The Edinburgh Investment Trust plc. Managed by

Transcription

1 2002 The Edinburgh Investment Trust plc Annual Report and Accounts 31 March 2002 Managed by

2 Contents: Objectives & Company Summary 1 Financial Summary 2 Chairman s Statement 3 Manager s Review 5 Thirty Largest Investments 8 Distribution of Assets 9 Changes in Asset Distribution 10 Analysis of Shareholders 11 Capital Gains Tax Information 11 Long Term Record 12 Corporate Information 14 Board of Directors 14 Directors Report 16 Statement of Directors Responsibilities 20 Independent Auditor s Report 21 Financial Statements 22 Investments 34 Notice of Meeting 36 Financial Calendar 38 Information for Investors 39 EIT s website The site offers investors comprehensive information on The Edinburgh Investment Trust (EIT) and its related products. Just some of the features are: the latest prices performance figures, charts and commentary product information how to invest EIT News subscription facility for market updates

3 Objectives The achievement of capital growth at a higher rate than the FTSE All-Share Index and dividend growth above the rate of UK inflation Company Summary Investment manager Edinburgh Fund Managers plc Equity shareholders funds 1,201.6 million at 31 March 2002 Market capitalisation 1,042.8 million at 31 March 2002 Capital structure Management fee ISA/PEP status AITC membership 246,821,714 ordinary shares of 25p each. Each ordinary share is entitled to one vote on a show of hands and, on a poll, to one vote for every share held. 100,000, /2% debenture stock ,000, /4% debenture stock % per annum of the total assets of the company, after deducting current liabilities and excluding commonly managed funds. The notice period is three months. The company s shares are eligible for Individual Savings Accounts (ISAs). The company s shares can continue to be held in existing PEPs and are eligible for PEP transfers. The company is a member of The Association of Investment Trust Companies. PAGE 1 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

4 Financial Summary Performance At 31 March % change Capital return Net asset value per share p p FTSE All-Share Index 2, , Share price p p Total return Net asset value -8.2 FTSE All-Share Index -3.2 Share price -8.6 NAV adjusted for borrowings valued at market value p p Total dividend for year 12.75p 12.45p +2.4 Revenue return per share 12.50p 12.07p +3.6 Discount (difference between share price and net asset value per share) Where borrowings are deducted at par value 12.8% 12.1% Where borrowings are deducted at market value 8.4% 7.9% Gearing Actual gearing ratio 11.1% 11.9% Maximum potential gearing ratio 16.7% 14.6% Total expense ratio as % of average shareholders funds 0.49% 0.53% Year s Highs/Lows High Low Net asset value 580.5p 394.2p Share price 503.5p 347.5p Discount 9.4% 14.8% PAGE 2 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

5 Chairman s Statement The two halves of the year to 31 March 2002 were very different both for the stock market and for the company. During the first six months the market fell sharply and the company failed to meet its benchmark: during the second six months markets recovered and the benchmark was exceeded. For the year as a whole, however, performance was extremely disappointing with the net asset value per share ( NAV ) falling by 10.4% compared to a fall of 5.7% in the FTSE All-Share Index. The board is proposing a final dividend of 8.65p which, if approved, will give a total distribution of 12.75p, an increase of 2.4%. During the same period the UK s underlying rate of inflation was 2.3%. The Earl of Eglinton and Winton Market background For the second successive year, the FTSE All-Share Index ended the period to 31 March at a lower level than at 1 April. Following a sharp fall in the months before the start of the year under review, the UK equity market reflected initial optimism that the world economy would avoid major recession. In the event, this proved unduly optimistic and weakness in the US caused major problems to international companies, and in turn affected all the world s major stock markets. The UK was not immune from this effect and, as I reported at the interim stage, the FTSE All-Share Index had by 30 September 2001 fallen by 13.7% in the six month period: the effect of 11 September accounted for only a small part of this fall. Subsequently, markets recovered sharply in the final quarter of 2001 as investors became more confident of global economic recovery. This optimism was later tempered by reported earnings which fell short of expectation and, despite recovery in March, the market performed poorly in the first quarter of Overall, the FTSE All-Share Index declined by 5.7% in the year ending 31 March 2002: a fall of 13.7% in the first six months being partly offset by an increase of 9.3% in the second. Portfolio performance I reported at the interim stage that the company s portfolio had performed badly in the six months to 30 September. The manager had been unduly optimistic about economic growth and the portfolio had been positioned accordingly: balance sheet gearing had exacerbated this position and the outcome of the first half year was an 18.5% fall in NAV, compared to the 13.7% reduction in the benchmark index. There has been a welcome improvement in the second half of the year, as a result of improved market optimism and some change in focus of the portfolio to companies and sectors benefiting from economic developments. In this second six months, the company s NAV has increased by 9.9%, compared to a rise of 9.3% in the benchmark index. The better second half performance has not offset the result in the first six months, and over the year as a whole the 10.4% decline in NAV was greater than the 5.7% fall in the FTSE All-Share Index. The use of borrowings gearing has been a significant contributor to the performance of the portfolio. The company s long term borrowings represented 14.6% of shareholder funds at the start of the year, rising slightly due to market movements during the year. Over many years of rising markets, gearing has been highly beneficial in adding value for shareholders: the reverse is true when the market falls, although this impact can be mitigated by increasing the amount of cash in the portfolio. To put this in context, the use of gearing contributed 0.8% to the fall in NAV during the year. Interest charged to the realised capital reserve accounted for an additional 1.1% reduction in NAV. The company has not utilised any of the additional 75 million short term loan facility which was mentioned in my interim statement. Share buy-back programme The board s continuing policy is to buy back shares for cancellation in order to address any imbalance PAGE 3 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

6 Chairman s Statement between the supply and the demand for the shares and to reduce the scale and volatility of the discount, whilst at all times enhancing the NAV for the remaining shareholders. During the year the company bought back and cancelled 6,040,000 ordinary shares, representing 2.4% of the share capital at the beginning of the year. This resulted in an increase in the NAV for remaining shareholders of 0.3% The board believes that its ability to buy back shares for cancellation is to the benefit of all shareholders. As in recent years, a Special Resolution proposing an extension of this facility will be put to the annual general meeting on 3 July Dividends The board is recommending a final dividend of 8.65p per share, which will make a total for the year of 12.75p per share, a rise of 2.4%. The revenue return per share for the year was 12.50p and therefore revenue reserves have again been drawn on modestly to meet the company s dividend objective. The board remains comfortable with this policy, which is under regular review, as the level of revenue reserves presently represents more than a full year s dividend and also because it anticipates that future dividend growth will not need to rely to any material extent on the use of these reserves. The board Dick Barfield, who was previously the Chief Investment Manager at Standard Life, was appointed to the board on 20 August We welcome him warmly and the company is already benefiting from his wealth of investment management expertise. Management contract Last October, following a period of poor investment performance, the company s manager, Edinburgh Fund Managers ( EFM ), agreed to the board s request that the notice period under the management contract should be reduced from 1 year to 3 months. On 4 March 2002 it was announced that the board had confirmed to Hermes Pensions Management, who were in merger discussions with EFM, that in the event of any change of control of its manager, and irrespective of the party acquiring control, the company would initiate a process whereby EFM and other fund managers would be invited to tender for the Investment Management Contract. Subsequently Hermes withdrew from its discussions with EFM. These events have introduced an element of uncertainty into the relationship between the company and its manager which, if allowed to continue, could be to the detriment of shareholders. The board is anxious, therefore, that this uncertainty should be dispelled. After much thought, it has concluded that, despite a welcome improvement in performance since 30 September 2001, it is not able to give a commitment to a continuing relationship with EFM without judging them formally against other fund managers. Accordingly, Hymans Robertson has been retained to assist the board in conducting a formal selection process, which will include EFM. Progress will be reported at the annual general meeting of the company on 3 July 2002 and it is hoped that the process will be completed shortly thereafter. In the interests of the company s shareholders protective notice terminating the management contract with effect from the close of business on 31 August 2002 has been given to EFM. The way ahead The Edinburgh Investment Trust is the UK s largest investment trust focussed solely on UK quoted companies and its objectives are the achievement of capital growth higher than the FTSE All-Share Index and dividend growth above the rate of UK inflation. Its aim is to provide both institutions and individuals alike with a low risk, lightly geared exposure to the UK equity market. The board is confident that, when the steps it is taking have settled the uncertainty surrounding the management of the company, these objectives and aims will be seen to offer an excellent vehicle to long term investors. The Earl of Eglinton and Winton Chairman 21 May 2002 PAGE 4 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

7 Manager s Review The company aims to achieve its objectives by investing in a portfolio of UK equities including large and small companies. As manager, we seek to add value in the longer term through a combination of sector allocation and stock selection. Borrowings, or gearing, are employed to raise exposure to equities when we feel the prospects for equities are attractive. The FTSE All-Share Index recorded its second successive annual fall, for the first time since , retreating by 5.7% during the twelve months to the end of March A steady flow of disappointing economic and corporate news weighed heavily on equity returns, particularly in the higher growth sectors of the market. The technology, telecommunications and media sectors were again among the worst performing sectors during the period, falling by 56%, 36% and 15%, respectively. In contrast, the defensive sectors of the market benefited from the economic uncertainty as investors favoured a high degree of earnings visibility over the more unpredictable and volatile exposure offered by cyclical companies. Food producers, beverages and tobacco were among the best performing sectors in the period. The twelve months under review has been one of the most volatile periods in UK equity market history. The FTSE All-Share Index started the year at 2,711 and made steady progress through the spring, peaking at 2,891 towards the end of May. However, as it became increasingly clear that the economic downturn, particularly in the US, was threatening to be far more pronounced than the market had been anticipating, equities started to drift lower through the summer. The response from the monetary authorities on both sides of the Atlantic was to continue cutting interest rates aggressively. Tentative economic signs that this stimulus was beginning to take effect were shattered by the terrorist atrocities in America on 11 September In the days following the attacks stock markets around the world collapsed with the FTSE All-Share Index reaching a low of Standing: Johnny Russell (Manager UK Small Companies), Robert Waugh (Overall Portfolio Manager), Ken Murray (Accountant) Seated: Lynn Mathewson (Secretary), Peter Cockburn (Manager UK Large Companies) 2,128. Companies within the transport, leisure and insurance industries were affected particularly badly. The global financial system, supported by further interest rate cuts in all of the major economies and attractive equity valuations, quickly stabilised and equity prices started to recover in the fourth quarter of the calendar year. The final quarter of the company s financial year has been dominated by the corporate results season in the UK. While reported earnings have met depressed expectations, there was a marked improvement in the tone of outlook statements provided by many companies. The FTSE All-Share Index closed the year at 2,557. Capital return The net asset value per share fell by 10.4% during the year from p to p. This compares with a capital return of minus 5.7% from the FTSE All-Share Index over the same period. Table 1 overleaf illustrates the key contributors to the performance of the net asset value of the company in relation to its benchmark. The analysis highlights the disappointing performance of the underlying UK equity portfolio and the negative contribution from the use of borrowings in a falling market. The weak contribution from the equity portfolio stemmed from the underperformance suffered in the first six months of the year. During this period, the PAGE 5 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

8 Manager s Review company was positioned for a recovery in the global economy reflected by the cyclical bias within the portfolio. Performance was therefore hurt by the weaker than anticipated economic activity, particularly during the extreme market conditions in September. The second half of the year has been much more positive, both for equities in general and the company s performance, with the underlying equity portfolio 1.0% ahead of the FTSE All-Share Index during this period. Following September s collapse in equity markets, the company took the opportunity to invest all of its borrowings in equities, raising the gearing level to 19%. The cash was invested in predominantly market sensitive stocks, which were trading on very depressed valuations. The FTSE All-Share Index subsequently rallied by 20% over the next two months, at which point the fund s gearing was reduced back to the more normal level of 10%. Revenue return The revenue return per share was 12.50p compared with the previous year s return of 12.07p, Decrease in Net Asset Value 10.4 Decrease in FTSE All-Share Index 5.7 Underperformance 4.7 Analysis of performance % UK Equities -2.9 Stock Selection -1.4 Sector Allocation -1.5 Borrowings* -0.8 Charges to capital -1.3 Debenture interest -1.1 Management fee -0.2 Share Buyback +0.3 Cash 0.0 Table 1 Analysis of capital performance year to 31 March 2002 * Excludes the attributable effect of stock selection and sector allocation % representing a 3.6% increase. This was principally the result of an increase in short term deposit interest received by the company through holding a higher cash balance than the previous year. The revenue return was also helped by a lower expense charge than last year. Dividends The total dividend for the year, subject to the approval of the final dividend at the annual general meeting, will be 12.75p, a rise of 2.4% on the previous year. The final dividend of 8.65p will be paid to those shareholders, directly or by way of the various savings schemes, who are on the register on the 7 June The dividend itself will be paid on the 4 July Borrowings The company has two debenture issues outstanding amounting to 200 million. This debt was only partly utilised during the period with an average gearing level of 10% during the year. At 31 March 2002, the company had approximately 111% of shareholders equity invested in UK equities. The interest on the borrowings reduced the company s net asset value by 1.1% during the period. Portfolio activity The managers UK equity resource was strengthened during the period with several new additions to the team. These changes have enhanced the stock selection process through the introduction of different valuation techniques, ensuring that our process continues to evolve. The process is built on rigorous fundamental financial analysis focused on understanding companies and how they fit into the industries in which they operate. Particular emphasis is placed on a company s ability to generate cash flow and the strength of its management team. This stock specific approach to portfolio construction has translated into overweight positions in the construction, beverages and engineering sectors, while exposure to technology, pharmaceutical and general retail stocks were reduced during the period to an underweight stance. PAGE 6 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

9 Manager s Review The company will continue to look for long term opportunities in companies with strong management, sustainable competitive advantage and undervalued share prices. Purchases Significant new holdings were established across twelve different market sectors during the year. The larger companies added to the portfolio were Cookson Group, SSL International, P & O Ports, EMAP, Persimmon, British Energy, Safeway, Abbey National, Weir Group, British Land, Old Mutual, Galen Holdings, Alliance & Leicester, Candover and Waste Recycling Group. Sales Some technology companies were sold out of the portfolio in the period including Spirent, Logica, Autonomy, ARM Holdings and Marconi. Valuations within the general retail sector also appeared stretched and Marks & Spencer, Kingfisher and Woolworths were disposed of during the year. Other sales included Railtrack, Brambles Industries, BskyB, Energis, EMI, Scottish & Newcastle, Sainsbury, Rank Group and BTG. Future portfolio strategy The coming year is expected to be one of recovery from the current low levels of economic growth. The slowdown has been much milder in the UK than in other parts of the world and therefore the rebound may be more modest, though a gradual acceleration in GDP growth is anticipated. The consumption element of GDP is our primary concern. The UK consumer has taken on a very high level of debt while interest rates have been falling, though this debt burden would become more difficult to service should interest rates start to rise. As a result we have reduced our exposure to the consumer related areas of the market, such as leisure and general retail, where company valuations are looking stretched. At 31 March 2002 Portfolio Index % % FTSE FTSE FTSE Small Cap Table 2 Size analysis of the UK equity portfolio Index is the FTSE All-Share Index restructure balance sheets following the downturn. This is inevitable after a period of economic weakness and falling equity markets, and has in the past given way to improving confidence and rising share prices. The portfolio s structure will continue to be driven by fundamental stock analysis. With volatile market conditions likely to persist, the company is well placed to take advantage of valuation anomalies across the UK equity market. Edinburgh Fund Managers plc 21 May 2002 The steadily improving economic news flow has created a more receptive equity market with over 4 billion of fresh capital raised in the first quarter of 2002, as companies attempt to repair and PAGE 7 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

10 Thirty Largest Investments at 31 March 2002 Company Market Value Sector 000 BP 118,750 Oil & gas GlaxoSmithKline 97,497 Pharmaceuticals Vodafone 73,014 Telecommunications services HSBC Holdings 70,786 Banks Shell Transport & Trading 45,389 Oil & gas Lloyds TSB Group 44,882 Banks Royal Bank of Scotland 44,368 Banks Diageo 43,146 Beverages AstraZeneca 39,752 Pharmaceuticals British Telecom 37,044 Telecommunications services Ten largest investments 614, % of total assets less current liabilities Barclays 30,423 Banks CGNU 22,722 Life assurance Anglo American 21,060 Mining Tesco 18,075 Food & drug retailers Legal & General 17,563 Life assurance BG 17,419 Oil & gas Granada 16,625 Media & photography Centrica 16,416 Gas distribution HBOS 15,625 Banks Prudential 15,151 Life assurance Twenty largest investments 805, % of total assets less current liabilities National Grid 14,592 Electricity Royal & Sun Alliance 14,293 Insurance Allied Domecq 14,190 Beverages Cadbury Schweppes 14,130 Food producers & processors Cookson 13,650 Engineering & machinery EMAP 13,192 Media & photography Reed International 12,776 Media & photography BAA 12,740 Transport RMC 12,673 Construction & building materials Associated British Ports 12,540 Transport Thirty largest investments 940, % of total assets less current liabilities Other equity investments 389,132 represented by 129 holdings Total equity investments 1,329, % of total assets less current liabilities Net current assets 66,813 Total assets less current liabilities 1,396, % A full list of investments is given on pages 34 and 35. PAGE 8 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

11 Distribution of Assets at 31 March FTSE All-Share Index Weightings Distribution of Assets Resources Mining Oil & Gas Basic industries Chemicals Construction & Building Materials Forestry & Paper Steel & Other Metals General industrials Aerospace & Defence Electronic & Electrical Equipment Engineering & Machinery Cyclical consumer goods Automobiles & Parts Household Goods & Textiles Non cyclical consumer goods Beverages Food Producers & Processors Health Personal Care & Household Products Pharmaceuticals Tobacco Cyclical services General Retailers Leisure Entertainment & Hotels Media & Photography Support Services Transport Non cyclical services Food & Drug Retailers Telecommunications Services Utilities Electricity Gas Distribution Water Information technology Information Technology Hardware Software & Computer Services Financials Banks Insurance Life Assurance Investment Companies Real Estate Speciality & Other Finance Total equities Net current assets Total assets less current liabilities PAGE 9 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

12 Changes in Asset Distribution Valuation at Net purchases Appreciation Valuation at Sector classification 31 March 2001 (sales) (depreciation) 31 March Resources 238,954 (33,338) 13, ,900 Basic industries 34,419 1,670 7,257 43,346 General industrials 14,536 15,641 3,817 33,994 Cyclical consumer goods 6,302 (5,139) 1,163 Non cyclical consumer goods 254,805 (22,777) 3, ,426 Cyclical services 251,160 (39,203) (24,989) 186,968 Non cyclical services 200,049 18,144 (66,761) 151,432 Utilities 52,191 1,962 (5,859) 48,294 Information technology 60,871 (9,426) (39,816) 11,629 Financials 417,307 (7,385) (11,459) 398,463 Total equities 1,530,594 (74,712) (126,267) 1,329,615 Net current assets 37,288 29,527 (2) 66,813 Total assets less current liabilities 1,567,882 (45,185) (126,269) 1,396,428 Investments by Sector in millions Cyclical Non cyclical Non Information Basic General consumer consumer Cyclical Cyclical tech- Resources industries industrials goods goods services services Utilities nology Financials PAGE 10 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

13 Analysis of Shareholders % of ordinary shares held by shareholders Individuals (46.1%) Insurance and assurance companies (28.4%) Pension funds (14.8%) Investment and unit trusts (6.8%) Others (3.9%) Capital Gains Tax Information The market value of an ordinary share in the company on 31 March 1982 was 58.49p. This price does not apply to shares held in Scottish United Investors plc at 31 March 1982 which were subsequently acquired by the company. PAGE 11 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

14 Long Term Record Per ordinary share at 31 March Total assets Ordinary % expenses Actual Potential Year ended less current shareholders Net asset Revenue Share of average gearing gearing 31 March liabilities funds value return Dividend price Discount shareholders ratio ratio m m p p p p % funds % % , , , , , , , , , , , , , , , , , , Notes: 1. Of the 11.85p dividend for 1999, 3.80p was paid as a foreign income dividend. 2. Shares have been bought back and cancelled as follows: Number of shares Cost Year bought back ,978, , ,978,930 56, ,040,000 28,125 Comparison of Net Dividend Growth of The Edinburgh Investment Trust (EIT) to Underlying Inflation (figures rebased to 100) EIT Net Dividend Growth Underlying Inflation Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Source: Datastream PAGE 12 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

15 Long Term Record Comparison of NAV and Share Price Total Return Performance of The Edinburgh Investment Trust (EIT) to FTSE All-Share Index (figures rebased to 100) 170 EIT NAV FTSE All-Share EIT Share Price Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Source: Fundamental Data Comparison of NAV and Share Price Capital Return Performance of The Edinburgh Investment Trust (EIT) to FTSE All-Share Index (figures rebased to 100) 150 EIT NAV FTSE All-Share EIT Share Price Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Source: Datastream PAGE 13 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

16 Corporate Information Registered Office Donaldson House 97 Haymarket Terrace Edinburgh EH12 5HD Telephone: website: The Earl of Eglinton and Manager and Secretary Edinburgh Fund Managers plc Donaldson House 97 Haymarket Terrace Edinburgh EH12 5HD Telephone: Regulated by the FSA website: Winton Chairman The Earl of Eglinton and Winton (62) was appointed to the board in 1992 and became chairman in He was deputy chairman of Gerrard and National Holdings and chairman of Gerrard Vivian Gray. Registrar Lloyds TSB Registrars Scotland PO Box Finance House Orchard Brae Edinburgh EH4 1WQ Telephone: Bankers Bank of New York Limited Auditors KPMG Audit Plc Saltire Court 20 Castle Terrace Edinburgh EH1 2EG Company Broker UBS Warburg Company Registration Number SC 1836 Ian Inglis Director Ian Inglis*, LLB, FCIBS, WS (61) was appointed to the board in He was a senior partner in Shepherd & Wedderburn WS and is a director of Murray tmt and Ivory & Sime UK Smaller Companies Trust. * Member of the Audit and Mana PAGE 14 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

17 Board of Directors Scott Dobbie Director Scott Dobbie*, CBE (62) was appointed to the board in 1998 and is the senior independent director. He is chairman of the Securities Institute and Standard Life European Private Equity Trust and a director of Premier Oil, Murray VCT4 and Scottish Financial Enterprise. He is also a Commissioner of the Jersey Financial Services Commission and an advisor to Deutsche Bank. Sir Gavin Laird Director Sir Gavin Laird*, CBE (69) was appointed to the board in 1994 and is chairman of the audit and management engagement committee. He was General Secretary of the Amalgamated Engineering and Electrical Union and is chairman of Murray VCT 4. Eileen Mackay Director Eileen Mackay*, CB (58) was appointed to the board in She was Principal Finance Officer in The Scottish Office and is a director of The Royal Bank of Scotland Group and its subsidiaries The Royal Bank of Scotland and National Westminster Bank. She is also a director of Scottish Financial Enterprise. the board Richard Barfield Director Richard Barfield* (55) was appointed to the board in He is a director of New Look Group, The Baillie Gifford Japan Trust, The Merchants Trust, Marshalls, The Fleming Overseas Investment Trust and Equitas. He was previously Chief Investment Manager at Standard Life. Roy Summers Director Roy Summers*, OBE (66) was appointed to the board in He was a director of Scottish & Newcastle, is a director of Young & Co s Brewery, East of Scotland Water Authority and chairman of Canongate Technology. gement Engagement Committee PAGE 15 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

18 Directors Report Business and status The company carries on business as an investment trust. The Inland Revenue has approved the company s status as an investment trust for the purposes of the Income and Corporation taxes Act 1988 for the year ended 31 March In the opinion of the directors, the company has subsequently conducted its affairs so as to enable it to continue to obtain such approval. Review of activities During the year the company followed the normal activities of an investment trust. Details of these are given in the Chairman s Statement and the Manager s Review. enhancing the net asset value for the remaining shareholders. Dividends The directors recommend that a final dividend of 8.65p ( p) per share be paid on 4 July 2002 to shareholders on the register at the close of business on 7 June 2002, making a total of 12.75p ( p) per share for the year ended 31 March Directors Sir Chips Keswick retired from the board on 4 July 2001 and Richard Barfield was appointed to the board on 20 August Share capital During the year the company bought back 6,040,000 ordinary shares of 25p each (representing 2.4% of the issued share capital as at 31 March 2001) on the London Stock Exchange for cancellation. The total cost of these shares was 28,125,000. Since 31 March 2002 a further 625,000 shares have been bought back for cancellation. The principal purpose of such share buybacks was to address the imbalance between the supply and demand for the company s ordinary shares and thereby reduce both the scale and volatility of the discount at which the shares trade in relation to the underlying net asset value whilst at all times In accordance with the articles of association, Richard Barfield will seek re-appointment. Roy Summers and The Earl of Eglinton and Winton retire by rotation at the annual general meeting and offer themselves for re-election. Resolutions in respect of the foregoing will be proposed at the annual general meeting. The names of the directors and their holdings in the company s shares are shown in Table 1 below. No contract or arrangement existed during the year in which any of the directors had a material interest. No director had a service contract with the company. Ordinary Shares held at 31 March March 2001 Nature of interest The Earl of Eglinton 4,350 4,350 Beneficial and Winton 4,885 4,741 Non beneficial Richard Barfield 2,289 Beneficial Scott Dobbie 108, ,606 Beneficial 2,281 Non beneficial Ian Inglis 5,000 2,000 Beneficial Sir Gavin Laird 5,460 5,308 Beneficial Eileen Mackay 2,552 2,526 Beneficial Roy Summers 22,492 19,099 Beneficial 3,522 2,304 Non beneficial Table 1 Directors and their holdings in the company PAGE 16 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

19 Directors Report Since 31 March 2002 the company has been notified that The Earl of Eglinton and Winton has added a further 12 shares to his non beneficial interest. The company has not been notified of any other changes in the holdings listed in Table 1 between 31 March 2002 and 21 May Corporate Governance Compliance The company is committed to high standards of corporate governance. The board is accountable to the company s shareholders for good governance and this statement describes how the company applies the principles identified in the Combined Code appended to the Listing Rules of the Financial Services Authority. The board believes that the company has complied throughout the accounting period with the provisions set out in Section 1 of the Code except for the provision which relates to the combination of the roles of the chairman and chief executive. This provision does not apply as the company has no executive directors. Directors The board has overall responsibility for the company s affairs. It delegates, through an investment management agreement and through specific instructions, the day to day management of the company to the manager, Edinburgh Fund Managers plc. The company has no executives or employees. The board presently consists of seven non-executive directors, one of whom is chairman. All of the directors are considered by the board to be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. board to provide effective strategic leadership and proper governance of the company. The senior independent director is Scott Dobbie. The board meets at least eleven times each year. There is an annual cycle of board meetings which is designed to address, in a systematic way, overall strategy, review of investment policy, investment performance, marketing achievements, budgets, dividend policy and communication with shareholders. Appointments of new directors are considered by the whole board taking into account the need to maintain a balanced board. When a new director is appointed to the board, he or she is provided with all relevant information regarding the company and their duties as a director. A director appointed during the year is required to retire and seek re-appointment by shareholders at the next annual general meeting. The Articles also require that one third of the directors retire by rotation each year and seek re-election at the annual general meeting and also that every director submit himself or herself for re-election at least every three years. There is a procedure for directors to take independent professional advice, if necessary, at the company s expense. This is in addition to the access which every director has to the advice and services of the company secretary, Edinburgh Fund Managers plc, which is responsible to the board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Communication with shareholders The directors place great importance on communication with the company s shareholders. The company also carries out a programme of regular dialogue and individual meetings with institutional shareholders. Biographies of the directors appear on pages 14 and 15 of this report. Each director has the requisite business and financial experience which enables the At the annual general meeting all shareholders have the opportunity to put questions to the board and a presentation from the manager covers the investment PAGE 17 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

20 Directors Report performance and strategy during the financial year and the outlook for the year ahead. The board hopes that as many shareholders as possible will be able to attend the meeting. Shareholders have direct access to the manager at any time through the freephone shareholder information service. Proxy voting as an institutional shareholder The manager instructs proxy votes on behalf of the company. Accountability and audit The respective responsibilities of the directors and the auditors in connection with the financial statements appear on pages 20 and 21. The board is responsible for the company s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The board confirms that there is an ongoing process for identifying, evaluating and managing the company s significant business and operational risks, that it has been in place for the year ended 31 March 2002 and up to the date of approval of the annual report and accounts, that it is regularly reviewed by the board and accords with the internal control guidance for directors on the Combined Code. The manager is responsible for the design, implementation and maintenance of controls and procedures to safeguard the assets of the company and to manage its affairs properly. The system extends to operational and compliance controls and risk management. Clear lines of accountability have been established between the board and the manager and regular reports on controls and compliance issues are provided to the board. In carrying out its review, the board has had regard to the activities of the manager, the manager's compliance and risk function and the external auditors. The audit and management engagement committee, of which Sir Gavin Laird is chairman, meets at least four times a year and considers reports from the internal and external auditors, as well as from the manager. The audit and management engagement committee keeps the scope and effectiveness of the external audit under review. The independence and objectivity of the external auditors are also considered on a regular basis, with particular regard to the level of non audit fees. Shareholders have the opportunity at each annual general meeting to vote on the election of the external auditors for the forthcoming year. Going concern The directors believe that the company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Substantial share interests At 21 May 2002 the substantial interests in the ordinary share capital which had been notified to the company are shown in Table 2 opposite. Corporate Governance and Socially Responsible Investment Policy The company s manager actively encourages investee companies to adhere to best practice in the area of Corporate Governance and Socially Responsible Investing. The manager believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in both areas. The manager s ultimate objective however is to deliver superior investment return for its clients. Accordingly, whilst it will seek to favour companies which pursue best practice in these areas this must not be to the detriment of the return on the investment portfolio. PAGE 18 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

21 Directors Report In order to monitor company policies effectively the manager subscribes to the Proxy Voting and Environmental Screening service offered by Manifest, an organisation which provides specialist research information on both areas. Commission The manager has arrangements in place whereby a number of stockbrokers pay for specific investment services used by the manager in return for business placed with such stockbrokers. The level of commission paid by the company in respect of such business was monitored by the board and for the year to 31 December 2001 it was 264,000. Payment of such commission by the company ceased on 31 March Payments Policy The company s payment policy is to ensure settlement of suppliers invoices in accordance with the stated terms. In certain circumstances, settlement terms are agreed prior to business taking place. Holder No of ordinary shares % The Standard Life Assurance Company 21,507, Scottish Widows Investment Partnership Ltd 18,606, Prudential plc 8,681, Table 2 Substantial share interests This authority, if conferred, will be exercised only if to do so would enhance the net asset value per share and is in the best interests of shareholders generally. By order of the board, Edinburgh Fund Managers plc Secretary Edinburgh, 21 May 2002 Auditors Resolutions will be proposed at the annual general meeting for the re-appointment of KPMG Audit Plc as auditors of the company and to authorise the directors to fix their remuneration. Annual General Meeting Special business At the annual general meeting of the company to be held on 3 July 2002, special resolution 8 will be proposed to renew the company s authority to make market purchases of its own shares. The maximum number of ordinary shares which may be purchased pursuant to the authority shall be 14.99% of the issued share capital of the company as at the date of the passing of the resolution. The minimum price which may be paid for an ordinary share shall be 25p. The maximum price for an ordinary share (exclusive of expenses) shall be an amount equal to 105% of the average of the middle market quotations for the company s ordinary shares for the five business days immediately preceding the date of purchase. PAGE 19 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

22 Statement of Directors Responsibilities Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the revenue of the company 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; state whether applicable accounting standards 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 company will continue in business. The directors confirm that they comply with all the above requirements. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and to detect fraud and other irregularities. PAGE 20 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

23 Independent Auditor s Report To the members of The Edinburgh Investment Trust plc We have audited the financial statements on pages 22 to 33. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 20, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and by our profession s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act We also report to you if, in our opinion, the directors report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors remuneration and transactions with the company is not disclosed. We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall presentation of information in the financial statements. We review whether the statement on pages 17 and 18 reflects the company s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority and we report if it does not. We are not required to consider whether the board s statements on internal controls cover all risks and controls, or to form an opinion on the effectiveness of the company s corporate governance procedures or its risk and control procedures. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company as at 31 March 2002 and of the return for the year then ended and have been properly prepared in accordance with the Companies Act KPMG Audit Plc Chartered Accountants Registered Auditor Edinburgh, 21 May 2002 PAGE 21 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

24 Statement of Total Return for the year ended 31 March Revenue Capital Total Revenue Capital Total Notes Realised (losses)/gains on investments 16 (30,040) (30,040) 183, ,567 Decrease in unrealised appreciation 17 (96,227) (96,227) (373,754) (373,754) TOTAL CAPITAL LOSSES ON INVESTMENTS (126,267) (126,267) (190,187) (190,187) Currency (losses)/gains 16 (2) (2) Income from investments 2 36,324 36,324 38,454 38,454 Interest receivable on short term deposits 3,457 3,457 1,889 1,889 Underwriting commission Investment management fee 3 (1,531) (3,573) (5,104) (1,874) (4,372) (6,246) Administrative expenses 4 (1,260) (1,260) (1,707) (1,707) NET RETURN BEFORE FINANCE COSTS AND TAXATION 36,994 (129,842) (92,848) 36,815 (193,693) (156,878) Interest payable and similar charges 5 (5,850) (13,651) (19,501) (5,850) (13,651) (19,501) RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION 31,144 (143,493) (112,349) 30,965 (207,344) (176,379) Taxation 6 (1) (1) (1) (1) RETURN ATTRIBUTABLE TO EQUITY SHAREHOLDERS 31,143 (143,493) (112,350) 30,964 (207,344) (176,380) Dividends in respect of equity shares 7 (31,230) (31,230) (31,177) (31,177) Transfer from reserves (87) (143,493) (143,580) (213) (207,344) (207,557) RETURN PER ORDINARY SHARE p (57.59p) (45.09p) 12.07p (80.81p) (68.74p) TOTAL DIVIDEND PER ORDINARY SHARE 12.75p 12.45p The revenue column of this statement represents the revenue account of the company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. PAGE 22 The Edinburgh Investment Trust plc Annual Report and Accounts 2002

25 Balance Sheet at 31 March Notes FIXED ASSETS Investments 9 1,329,615 1,530,594 CURRENT ASSETS Debtors 10 12,878 13,087 AAA Money Market Funds 73,000 UK Treasury Bills 24,831 54,605 Cash and short term deposits 2,797 5, ,506 72,830 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 11 46,693 35,542 NET CURRENT ASSETS 66,813 37,288 TOTAL ASSETS LESS CURRENT LIABILITIES 1,396,428 1,567,882 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR , ,599 1,201,578 1,373,283 CAPITAL AND RESERVES Called up share capital equity 13 61,705 63,215 Share premium 14 6,639 6,639 Capital redemption reserve 15 11,750 10,240 Capital reserve realised , ,727 Capital reserve unrealised , ,201 Revenue reserve 18 41,174 41,261 TOTAL EQUITY SHAREHOLDERS FUNDS 1,201,578 1,373,283 NET ASSET VALUE PER ORDINARY SHARE p p The financial statements on pages 22 to 33 were approved by the board on 21 May 2002 and were signed on its behalf by: THE EARL OF EGLINTON AND WINTON, Director PAGE 23 The Edinburgh Investment Trust plc Annual Report and Accounts 2002