absence of
a corresponding reduction in borrowings, result in an increase in a Portfolio's
gearing.
Whilst the use of borrowings by the Company should enhance the total return on
a particular class of shares where the return on the underlying securities is
rising and exceeds the cost of borrowing, it will have the opposite effect
where the underlying return is falling, further reducing the total return on
the shares. Similarly, the use of gearing by investment companies or funds in
which the Company invests increases the volatility of the NAV of the Company's
shares.
Market Movements and Portfolio Performance
Individual Portfolio performance is substantially dependent on the performance
of the types of securities held within the investment portfolio. The prices of
these securities are influenced by many factors including the general health of
worldwide economies; interest rates; inflation; government policies; industry
conditions; political and diplomatic events; tax laws; environmental laws; and
by the demand from investors for income. The Managers strive to maximise the
total return from the stocks in which they invest, but these securities are
influenced by market conditions and the Board acknowledges the external
influences on the performance of each Portfolio.
The performance of the Managers is carefully monitored by the Board, and the
continuation of the Managers' mandates is reviewed each year. The Board has
established guidelines to ensure that the investment policies that are approved
are pursued by the Managers. The Board and the Managers maintain an active
dialogue with the aim of ensuring that the market rating of the Portfolios'
shares reflects the underlying NAV; and that buy back and issuance facilities
help the management of this process.
The Company and the investee hedge funds are able to invest in emerging market
securities. Securities of this nature involve certain risks and special
considerations not typically associated with investing in other more
established economies or securities markets.
Past performance of the Company, and all of the securities managed by the
Managers, is not necessarily indicative of future performance.
For a fuller discussion of the economic and market conditions facing the
Company and the current and future performance of the different Portfolios of
the Company, please see both the Chairman's Statement and Managers' Reports.
Hedging
The Company may use derivatives for the purpose of efficient portfolio
management. There may be a price correlation between price movements in the
underlying securities, currency or index, on the one hand, and price movements
in the investments, which are the subject of the hedge, on the other hand. In
addition, an active market may not exist for a particular derivative instrument
at any particular time.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue of its status
as a Company registered under the Companies Act 2006 and as an investment trust
and its listing on the London Stock Exchange. A breach of the Income and
Corporation Taxes Act 1988 (`ICTA') s842 could lead to the Company being
subject to capital gains tax on the sale of its investments. A serious breach
of other regulatory rules could lead to suspension from the Stock Exchange, a
fine or a qualified Audit Report. Other control failures, either by the
Managers or any other of the Company's service providers, could result in
operational or reputational problems, erroneous disclosures or loss of assets
through fraud, as well as breaches of regulations.
The Manager reviews the level of compliance with ICTA s842 and other financial
regulatory requirements on a daily basis. All transactions, income and
expenditure are reported to the Board. The Board regularly considers all risks,
the measures in place to control them and the possibility of any other risks
that could arise. The Board ensures that satisfactory assurances are received
from service providers. The Manager's Compliance and Internal Audit Officers
produce regular reports for review by the Company's Audit Committee.
The hedge funds in which Fauchier invests, including managed accounts, may not
be subject to any form of authorisation or regulatory supervision. Investment
in such vehicles carries a higher potential risk and this should be taken into
account in any investment decision.
The risks and risk management policies and procedures as they relate to the
financial assets and liabilities of the Company are also detailed in note 16 to
the financial statements in the Annual Financial Report.
Additional Risks Applicable to Managed Liquidity Shares
Investors should note that the Managed Liquidity Shares are not designed to
replicate the returns or other characteristics of a bank or building society
deposit or money market fund.
Additional Risks Applicable to Hedge Fund Shares
The Fauchier Managed Funds may be indirectly exposed to gearing to the extent
that investee funds are themselves geared. This can result in the hedge fund
controlling more assets than it has equity. The use of leverage exposes the
hedge fund to additional levels of risk from investments than would have been
the case had the hedge fund not borrowed to make the investments.
Hedge funds in which Fauchier Managed Funds invest may engage in short selling,
which involves selling securities which are not owned at that point in time
(i.e. selling borrowed securities). These transactions could expose the
investee hedge fund to the risk of uncapped losses until the position is
`closed-out'.
Investee hedge funds may purchase put and call options, commodities and futures
contracts, derivative instruments and high-yield securities. These are
specialised activities and entail greater than ordinary investment risks. It is
also possible that investee hedge funds invest in companies involved in
acquisition attempts or tender offers or companies involved in work-outs,
liquidations, spin-offs, reorganisations, bankruptcies and similar
transactions, the uncertainty of which can increase the potential risk for
losses by such funds. Investee hedge funds may not be subject to any form of
authorisation or regulatory supervision and investment in such vehicles carries
a higher potential risk.
Fauchier Managed Funds may invest in hedge funds that do not permit frequent
redemptions, including hedge funds that may have `lock-up' periods. This means
that an investment may be relatively illiquid.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the annual financial report
Directors are responsible for preparing the annual financial report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice. The financial statements are required by law to give a true and fair
view of the state of affairs of the Company and of the profit or loss of the
Company for that period.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgments and estimates that are reasonable and prudent; and
* state whether applicable accounting standards have been followed, subject to
any material departures disclosed and explained in the financial statements.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with
Company Law (as updated by the Companies Act 2006). They are also responsible
for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors, to the best of their knowledge, state that:
* the financial statements, prepared in accordance with United Kingdom
Generally Accepted Accounting Practice, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company; and
* the Report of the Directors includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principal risks and uncertainties that it faces.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
20 July 2009
Income Statement
for the year ended 31 May
2009 2008
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(Losses)/gains on - (22,521) (22,521) - 104 104
investments
Gains/(losses) on currency
hedges - 14 14 - (20) (20)
Foreign exchange (losses)/ - (689) (689) - 59 59
gains
Income - note 2 3,764 - 3,764 4,421 - 4,421
Management fees (141) (376) (517) (218) (584) (802)
Performance fees - (438) (438) - (140) (140)
Other expenses (488) (50) (538) (424) (30) (454)
Net return before finance
costs and taxation 3,135 (24,060) (20,925) 3,779 (611) 3,168
Finance costs (67) (166) (233) (109) (254) (363)
Return on ordinary
activities
before tax 3,068 (24,226) (21,158) 3,670 (865) 2,805
Tax on ordinary activities (216) 103 (113) (368) 116 (252)
Return on ordinary
activities
after tax for the 2,852 (24,123) (21,271) 3,302 (749) 2,553
financial year
Basic return per ordinary
share (note 3):
- UK Equity Share Portfolio 3.3p (23.2)p (19.9)p 3.3p (10.3)p (7.0)
p
- Global Equity Share 2.1p (21.3)p (19.2)p 2.2p (0.1)p 2.1p
Portfolio
- Hedge Fund Share Portfolio (0.5)p (27.7)p (28.2)p (0.3)p 19.5p 19.2p
- Managed Liquidity Share 3.6p (1.1)p 2.5p 4.4p (0.1)p 4.3p
Portfolio
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are prepared in accordance with the Statement of
Recommended Practice issued by the Association of Investment Companies. All
items in the above statement derive from continuing operations and the Company
has no other gains or losses. Therefore no statement of recognised gains or
losses is presented. No operations were acquired or discontinued in the period.
Reconciliation of Moments in Shareholders Funds
for the year ended 31 May
Share Capital
Share Premium Special Redemption Capital Revenue
Capital Account Reserve Reserve Reserves Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 May 2007 1,312 - 129,586 50 10,182 1,260 142,390
Cancellation of - - (4) 4 - - -
deferred shares
Net proceeds from issue
of
new shares 10 1,290 - - - - 1,300
Shares bought back and
cancelled/
held in treasury (1) - (5,428) - - - (5,429)
Realised gains on
disposal of
investments - - - - 2,749 - 2,749
Decrease in unrealised
appreciation on - - - - (2,645) - (2,645)
investments
Losses on forward
currency
hedges - - - - (20) - (20)
Foreign exchange gains - - - - 59 - 59
Charged to capital:
- management fees - - - - (584) - (584)
- performance fees - - - - (140) - (140)
- other expenses - - - - (30) - (30)
- finance costs - - - - (254) - (254)
Tax credited to capital - - - - 116 - 116
Revenue return on
ordinary
activities per the
income
statement - - - - - 3,302 3,302
Dividends - - - - - (4,176) (4,176)
At 31 May 2008 1,321 1,290 124,154 54 9,433 386 136,638
Cancellation of - - (2) 2 - - -
deferred shares
Shares bought back and
cancelled/
held in treasury (68) - (9,828) 78 - - (9,818)
Realised losses on
disposal
of investments - - - - (6,913) - (6,913)
Increase in unrealised
depreciation on - - - - (15,608) - (15,608)
investments
Gains on forward
currency
hedges - - - - 14 - 14
Foreign exchange losses - - - - (689) - (689)
Charged to capital:
- management fees - - - - (376) - (376)
- performance fees - - - - (438) - (438)
- other expenses - - - - (50) - (50)
- finance costs - - - - (166) - (166)
Tax credited to capital - - - - 103 - 103
Revenue return on
ordinary
activities per the
income
statement - - - - - 2,852 2,852
Dividends - - - - - (3,185) (3,185)
As at 31 May 2009 1,253 1,290 114,324 134 (14,690) 53 102,364
Balance Sheet
as at 31 May 2009
UK Global Hedge Managed
Equity Equity Fund Liquidity Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments held at fair value 40,299 30,262 16,979 18,758 106,298
Current assets
Debtors 301 121 3 364 789
Cash and short-term deposits - 2,224 - 2 2,226
301 2,345 3 366 3,015
Creditors: amounts falling due
within one year (6,098) (352) (320) (179) (6,949)
Net current (liabilities)/ (5,797) 1,993 (317) 187 (3,934)
assets
Net assets 34,502 32,255 16,662 18,945 102,364
Shareholders' funds
Share capital 495 386 173 199 1,253
Share premium account - - 1,290 - 1,290
Special reserve 45,487 35,496 14,756 18,585 114,324
Capital redemption reserve 22 33 9 70 134
Capital reserves (11,709) (3,676) 647 48 (14,690)
Revenue reserve 207 16 (213) 43 53
Shareholders' funds 34,502 32,255 16,662 18,945 102,364
Net asset value per ordinary
Share (note 5) - basic 74.5p 89.7p 105.1p 99.8p
Balance Sheet
as at 31 May 2008
UK Global Hedge Managed
Equity Equity Fund Liquidity Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments held at fair value 49,306 40,304 29,573 22,176 141,359
Current assets
Debtors 4,011 127 - 209 4,347
Cash and short-term deposits - - 47 - 47
4,011 127 47 209 4,394
Creditors: amounts falling due
within one year (8,412) (512) (77) (114) (9,115)
Net current (liabilities)/assets (4,401) (385) (30) 95 (4,721)
Net assets 44,905 39,919 29,543 22,271 136,638
Shareholders' funds
Share capital 476 386 227 232 1,321
Share premium account - - 1,290 - 1,290
Special reserve 45,311 35,533 21,702 21,608 124,154
Capital redemption reserve 19 17 9 9 54
Capital reserves (1,172) 3,889 6,421 295 9,433
Revenue reserve 271 94 (106) 127 386
Shareholders' funds 44,905 39,919 29,543 22,271 136,638
Net asset value per ordinary
Share (note 5) - basic 97.9p 110.6p 130.2p 101.0p
Cash Flow Statement
for the year ended 31 May
2009 2008
GBP'000 GBP'000
Net cash inflow from operating activities 2,319 2,748
Servicing of finance (256) (237)
Taxation 51 22
Capital expenditure and financial investment 15,867 (6,133)
Equity dividends paid (3,185) (4,175)
Net cash inflow/(outflow) before management
of liquid resources and financing 14,796 (7,775)
Management of liquid resources (1,368) 9,607
Financing (11,927) (2,730)
Increase/(decrease) in cash 1,501 (898)
Reconciliation of net cash flow to movement in
net debt
Increase/(decrease) in cash 1,501 (898)
Cashflow from movement in liquid resources 1,368 (9,607)
Exchange movements (690) 78
Cash movements from changes in debt 2,109 (1,400)
Movement of debt in year 4,288 (11,827)
Net (debt)/funds at beginning of year (8,097) 3,730
Net debt at end of year (3,809) (8,097)
Notes to the Financial Statements
1. Accounting Policies
The principal accounting policies, all of which have been consistently applied
throughout this year and the preceding year, are set out below.
(a) Basis of preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable
United Kingdom law and Accounting Standards and with the Statement of
Recommended Practice (`SORP') `Financial Statements of Investment Trust
Companies and Venture Capital Trusts' issued by the Association of Investment
Companies in January 2009.
(ii) Changes to presentation
Following the publication of the new SORP, capital reserves are now shown in
aggregate in the balance sheet and reconciliation of movements in shareholders'
funds. This has no effect on either the net assets or earnings of the Company
or the four Portfolios.
(iii) Definitions used in the financial statements
`Portfolio' the UK Equity Share Portfolio, the Global Equity Share Portfolio,
the Hedge Fund Share Portfolio and/or the Managed Liquidity Share Portfolio (as
the case may be). Comprising investment portfolio, cash, loans, debtors and
other creditors, which together make up the net assets as shown in the balance
sheet.
`Shares' UK Equity Shares, Global Equity Shares, Hedge Fund Shares, Managed
Liquidity Shares and/or Deferred Shares (as the case may be).
The financial statements for the Company comprise the Income Statement,
Reconciliation of Movements on Shareholders' Funds, the Total Column of the
Balance Sheet, the Cash Flow Statement and the Total or Company Notes to the
Financial Statements.
The UK Equity, Global Equity, Hedge Fund and Managed Fund Share Portfolios'
Income Statements and Balance Sheets are not required under UK Generally
Accepted Accounting Practice or the SORP, but have been disclosed to assist
shareholders' understanding of the assets and liabilities, and income and
expenses of the different share classes.
In order to better reflect the activities of an investment trust company and in
accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and capital nature has
been presented alongside the Income Statement. In accordance with the Company's
status as a UK investment company under Section 833 of the Companies Act 2006,
net capital returns may not be distributed by way of a dividend. Additionally,
the net revenue is the measure the Directors believe appropriate in assessing
the Company's compliance with certain requirements set out in Section 842 of
the Income and Corporation Taxes Act 1988.
(iv) Functional currency
The Company's functional currency is pounds sterling as its operating
activities are based in the UK and a majority of its assets, liabilities,
income and expenses are in sterling, which is also the currency in which these
accounts are prepared.
2. Income
UK Global Hedge Managed Company
Equity Equity Fund Liquidity Total
2009 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income from investments
UK dividends 1,600 329 - - 1,929
UK scrip dividends 19 - - - 19
Overseas dividends 176 644 - 144 964
Overseas scrip dividends - 61 - - 61
Unfranked investment income - - 3 741 744
- interest
1,795 1,034 3 885 3,717
Other income
Deposit interest 6 31 1 4 42
Underwriting and sundry 5 - - - 5
Total income 1,806 1,065 4 889 3,764
2008
Income from investments
UK dividends 1,790 377 - - 2,167
Overseas dividends 142 823 7 240 1,212
Unfranked investment income - - - 913 913
- interest
1,932 1,200 7 1,153 4,292
Other income
Deposit interest 10 95 1 3 109
Underwriting and sundry 8 7 3 2 20
Total income 1,950 1,302 11 1,158 4,421
3. Basic return per ordinary Share
Basic revenue, capital and total return per ordinary share is based on each of
the returns on ordinary activities after taxation as shown by the Income
Statement for the applicable Share and on the following number of shares being
the weighted number of shares in issue throughout the period for each
applicable Share:
Average Number of Shares
Share 2009 2008
UK Equity 45,354,581 47,115,373
Global Equity 35,618,724 37,842,061
Hedge Fund 20,855,531 21,334,560
Managed 20,300,485 22,062,528
Liquidity
4. Dividends
Dividends paid for each applicable Share follow:
2009 2008
Number Dividend Total Number Dividend Total
of Shares Rate GBP'000 of Shares Rate GBP'000
(pence) (pence)
UK Equity
First interim 44,997,509 1.80 810 47,935,519 1.45 695
Second interim 44,876,839 1.65 740 45,737,619 1.25 572
3.45 1,550 2.70 1,267
Global Equity
First interim 35,613,603 1.20 428 37,937,789 0.90 342
Second interim 34,424,275 1.05 361 37,465,247 1.25 468
2.25 789 2.15 810
Managed Liquidity
First interim 21,286,581 2.70 575 21,526,401 2.45 527
Second interim 19,348,802 1.40 271 21,872,767 1.90 416
4.10 846 4.35 943
Total paid in
respect of
the year 3,185 3,020
Total paid in
respect of the
period ended 31 - 1,156
May 2007
3,185 4,176
5. Net asset values per Share
The net asset value per Share and the net assets attributable at the year end
were as follows:
Ordinary shares 2009 2008
Net Asset Net Asset
Value per Net Assets Value per Net Assets
Share Attributable Share Attributable
pence GBP'000 pence GBP'000
UK Equity 74.5 34,502 97.9 44,905
Global Equity 89.7 32,255 110.6 39,919
Hedge Fund 105.1 16,662 130.2 29,543
Managed Liquidity 99.8 18,945 101.0 22,271
Net asset value per Share is based on net assets at the year end and on the
number of relevant shares in issue at the year end.
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 May 2009 or the year ended 31 May
2008. The financial information for 2008 is derived from the statutory accounts
for 2008, which have been delivered to the Registrar of Companies. The auditors
have reported on the 2008 accounts; their report was unqualified, did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying the report and did not contain a statement under
section 498 of the Companies Act 2006. The statutory accounts for the year
ended 31 May 2009 have not yet been delivered to the Registrar of Companies.
The statutory accounts for the year ended 31 May 2009 have been finalised on
the basis of the information presented by the directors in this Annual
Financial Report announcement and will be delivered to the Registrar of
Companies following the Company's Annual General Meeting.
The audited Annual Financial Report will be available to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, 30 Finsbury Square, London, EC2A 1AG or the Company's
website at www.invescoperpetual.co.uk/investmenttrusts.
The Annual General Meeting will be held on 22 September 2009 at 11.30a.m. at 30
Finsbury Square, London, EC2A 1AG.
By order of the Board
Invesco Asset Management Limited
20 July 2009
END
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