Stewardship Investment Funds ICVC Annual Report and Audited Financial

Stewardship Investment Funds ICVC Annual Report and Audited Financial Statements For the year ended: 31.05.2008 Stewardship Investment Funds ICVC Contents Company Information* Statement of Authorised Corporate Director’s Responsibilities Depositary’s Report Certification of Accounts by Directors of the Authorised Corporate Director* Independent Auditors’ Report Stewardship Principles 4 5 5 6 7 9 Financial Statements of Stewardship Investment Funds ICVC Aggregated Statement of Total Return Aggregated Statement of Change in Shareholders' Net Assets Aggregated Balance Sheet Aggregated Notes to the Financial Statements 12 12 13 14 Reports and Financial Statements of each Fund Stewardship Growth Fund Stewardship Income Fund Stewardship International Fund 24 43 68 *The Authorised Corporate Director’s Report comprises those items denoted above along with the Investment Objective and Policy, Market Review, Fund Activity, Market Outlook and Performance Summary of each sub-fund. Page 1 F&C Stewardship Investment Funds ICVC Company information Stewardship Investment Funds ICVC Exchange House Primrose Street London EC2A 2NY Authorised Corporate Director F&C Fund Management Limited Exchange House Primrose Street London EC2A 2NY Telephone: (0207) 506 1100 Facsimile: (0207) 600 4180 Regulated by the Financial Services Authority Investment Advisor F&C Managers Limited Exchange House Primrose Street London EC2A 2NY Depositary JPMorgan Trustee & Depositary Company Limited Chaseside Bournemouth Dorset BH7 7DA Administrator and Registrar International Financial Data Services (UK) Limited IFDS House St Nicholas Lane Basildon Essex SS15 5FS Fund Accounting and Unit Pricing J.P.Morgan Europe plc 3 Lochside View Edinburgh Park Edinburgh EH12 9DH Auditor PricewaterhouseCoopers LLP Erskine House 68-73 Queen Street Edinburgh EH2 4NH Page 2 F&C Stewardship Investment Funds ICVC Legal Advisers Eversheds LLP Senator House 85 Queen Victoria Street London EC4V 4JL Page 3 F&C Stewardship Investment Funds ICVC Company Information F&C Fund Management Limited, the Authorised Corporate Director (ACD) of the Open-Ended Investment Company (OEIC), is the sole director. The ACD has appointed F&C Managers Limited as the Investment Advisor to the individual funds of the OEIC. Stewardship Investment Funds ICVC is an investment company with variable capital under the Open-Ended Investment Company Regulations 2001 (SI2001/1228). The Company is an umbrella company with 3 individual funds and each of the funds is a UCITs scheme. Financial Statements These financial statements are for the year from 1 June 2007 to 31 May 2008. Shareholders Shares of the Company have no par value and the share capital of the Company will at all times equal the sum of the net asset value of each of the funds. Shareholders are not liable for the debts of the Company. The assets of each fund are treated as separate from those of every other fund and are invested in accordance with the investment objectives and policy of that fund. However, a fund is not a legal entity and consequently if the assets attributable to any fund were insufficient to meet the liabilities attributable to it, the shortfall might have to be met out of the assets attributable to one or more other funds of the Company. Instrument of Incorporation and Prospectus The Company was incorporated and authorised by the Financial Services Authority on 8 August 2001 under registered number IC118. At 31 May 2008, it has the following sub-funds: Stewardship Growth Fund Stewardship Income Fund Stewardship International Fund Additional sub-funds may be added at the ACD’s discretion. The investment objectives, investment policies and investment activity reports are included in the financial statements of the individual sub-funds. Copies of the current prospectus and the latest annual report and any subsequent reports are available from the Administrator. Other Information The Stewardship Growth Fund, Stewardship Income Fund and Stewardship International Fund offer both Accumulation and Income shares. Page 4 F&C Stewardship Investment Funds ICVC Statement of Authorised Corporate Director’s responsibilities in relation to the Regulations of the Company The Open-Ended Investment Companies Regulations 2001 and the Collective Investment Schemes sourcebook, (“the regulations”) as issued and amended by the Financial Services Authority require the ACD to prepare financial statements for each annual accounting period which give a true and fair view of the financial affairs of the Company and of its net income/expenditure and the net gains/losses on the property of the Company for the period. In preparing the financial statements the ACD is required to: • • • • • • • select suitable accounting policies and then apply them consistently; comply with the disclosure requirements of the Statement of Recommended Practice for Financial Statements of Authorised Funds issued in December 2005; follow generally accepted accounting principles and applicable United Kingdom accounting standards; keep proper accounting records, which enable it to demonstrate that the financial statements as prepared comply with the above requirements; take reasonable steps for the prevention and detection of fraud and non-compliance with laws or regulations; make judgements and estimates that are prudent and reasonable; and prepare financial statements on a going concern basis unless it is inappropriate to presume that the Scheme will continue in operation. The ACD is responsible for the management of the Company in accordance with its Prospectus and the Regulations. Report of the Depositary to the Shareholders of the Stewardship Investment Funds ICVC The depositary is responsible for the safekeeping of all of the property of the Company (other than tangible moveable property) which is entrusted to it and for the collection of income that arises from that property. It is the duty of the depositary to take reasonable care to ensure that the Company is managed by the authorised fund manager in accordance with the Financial Services Authority’s Collective Investment Schemes sourcebook (“the COLL sourcebook”), the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) (“the OEIC Regulations”) and the Company’s Instrument of Incorporation and Prospectus, as appropriate, in relation to the pricing of, and dealings in, shares in the Company; the application of income of the Company; and the investment and borrowing powers of the Company. Having carried out such procedures as we consider necessary to discharge our responsibilities as depositary of the company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the authorised fund manager: (i). has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company’s shares and the application of the Company’s income in accordance with the COLL sourcebook and, where applicable, the OEIC Regulations and the Company’s Instrument of Incorporation and Prospectus; and has observed the investment and borrowing powers and restrictions applicable to the Company. (ii). JPMorgan Trustee and Depositary Company Limited Bournemouth 31 July 2008 Page 5 F&C Stewardship Investment Funds ICVC Certification of Accounts by Directors of the Authorised Corporate Director This report contains the information required by the Statement of Recommended Practice (SORP) for Financial Statements of Authorised Funds issued in December 2005 in the case of annual accounts and was approved for publication on 29 August 2008. N Criticos MANAGING DIRECTOR On behalf of F&C Fund Management Limited Authorised Corporate Director 29 August 2008 Page 6 F&C Stewardship Investment Funds ICVC Independent Auditors’ report to the shareholders of Stewardship Investment Funds ICVC We have audited the financial statements of Stewardship Investment Funds ICVC (“the Company”) for the year ended 31 May 2008 which comprise the aggregated statement of total return, the aggregated statement of change in shareholders’ net assets, the aggregated balance sheet and related notes and for each of the Company’s sub-funds, the statement of total return, the statement of change in shareholders’ net assets, the portfolio statement, the balance sheet, the related notes, the summary of material portfolio changes and the distribution tables. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of Authorised Corporate Director and Auditors The Authorised Corporate Director's responsibilities for preparing the annual report and financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of Authorised Corporate Director's responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland) and the requirements of the Collective Investment Schemes sourcebook. This report, including the opinion has been prepared for and only for the Company’s shareholders as a body in accordance with paragraph 4.5.12 of the Collective Investment Schemes sourcebook as required by paragraph 67(2) of the Open-Ended Investment Companies Regulations 2001 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. 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 Statement of Recommended Practice for Authorised Funds issued by the IMA in December 2005, the Collective Investment Schemes sourcebook and the Instrument of Incorporation. We also report to you whether, in our opinion, proper accounting records for the Company have not been kept or whether the financial statements are not in agreement with those records, and whether information given in the Authorised Corporate Director’s Report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purpose of our audit. We read the other information contained in the annual report and consider whether it is consistent with the audited financial statements. This other information comprises only the Authorised Corporate Director’s Report and the other items set out on the contents page. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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 Authorised Corporate Director 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 adequacy of the presentation of information in the financial statements. Page 7 F&C Stewardship Investment Funds ICVC Opinion In our opinion the financial statements: • • give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the financial position of the Company and each of the sub-funds at 31 May 2008 and of the net income and net gains/(losses) of the property of the Company and the sub-funds for the period then ended; and have been properly prepared in accordance with the Statement of Recommended Practice for Authorised Funds issued by the IMA in December 2005, the Collective Investment Schemes sourcebook and the Instrument of Incorporation. We have obtained all the information and explanations we consider necessary for the purposes of the audit. In our opinion the information given in the Authorised Corporate Director’s Report is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Edinburgh 29 August 2008 The financial statements are published on the www.fandc.com website, which is a website maintained by F&C Fund Management Limited (“F&C”). The maintenance and integrity of the website maintained by F&C or any of its subsidiaries is, so far as it relates to the Company, the responsibility of F&C. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and accordingly, the auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction. Page 8 F&C Stewardship Investment Funds ICVC Stewardship Principles Introduction Stewardship is the name of a range of socially responsible investment funds provided by Friends Provident. These funds are invested in company shares and bonds to provide capital growth and income for customers. Published policy is outlined in the Friends Provident Stewardship Technical Guide, which states positive and negative criteria but without these specificities. Philosophy Many people believe that investors should have some moral responsibility for the investments they make. Stewardship is committed to this principle and offers people a way to invest in the stockmarket while expressing this sense of responsibility. Stewardship does this by applying ethical and environmental principles to the selection of investments, and by using its influence as a shareholder to encourage more socially responsible and environmentally sustainable behaviour by companies. Investment in companies raises both ethical opportunities and ethical difficulties for investors. Opportunities, because companies can make a very positive contribution to society by creating jobs and wealth and by providing many of the products and services on which a sustainable society depends. By becoming shareholders, investors have the opportunity to support the positive contribution some companies make. However, companies can also give rise to many social and environmental problems by, for example, making harmful products, acting irresponsibly with regard to customers, employees and the communities in which they operate, and by polluting the environment. Investors in such companies inevitably feel some responsibility for the harm that they do. Companies do not, however, fit neatly into one category or the other. They commonly have a satisfactory approach to some aspects of their activities and weaknesses in others. Where the failings are not so serious as to disqualify a company outright for inclusion in the portfolio, Stewardship will take a balanced view across all its activities. An investment is more likely to be made in cases where there is clear scope for a shareholding to give opportunities to influence it for the better. Stewardship is committed to taking a more socially responsible approach to investment by making the most of these opportunities and reducing its contribution to the problems through: • Investing in companies whose products, services and operations make positive contribution to society, and those which demonstrate a responsible attitude in all aspects of their business, notably including their customers, employees, the communities in which they operate and the environment. Avoiding investment in companies that do particular harm, including those involved in the supply or production of armaments; or which operate irresponsibly, particularly with regard to the environment, human rights or animal welfare issues; or which are involved in the production of alcohol, tobacco or pornography; or in gambling. Using its influence as an investor to encourage companies in their efforts to improve their management of environmental and social responsibility issues. • • We recognise that Stewardship's core aim of investing only in those companies which, in what they do and they way they do it, on balance make a positive contribution to society cannot be fully captured in the policies described here. Accordingly, we may on rare occasions exclude companies which we judge conflict with that aim even when they do not fall foul of any of the negative criteria set out in this document. We may also on rare occasions where a company is considered, on balance, to make a positive contribution to society, include a company that breaches a negative investment selection criterion in a minor, inconsequential or non-material way. Page 9 F&C Stewardship Investment Funds ICVC Summary of all Stewardship Criteria Positive criteria • • • • • • • • • • • Supplying the basic necessities of life eg healthy food, housing, clothing, water, energy, communication, healthcare, public transport, safety, personal finance, education Offering product choices for ethical and sustainable lifestyles eg. fair trade, organic Improving quality of life through the responsible use of new technologies Good environmental management Actively addressing climate change e.g. renewable energy, energy efficiency Promotion and protection of human rights Good employment practices Positive impact on local communities Good relations with customers and suppliers Effective anti-corruption controls Transparent communication Negative criteria • • • • • • • • • • Tobacco production Alcohol production Gambling Pornography or violent material Manufacture and sale of weapons Unnecessary exploitation of animals Nuclear power generation Poor environmental practices Human rights abuses Poor relations with employees, customers or suppliers Stewardship Policies While recognising that many issues overlap, for practical purposes Stewardship Criteria are separated into: • • • Ethical Environmental Social Page 10 F&C Stewardship Investment Funds ICVC Committee of Reference Members at 31 May 2008 Tony Stoller, Chair (as of January 2007) Tony has enjoyed a varied career in newspapers, broadcasting, retailing and regulation. He has run both a radio station and a department store, the latter as a Principal Director of the John Lewis Partnership. He was Chief Executive of The Radio Authority for eight years until it was merged into the new Office of Communications, and then helped to set up the new regulator as its External Relations Director until his retirement at the end of 2005. He is a Trustee of the Joseph Rowntree Foundation and the Joseph Rowntree Housing Trust and a Governor and Director of Leighton Park School. Tony is a Quaker and was the 2001 Swarthmore Lecturer. His book Wrestling with the Angel examines the ethical position of the individual in commerce and public life. He has degrees in modern history and public law, and was awarded the CBE in 2003 for services to broadcasting. Brian Sweetland Brian, a Solicitor, is the Company Secretary of Cancer Research UK, a Trustee of the Friends Provident Charitable Foundation and a director of F&C Commercial Property Trust Limited. Until his retirement in 2005, he was director of a number of companies including Friends Provident plc and F&C Asset Management plc. He was the Secretary of the Friends Provident Group of Companies for over 20 years until end-2004 and drafted the original Stewardship Unit Trust prospectus in 1984. Jiggy Lloyd Jiggy was appointed to the Committee in 2006. She is an independent consultant in public policy, corporate strategy and sustainable development. Between 1993 and 2005 she held a series of senior posts covering environmental policy and corporate social responsibility with Generale des Eaux (1993-2000), Severn Trent Plc (2000-2003) and AWG Plc (2003-2005). Her earlier career included work with the mining industry and in local government. She is a Trustee of Transport 2000 Trust, a Vice-President of the Town and Country Planning Association and an Associate of Green Alliance. Her academic background is in ecology and planning; she is a Nuffield Scholar. Michael Banner Michael has been Fellow and Dean of Chapel of Trinity College, Cambridge, since September 2006. He was previously Professor of Public Policy in the Life Sciences in the Medical School, Edinburgh University, and before that F.D. Maurice Professor of Moral and Social Theology at King's College, London. As an undergraduate in Oxford he studied Jurisprudence and Philosophy and Theology at Balliol College. His books include Christian Ethics and Contemporary Moral Problems (CUP, 1999). Amongst various committee memberships, he served as a member of the Royal Commission on Environmental Pollution, chaired the Home Office’s Animal Procedures Committee for eight years, and is currently a member of the Human Tissue Authority. He also chairs Shell’s advisory panel on the use of animals. Baroness Janet Whitaker Janet is Vice-Chair of the Parliamentary Labour Party Civil Rights and International Development Committees and vice-chair of the All Party Group on Ethiopia. She is a member of Transparency International (UK)'s Advisory Council and of the Council of the Overseas Development Institute. Baroness Whitaker is also council member of SOS Sahel, vice-president of One World Trust, a patron of the Runnymede Trust and a member of Population Concern. She is currently the Labour Party International Development Liaison Peer. Nick Boakes Nick is Director of Friends Provident’s group communications which includes corporate responsibility and community activities. He trained as an accountant and subsequently directed and managed two corporate and financial public relations consultancies based in London, where he advised a broad range of international and national client companies on issues affecting their reputation. Justin Welby Justin was appointed to the Board in 2007. He is Sub Dean & Canon for Reconciliation Ministry at Coventry Cathedral, working on inter faith relations, reconciliation and conflict resolution in the UK, Africa and the Middle East. He has been ordained in the Church of England since 1992, before which he worked at a senior level in the oil industry in France and the UK. He is Personal and Ethical Adviser at the UK Association of Corporate Treasurers. He has also chaired an NHS general hospital trust, and two school boards. He lectures on ethics and finance in the UK and Switzerland, and is on the Board of the International Association for Catholic Social Teaching. Page 11 F&C Stewardship Investment Funds ICVC Aggregated Statement of Total Return for the year ended 31 May 2008 Notes Net (losses)/gains on investments during the year Other gains Income Expenses Finance costs: Interest Net income before taxation Taxation Net income after taxation for the year Total return before distributions for the year Finance costs: Distributions Change in net assets attributable to shareholders 7 6 2 3 4 5 7 47,217 (10,559) (63) 36,595 (660) 35,935 (286,581) (40,273) (326,854) 31/05/2008 £'000 (322,900) 384 34,993 (9,955) (6) 25,032 (271) 24,761 346,145 (28,507) 317,638 31/05/2007 £'000 321,344 40 Aggregated Statement of Change in Shareholders' Net Assets for the year ended 31 May 2008 31/05/2008 £'000 Net assets at the start of the year Movement due to sales and repurchase of shares Amounts receivable on issue of shares Amounts payable on cancellation of shares 1,583,414 31/05/2007 £'000 1,144,594 288,873 (202,760) 86,113 206,190 (93,061) 113,129 (377) 317,638 Stamp duty reserve tax Change in net assets attributable to shareholders (see above) Retained distribution on accumulation shares Unclaimed distributions Net assets at the end of the year Notes to the financial statements are on pages 14 to 23. Page 12 (727) (326,854) 12,328 8 1,354,282 8,419 11 1,583,414 F&C Stewardship Investment Funds ICVC Aggregated Balance Sheet as at 31 May 2008 Notes ASSETS Portfolio of investments Debtors Cash and bank balances Total other assets 9 12,549 106,856 119,405 1,271,343 16,779 67,954 84,733 1,528,443 31/05/2008 £'000 31/05/2007 £'000 Total assets LIABILITIES Creditors Bank overdrafts Distribution payable on income shares Total liabilities 10 (4,640) (16,500) (15,326) 1,390,748 1,613,176 (6,798) (13,029) (9,935) (36,466) (29,762) Net assets attributable to shareholders 1,354,282 1,583,414 Notes to the financial statements are on pages 14 to 23. . Page 13 F&C Stewardship Investment Funds ICVC Aggregated Notes to the Financial Statements 1. ACCOUNTING POLICIES a) Basis of accounting The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice (SORP) for Authorised Funds issued by the Investment Management Association in December 2005. From 1 June 2007, the method of recognising income on interest bearing securities has changed from a coupon basis to an effective interest rate basis as required by the SORP. In accordance with the provisions in the SORP, the prior year comparative information has not been restated to reflect this change. The income for the prior year is shown on a coupon basis, in line with the previous accounting policy. If comparative information had been restated the main adjustments required would be to either increase or decrease income on debt securities, with a corresponding decrease or increase in the net gains/losses on investments. There would be no overall net impact on the total return before distributions or on the net assets of the Fund. b) Aggregation The aggregate accounts represent the sum of the individual funds within the Company. Further analysis of the distribution and net asset position can be found within the financial statements of the individual funds. c) Recognition of income Dividends on equities are recognised when the security is quoted ex-dividend. Income from unquoted equity investments is recognised when the dividend is declared. Dividends received include any withholding taxes but exclude attributable tax credits. Other income, including interest on bank balances is accounted for on an accruals basis. Interest earned on interest-bearing securities is determined on an effective yield basis. Effective yield is an income calculation that reflects the amount of amortisation of any discount or premium on the purchase price over the remaining life of the security. d) Treatment of stock dividends The ordinary element of stock dividends is treated as income and does form part of the distribution. Any enhancement above the cash dividend is treated as capital gains on investments. e) Treatment of special dividends Special dividends may be treated as repayments of capital or as income dependent on the facts of the particular case. f) Basis of valuation of investments The investments have been valued on a bid basis at the close of business on 31 May 2008, excluding any accrued interest in the case of fixed and floating rate securities. Investments in F&C Managed funds have been valued at the single price as at close of business on 31 May 2008 in accordance with the IMA SORP (2005). Suspended securities of companies currently in administration or receivership have been valued at nil market value. All other suspended or unlisted securities have been valued at their suspended price or such other price as may be deemed appropriate by the Authorised Corporate Director. Unapproved investments are valued based on the Authorised Corporate Directors opinion of fair value, the intention of which is to estimate market value. g) Stock lending income Income from stock lending is accounted for net of bank and agent fees and is recognised on an accruals basis. h) Current taxation The charge for taxation is based on taxable income for the period less allowable expenses. UK dividend income is disclosed net of any related tax credit. Overseas dividends are disclosed gross of any tax suffered. Page 14 F&C Stewardship Investment Funds ICVC i) Deferred taxation Deferred tax is provided on all timing differences that have originated but not reversed by the balance sheet date other than those differences regarded as permanent. Any liability to deferred tax is provided at the average rate of tax expected to apply. Deferred tax assets and liabilities are not discounted to reflect the time value of money. Deferred tax assets are recognised only to the extent that it is more likely than not that there will be taxable profits from which underlying timing differences can be deducted. j) Distribution policy The income on distribution shares is distributed to shareholders annually on 31 May. The Stewardship Growth Fund and Stewardship International Fund also distribute on 30 November. The Stewardship Income Fund also distribute on 28 February, 31 August and 30 November. The income on accumulation shares is retained and reinvested and is reflected in the value of the shares. Equalisation received from collective investment scheme distributions has been treated as a reduction in the book cost of investments and not distributed. The effective yield method of accounting for income from fixed income securities may in some circumstances result in adjusting income in respect of changes in market value of the securities as a result of revised cash flow expectations. These adjustments are a requirement of FRS26 Application Guidance 8 (AG8). It is the policy of the Fund not to distribute such adjustments. k) Authorised corporate director’s charge The ACD’s periodic charge is charged to the income property of the Fund subject to the following exception. For the purposes of determining the distribution of Stewardship Income Fund the ACD’s periodic charge is borne by the capital property of that Fund. l) Other expenses Other expenses are recognised on an accruals basis and are charged to the income property of the Fund with the exception of the expenses, such as handling charges, which relate to the purchases and sales of investments which are charged to capital. m) Exchange rates Transactions in overseas currencies are translated to Sterling at the rates of exchange ruling on the day of any such transaction. Foreign currency balances are converted to Sterling at the exchange rates applicable at the end of the accounting period. n) Stamp duty reserve tax (SDRT) SDRT arising from the redemption of shares in the individual funds is borne by the capital property of the Fund, and is reflected in the Statement of Change in Shareholders’ Net Assets, on an accruals basis. o) Allocation of income and expenses to multiple share classes The allocation of income and expenses to each share class is based upon the proportion of the individual fund’s assets attributable to each share class on the day the income is earned or the expense is suffered. The Authorised Corporate Director’s periodic charge, Registrar’s fee, Accounting & Administration fees and the Report & Accounts printing costs are specific expenses to each share class. p) Derivative Contracts Where the Company invests in overseas bonds, a forward foreign exchange contract may be entered into to hedge the underlying investment against currency exchange rate movement, with any subsequent movement taken to capital. The Stewardship International Fund may also enter into forward foreign exchange contracts to hedge against exchange rate movements. In such cases, the difference between the spot and forward contract rate, when the contract is first acquired, is recognised as income within the Fund, over the duration of the contract. Derivative contracts are shown in the portfolio statement at market value. The exposure to the open position on these contracts is shown in the balance sheet as open derivatives commitment and the resulting profit or loss is reflected in the net gains/(losses) on investments. The margins paid on these contracts are included in the amounts held at derivative clearing houses and brokers. q) Underwriting commission Underwriting commission is accounted for when the issue underwritten takes place. Where the Company is required to take up all of the shares underwritten, the commission received is treated as a deduction from the cost of the shares taken up. Where the Company is required to take a proportion of the shares underwritten, the same proportion of the commission received is treated as a deduction from the cost of shares taken up and the balance is taken to income. Page 15 F&C Stewardship Investment Funds ICVC r) Dilution adjustments From 1 June 2007 the pricing basis of the company moved to swinging single price basis. Using this methodology the funds may apply a dilution adjustment, intended to cover certain dealing charges which could have a diluting effect on the performance of the funds. This adjustment, where applied is included within the dealing price available to shareholders and is not disclosed separately in the financial statements. Page 16 F&C Stewardship Investment Funds ICVC 2. NET (LOSSES)/GAINS ON INVESTMENTS The net (losses)/gains on investments during the year comprise: Non-derivative securities 3. OTHER GAINS Currency gains 4. INCOME UK dividends Overseas dividends Bank interest Interest on debt securities Stocklending commission* Interest distributions Property income distributions from UK REITs Unfranked component of dividend distributions Franked component of dividend distributions 384 40 (322,900) 321,344 31/05/2008 £'000 31/05/2007 £'000 37,386 3,874 2,760 1,293 985 394 373 126 26 47,217 29,311 2,100 2,279 1,156 147 34,993 The effective yield method of accounting for income from fixed securities may in some circumstances result in adjusting income in respect of changes in market value of the securities as a result of revised cash flow expectations. These adjustments are a requirement of FRS26 Application Guidance 8 (AG8). It would be inappropriate to distribute as income such movements in market values and income available for distribution has been adjusted accordingly. The net income figure in the statement of total return includes AG8 adjustments of £69,355. In accordance with the accounting policy on distributions, these adjustments have been excluded from ‘income property’ of the Fund available for distribution. The impact on the distribution amounts is demonstrated in the distribution note (note 8). *Stocklending commission is disclosed net of fees as explained in accounting policy 1(g). The gross stocklending commission received was £1,477,699, (31/05/2007: £222,060) with fees deducted of £492,368, (31/05/2007: £75,255). The total amount paid to F&C in relation to stocklending expenses was £422,285, (31/05/2007: £62,916). Page 17 F&C Stewardship Investment Funds ICVC 5. EXPENSES Payable to the Authorised Corporate Director, associates of the Authorised Corporate Director, and agents of either of them: Authorised Corporate Director's periodic charge Payable to the Depositary, associates of the Depositary and agents of either of them: Depositary's fee Safe custody fees Handling charges Administration costs 31/05/2008 £'000 31/05/2007 £'000 9,912 9,137 154 54 22 21 251 141 36 12 15 204 Other expenses: Registrar's fees Accounting & administration fees Audit fee Price publication costs Report & accounts printing costs Dividend charges VAT recovered* Total expenses (including VAT where appropriate) 515 70 22 16 3 3 (233) 396 10,559 539 25 21 20 8 1 614 9,955 * During the period, the sub-funds recovered VAT as a result of the European Court of Justice decision C-169 / 04 in May 2006. Page 18 F&C Stewardship Investment Funds ICVC 6. TAXATION a) Analysis of charge in the year Corporation tax Double taxation relief Overseas tax suffered Movement in overseas tax provision Eligible unrelieved foreign tax brought forward Total current tax (note 6b) Deferred tax (note 6c) Total taxation 31/05/2008 £'000 651 (320) 292 3 (69) 557 103 660 31/05/2007 £'000 379 (255) 279 (8) (124) 271 271 b) Factors affecting current tax charge for year The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an Open Ended Investment Company (OEIC) of 20%. The differences are explained below: Net income before taxation Corporation tax at 20% (2007: 20%) Effects of: Income not subject to taxation Income taxable in different periods Expenses not deductible for tax purposes Movement in excess expenses Movement in overseas tax provision Irrecoverable overseas tax Utilisation of eligible unrelieved foreign tax brought forward Taxable dividend taken to capital Current tax charge (note 6a) (7,482) (49) 4 859 3 (28) (69) 557 (5,863) (38) 2 1,176 (8) 24 (124) 96 271 36,595 7,319 25,032 5,006 Open Ended Investment Companies are exempt from tax on capital gains. Therefore, any capital return is not included in the above reconciliation. c) The makeup of the deferred tax liability and of the disclosure of any potential unrecognised deferred assets are included within the individual sub-fund accounts. d) Factors that may affect future tax charges At the period end, after offset against accrued income taxable on receipt, there is a potential deferred tax asset of £13,099,943 (31/05/2007: £12,280,977) made up of excess management expenses of £13,099,943 (31/05/2007: £12,241,205) and eligible unrelieved foreign tax available for double taxation relief of £nil (31/05/2007: £39,772). It is unlikely the Fund will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised in the year or the prior year. Page 19 F&C Stewardship Investment Funds ICVC 7. FINANCE COSTS 31/05/2008 £'000 31/05/2007 £'000 Distributions and interest The distributions take account of income received on the issue of shares and income deducted on the cancellation of shares and comprise: Interim dividend distributions Final dividend distributions Income deducted on cancellation of shares Income received on issue of shares Net distribution for the period 18,355 22,362 40,717 1,405 (1,849) 40,273 15,484 13,618 29,102 314 (909) 28,507 Details of the distribution per share are set out in the accounts for each individual fund. Interest Total finance costs 8. MOVEMENT BETWEEN NET INCOME AND DISTRIBUTIONS Net income after taxation ACD fees paid from capital Less: Tax relief thereon Handling charges paid from capital AG8 adjustment not distributable Recovery of taxable dividends taken to capital 35,935 4,494 (85) 22 (69) (24) 40,273 24,761 3,662 12 72 28,507 63 40,336 6 28,513 9. DEBTORS Amounts receivable for issue of shares Accrued income Sales awaiting settlement Overseas tax recoverable Income tax recoverable Prepaid expenses 6,444 5,807 126 98 69 5 12,549 9,730 5,065 1,967 15 2 16,779 10. CREDITORS Amounts payable for cancellation of shares Accrued Authorised Corporate Director’s periodic charge Purchases awaiting settlement Corporation tax payable Accrued expenses Deferred tax provision Overseas tax provision 2,877 799 465 236 112 103 48 4,640 2,584 901 3,183 128 2 6,798 Page 20 F&C Stewardship Investment Funds ICVC 11. PORTFOLIO TRANSACTION COSTS The numerical disclosures for Portfolio transaction costs are shown within each individual sub-fund and can be found on the pages indicated below: Page Stewardship Growth Fund 36 Stewardship Income Fund 58 Stewardship International Fund 82 12. RELATED PARTY DISCLOSURES F&C Fund Management Limited, as Authorised Corporate Director (ACD), is a related party, and acts as principal in respect of all transactions of shares in the Company. The aggregate monies received through issue, and paid on cancellation are disclosed in the Statement of Change in Shareholders' Net Assets. Any amounts due to, or from, F&C Fund Management Limited at the end of the accounting period are disclosed in notes 10 and 9. Amounts payable to F&C Fund Management Limited in respect of fund administration are disclosed in note 5 and amounts due at the period end in note 10. Amounts payable to F&C Fund Management Limited in respect of stocklending fees are disclosed in note 4. The ACD is also the ACD or Manager for other authorised funds and those funds may invest in each other where this is within the investment objectives of the investing fund. Such transactions will be conducted on an arms length basis within the regulations and the terms of the prospectus. Investments considered to be related parties have been identified in the portfolio statement on the individual sub-funds and the income received from these investments is £403,427. As at 31 May 2008 the ACD and related companies held a position in the Fund of £700,425,969. 13. EQUALISATION The quoted price of shares includes the value of securities and the income accrued up to that time, in respect of those securities. When buyers purchase shares, the price they pay includes a sum not only to equate with the value of the securities comprised within that share, but also an amount to equate with the income included. All shareholders in the same share class receive the same pence per share distribution, but those with Group 2 shares have their distribution partially made up of a return of the sum equating to the income content in the purchase price of their shares. This sum represents the average amount of income included in all Group 2 shares. It is deemed to be a return of capital, and as such is not liable to income tax. It must, however, be deducted from the cost of shares for capital gains tax purposes. 14. FINANCIAL INSTRUMENT RISKS In pursuing the investment objectives of the individual funds the Company may hold a number of financial instruments which comprise: • • • • • Equity shares, equity related instruments, collective investment schemes, floating rate securities and fixed income securities which are held in accordance with the individual fund’s investment objectives and policies; Cash, liquid resources and short-term debtors and creditors that arise directly from its operations; Shareholders’ funds which represent investor’s monies, which are invested on their behalf; Shares/units in collective investment schemes which are either a money market scheme or a scheme of a category that is equivalent to a money market scheme; Short term borrowings used to finance investment activity; and Page 21 F&C Stewardship Investment Funds ICVC • Derivative transactions which the individual funds may also enter into, principally forward foreign currency contracts and options, the purpose of which is to manage the currency and market risks arising from the individual fund’s investment activities and related financing. It is, and has been throughout the period under review, the Company’s policy that no trading in financial instruments shall be undertaken to make short-term speculative gains. The main risks arising from the Company’s financial instruments are market price, foreign currency, liquidity, interest rate, credit, and default risks. The ACD reviews policies for managing each of these risks and these are summarised below. These policies have remained unchanged since the beginning of the period to which these financial statements relate. Market price risk Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The ACD monitors on a daily basis the asset allocation of the portfolio in order to minimise the risk associated with particular countries and industry sectors whilst continuing to follow the investment objective. An individual fund manager has responsibility for monitoring the existing portfolio selected in accordance with the overall asset allocation parameter and seeks to ensure that individual stocks also meet the risk reward profile that is acceptable. Foreign currency risk The income and capital value of the Company’s investments can be significantly affected by currency translation movements as some of the Company’s assets and income are denominated in currencies other than Sterling which is the Company’s functional currency. The ACD has identified three principal areas where foreign currency risk could impact the Company: • • • Movements in rates affect the value of investments; Movements in rates affect short term timing differences; and Movements in rates affect the income received. Currency exposure is monitored closely and is considered to be part of the overall investment process. Currency hedges via forward exchange contracts or futures will only be used in the event of a specific currency risk being identified. The Company may be subject to short-term exposure to exchange rate movements, for instance, where there is a difference between the date an investment purchase or sale is entered into and the date when settlement of the proceeds occurs. The ACD may elect to hedge against this risk. The Company receives income in currencies other than Sterling and the Sterling values of this income can be affected by movements in exchange rates. The ACD may elect to hedge against this risk. Liquidity risk The Company’s assets comprise mainly readily realisable securities. redemption of any shares that investors wish to sell. Interest rate risk The individual funds, invest predominately in equity shares and investments which neither pay interest nor have a maturity date. The individual funds may also invest in fixed rate securities. Any change to the interest rates relevant for particular securities may result in either income increasing or decreasing or the ACD being unable to secure similar returns on the expiry of contracts or the sale of securities. In addition, changes to prevailing rates or changes in expectations of future rates may result in an increase or decrease in the value of the securities held. In general, if interest rates rise, the income potential of the individual fund also rises, but the value of fixed rate securities will decline. A decline in interest rates will generally have the opposite effect. Page 22 The main liability of the Company is the F&C Stewardship Investment Funds ICVC Credit risk Stewardship Growth Fund and Stewardship Income Fund invest in bonds issued by a number of companies. If any individual company fails to perform well, the credit rating of the company may well fall and the bonds would fall in price. All investments are monitored internally and externally by a number of different agencies and assigned ratings, which often change over time. The Company closely monitors the ratings of the bonds within the portfolio. Default risk Stewardship Growth Fund and Stewardship Income Fund invest in bonds that are at risk of default at any time. Bond defaults may be characterised by any missed or delayed payment of interest or principal, bankruptcy or breach of certain financial covenants that may render them financially distressed. This risk is minimised by regularly monitoring the bonds internally and externally through the ratings agencies. Other risks Certain transactions in securities that the Company enters into expose it to the risk that the counter-party will not deliver the investment (purchase) or cash (sale) after the Company has fulfilled its responsibilities. The Company mainly deals, however, on a “delivery versus payment” basis which reduces counter-party risk. The Company only buys and sells investments through brokers which have been approved by the ACD as an acceptable counter-party. In addition, limits are set as to the maximum exposure to any individual broker that may exist at any time; these limits are reviewed quarterly. The numerical disclosures required by FRS13 are shown within each individual sub-fund and can be found on the pages indicated below. Page Stewardship Growth Fund 38 Stewardship Income Fund 60 Stewardship International Fund 84 Page 23 Stewardship Growth Fund Authorised Corporate Director’s Investment Report for the year ended 31 May 2008 Fund Objective The Fund provides an investment medium for people who do not regard financial gain as the sole criterion for investment but look to wider issues. Investment is concentrated in UK companies whose products and operations are considered to be of long-term benefit to the community both at home and abroad, with the aim of achieving long-term capital growth and increasing income, with the emphasis on capital growth. Fund manager Fund size Launch date Initial launch date Ted Scott £718.8 million 22 August 2002 1 June 1984 Market Review The latter half of 2007 and first half of 2008 have proved to be a challenging time for the market and the Fund. Concerns over the impact of the credit crisis on the UK housing market and consumer confidence continue to mount and contributed to a deteriorating outlook for the UK economy. Inflation has also become a headline issue driven by the growing cost of oil and basic food stuffs. The effects of the credit crisis have been significant in the UK and have made it more difficult to avoid a recession. Most notably it has meant the Bank of England’s monetary policy of cutting interest rates has been rendered largely impotent because the banks have not passed these cuts onto mortgage payers. Despite a 14% rally between mid March and mid May 2008, the UK market has fallen some 7.12% over the 12 months under review. We believe that the fall in the market is pricing in a slowdown but not a recession. Within the market, equities have become increasingly polarised with the strong sectors concentrated in the commodities areas and domestic and financial sectors being especially weak. Activity Strategy remained focused on providing investors with long-term capital growth through a portfolio investing predominantly in UK shares. The performance of the market has been concentrated in the resources area. The fund has limited exposure to this area for ethical reasons with nothing in the mining sector. Where we are allowed to invest we have had large weightings and BG has been our largest holding in the Fund. The Fund also benefited from large holdings in Cairn Energy and Expro International Group. Both are specialists in oil support services and are in great demand as the price of oil continues to soar. The strong performance of other non-ethical sectors such as tobacco and aerospace has also been a negative factor although they are smaller. Our overall positioning remained broadly unchanged as we continued to favour ‘defensive’ investments – a bias resulting from our cautious near-term outlook for UK shares. Outlook A UK recession is increasingly possible towards the end of 2008 and in to 2009 as the sharp downturn demonstrated within the property market filters down into the rest of the economy. High inflation, caused by rising fuel and food costs, is already affecting the consumer. We believe a recession has not yet been discounted within the UK equity market, which continues to suffer in the wake of rising inflation. Further cuts to interest rates are unlikely in the shortterm as the Monetary Policy Committee is tasked with an annual inflation target of 2% despite the pressure on the consumer and falling house prices. Our outlook remains cautious and the Fund is likely to retain a defensive bias as we look to further increase exposure to companies demonstrating greater resilience against a more challenging backdrop. Performance Summary The F&C Stewardship Growth Fund returned -21.76% in the 12 months to the 31st May 2008 whilst the benchmark (FTSE All-Share) index returned -7.12%. All figures are on a total return basis. The Fund’s inherent bias to small cap stocks has been a hindrance to performance as these companies have underperformed their large cap contemporaries in the current market conditions. All figures are on a total return basis. F&C Fund Management Limited 30 June 2008 Page 24 Stewardship Growth Fund Comparative Table Net Asset Value Record Date Share Class Total Net Asset Value (£) 46,822,426 238,999,626 37,227,607 414,369,454 61,072,646 298,867,813 33,432,853 546,480,478 47,870,363 226,160,117 18,559,438 426,202,052 Shares in Issue Total Net Asset Value per Share (p) 677.0 710.7 156.6 678.3 874.4 927.6 205.7 877.0 671.0 725.0 162.0 672.5 31 May 2006 31 May 2007 31 May 2008 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 6,916,593 33,627,742 23,771,555 61,086,471 6,984,585 32,220,607 16,251,002 62,309,057 7,134,453 31,194,817 11,453,218 63,374,870 All share classes were issued at launch except for Share Class 2 - Accumulation which was launched on 14 August 2003. Share Class 4 - Accumulation closed on 12 August 2003. Page 25 Stewardship Growth Fund Performance Record Calendar Year Share Class Highest Share Price (p) 481.9 489.2 105.6 480.4 463.3 574.5 592.7 129.1 576.2 660.7 690.4 151.7 662.9 817.5 863.4 190.9 820.6 883.2 934.0 207.2 891.6 764.4 815.9 181.7 767.3 Lowest Share Price (p) 349.7 351.4 100.0 351.1 354.1 479.1 489.3 105.6 480.5 574.0 592.2 129.0 575.9 650.4 683.5 150.5 653.3 731.2 778.3 173.3 733.5 657.9 702.2 156.7 662.5 Distribution per Share (p) 7.0134 7.0757 0.4009 13.1061 6.8151 6.8548 5.9535 2.1750 14.3289 8.4933 7.9976 2.8355 17.4572 8.5799 8.1934 3.1410 18.8644 8.8215 8.8560 3.3511 20.6649 8.5428 8.8818 2.6408 13.8577 2003 2004 2005 2006 2007 2008*** 1 – Income 1 – Accumulation 2 – Accumulation* 4 – Income 4 – Accumulation** 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income * From 14 August 2003. **To 12 August 2003. *** To 31 May 2008. Past performance is not necessarily a guide to future performance. The price of shares, and the income from them may go down as well as up. Total Expense Ratios Date 31 May 2007 Share Class 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income Total Expense Ratio (%) 1.45 1.51 0.77 0.01 1.47 1.54 0.77 0.01 31 May 2008 Page 26 Stewardship Growth Fund Statement of Total Return for the year ended 31 May 2008 Notes Net (losses)/gains on investments during the year Other gains Income Expenses Finance costs: Interest Net income before taxation Taxation Net income after taxation for the year Total return before distributions for the year Finance costs: Distributions 6 5 1 2 3 4 6 26,527 (4,867) (3) 21,657 21,657 (201,603) (21,662) 31/05/2008 £'000 (223,265) 5 21,871 (5,144) (1) 16,726 16,726 230,712 (16,732) 31/05/2007 £'000 213,986 - Change in net assets attributable to shareholders (223,265) 213,980 Statement of Change in Shareholders' Net Assets for the year ended 31 May 2008 31/05/2008 £'000 Net assets at the start of the year Movement due to sales and repurchases of shares Amounts received on issue of shares Amounts paid on cancellation of shares 939,854 31/05/2007 £'000 737,419 134,406 (136,581) (2,175) 58,377 (73,195) (14,818) (250) 213,980 3,517 6 Stamp duty reserve tax Change in net assets attributable to shareholders (see above) Retained distribution on accumulation shares Unclaimed distributions (519) (223,265) 4,893 4 Net assets at the end of the year 718,792 939,854 Notes to the financial statements are on pages 34 to 39. Page 27 Stewardship Growth Fund Portfolio Statement as at 31 May 2008 Total Net Assets % Investment Oil & Gas - 11.67% (31/05/2007 - 5.56%) Oil & Gas Producers - 10.57% (4.49%) BG Cairn Energy Oil Equipment, Services & Distribution - 1.10% (1.07%) Expro International Lamprell Holding Market Value £’000 3,459,649 956,628 43,799 32,200 6.09 4.48 322,262 513,333 5,205 2,695 83,899 0.72 0.38 11.67 Basic Materials - 0.24% (31/05/2007 - 1.08%) Chemicals - 0.24% (1.08%) Porvair Industrials - 19.80% (31/05/2007 - 21.07%) Construction & Materials - 0.63% (0.55%) James Halstead Lupus Capital Aerospace & Defence - 0.32% (0.45%) Aero Inventory General Industrials - 1.04% (1.86%) Rexam Electronics & Electrical Equipment - 1.98% (1.20%) Chloride Renishaw Industrial Engineering - 2.37% (1.81%) Halma Rotork Spirax-Sarco Industrial Transportation - 2.12% (1.62%) Forth Ports Wincanton 1,734,912 1,735 0.24 626,740 1,904,377 3,359 1,124 0.47 0.16 426,315 2,340 0.32 1,686,973 7,478 1.04 4,287,268 317,439 11,919 2,397 1.65 0.33 1,879,000 756,883 397,521 3,941 8,583 4,544 0.55 1.19 0.63 496,389 1,656,398 10,335 4,915 1.44 0.68 Page 28 Stewardship Growth Fund Support Services - 11.34% (13.58%) Aggreko BPP Bunzl Capita Diploma Homeserve Hyder Consulting Intertek Lavendon Mitie Mouchel Parkman Premier Farnell SIG SThree Wolseley 1,271,019 802,925 640,000 2,772,318 2,577,735 440,211 765,716 476,298 996,704 1,336,948 898,897 2,598,647 731,161 1,422,375 728,590 7,683 4,015 4,522 18,727 4,253 8,034 3,086 4,873 2,469 3,088 4,079 4,216 5,389 2,941 4,007 142,317 1.07 0.56 0.63 2.61 0.59 1.12 0.43 0.68 0.34 0.43 0.57 0.59 0.75 0.41 0.56 19.80 Consumer Goods - 6.88% (31/05/2007 - 10.00%) Automobiles & Parts - 1.53% (1.89%) Inchcape Beverages - 0.00% (0.68%) Food Producers - 2.76% (2.95%) Associated British Foods Dairy Crest Premier Foods Household Goods - 1.72% (3.57%) Barratt Development Bellway Berkeley Bovis Homes Redrow Personal Goods - 0.87% (0.91%) Burberry 2,521,044 10,992 1.53 1,561,372 804,800 2,523,305 13,451 3,288 3,123 1.87 0.46 0.43 731,078 416,182 422,573 616,348 1,042,203 1,332 2,589 3,425 2,547 2,460 0.19 0.36 0.48 0.35 0.34 1,247,446 6,237 49,444 0.87 6.88 Health Care - 0.61% (31/05/2007 - 2.00%) Health Care Equipment & Services - 0.55% (1.90%) Consort Medical Corin Pharmaceuticals & Biotechnology - 0.06% (0.10%) Entelos Consumer Services - 14.17% (31/05/2007 - 23.96%) Food & Drug Retails - 2.82% (3.65%) Greggs Tesco 247,870 1,053,678 1,487 2,508 0.20 0.35 1,823,707 419 4,414 0.06 0.61 140,213 3,518,199 5,683 14,569 0.79 2.03 Page 29 Stewardship Growth Fund General Retailers - 2.88% (3.86%) Carphone Warehouse Home Retail Marks & Spencer Next Signet Media - 5.30% (10.41%) Daily Mail & General Trust Informa ITV Johnston Press Mecom Pearson UTV Travel & Leisure - 3.17% (6.04%) Arriva FirstGroup Go-Ahead Intercontinental Hotels Prezzo 1,365,156 1,376,864 2,275,035 216,624 4,967,673 3,239 3,225 8,639 2,506 3,080 0.45 0.45 1.20 0.35 0.43 1,445,959 2,158,414 6,513,048 1,743,906 14,175,588 1,752,298 1,347,776 5,881 8,294 3,836 1,962 3,331 11,959 2,938 0.82 1.15 0.53 0.27 0.46 1.66 0.41 538,572 1,472,573 245,069 696,824 3,850,644 3,444 7,790 3,794 5,794 1,906 101,870 0.48 1.08 0.53 0.81 0.27 14.17 Telecommunications - 7.04% (31/05/2007 - 4.26%) Fixed Line Telecommunications - 0.59% (0.81%) Cable & Wireless Freedom4Communications Mobile Telecommunications - 6.45% (3.45%) Vodafone 2,490,182 9,065,448 4,091 143 0.57 0.02 28,577,958 46,353 50,587 6.45 7.04 Utilities - 10.64% (31/05/2007 - 8.47%) Electricity - 4.08% (3.21%) Renewable Energy Scottish & Southern Energy Gas, Water & Multiutilities - 6.56% (5.26%) Centrica National Grid United Utilities Financials - 19.76% (31/05/2007 - 16.20%) Banks - 5.35% (2.28%) Alliance & Leicester Barclays Bradford & Bingley HBOS Royal Bank of Scotland Royal Bank of Scotland nil paid rights Non-life Insurance - 0.00% (0.71%) 2,569,082 1,911,071 1,207 28,093 0.17 3.91 2,879,733 3,789,961 1,395,848 8,452 28,254 10,441 76,447 1.18 3.93 1.45 10.64 2,069,123 2,624,284 3,075,276 2,553,050 2,793,009 1,706,838 8,758 9,835 2,706 10,206 6,375 478 1.22 1.37 0.38 1.42 0.89 0.07 Page 30 Stewardship Growth Fund Life Insurance - 3.94% (0.00%) Aviva Legal & General Real Estate - 4.83% (7.29%) Capital & Regional CLS Derwent London Development Securities Grainger Helical Bar Land Securities Minerva O Twelve Estates Shaftesbury Workspace General Financial - 4.77% (5.92%) Assura Cattles Cattles nil paid rights Experian International Personal Finance Leaf Clean Energy Phaunos Timber Fund Provident Financial ^RT Trading Emissions Wichford Equity Investment Instruments - 0.87% (0.00%) †F&C Sterling Enhanced Cash Fund Class 4 Acc Technology - 3.01% (31/05/2007 - 4.11%) Software & Computer Services - 3.01% (3.56%) Autonomy Blinkx Fidessa Phoenix IT Sage ^Torex Retail Technology Hardware & Equipment - 0.00% (0.55%) Corporate Bonds - 0.00% (31/05/2007 - 0.51%) Convertible - 0.00% (0.51%) Portfolio of investments Net other assets Total net assets 674,403 44,389 718,792 93.82 6.18 100.00 2,260,000 11,790,654 14,249 14,125 1.98 1.96 565,263 279,098 281,933 1,107,131 860,784 1,369,000 350,904 633,133 5,803,964 454,463 4,545,822 1,680 954 3,318 4,274 2,410 4,117 4,955 639 2,002 2,072 8,319 0.23 0.13 0.46 0.59 0.34 0.57 0.69 0.09 0.28 0.29 1.16 3,271,191 2,924,913 1,316,210 755,770 1,036,804 3,240,000 5,248,525 691,822 40,000 3,397,526 2,596,834 3,345 5,345 704 3,065 2,672 3,240 2,851 5,521 4,655 2,876 0.46 0.74 0.10 0.43 0.37 0.45 0.40 0.77 0.65 0.40 6,000,000 6,288 142,034 0.87 19.76 357,600 5,337,213 588,574 1,661,154 2,775,016 3,781,450 3,167 1,441 5,156 5,648 6,244 21,656 0.44 0.20 0.72 0.78 0.87 3.01 All investments are approved securities as defined in the Collective Investment Schemes sourcebook unless otherwise stated. The comparative percentage figures in brackets are as at 31 May 2007. ^ Delisted. † This holding is deemed to be an investment in a related party of the ACD. Page 31 Stewardship Growth Fund Balance Sheet as at 31 May 2008 31/05/2008 £'000 31/05/2007 £'000 Notes ASSETS Portfolio of investments Debtors Cash and bank balances Total other assets 8 3,844 61,129 674,403 7,236 33,579 64,973 913,721 40,815 Total assets LIABILITIES Creditors Bank overdraft Distribution payable on income shares Total liabilities 9 (2,248) (8,944) (9,392) 739,376 954,536 (3,018) (5,230) (6,434) (20,584) (14,682) Net assets attributable to shareholders 718,792 939,854 Notes to the financial statements are on pages 34 to 39. Page 32 Stewardship Growth Fund Summary of Material Portfolio Changes for the year ended 31 May 2008 Note Purchases HBOS Barclays Vodafone Aviva Legal & General Royal Bank of Scotland Alliance & Leicester †F&C Sterling Enhanced Cash Fund Bradford & Bingley Helical Bar Bunzl Land Securities Halma Carphone Warehouse Leaf Clean Energy Shaftesbury Lamprell Associated British Foods Greggs Tesco Cost £'000 21,234 18,622 18,460 16,833 15,457 13,657 10,268 6,291 5,722 4,674 4,474 4,192 4,050 3,945 3,240 2,592 2,059 1,875 1,864 1,856 Note Sales Tesco Expro International Reuters National Express Victrex Domestic & General Go-Ahead Intertek Vodafone Smith (DS) Whitbread Whatman Gyrus RPS Northgate Information Solutions SIG Spirax-Sarco Arriva Capital & Regional 6.75% Convertible Bonds 2016 Alliance Boots Other sales Total for the year 10 Proceeds £'000 14,997 11,963 11,581 7,812 7,568 6,697 6,697 6,191 6,144 5,976 5,603 5,563 5,547 5,411 4,877 4,814 4,799 4,715 4,319 3,952 64,421 199,647 Other purchases Total for the year 10 22,234 183,599 † This holding is deemed to be an investment in a related party of the ACD. Page 33 Stewardship Growth Fund Notes to the Financial Statements 1. NET (LOSSES)/GAINS ON INVESTMENTS The net (losses)/gains on investments during the year comprise: Non-derivative securities 2. OTHER GAINS Currency gains 3. INCOME UK dividends Bank interest Stocklending commission* Property income distributions from UK REITs Interest distributions Overseas dividends Interest on debt securities 23,922 1,440 438 362 236 126 3 26,527 20,435 1,301 41 50 44 21,871 5 (223,265) 213,986 31/05/2008 £'000 31/05/2007 £'000 *Stocklending commission is disclosed net of fees as explained in accounting policy 1 (g). The gross stocklending commission received was £664,080 (31/05/2007: £65,818), with fees deducted of £225,794 (31/05/2007: £24,528). The total amount paid to F&C Fund Management Limited in relation to stocklending was £187,837 (31/05/2007: £17,695). 4. EXPENSES Payable to the Authorised Corporate Director, associates of the Authorised Corporate Director, and agents of either of them: Authorised Corporate Director's periodic charge Payable to the Depositary, associates of the Depositary and agents of either of them: Depositary's fee Safe custody fees Administration costs Handling charges 4,552 4,670 81 12 7 5 105 82 12 5 6 105 Other expenses: Registrar's fees Accounting & administration fees Audit fee Price publication costs Report & accounts printing costs VAT recovered* Total expenses (including VAT where appropriate) 330 18 7 6 (1) (150) 210 4,867 352 (5) 7 8 7 369 5,144 * During the period, the Fund recovered VAT of £150,535 as a result of the European Court of Justice decision C-169 / 04 in May 2006. Page 34 Stewardship Growth Fund 5. TAXATION a) Analysis of charge in the year Total taxation 31/05/2008 £'000 31/05/2007 £'000 - b) Factors affecting current tax charge for year The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an Open Ended Investment Company (OEIC) of 20%. The differences are explained below: Net income before taxation Corporation tax at 20% (2007: 20%) Effects of: UK dividend income not subject to corporation tax Movement in excess expenses Expenses not deductible for tax purposes Current tax charge (note 5a) 21,657 4,331 16,726 3,345 (4,784) 452 1 - (4,087) 741 1 - Open Ended Investment Companies are exempt from tax on capital gains. Therefore, any capital return is not included in the above reconciliation. c) Factors that may affect future tax charges At the period end, after offset against accrued income taxable on receipt there is a potential deferred tax asset of £10,482,213 (31/05/2007: £10,030,365) in relation to excess management expenses. It is unlikely that the Fund will generate sufficient taxable profits in the future to utilise these distributions and, therefore, no deferred tax asset has been recognised in the year or the prior year. 6. FINANCE COSTS Distributions and interest The distributions take account of income received on the issue of shares and income deducted on the cancellation of shares and comprise: Interim dividend distribution Final dividend distribution Income deducted on cancellation of shares Income received on issue of shares Net distributions for the year 9,229 12,465 21,694 913 (945) 21,662 8,733 7,971 16,704 265 (237) 16,732 Details of the distributions per share are set out in the distribution tables on page 40. Interest Total finance costs 7. MOVEMENT BETWEEN NET INCOME AND DISTRIBUTIONS Net income after taxation Handling charges paid from capital 21,657 5 21,662 16,726 6 16,732 3 21,665 1 16,733 Page 35 Stewardship Growth Fund 8. DEBTORS 31/05/2008 £'000 3,457 302 69 14 2 3,844 31/05/2007 £'000 3,114 2,151 4 1,967 7,236 Accrued income Amounts receivable for issue of shares Income tax recoverable Overseas tax recoverable Prepaid expenses Sales awaiting settlement 9. CREDITORS Amounts payable for cancellation of shares Accrued Authorised Corporate Director’s periodic charge Purchases awaiting settlement Accrued expenses 1,629 361 205 53 2,248 1,129 439 1,379 71 3,018 10. PORTFOLIO TRANSACTION COSTS Analysis of total purchase costs Purchases in the period before transaction costs Commissions Taxes Total purchase costs Gross purchases total Analysis of total sales costs Gross sales before transaction costs Commissions Total sales net of transaction costs 11. MANUALLY PRICED SECURITIES The following security prices were not readily available through published sources, and as such required to be manually calculated or had to be sourced from a third party. Stock Name RT Price £nil Price Source ACD Method of Valuation Stock delisted as in liquidation. Stock valued at zero as there is no expected future return. Stock is suspended. Stock valued at zero as there is no expected future return. 199,941 (294) 199,647 160,513 (238) 160,275 182,219 301 1,079 1,380 183,599 150,227 220 624 844 151,071 Torex Retail £nil ACD The above prices have been calculated with the intention of estimating the market value. Page 36 Stewardship Growth Fund 12. CONTINGENT ASSETS The Fund has a contingent asset comprising amounts refundable in respect of VAT charged on services provided to the Fund and originally treated by HM Revenue and Customs as subject to VAT. Following the European Court of Justice decision in C-169 / 04, Abbey National PLC & Inscape Investment Fund in May 2006, HMRC has revised its guidance as to the extent of the exemption available to investment funds in accordance with Article 13B(d)(6) of the Sixth VAT Directive as effected in UK law by Items 9 & 10 of Group 5, Schedule 9 to the VAT Act 1994. Claims for repayment of VAT paid on services that now satisfy the revised conditions for exemption may be made for a maximum of three years from the date of claim. The Fund is in the process of reviewing VAT incurred on Registration and Administration fees in order to claim repayment where appropriate but is not yet able to calculate an accurate monetary estimate of the amounts recoverable. A large portion of this has now been received and disclosed within note 4. However, further claims are currently in the process of being agreed. 13. CONTINGENT LIABILITIES AND COMMITMENTS The aggregate of commitments not provided for at the balance sheet date are as follows: £'000 Cattles nil paid rights Royal Bank of Scotland nil paid rights 1,685 3,414 5,099 14. POST BALANCE SHEET EVENTS There were no material post balance sheet events which have a bearing on the understanding of the financial statements. 15. RELATED PARTY DISCLOSURES F&C Fund Management Limited, as Authorised Corporate Director (ACD), is a related party, and acts as principal in respect of all transactions of shares in the Company. The aggregate monies received through issue, and paid on cancellation, are disclosed in the Statement of Change in Shareholders' Net Assets. Any amounts due to, or from, F&C Fund Management Limited at the end of the accounting period are disclosed in notes 9 and 8 respectively. Amounts payable to F&C Fund Management Limited in respect of fund administration are disclosed in note 4 and amounts due at the end of the year in note 9. The ACD is also the ACD or Manager for other authorised funds and those funds may invest in each other where this is within the investment objectives of the investing fund. Such transactions will be conducted on an arms length basis within the regulations and the terms of the prospectus. Investments considered to be related parties have been identified in the portfolio statement and the income from these investments is £236,202. 16. STOCK LENDING The Fund carries out stock lending activities. Income from these activities is shown in note 3. The value of stock on loan at the balance sheet date was £134,342,802 (31/05/2007: £103,645,074). The value of collateral held at the balance sheet date was £137,502,714 (31/05/2007: £107,252,404). This collateral was held in the form of: Government Bonds Cash Instruments Corporate Bonds £71,349,343 £66,153,371 £nil (31/05/2007: £33,866,512) (31/05/2007: £73,194,616) (31/05/2007: £191,276) Page 37 Stewardship Growth Fund 17. SHAREHOLDERS’ FUNDS The Fund currently has three share classes: Class 1 (Retail), Class 2 (Institutional) and Class 4 (Asset Manager). The ACD charge on each share class is as follows: Class 1: Class 2: Class 4: 1.50%* 0.75% nil The net asset value of each share class, the net asset value per share, and the number of shares in each share class are given in the comparative table on page 25. The distribution per share class is given in the distribution table on page 40. All classes have the same rights on winding up. * The ACD charge changed from 1.375% to 1.50% from 1 March 2008. 18. FINANCIAL INSTRUMENTS The analyses and tables provided below refer to the narrative disclosure on ‘Financial Instrument Risks’ on page 21. Currency exposures A proportion of the financial net assets of the Fund are denominated in currencies other than Sterling with the effect that the balance sheet and total return can be affected by currency movements. Currency Monetary exposures £’000 8 Net foreign currency assets As at 31/05/2008 Non-monetary exposures £’000 2,850 Net foreign currency assets As at 31/05/2007 Non-monetary exposures £’000 2,397 US Dollars Currency Total £’000 2,858 Euro US Dollars Monetary exposures £’000 4 - Total £’000 4 2,397 Interest rate risk profile of financial assets and financial liabilities The interest rate profile of the Fund’s financial assets at 31 May 2008 was: Total Currency 31/05/2008 UK Sterling US Dollars Total 31/05/2007 Euro UK Sterling US Dollars Total £’000 736.518 2,858 739,376 £’000 4 952,135 2,397 954,536 Floating rate financial assets £’000 61,121 8 61,129 £’000 33,579 33,579 Fixed rate interest assets £’000 £’000 4,749 4,749 Financial assets on which no interest is paid £’000 675,397 2,850 678,247 £’000 4 913,807 2,397 916,208 The floating rate financial assets earn interest which is based on the London Inter Bank Offer Rate (LIBOR) or its overseas equivalent. Financial assets on which no interest is paid in both periods comprised equity shares and collective investment schemes that have no maturity date and short term debtors and creditors. Page 38 Stewardship Growth Fund The interest rate profile of the Fund’s financial liabilities at 31 May 2008 was: Total Currency Floating rate financial liabilities £’000 8,944 8,944 £’000 5,230 5,230 Fixed rate interest liabilities £’000 £’000 Financial liabilities on which no interest is paid £’000 730,432 730,432 £’000 949,306 949,306 31/05/2008 UK Sterling Total 31/05/2007 UK Sterling Total £’000 739,376 739,376 £’000 954,536 954,536 * Including £718,791,971 (31/05/2007: £939,853,790) in respect of the Fund’s liability to redeem all shares. The floating rate financial liabilities include a Sterling denominated overdraft that in both periods bore interest based on the London Inter Bank Offer Rate (LIBOR). Currency Fixed rate financial assets Weighted average interest rate % % 6.75 Fixed rate financial assets Weighted average period for which rate is fixed Years Years 9.20 31/05/2008 UK Sterling - Fixed life bonds 31/05/2007 UK Sterling - Fixed life bonds Effective Yield With effect from 31 May 2007, the Stewardship Growth Fund is required to account for income from debt securities on an effective yield basis. Effective yield is a method of recognising income from debt securities that takes account of any differences (i.e. premium or discount) between the amount paid for the security and the amount that will be received if the security is held until its redemption date. It has the effect of adjusting the income arising from a debt security to a level more closely aligned with the yield over the lifetime of the security by transferring any premium or discount to or from capital. As such it does not affect return. Prior to this change debt security income was generally accounted for and distributed on a coupon basis. The new rules require the accounting treatment to change to the effective yield method. However, it is permissible in certain circumstances to continue to distribute income on the old coupon basis. The coupon method makes it possible to distribute a higher level of income; however, it carries a higher risk of capital erosion or constrained future growth. F&C have determined that the objective of the Fund is best served by adopting a distribution policy that follows the effective yield basis for recognising income. This could potentially cause a small reduction in the level of distribution, but any reduction will be offset by a corresponding increase in the capital value. Maturity of financial liabilities The financial liabilities of the Fund as at 31 May 2008 are payable either within one year or on demand, as were the financial liabilities of the previous year ended 31 May 2007. Fair values of financial assets and liabilities There is no material difference between the value of the financial assets and liabilities, as shown in the balance sheet and their fair value. Page 39 Stewardship Growth Fund Distribution table for the period from 1 December 2007 to 31 May 2008 Net Income Equalisation Distribution payable 31/07/2008 pence per share Distribution paid 31/07/2007 pence per share pence per share pence per share 31/05/2008 Group 1: Shares purchased prior to 1 December 2007. Group 2: Shares purchased from 1 December 2007 to 31 May 2008. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 13.8577 8.8390 5.0187 13.8577 13.8577 9.8874 9.8874 Accumulation 2.6408 1.9091 0.7317 2.6408 2.6408 1.5532 1.5532 Accumulation 8.8818 6.5589 2.3229 8.8818 8.8818 3.9859 3.9859 Income 8.5428 5.9120 2.6308 8.5428 8.5428 3.9101 3.9101 Page 40 Stewardship Growth Fund Distribution table for the period from 1 June 2007 to 30 November 2007 Net Income Equalisation Distribution paid 31/01/2008 pence per share Distribution paid 31/01/2007 pence per share pence per share pence per share 30/11/2007 Group 1: Shares purchased prior to 1 June 2007. Group 2: Shares purchased from 1 June 2007 to 30 November 2007. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 10.7775 4.6389 6.1386 10.7775 10.7775 10.3477 10.3477 Accumulation 1.7979 0.8734 0.9245 1.7979 1.7979 1.6566 1.6566 Accumulation 4.8701 2.4347 2.4354 4.8701 4.8701 5.0090 5.0090 Income 4.9114 2.5020 2.4094 4.9114 4.9114 5.0726 5.0726 Page 41 Stewardship Growth Fund CORPORATE SHAREHOLDERS Dividend distribution A shareholder liable to UK corporation tax receives these income distributions and associated tax credits as franked investment income to the extent that the gross income from which the distributions are made is itself franked investment income. Where the gross income from which the distributions are made is not wholly franked investment income, part of the distributions are received as an annual payment from which income tax at the lower rate is deemed to have been deducted. A shareholder liable to UK corporation tax receives these distributions, excluding equalisation, as follows; Date Share Class Franked Investment Income* (%) 88.55 88.55 88.55 88.55 92.23 92.23 92.23 92.23 Unfranked Investment Income** (%) 11.45 11.45 11.45 11.45 7.77 7.77 7.77 7.77 31/05/2008 30/11/2007 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income * Proportion of the total income distribution, excluding equalisation, together with the tax credit, which is received as franked investment income. ** Proportion of the total income distribution, excluding equalisation, which is deemed to be received as an annual payment after deduction of income tax at the lower rate and is liable to corporation tax. It is not franked investment income. Page 42 Stewardship Income Fund Authorised Corporate Director’s Investment Report for the year ended 31 May 2008 Fund Objective Investment is concentrated in UK companies whose products and operations are considered to be of long-term benefit to the community both at home and abroad, and will generally exclude those considered to be involved with harmful products and practices or which trade extensively with oppressive regimes. Securities are chosen with the aim of achieving an above average and increasing income with the prospect of capital growth. Fund manager Fund size Launch date Initial launch date Ted Scott £366.1 million 22 August 2002 13 October 1987 Market Review The latter half of 2007 and first half of 2008 have proved to be a challenging time for the market and the Fund. Concerns over the impact of the credit crisis on the UK housing market and consumer confidence continue to mount and contributed to a deteriorating outlook for the UK economy. Inflation has also become a headline issue driven by the growing cost of oil and basic food stuffs. The effects of the credit crisis have been significant in the UK and have made it more difficult to avoid a recession. Most notably it has meant the Bank of England’s monetary policy in cutting interest rates has been rendered largely impotent because the banks have not passed these cuts onto mortgage payers. Despite a 14% rally between mid March and mid May 2008, the UK market has fallen some 7.12% over the 12 months under review. We believe that the fall in the market is pricing in a slowdown but not a recession. Within the market, equities have become increasingly polarised with the strong sectors concentrated in the commodities areas and domestic and financial sectors being especially weak. Activity Strategy remained focused on providing investors with an attractive income whilst maintaining scope for capital growth through a portfolio investing predominantly in UK shares. The performance of the market has been concentrated in the resources area. The fund has limited exposure to this area for ethical reasons with nothing in the mining sector. Where we are allowed to invest, we maintained significant positions. In particular, the Fund benefited from large holdings in BG, Cairn Energy and Expro International. The latter two firms are specialists in oil support services and are in great demand as the price of oil continues to soar. The strong performance of other non-ethical sectors such as tobacco and aerospace has also been a negative factor although they are smaller. Holdings in utilities such as Scottish and Southern Energy also proved positive as did our holding in Tesco which should benefit from high food prices and international expansion. Following changes to the Stewardship investment criteria the Fund bought financial stocks as these normally provide good yields. However, these stocks have been hit particularly hard in the current market. Our overall positioning remained broadly unchanged as we continued to favour ‘defensive’ investments – a bias resulting from our cautious near-term outlook for UK shares. Outlook A UK recession is increasingly possible towards the end of 2008 and in to 2009 as the sharp downturn demonstrated within the property market filters down into the rest of the economy. High inflation, caused by rising fuel and food costs, is already affecting the consumer. We believe a recession has not yet been discounted within the UK equity market, which continues to suffer in the wake of rising inflation. Further cuts to interest rates are unlikely in the shortterm as the Monetary Policy Committee is tasked with an annual inflation target of 2% despite the pressure on the consumer and falling house prices. Our outlook remains cautious and the Fund is likely to retain a defensive bias as we look to further increase exposure to companies demonstrating greater resilience against a more challenging backdrop. Page 43 Stewardship Income Fund Performance Summary The F&C Stewardship Income Fund returned -19.13% in the 12 months to the 31st May 2008 whilst the benchmark (FTSE All-Share) index returned -7.12%. The Fund’s inherent bias to small cap stocks has been a hindrance to performance as these companies have underperformed their large cap contemporaries in the current market conditions. All figures are on a total return basis. F&C Fund Management Limited 30 June 2008 Page 44 Stewardship Income Fund Comparative Table Net Asset Value Record Date Share Class Total Net Asset Value (£) 93,070,981 120,559,907 11,954,550 29,643,148 143,069,123 181,649,662 23,765,544 59,228,795 111,498,558 165,570,987 14,342,290 74,679,250 Shares in Issue Total Net Asset Value per Share (p) 120.6 138.5 143.2 127.1 153.1 181.1 182.9 163.6 118.7 146.2 142.7 128.6 31 May 2006 31 May 2007 31 May 2008 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 77,154,709 87,066,762 8,348,174 23,319,339 93,437,601 100,284,608 12,993,561 36,198,679 93,957,414 113,264,293 10,050,485 58,065,503 All share classes were issued at launch except for Share Class 2 – Income and Accumulation which were launched on 14 August 2003. Page 45 Stewardship Income Fund Performance Record Calendar Year Share Class Highest Share Price (p) 92.88 97.92 108.5 109.8 94.77 91.38 107.1 116.6 126.5 137.2 110.8 118.8 133.7 140.8 146.6 124.5 143.7 167.2 171.2 152.8 155.3 182.6 185.5 166.0 136.6 163.7 163.9 147.1 Lowest Share Price (p) 71.64 73.07 100.0 100.0 73.22 73.65 92.83 97.88 108.5 109.7 94.75 107.5 117.0 126.9 137.6 111.2 117.1 134.2 139.2 123.5 130.8 155.6 156.7 140.6 117.5 141.8 141.2 126.8 Distribution per Share (p) 3.5955 3.6572 0.3943 0.3943 3.6167 2.9010 3.2482 3.3283 3.3260 2.5573 3.3767 3.7921 4.0364 4.3646 2.4768 4.0257 4.2411 4.8096 5.2641 4.5457 4.3248 4.9785 4.9348 4.7408 3.3752 4.2027 4.1691 3.6164 2003 2004 2005 2006 2007 2008*** 1 – Income 1 – Accumulation 2 – Income 2 – Accumulation 4 – Income 4 – Accumulation* 1 – Income 1 – Accumulation 2 – Income 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Income 2– Accumulation** 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income * To 12 August 2003. ** To 1 August 2005. *** To 31 May 2008. Past performance is not necessarily a guide to future performance. The price of shares, and the income from them may go down as well as up. Total Expense Ratios Date 31 May 2007 Share Class 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income Total Expense Ratio (%) 1.43 1.47 0.82 0.04 1.45 1.48 0.82 0.03 31 May 2008 Page 46 Stewardship Income Fund Statement of Total Return for the year ended 31 May 2008 Notes Net (losses)/gains on investments during the year Other gains Income Expenses Finance costs: Interest Net income before taxation Taxation Net income after taxation for the year Total return before distributions for the year Finance costs: Distributions 6 5 1 2 3 4 6 15,808 (4,687) (51) 11,070 11,070 (85,733) (15,416) 31/05/2008 £'000 (96,822) 19 10,164 (3,886) (2) 6,276 6,276 85,835 (9,943) 31/05/2007 £'000 79,550 9 Change in net assets attributable to shareholders (101,149) 75,892 Statement of Change in Shareholders' Net Assets for the year ended 31 May 2008 31/05/2008 £'000 Net assets at the start of the year Movement due to sales and repurchases of shares Amounts received on issue of shares Amounts paid on cancellation of shares 407,713 31/05/2007 £'000 255,229 85,051 (32,336) 52,715 78,715 (6,673) 72,042 (119) 75,892 4,664 5 Stamp duty reserve tax Change in net assets attributable to shareholders (see above) Retained distribution on accumulation shares Unclaimed distributions (201) (101,149) 7,009 4 Net assets at the end of the year 366,091 407,713 Notes to the financial statements are on pages 55 to 62. Page 47 Stewardship Income Fund Portfolio Statement as at 31 May 2008 Investment Holding or Nominal Value Market Value £’000 Total Net Assets % Oil & Gas - 9.61% (31/05/2007 - 3.44%) Oil & Gas Producers - 7.31% (1.82%) BG Cairn Energy Oil Equipment, Services & Distribution - 2.30% (1.62%) Expro International Lamprell 1,000,000 419,225 12,660 14,111 3.46 3.85 351,940 520,000 5,684 2,730 35,185 1.55 0.75 9.61 Industrials - 13.45% (31/05/2007- 21.25%) Construction & Materials - 1.19% (0.99%) Cyril Sweett Keller Lupus Capital General Industrials - 0.00% (2.00%) Electronics & Electrical Equipment - 1.86% (1.08%) Ceres Power Chloride CMR Fuel Cells Renishaw Industrial Engineering - 1.98% (1.30%) Alumasc Lincat Nviro Cleantech Rotork ^Tinsley (Eliza) Industrial Transportation - 0.56% (2.75%) Wincanton Support Services - 7.86% (13.13%) BPP Cape Capita CVS Electrocomponents Hogg Robinson Homeserve Johnson Service Lavendon Premier Farnell SIG Page 48 1,233,767 267,541 2,497,246 1,086 1,777 1,473 0.30 0.49 0.40 315,000 1,798,129 230,000 162,795 473 4,999 44 1,229 0.13 1.38 0.01 0.34 750,000 393,631 1,904,762 241,122 3,515,222 1,335 2,322 876 2,734 - 0.36 0.63 0.24 0.75 - 694,660 2,061 0.56 441,773 838,939 303,870 877,000 2,262,000 3,823,000 209,405 809,390 550,810 1,400,000 303,000 2,209 2,160 2,053 2,280 3,896 1,663 3,822 210 1,365 2,272 2,233 0.60 0.59 0.56 0.62 1.07 0.45 1.04 0.06 0.37 0.62 0.61 Stewardship Income Fund Spring Waterman Wolseley 2,800,000 1,591,800 200,000 1,288 2,276 1,100 49,236 0.35 0.62 0.30 13.45 Consumer Goods - 6.49% (31/05/2007 - 7.22%) Automobiles & Parts - 0.89% (1.01%) Inchcape Food Producers - 2.96% (1.66%) Associated British Foods Hilton Food Northern Foods Household Goods - 2.64% (4.55%) Alexandra Barratt Development Berkeley Headlam Omega International Slimma 743,000 3,239 0.89 465,000 2,002,634 3,322,315 4,006 4,206 2,641 1.09 1.15 0.72 2,935,531 317,084 121,250 714,200 1,216,503 550,000 2,436 578 983 2,787 2,798 66 23,740 0.67 0.16 0.27 0.76 0.76 0.02 6.49 Health Care - 1.33% (31/05/2007 - 1.17%) Health Care Equipment & Services - 0.74% (0.66%) Clinphone Pharmaceuticals & Biotechnology - 0.59% (0.51%) Concateno 2,507,264 2,683 0.74 1,426,943 2,169 4,852 0.59 1.33 Consumer Services - 9.31% (31/05/2007 - 17.82%) Food & Drug Retails - 1.54% (1.69%) Greggs Tesco General Retailers - 2.09% (5.61%) Dignity ^European Home Retail Findel Halfords Marks & Spencer Media - 3.21% (4.21%) Coral Products Daily Mail & General Trust 'A' Non-Voting Informa ITV Johnston Press Pearson 46,200 905,022 1,872 3,748 0.51 1.03 166,818 485,000 619,145 625,792 846,343 1,214 102 1,393 1,722 3,214 0.33 0.03 0.38 0.47 0.88 1,212,825 415,298 929,676 3,335,000 1,279,476 441,250 73 1,689 3,572 1,964 1,439 3,012 0.02 0.46 0.98 0.54 0.39 0.82 Page 49 Stewardship Income Fund Travel & Leisure - 2.47% (6.31%) FirstGroup Holidaybreak Powerleague Prezzo Real Hotel 300,000 500,000 4,507,450 2,197,057 5,252,991 1,587 2,538 2,952 1,088 893 34,072 0.43 0.69 0.81 0.30 0.24 9.31 Telecommunications - 7.91% (31/05/2007 - 7.59%) Fixed Line Telecommunications - 1.44% (1.48%) Cable & Wireless Kingston Communications Mobile Telecommunications - 6.47% (6.11%) Vodafone 2,195,500 3,771,532 3,607 1,659 0.99 0.45 14,593,486 23,671 28,937 6.47 7.91 Utilities - 17.64% (31/05/2007 - 11.38%) Electricity - 6.84% (3.57%) IPSA Ocean Power Technologies Rurelec Scottish & Southern Energy Gas, Water & Multiutilities - 10.80% (7.81%) Centrica National Grid Northumbrian Water United Utilities 2,150,000 39,500 3,577,000 1,438,063 1,441 188 2,289 21,140 0.39 0.05 0.63 5.77 410,000 2,519,838 1,561,063 1,926,500 1,203 18,785 5,136 14,410 64,592 0.33 5.13 1.40 3.94 17.64 Financials - 21.08% (31/05/2007 - 17.86%) Banks - 5.57% (5.06%) Alliance & Leicester Barclays Bradford & Bingley HBOS Royal Bank of Scotland Royal Bank of Scotland nil paid rights Life Insurance 4.99% (0.00%) Aviva Legal & General Real Estate - 2.83% (3.57%) Dawnay Day Sirius Development Securities Rugby Estates Rugby Estates Investment Trust Non-life Insurance - 0.00% (0.68%) 1,308,966 1,224,258 2,216,678 1,265,000 1,333,000 814,611 5,540 4,588 1,951 5,057 3,043 228 1.52 1.25 0.53 1.38 0.83 0.06 1,800,000 5,776,522 11,349 6,920 3.10 1.89 6,833,031 453,100 923,049 2,614,000 3,522 1,749 3,600 1,483 0.96 0.48 0.98 0.41 Page 50 Stewardship Income Fund General Financial - 6.54% (8.55%) Assura Cattles Cattles nil paid rights Experian International Personal Finance Prodesse Investment Provident Financial Silverdell Summit Germany Trading Emissions ‘C’ Wichford Equity Investment Instruments - 1.15% (0.00%) † F&C Sterling Enhanced Fund Class 4 Acc 1,440,000 1,366,953 615,128 342,390 1,110,000 1,105,815 328,500 1,500,000 6,730,901 1,427,905 2,163,967 1,472 2,498 329 1,388 2,861 4,114 2,622 1,200 3,125 1,956 2,397 0.40 0.68 0.09 0.38 0.78 1.12 0.72 0.33 0.85 0.53 0.66 4,000,000 4,192 77,184 1.15 21.08 Technology - 2.16% (31/05/2007 - 2.54%) Software & Computer Services - 2.16% (2.54%) Netstore Phoenix IT Redstone SDL 9,033,000 609,112 2,615,261 638,188 2,258 2,071 1,543 2,036 7,908 0.62 0.56 0.42 0.56 2.16 Government Bonds - 0.72% (31/05/2007 - 0.65%) International Authority - 0.72% (0.65%) Bank Nederlandse Gemeenten 5.75% 2019 European Investment Bank 4.5% 2008 European Investment Bank 5.5% 2011 European Investment Bank 6% 2028 Reseau Ferre de France 5.5% 2021 £ £ £ £ £ 450,000 460,000 380,000 821,000 470,000 456 457 379 901 466 2,659 0.12 0.12 0.10 0.25 0.13 0.72 Corporate Bonds - 4.30% (31/05/2007 - 5.39%) Non-Convertible - 4.30% (5.39%) Aggregate Industries 6.25% 2009 Alliance & Leicester STEP 2023 Anglian Water Services 5.837% 2022 Bank of America 8.125% Perpetual Bradford & Bingley 5.73% 2022 Britannia Building Society 5.56% Perpetual Brixton 6% 2019 Canary Wharf Finance 5.952% 2037 Cattles 6.875% 2014 Centrica 5.875% 2012 Chelsea Building Society 6.25% 2017 Citigroup 7.625% 2018 Co-operative 5.875% 2013 Countrywide Financial 5.125% 2011 Coventry Building Society 6.092% Perpetual £ £ £ $ £ £ £ £ £ £ £ £ £ £ £ 485,000 52,000 490,000 179,000 500,000 161,000 400,000 300,000 288,000 310,000 415,000 124,000 348,000 463,000 180,000 483 54 450 91 377 126 345 294 238 300 380 127 336 389 162 0.13 0.01 0.13 0.02 0.10 0.03 0.09 0.08 0.07 0.08 0.10 0.03 0.09 0.11 0.04 Page 51 Stewardship Income Fund Coventry Building Society FRN 2010 Derbyshire Building Society 5.875% 2015 Euronext Amsterdam 5.125% 2009 Experian Finance 6.375% 2009 Hammerson 6.875% 2020 HSBC Holdings 6.8% 2038 ING Bank 6.875% 2023 Irish Nationwide 4.75% 2008 Lafarge 6.875% 2012 Land Securities Capital Markets 5.292% 2015 Leeds Building Society FRN 2009 Lend Lease Europe Finance 6.125% 2021 Lewis (John) 6.375% 2012 Lloyds TSB Bank 6.9625% 2020 Marks & Spencer 5.625% 2014 National Australia Bank 7.125% 2023 National Grid Electricity Transport 6.5% 2028 Nationwide Building Society 6.25% Perpetual Nationwide Building Society 7.971% Perpetual Newcastle Building Society FRN 2008 Northern Rock 5.625% 2015 Paragon 7% 2017 Principality Building Society 5.375% 2016 Royal Bank of Scotland 6.934% 2018 Segro 7.125% 2010 Severn Trent 6.125% 2024 Southern Water 6.192% 2029 Standard Chartered Bank 7.75% 2018 Statoil 6.125% 2028 TCNZ Finance 5.75% 2020 Tesco 5% 2023 UBS London 6.625% 2018 UBS Capital Securities 8.836% Perpetual United Utilities Water 5.625% 2027 Vodafone 5.9% 2032 Westfield European Finance 5.5% 2017 Yorkshire Building Society 5.649% Perpetual Yorkshire Water Services Finance 5.375% 2023 £ £ £ £ £ $ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ € £ £ £ £ £ £ £ £ € £ £ £ £ £ 350,000 313,000 500,000 440,000 350,000 300,000 121,000 540,000 450,000 531,000 350,000 500,000 400,000 126,000 350,000 261,000 430,000 225,000 275,000 340,000 300,000 115,000 72,000 161,000 478,000 355,000 415,000 150,000 330,000 400,000 370,000 80,000 150,000 455,000 250,000 500,000 530,000 465,000 347 297 491 437 306 146 119 525 436 502 348 398 397 126 316 261 432 175 262 340 244 86 66 131 478 340 394 155 327 359 322 79 121 408 226 415 364 416 15,744 0.09 0.08 0.14 0.12 0.08 0.04 0.03 0.15 0.12 0.14 0.10 0.12 0.11 0.03 0.09 0.07 0.12 0.05 0.07 0.09 0.07 0.02 0.02 0.04 0.13 0.09 0.11 0.04 0.09 0.10 0.09 0.02 0.03 0.12 0.06 0.11 0.10 0.11 4.30 Portfolio of investments Net other assets Total net assets 344,109 21,982 366,091 94.00 6.00 100.00 All investments are approved securities as defined in the Collective Investment Schemes Sourcebook unless otherwise stated. The comparative percentage figures in brackets are as at 31 May 2007. ^ Delisted. † This security is deemed to be an investment in a related party of the ACD. € = Euro £ = Sterling $ = US Dollar Page 52 Stewardship Income Fund Balance Sheet as at 31 May 2008 31/05/2008 £'000 31/05/2007 £'000 Notes ASSETS Portfolio of investments Debtors Cash and bank balances Total other assets 8 1,756 32,426 344,109 4,844 20,701 34,182 392,653 25,545 Total assets LIABILITIES Creditors Bank overdraft Distribution payable on income shares Total liabilities 9 (1,870) (6,167) (4,163) 378,291 418,198 (1,143) (6,942) (2,400) (12,200) (10,485) Net assets attributable to shareholders 366,091 407,713 Notes to the financial statements are on pages 55 to 62. . Page 53 Stewardship Income Fund Summary of Material Portfolio Changes for the year ended 31 May 2008 Note Purchases Aviva HBOS Barclays Scottish & Southern Energy BG Legal & General Royal Bank of Scotland Bradford & Bingley Vodafone Alliance & Leicester Northumbrian Water Tesco † F&C Sterling Enhanced Cash Fund Class 4 Acc National Grid Associated British Foods Yell Northern Foods Ashtead Dignity CSR Other purchases Total for the year 10 Cost £'000 12,736 10,805 10,008 9,709 8,038 7,557 6,328 5,908 5,422 5,234 4,937 4,362 4,157 3,954 3,876 3,464 2,806 2,425 2,250 2,174 49,586 165,736 Note Sales Vodafone Alliance & Leicester Carpetright Tesco Air Partner Sondex Smith (DS) Inspicio Tanfield Home Retail Premier Foods Expro International National Express Domestic & General Go-Ahead Clarkson Southern Cross Healthcare Whatman Safestore Arriva Proceeds £'000 8,168 7,063 6,007 5,691 4,536 4,380 4,379 4,344 4,013 3,758 3,706 3,637 3,410 3,241 3,237 3,087 3,034 2,348 2,211 2,134 Other sales Total for the year 10 34,991 117,375 † This security is deemed to be an investment in a related party of the ACD. Page 54 Stewardship Income Fund Notes to the Financial Statements 1. NET (LOSSES)/GAINS ON INVESTMENTS The net (losses)/gains on investments during the year comprise: Non-derivative securities 2. OTHER GAINS Currency gains 3. INCOME UK dividends Interest on debt securities Bank interest Stocklending commission* Interest distributions Overseas dividends 13,110 1,290 833 386 158 31 15,808 8,453 1,112 586 8 5 10,164 19 9 (96,822) 79,550 31/05/2008 £'000 31/05/2007 £'000 The effective yield method of accounting for income from fixed income securities may in some circumstances result in adjusting income in respect of changes in market value of the securities as a result of revised cash flow expectations. These adjustments are a requirement of FRS26 application guidance 8 (AG8). It would be inappropriate to distribute as income such movements in market values, and as such the income available for distribution has been adjusted accordingly. The net income figure of £15,807,840 in the statement of total return includes AG8 adjustments of £69,355. Therefore, the pre tax net income excluding these adjustments is £15,738,485. In accordance with the accounting policy on distributions, these adjustments have been excluded from ‘income property’ of the Fund available for distribution. The impact on the distribution amounts is demonstrated in the distribution note (note 7). *Stocklending commission is disclosed net of fees as explained in accounting policy 1 (g). The gross stocklending commission received was £577,920 (31/05/2007: £12,849), with fees deducted of £191,477 (31/05/2007: £5,121). The total amount paid to F&C Fund Management Limited in relation to stocklending was £165,618 (31/05/2007: £3,312). Page 55 Stewardship Income Fund 4. EXPENSES Payable to the Authorised Corporate Director, associates of the Authorised Corporate Director, and agents of either of them: Authorised Corporate Director's periodic charge Payable to the Depositary, associates of the Depositary and agents of either of them: Depositary's fee Safe custody fees Administration costs Handling charges 31/05/2008 £'000 31/05/2007 £'000 4,494 3,662 44 8 7 6 65 36 6 5 5 52 Other expenses: Registrar's fees Accounting & administration fees Audit fee Price publication costs Report & accounts printing costs VAT recovered* Total expenses (including VAT where appropriate) 136 32 8 6 2 (56) 128 4,687 135 21 8 8 172 3,886 * During the period, the Fund recovered VAT of £56,194 as a result of the European Court of Justice decision C-169 / 04 in May 2006. 5. TAXATION a) Analysis of charge in the year Total taxation - - b) Factors affecting current tax charge for year The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an Open Ended Investment Company (OEIC) of 20%. The differences are explained below: Net income before taxation Corporation tax at 20% (2007: 20%) Effects of: UK dividend income not subject to corporation tax Expenses not deductible for tax purposes Movement in excess expenses Current tax charge (note 5a) 11,070 2,214 6,276 1,255 (2,622) 1 407 - (1,691) 1 435 - Open Ended Investment Companies are exempt from tax on capital gains. Therefore, any capital return is not included in the above reconciliation. c) Factors that may affect future tax charges At the period end, after offset against accrued income taxable on receipt, there is a potential deferred tax asset of £2,617,730 (31/05/2007: £2,210,840) in relation to excess management expenses. It is unlikely the Fund will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised in the year or the prior year. Page 56 Stewardship Income Fund 6. FINANCE COSTS 31/05/2008 £'000 31/05/2007 £'000 Distributions and interest The distributions take account of income received on the issue of shares and income deducted on the cancellation of shares and comprise: Interim dividend distributions Final dividend distributions Income deducted on cancellation of shares Income received on issue of shares Net distributions for the period 7,974 7,791 15,765 369 (718) 15,416 6,068 4,384 10,452 41 (550) 9,943 Details of the distributions per share are set out in the distribution tables on page 63. Interest Total finance costs 7. MOVEMENT BETWEEN NET INCOME AND DISTRIBUTIONS Net income after taxation ACD fees paid from capital Less: Tax relief thereon Handling charges paid from capital * AG8 adjustment not distributable 11,070 4,494 (85) 6 (69) 15,416 6,276 3,662 5 9,943 51 15,467 2 9,945 * The effective yield method of accounting for income from fixed securities may in some circumstances result in adjusting income in respect of changes in market value of the securities as a result of revised cash flow expectations. These adjustments are a requirement of FRS26 application guidance 8 (AG8). It would be inappropriate to distribute as income such movements in market values and income available for distribution has been adjusted accordingly. 8. DEBTORS Accrued income Sales awaiting settlement Amounts receivable for issue of shares Overseas tax recoverable Prepaid expenses 1,515 126 107 6 2 1,756 1,427 3,415 1 1 4,844 9. CREDITORS Amounts payable for cancellation of shares Accrued Authorised Corporate Director’s periodic charge Purchases awaiting settlement Accrued expenses 1,217 362 260 31 1,870 386 721 36 1,143 Page 57 Stewardship Income Fund 10. PORTFOLIO TRANSACTION COSTS Analysis of total purchase costs Purchases in the period before transaction costs Commissions Taxes Total purchase costs Gross purchases total Analysis of total sales costs Gross sales before transaction costs Commissions Total sales net of transaction costs 11. MANUALLY PRICED SECURITIES The following security prices were not readily available through published sources, and as such required to be manually calculated or had to be sourced from a third party. Stock Name European Home Retail Tinsley (Eliza) Price £0.21 £nil Price Source ACD ACD Method of Valuation Stock is valued at suspended price. Stock is suspended. Stock is valued at zero as there is no expectation of future returns. 117,561 (186) 117,375 107,908 (185) 107,723 164,716 273 747 1,020 165,736 172,070 268 671 939 173,009 31/05/2008 £'000 31/05/2007 £'000 The above prices have been calculated with the intention of estimating the market value. 12. CONTINGENT ASSETS The Fund has a contingent asset comprising amounts refundable in respect of VAT charged on services provided to the Fund and originally treated by HM Revenue and Customs as subject to VAT. Following the European Court of Justice decision in C-169 / 04, Abbey National PLC & Inscape Investment Fund in May 2006, HMRC has revised its guidance as to the extent of the exemption available to investment funds in accordance with Article 13B(d)(6) of the Sixth VAT Directive as effected in UK law by Items 9 & 10 of Group 5, Schedule 9 to the VAT Act 1994. Claims for repayment of VAT paid on services that now satisfy the revised conditions for exemption may be made for a maximum of three years from the date of claim. The Fund is in the process of reviewing VAT incurred on Registration and Administration fees in order to claim repayment where appropriate but is not yet able to calculate an accurate monetary estimate of the amounts recoverable. A large portion of this has now been received and disclosed within note 4. However, further claims are currently in the process of being agreed. Page 58 Stewardship Income Fund 13. CONTINGENT LIABILITIES AND COMMITMENTS The aggregate of commitments not provided for at the balance sheet date are as follows: £'000 Cattles nil paid rights Royal Bank of Scotland nil paid rights 787 1,629 2,416 14. POST BALANCE SHEET EVENTS There were no material post balance sheet events which have a bearing on the understanding of the financial statements. 15. RELATED PARTY DISCLOSURES F&C Fund Management Limited, as Authorised Corporate Director (ACD), is a related party, and acts as principal in respect of all transactions of shares in the Company. The aggregate monies received through issue, and paid on cancellation, are disclosed in the Statement of Change in Shareholders' Net Assets. Any amounts due to, or from, F&C Fund Management Limited at the end of the accounting period are disclosed in notes 9 and 8 respectively. Amounts payable to F&C Fund Management Limited in respect of fund administration are disclosed in note 4 and amounts due at the end of the year in note 9. The ACD is also the ACD or Manager for other authorised funds and those funds may invest in each other where this is within the investment objectives of the investing fund. Such transactions will be conducted on an arms length basis within the regulations and the terms of the prospectus. Investments considered to be related parties have been identified in the portfolio statement and the income from these investments is £157,468. 16. STOCK LENDING The Fund carries out stock lending activities. Income from these activities is shown in note 3. The value of stock on loan at the balance sheet date was £44,854,776 (31/05/2007: £27,631,881). The value of collateral held at the balance sheet date was £46,164,166 (31/05/2007: £28,208,726). This collateral was held in the form of: Cash Instruments Government Bonds Corporate Bonds 17. SHAREHOLDERS’ FUNDS The Fund currently has three share classes: Class 1 (Retail), Class 2 (Institutional) and Class 4 (Asset Manager). The ACD charge on each share class is as follows: Class 1: Class 2: Class 4: 1.50%* 0.75% nil £23,293,488 £22,233,122 £637,556 (31/05/2007: £14,687,872) (31/05/2007: £13,249,016) (31/05/2007: £271,838) The net asset value of each share class, the net asset value per share, and the number of shares in each share class are given in the comparative table on page 45. The distributions per share class is given in the distribution tables on page 63. All classes have the same rights on winding up. * The ACD charge changed from 1.375% to 1.50% from 1 March 2008. Page 59 Stewardship Income Fund 18. FINANCIAL INSTRUMENTS The analyses and tables provided below refer to the narrative disclosure on ‘Financial Instrument Risks’ on page 21. Currency exposures A proportion of the financial net assets of the Fund are denominated in currencies other than Sterling with the effect that the balance sheet and total return can be affected by currency movements. Currency Monetary exposures £’000 8 124 Net foreign currency assets As at 31/05/2008 Non-monetary Exposures £’000 6,899 237 Net foreign currency assets As at 31/05/2007 Non-monetary exposures £’000 8,190 Euro US Dollar Currency Total £’000 6,907 361 Euro Monetary exposures £’000 (3,997) Total £’000 4,193 Interest rate risk profile of financial assets and financial liabilities The interest rate profile of the Fund’s financial assets at 31 May 2008 was: Total Currency 31/05/2008 Euro UK Sterling US Dollar Total 31/05/2007 Euro UK Sterling Total £’000 6,907 371,023 361 378,291 £’000 8,190 410,008 418,198 Floating rate financial assets £’000 33,461 33,461 £’000 21,741 21,741 Fixed rate interest assets £’000 251 16,879 237 17,367 £’000 23,618 23,618 Financial assets on which no interest is paid £’000 6,656 320,683 124 327,463 £’000 8,190 364,649 372,839 The floating rate financial assets earn interest which is based on the London Inter Bank Offer Rate (LIBOR) or its overseas equivalent, and the value of floating rate notes held at the period end. Financial assets on which no interest is paid in both periods comprised equity shares and collective investment schemes that have no maturity date and short term debtors and creditors. Page 60 Stewardship Income Fund The interest rate profile of the Fund’s financial liabilities at 31 May 2008 was: Total Currency Floating rate financial liabilities £’000 6,167 6,167 £’000 3,997 2,945 6,942 Fixed rate interest liabilities £’000 £’000 Financial liabilities on which no interest is paid £’000 372,124 372,124 £’000 411,256 411,256 31/05/2008 UK Sterling* Total 31/05/2007 Euro UK Sterling* Total £’000 378,291 378,291 £’000 3,997 414,201 418,198 * Including £366,091,085 (31/05/2007: £407,713,124) in respect of the Fund’s liability to redeem all shares. The floating rate financial liabilities include a Sterling denominated overdraft that in both periods bore interest based on the London Inter Bank Offer Rate (LIBOR). Currency Fixed rate financial assets Weighted average interest rate % 6.47 4.90 6.99 6.36 7.11 10.00 % 5.93 6.49 Fixed rate financial assets Weighted average period for which rate is fixed Years 9.90 Open 9.68 Open 30.00 Open Years 11.37 Open 31/05/2008 Euro - Fixed life bonds - Perpetual bonds UK Sterling - Fixed life bonds - Perpetual bonds US Dollar - Fixed life bonds - Perpetual bonds 31/05/2007 UK Sterling - Fixed life bonds - Perpetual bonds Effective Yield With effect from 31 May 2007, the Stewardship Income Fund is required to account for income from debt securities on an effective yield basis. Effective yield is a method of recognising income from debt securities that takes account of any differences (i.e. premium or discount) between the amount paid for the security and the amount that will be received if the security is held until its redemption date. It has the effect of adjusting the income arising from a debt security to a level more closely aligned with the yield over the lifetime of the security by transferring any premium or discount to or from capital. As such it does not affect return. Prior to this change debt security income was generally accounted for and distributed on a coupon basis. The new rules require the accounting treatment to change to the effective yield method. However, it is permissible in certain circumstances to continue to distribute income on the old coupon basis. The coupon method makes it possible to distribute a higher level of income; however, it carries a higher risk of capital erosion or constrained future growth. F&C have determined that the objective of the Fund is best served by adopting a distribution policy that follows the effective yield basis for recognising income. This could potentially cause a small reduction in the level of distribution, but any reduction will be offset by a corresponding increase in the capital value. Page 61 Stewardship Income Fund Maturity of financial liabilities The financial liabilities of the Fund as at 31 May 2008 are payable either within one year or on demand, as were the financial liabilities of the previous year ended 31 May 2007. Fair values of financial assets and liabilities There is no material difference between the value of the financial assets and liabilities, as shown in the balance sheet and their fair value. Page 62 Stewardship Income Fund Distribution table for the period from 1 March 2008 to 31 May 2008 Net Income Equalisation Distribution payable 31/07/2008 pence per Share Distribution paid 31/07/2007 pence per share pence per share pence per share 31/05/2008 Group 1: Shares purchased prior to 1 March 2008. Group 2: Shares purchased from 1 March 2008 to 31 May 2008. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 2.6164 1.0091 1.6073 2.6164 2.6164 1.7408 1.7408 Income 3.1691 1.3281 1.8410 3.1691 3.1691 1.9348 1.9348 Accumulation 3.2027 1.0101 2.1926 3.2027 3.2027 1.9785 1.9785 Income 2.4752 0.8022 1.6730 2.4752 2.4752 1.6248 1.6248 Page 63 Stewardship Income Fund Distribution table for the period from 1 December 2007 to 29 February 2008 Net Income Equalisation Distribution paid 30/04/2008 pence per share Distribution paid 30/04/2007 pence per Share pence per share pence per share 28/02/2008 Group 1: Shares purchased prior to 1 December 2007. Group 2: Shares purchased from 1 December 2007 to 29 February 2008. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Accumulation 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 0.9000 0.0000 0.9000 0.9000 0.9000 0.9000 0.9000 Page 64 Stewardship Income Fund Distribution table for the period from 1 September 2007 to 30 November 2007 Net Income Equalisation Distribution paid 31/01/2008 pence per share Distribution paid 31/01/2007 pence per Share pence per share pence per share 30/11/2007 Group 1: Shares purchased prior to 1 September 2007. Group 2: Shares purchased from 1 September 2007 to 30 November 2007. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Accumulation 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 0.9000 0.0000 0.9000 0.9000 0.9000 0.9000 0.9000 Page 65 Stewardship Income Fund Distribution table for the period from 1 June 2007 to 31 August 2007 Net Income Equalisation Distribution paid 31/10/2007 pence per share Distribution paid 31/10/2006 pence per share pence per share pence per share 31/08/2007 Group 1: Shares purchased prior to 1 June 2007. Group 2: Shares purchased from 1 June 2007 to 31 August 2007. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Accumulation 1.0000 0.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Income 0.9000 0.0000 0.9000 0.9000 0.9000 0.9000 0.9000 Page 66 Stewardship Income Fund Corporate shareholders Dividend distribution A shareholder liable to UK corporation tax receives these income distributions and associated tax credits as franked investment income to the extent that the gross income from which the distributions are made is itself franked investment income. Where the gross income from which the distributions are made is not wholly franked investment income, part of the distributions is received as an annual payment from which income tax at the lower rate is deemed to have been deducted. A shareholder liable to UK corporation tax receives these distributions, excluding equalisation, as follows; Date Share Class Franked Investment Income* (%) 86.15 86.15 86.15 86.15 65.41 65.41 65.41 65.41 83.33 83.33 83.33 83.33 87.25 87.25 87.25 87.25 Unfranked Investment Income** (%) 13.85 13.85 13.85 13.85 34.59 34.59 34.59 34.59 16.67 16.67 16.67 16.67 12.75 12.75 12.75 12.75 31/05/2008 28/02/2008 30/11/2007 31/08/2007 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income 1 – Income 1 – Accumulation 2 – Income 4 – Income * Proportion of the total income distribution, excluding equalisation, together with the tax credit, which is received as franked investment income. ** Proportion of the total income distribution, excluding equalisation, which is deemed to be received as an annual payment after deduction of income tax at the lower rate and is liable to corporation tax. It is not franked investment income. Page 67 Stewardship International Fund Authorised Corporate Director’s Investment Report for the year ended 31 May 2008 Fund Objective Investment is concentrated in companies in any market whose products and operations are considered to be making a positive contribution to society and seeks to avoid companies which, on balance, are felt to be harming the world, its people, or its wildlife. The portfolio is chosen with the aim of achieving long-term capital growth. Fund manager Fund size Launch date Initial launch date Sophie Horsfall £269.4 million 22 August 2002 13 October 1987 Market Review The global equity market changed dramatically during the period under review as the US sub-prime mortgage crisis and subsequent credit crunch impacted more widely and with greater vigour than originally anticipated. The US, UK and European economies all suffered with several rate cuts and cash injections deemed necessary in an attempt to stabilise volatility. Initially emerging markets remained relatively resilient but sold off later on fears over inflation and the potential impact of slower US growth. Activity As a financial crisis triggered by rising US mortgage defaults evolved into an economic one it proved to be a challenging period for global investors. Equity markets traded downwards amidst high levels of volatility and although investors in the Fund will see a small fall in the value of their investment we are encouraged by our returns relative to the wider market. Few areas escaped the turmoil but commodities was one that did buck the wider trend with high demand and concerns over supply pushing prices for oil and other raw materials to all time highs. Ethical screening precludes investment in many commodity related areas but we were able to offset much of the negative impact through our ongoing preference for alternative energy related names. Energy Conversion Devices, SunPower Corp, JA Solar and Centrotherm Photovoltaics all posted strong absolute returns as investors increasingly favoured ‘alternatives’ against a backdrop of higher oil prices. In addition we were selectively able to benefit from commodity strength through a small number of more traditional ‘approved’ names including BG Group which saw its share price rise strongly following a significant oil find off the coast of Brazil. Drilling specialist Nabors Industries also appreciated strongly – its services in greater demand as the oil majors invest in projects to boost supply. Although changes to the Stewardship criteria increased our ability to invest within the financial sector we remained wary of increasing our exposure as uncertainty persists as to the full extent of the credit crisis. Our holding in Northern Rock was notable for its related problems but by swiftly selling our shares we avoided the worst of its derating. More broadly we moved to reduce our positions within consumer related areas, especially in the US and UK where spending proved particularly lacklustre. Starbucks detracted from returns and we sold our position in plumbing supplies firm Wolseley as it is heavily reliant on the US housing market. We exited positions in eBay and ABF (owner of Primark) choosing instead to favour firms geared into Asia and the emerging markets where growth remains robust. Elsewhere we took advantage of weak markets to increase exposure/establish positions in companies in which our conviction is high. Asahi Pretec for example is a relatively small Japanese firm specialising in precious metal recycling and one that looks well placed to benefit from a shortage of metals such as silicon. By the close of the period the shares had posted a double digit return. Outlook We expect a mild recession rather than a prolonged economic contraction in the US, and although leading indicators for Asia and emerging markets highlight a slight slowing of growth, long-term economic prospects appear strong for these regions. We are therefore looking to slightly increase our weighting in emerging markets, although we are monitoring leading indicators closely for any change and are looking to avoid Asian exporters that are more exposed to global cyclical slowdowns. Page 68 Stewardship International Fund Performance Summary The F&C Stewardship International Fund returned -2.38% in the 12 months to the 31 May 2008 outperforming the benchmark (MSCI World) index which returned -3.06%. All figures are on a total return basis. F&C Fund Management Limited 30 June 2008 Page 69 Stewardship International Fund Comparative Table Net Asset Value Record Date Share Class Total Net Asset Value (£) 6,390,960 23,692,968 35,465,070 86,396,631 13,894,775 30,914,391 37,865,984 153,172,223 14,172,931 37,197,606 35,187,774 182,840,970 Shares in Issue Total Net Asset Value per Share (p) 197.5 198.4 137.8 198.0 226.5 227.6 159.0 227.3 222.6 224.0 157.9 222.4 31 May 2006 31 May 2007 31 May 2008 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 3,236,181 11,939,562 25,743,804 43,631,536 6,135,642 13,583,887 23,810,388 67,397,494 6,366,706 16,605,411 22,286,204 82,196,226 All share classes were issued at launch except for Share Class 2 - Accumulation which was launched on 14 August 2003. Page 70 Stewardship International Fund Performance Record Calendar Year Share Class Highest Share Price (p) 156.1 156.7 106.1 155.3 148.6 169.3 169.9 116.4 169.8 206.1 206.8 142.9 206.6 225.0 225.7 156.2 226.2 230.3 231.3 162.1 232.2 229.6 230.6 161.7 230.7 Lowest Share Price (p) 118.5 118.6 100.1 119.0 119.5 149.9 150.5 102.3 150.4 163.4 163.8 112.7 164.7 188.5 189.4 131.5 189.1 204.6 205.3 143.4 207.3 188.2 189.0 132.7 189.5 Distribution per Share (p) 0.4600 0.4602 0.1917 2.4804 1.3544 0.4720 0.1843 0.6229 2.8450 0.6384 0.2588 1.1458 3.0215 0.9736 2.9565 0.3090 0.0655 1.0522 2.8936 0.8560 0.6144 1.0459 2.0878 2003 2004 2005 2006 2007 2008*** 1 – Income 1 – Accumulation 2 – Accumulation* 4 – Income 4 – Accumulation** 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income * From 14 August 2003. ** To 12 August 2003. *** To 31 May 2008. Past performance is not necessarily a guide to future performance. The price of shares, and the income from them may go down as well as up. Total Expense Ratios Date 31 May 2008 Share Class 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income Total Expense Ratio (%) 1.52 1.65 0.81 0.06 1.46 1.60 0.79 0.03 31 May 2007 Page 71 Stewardship International Fund Statement of Total Return for the year ended 31 May 2008 Notes Net (losses)/gains on investments during the year Other gains Income Expenses Finance costs: Interest Net income before taxation Taxation Net income after taxation for the year Total return before distributions for the year Finance costs: Distributions 6 5 1 2 3 4 6 4,882 (1,005) (9) 3,868 (660) 3,208 755 (3,195) 31/05/2008 £'000 (2,813) 360 2,958 (925) (3) 2,030 (271) 1,759 29,598 (1,832) 31/05/2007 £'000 27,808 31 Change in net assets attributable to shareholders (2,440) 27,766 Statement of Change in Shareholders' Net Assets for the year ended 31 May 2008 31/05/2008 £'000 Net assets at the start of the year Movement due to sales and repurchases of shares Amounts received on issue of shares Amounts paid on cancellation of shares 235,847 31/05/2007 £'000 151,946 69,416 (33,843) 35,573 69,098 (13,193) 55,905 (8) 27,766 238 Stamp duty reserve tax Change in net assets attributable to shareholders (see above) Retained distribution on accumulation shares (7) (2,440) 426 Net assets at the end of the year 269,399 235,847 Notes to the financial statements are on pages 79 to 86. Page 72 Stewardship International Fund Portfolio Statement as at 31 May 2008 Total Net Assets % 1.52 1.69 0.44 0.44 1.92 6.01 Investment Australia - 6.01% (31/05/2007 - 2.64%) Arrow Energy Cochlear Energy Development Lend Lease Sonic Healthcare Holding Market Value £’000 4,126 4,542 1,184 1,184 5,166 16,202 2,577,823 173,852 975,692 201,438 749,100 Austria - 1.14% (31/05/2007 - 1.45%) Telekom Austria Belgium - 0.00% (31/05/2007 - 0.00%) Dexia Strips VVPR Bermuda - 3.59% (31/05/2007 - 2.27%) Accenture 'A' China Hongxing Sports Nabors Industries 255,360 3,081 1.14 47,820 - - 216,000 8,175,000 160,060 4,473 1,777 3,410 9,660 1.66 0.66 1.27 3.59 Brazil - 4.15% (31/05/2007 - 1.59%) Companhia Energetica Minas Gerais ADR Non-voting Preference Diagnosticos da America Natura Cosmeticos 577,040 128,100 435,900 6,907 1,733 2,548 11,188 2.56 0.64 0.95 4.15 Canada - 2.86% (31/05/2007 - 0.94%) Canadian Tire Corp Class 'A' Carmanah Technologies Shoppers Drug Mart Tim Hortons 69,636 20,460 124,671 121,627 2,124 10 3,541 2,038 7,713 0.79 1.31 0.76 2.86 Cayman Islands - 1.17% (31/05/2007 - 1.41%) JA Solar ADR Suntech Power ADR 133,027 79,600 1,436 1,716 3,152 0.53 0.64 1.17 China - 0.20% (31/05/2007 - 0.53%) Tianjin Capital Environmental Protection Cyprus - 0.72% (31/05/2007 - 0.00%) Prosafe Production Denmark - 0.80% (31/05/2007 - 1.04%) William Demant Finland - 0.80% (31/05/2007 - 1.05%) YIT 2,830,000 543 0.20 533,600 1,931 0.72 56,575 2,143 0.80 144,582 2,148 0.80 Page 73 Stewardship International Fund France - 3.06% (31/05/2007- 1.62%) AXA Essilor International Vallourec 210,048 51,458 18,208 3,754 1,637 2,851 8,242 1.39 0.61 1.06 3.06 Germany - 3.84% (31/05/2007- 3.87%) Celesio Centrotherm Photovoltaics Rhoen-Klinikum SAP Solar World 40,051 61,122 140,484 50,770 108,144 853 3,041 2,185 1,419 2,846 10,344 0.32 1.13 0.81 0.53 1.05 3.84 Hong Kong - 1.53% (31/05/2007- 1.21%) Esprit India - 1.38% (31/05/2007 - 0.97%) Infosys Technologies ADR Japan - 15.25% (31/05/2007 - 11.20%) Aisin Seiki Asahi Pretec Benesse East Japan Railway FANUC Keyence Matsushita Electric Industrial Mitsubishi Estate Sumitomo Electric Toyota Motor USS 695,000 4,122 1.53 149,230 3,720 1.38 180,000 355,300 220,700 1,126 60,100 17,800 199,000 551,000 541,700 130,600 39,170 3,182 5,479 4,517 4,398 3,300 2,151 2,290 7,517 3,539 3,357 1,342 41,072 1.18 2.03 1.68 1.63 1.22 0.81 0.85 2.79 1.31 1.25 0.50 15.25 Luxembourg - 0.00% (31/05/2007 - 1.27%) Mexico - 0.97% (31/05/2007 - 0.62%) Alsea Banco Compartamos 1,472,500 767,522 972 1,628 2,600 0.36 0.61 0.97 Netherlands - 0.00% (31/05/2007 - 0.60%) Norway - 3.98% (31/05/2007 - 3.39%) Prosafe Statoil Tomra Systems 533,600 190,934 1,122,400 2,891 3,758 4,078 10,727 1.07 1.40 1.51 3.98 Philippines - 1.26% (31/05/2007 - 0.66%) Manila Water Portugal - 0.39% (31/05/2007 - 0.70%) Sonae SGPS Singapore - 1.70% (31/05/2007 - 0.00%) City Developments Page 74 16,754,000 3,404 1.26 1,290,001 1,061 0.39 1,086,000 4,583 1.70 Stewardship International Fund South Korea - 0.59% (31/05/2007 - 0.69%) Shinsegae Spain - 1.98% (31/05/2007 - 2.05%) Ebro Puleva Industria de Diseno Textil 5,418 1,596 0.59 332,436 78,265 3,377 1,946 5,323 1.25 0.73 1.98 Sweden - 1.14% (31/05/2007 - 0.87%) Assa Abloy Securitas 246,400 144,268 2,155 912 3,067 0.80 0.34 1.14 Taiwan - 0.51% (31/05/2007 - 0.29%) Taiwan Semiconductor Manufacturing ADS United Kingdom - 6.51% (31/05/2007 - 13.26%) BG Cattles Cattles nil paid rights Informa †F&C International Heritage Fund Acc 4 SSL International Trading Emissions 237,914 1,377 0.51 203,599 329,638 148,336 668,621 7,000,000 641,388 933,324 2,578 602 79 2,569 7,336 3,091 1,279 17,534 0.96 0.22 0.03 0.95 2.72 1.15 0.48 6.51 United States of America - 28.32% (31/05/2007 - 37.97%) Autoliv Automatic Data Processing Burlington Northern Santa Fe Community Health Systems Comverge Crown Castle International CVS Caremark DaVita Dell Energen Energy Conversion Devices EnerNOC Evergreen Solar FuelCell Energy Henry Schein Intel Microsoft Motorola National Oilwell Varco Ormat Technologies PepsiCo PerkinElmer Qualcomm Quanta Services Scholastic Starbucks 118,905 63,543 39,541 121,636 235,635 221,473 200,898 198,199 212,223 73,325 48,044 90,642 196,022 395,906 87,546 358,638 267,649 228,911 37,905 76,889 62,643 367,762 88,528 184,092 74,315 260,227 3,293 1,389 2,265 2,220 1,531 4,772 4,355 5,212 2,484 2,789 1,546 684 1,032 2,026 2,472 4,203 3,833 1,083 1,603 1,955 2,171 5,279 2,179 2,990 1,171 2,401 1.22 0.52 0.84 0.82 0.57 1.77 1.62 1.93 0.92 1.04 0.57 0.25 0.38 0.75 0.92 1.56 1.42 0.40 0.60 0.73 0.81 1.96 0.81 1.11 0.43 0.89 Page 75 Stewardship International Fund SunPower 'A' United Rentals Whole Foods Market 40,862 455,854 197,480 1,695 4,764 2,901 76,298 0.63 1.77 1.08 28.32 Portfolio of investments Net other assets Total net assets 252,831 16,568 269,399 93.85 6.15 100.00 All investments are approved securities as defined in the Collective Investment Schemes sourcebook unless otherwise stated. The comparative percentage figures in brackets are as at 31 May 2007. † This security is deemed to be an investment in a related party of the ACD. Page 76 Stewardship International Fund Balance Sheet as at 31 May 2008 31/05/2008 £'000 31/05/2007 £'000 Notes ASSETS Portfolio of investments Debtors Cash and bank balances Total other assets 8 6,949 13,301 252,831 4,699 13,674 20,250 222,069 18,373 Total assets LIABILITIES Creditors Bank overdraft Distribution payable on income shares Total liabilities 9 (522) (1,389) (1,771) 273,081 240,442 (2,637) (857) (1,101) (3,682) (4,595) Net assets attributable to shareholders 269,399 235,847 Notes to the financial statements are on pages 79 to 86. . Page 77 Stewardship International Fund Summary of Material Portfolio Changes for the year ended 31 May 2008 Note Purchases On Semiconductor United Rentals Mitsubishi Estate City Developments Cochlear Shoppers Drug Mart AXA Vallourec Centrotherm Photovoltaics Aisin Seiki eBay Companhia Energetica Minas Gerais ADR Non-voting Preference Asahi Pretec Arrow Energy Whole Foods Market Hypo Real Estate Canadian Tire Corp Class 'A' Crown Castle International Landi Renzo YIT Other purchases Total for the year 10 Cost £'000 5,481 5,276 5,265 5,209 4,675 4,370 3,851 3,421 3,317 3,289 3,196 2,965 2,939 2,894 2,859 2,655 2,540 2,489 2,485 2,427 71,502 143,105 Note Sales On Semiconductor Burlington Northern Santa Fe eBay SunPower 'A' Apple Associated British Foods Vallourec Hypo Real Estate Evergreen Solar Ryohin Keikaku Oriflame Cosmetics SDR JA Solar ADR CVS Caremark United Rentals Best Buy Whole Foods Market Centrotherm Photovoltaics Applied Materials Seven & I Reuters Proceeds £'000 4,829 4,616 4,497 4,342 3,726 3,545 3,342 3,257 3,066 2,961 2,912 2,871 2,806 2,773 2,313 2,312 2,273 2,163 2,138 2,104 Other sales Total for the year 10 46,653 109,499 Page 78 Stewardship International Fund Notes to the Financial Statements 1. NET (LOSSES)/GAINS ON INVESTMENTS The net (losses)/gains on investments during the year comprise: Non-derivative securities 2. OTHER GAINS Currency gains 3. INCOME Overseas dividends Bank interest UK dividends Stocklending commission* Unfranked component of dividend distributions Franked component of dividend distributions Property income distributions from UK REITs 3,717 487 354 161 126 26 11 4,882 2,045 392 423 98 2,958 360 31 (2,813) 27,808 31/05/2008 £'000 31/05/2007 £'000 * Stocklending commission is disclosed net of fees as explained in accounting policy 1 (g). The gross stocklending commission received was £235,699 (31/05/2007: £143,393), with fees deducted of £75,097 (31/05/2007: £45,606). The total amount paid to F&C Fund Management Limited in relation to fees deducted was £68,830 (31/05/2007: £41,909). 4. EXPENSES Payable to the Authorised Corporate Director, associates of the Authorised Corporate Director, and agents of either of them: Authorised Corporate Director's periodic charge Payable to the Depositary, associates of the Depositary and agents of either of them: Safe custody fees Depositary's fee Handling charges Administration costs 866 805 34 29 11 7 81 18 23 1 5 47 Other expenses: Registrar's fees Accounting & administration fees Audit fee Price publication costs Dividend Charges Report & accounts printing costs VAT recovered* Total expenses (including VAT where appropriate) 49 20 7 4 3 2 (27) 58 1,005 52 9 6 4 1 1 73 925 * During the period, the Fund recovered VAT of £27,088 as a result of the European Court of Justice decision C-169 / 04 in May 2006. Page 79 Stewardship International Fund 5. TAXATION a) Analysis of charge in the year Corporation tax Double taxation relief Overseas tax suffered Movement in overseas tax provision Eligible unrelieved foreign tax brought forward Total current tax (note 5b) Deferred tax (note 5c) Total taxation 31/05/2008 £'000 651 (320) 292 3 (69) 557 103 660 31/05/2007 £'000 379 (255) 279 (8) (124) 271 271 b) Factors affecting current tax charge for year The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an Open Ended Investment Company (OEIC) of 20%. The differences are explained below: Net income before taxation Corporation tax at 20% (2007: 20%) Effects of: Income not subject to taxation. Utilisation of eligible unrelieved foreign tax brought forward Expenses not deductible for tax purposes Irrecoverable overseas tax Income taxable in different periods Movement in overseas tax provision Taxable dividends taken to capital Current tax charge (note 5a) (76) (69) 2 (28) (49) 3 557 (85) (124) 24 (38) (8) 96 271 3,868 774 2,030 406 Open Ended Investment Companies are exempt from tax on capital gains. Therefore, any capital return is not included in the above reconciliation. c) Deferred tax Provision at start of year Deferred tax charge in profit and loss account for period (note 5a) Provision at end of year The provision for deferred taxation is made up as follows: Income taxable in different periods d) Factors that may affect future tax charges At the period end, after offset against accrued income taxable on receipt, there is a potential deferred tax asset in relation to eligible unrelieved foreign tax available for double taxation relief of £nil (31/05/2007: £39,772). 103 103 - 103 - Page 80 Stewardship International Fund 6. FINANCE COSTS 31/05/2008 £'000 31/05/2007 £'000 Distributions and interest The distributions take account of income received on the issue of shares and income deducted on the cancellation of shares and comprise: Interim dividend distributions Final dividend distributions Income deducted on cancellation of shares Income received on issue of shares Net distributions for the year Details of the distributions per share are set out in the distribution tables on page 87. Interest Total finance costs 7. MOVEMENT BETWEEN NET INCOME AND DISTRIBUTIONS Net income after taxation Handling charges Recovery of taxable dividends taken to capital 3,208 11 (24) 3,195 1,759 1 72 1,832 9 3,204 3 1,835 1,152 2,106 3,258 123 (186) 3,195 683 1,263 1,946 8 (122) 1,832 8. DEBTORS Amounts receivable for issue of shares Accrued income Overseas tax recoverable Prepaid expenses 6,035 835 78 1 6,949 4,164 524 10 1 4,699 9. CREDITORS Corporation tax payable Deferred tax provision Accrued Authorised Corporate Director’s periodic charge Overseas tax provision Amounts payable for cancellation of shares Accrued expenses Purchases awaiting settlement 236 103 76 48 31 28 522 76 2 734 21 1,804 2,637 Page 81 Stewardship International Fund 10. PORTFOLIO TRANSACTION COSTS Analysis of total purchase costs Purchases in the period before transaction costs Commissions Taxes Total purchase costs Gross purchases total Analysis of total sales costs Gross sales before transaction costs Commissions Taxes Total sales costs Total sales net of transaction costs 11. CONTINGENT ASSETS The Fund has a contingent asset comprising amounts refundable in respect of VAT charged on services provided to the Fund and originally treated by HM Revenue and Customs as subject to VAT. Following the European Court of Justice decision in C-169 / 04, Abbey National PLC & Inscape Investment Fund in May 2006, HMRC has revised its guidance as to the extent of the exemption available to investment funds in accordance with Article 13B(d)(6) of the Sixth VAT Directive as effected in UK law by Items 9 & 10 of Group 5, Schedule 9 to the VAT Act 1994. Claims for repayment of VAT paid on services that now satisfy the revised conditions for exemption may be made for a maximum of three years from the date of claim. The Fund is in the process of reviewing VAT incurred on Registration and Administration fees in order to claim repayment where appropriate but is not yet able to calculate an accurate monetary estimate of the amounts recoverable. A large portion of this has now been received and disclosed within note 4. However, further claims are currently in the process of being agreed. 12. CONTINGENT LIABILITIES AND COMMITMENTS The aggregate of commitments not provided for at the balance sheet date are as follows: £'000 Cattles nil paid rights 13. POST BALANCE SHEET EVENTS There were no material post balance sheet events which have a bearing on the understanding of the financial statements. 190 109,683 (183) (1) (184) 109,499 68,113 (98) (4) (102) 68,011 142,898 189 18 207 143,105 118,949 200 50 250 119,199 31/05/2008 £'000 31/05/2007 £'000 Page 82 Stewardship International Fund 14. RELATED PARTY DISCLOSURES F&C Fund Management Limited, as Authorised Corporate Director (ACD), is a related party, and acts as principal in respect of all transactions of shares in the Company. The aggregate monies received through issue, and paid on cancellation, are disclosed in the Statement of Change in Shareholders' Net Assets. Any amounts due to, or from, F&C Fund Management Limited at the end of the accounting period are disclosed in notes 9 and 8 respectively. Amounts payable to F&C Fund Management Limited in respect of fund administration are disclosed in note 4 and amounts due at the end of the year in note 9. Amounts payable to F&C Fund Management Limited in respect of stocklending fees are disclosed in note 3. The ACD is also the ACD or Manager for other authorised funds and those funds may invest in each other where this is within the investment objectives of the investing fund. Such transactions will be conducted on an arms length basis within the regulations and the terms of the prospectus. Investments considered to be related parties have been identified in the portfolio statement and the income from these investments is £151,457. 15. STOCK LENDING The Fund carries out stock lending activities. Income from these activities is shown in note 3. The value of stock on loan at the balance sheet date was £31,535,908 (31/05/2007: £19,805,347). The value of collateral held at the balance sheet date was £32,239,912 (31/05/2007: £21,732,563). This collateral was held in the form of: Government Bonds Cash Instruments Corporate Bonds 16. SHAREHOLDERS’ FUNDS The Fund currently has three share classes: Class 1 (Retail), Class 2 (Institutional) and Class 4 (Asset Manager). The ACD charge on each share class is as follows: Class 1: Class 2: Class 4: 1.50%* 0.75% nil £24,697,762 £7,542,150 £nil (31/05/2007: £17,669,331) (31/05/2007: £3,950,670) (31/05/2007: £112,562) The net asset value of each share class, the net asset value per share, and the number of shares in each share class are given in the comparative table on page 70. The distribution per share class is given in the distribution table on page 87. All classes have the same rights on winding up. * The ACD charge changed from 1.375% to 1.50% from 1 March 2008. Page 83 Stewardship International Fund 17. FINANCIAL INSTRUMENTS The analyses and tables provided below refer to the narrative disclosure on ‘Financial Instrument Risks’ on page 21. Currency exposures A substantial proportion of the financial net assets of the Fund are denominated in currencies other than Sterling with the effect that the balance sheet and total return can be significantly affected by currency movements. Currency Monetary exposures £’000 11 21 29 207 137 19 1,240 Net foreign currency assets As at 31/05/2008 Non-monetary exposures £’000 16,202 4,281 7,713 2,143 30,199 4,665 41,070 1,596 12,658 2,599 3,404 6,359 3,067 99,340 Net foreign currency assets As at 31/05/2007 Non-monetary exposures £’000 6,238 1,267 2,212 2,454 26,747 3,624 26,421 1,629 7,986 1,472 1,548 859 5,054 103,280 Australian Dollar Brazilian Real Canadian Dollar Chinese Yuan Renminbi Danish Krone Euro Hong Kong Dollar Japanese Yen Korean Won Norwegian Krone Mexican Peso Philippine Peso Singapore Dollar Swedish Krona US Dollar Currency Total £’000 16,202 4,281 7,724 21 2,143 30,228 4,665 41,277 1,596 12,795 2,618 3,404 6,359 3,067 100,580 Australian Dollar Brazilian Real Canadian Dollar Chinese Yuan Renminbi Danish Krone Euro Hong Kong Dollar Japanese Yen Korean Won Norwegian Krone Mexican Peso Philippine Peso Singapore Dollar Swedish Krona US Dollar Monetary exposures £’000 2 7 2,119 (106) 101 9 1,956 Total £’000 6,238 1,267 2,214 7 2,454 28,866 3,624 26,315 1,629 8,087 1,472 1,548 868 5,054 105,236 Page 84 Stewardship International Fund Interest rate risk profile of financial assets and financial liabilities The interest rate profile of the Fund’s financial assets at 31 May 2008 was: Total Currency 31/05/2008 Australian Dollar Brazilian Real Canadian Dollar Chinese Yuan Renminbi Danish Krone Euro Hong Kong Dollar Japanese Yen Korean Won Norwegian Krone Mexican Peso Philippine Peso Singapore Dollar Swedish Krona UK Sterling US Dollar Total 31/05/2007 Australian Dollar Brazilian Real Canadian Dollar Chinese Yuan Renminbi Danish Krone Euro Hong Kong Dollar Japanese Yen Korean Won Norwegian Krone Mexican Peso Philippine Peso Singapore Dollar Swedish Krona UK Sterling US Dollar Total £’000 16,202 4,281 7,724 21 2,143 30,228 4,665 41,277 1,596 12,837 2,618 3,404 6,359 3,067 36,073 100,586 273,081 £’000 6,238 1,267 2,214 7 2,454 28,866 3,624 28,119 1,629 8,087 1,472 1,548 868 5,054 43,756 105,239 240,442 Floating rate financial assets £’000 12,459 842 13,301 £’000 2,035 1,586 8,268 1,785 13,674 Fixed rate interest assets £’000 £’000 Financial assets on which no interest is paid £’000 16,202 4,281 7,724 21 2,143 30,228 4,665 41,277 1,596 12,837 2,618 3,404 6,359 3,067 23,614 99,744 259,780 £’000 6,238 1,267 2,214 7 2,454 26,831 3,624 26,533 1,629 8,087 1,472 1,548 868 5,054 35,488 103,454 226,768 The floating rate financial assets earn interest which is based on the London Inter Bank Offer Rate (LIBOR) or its overseas equivalent. Financial assets on which no interest is paid in both periods comprised equity shares and collective investment schemes that have no maturity date and short term debtors and creditors. Page 85 Stewardship International Fund The interest rate profile of the Fund’s financial liabilities at 31 May 2008 was: Total Currency Floating rate financial liabilities £’000 1,389 1,389 £’000 857 857 Fixed rate interest liabilities £’000 £’000 Financial liabilities on which no interest is paid £’000 42 271,644 6 271,692 £’000 1,804 237,778 3 239,585 31/05/2008 Norwegian Krone UK Sterling* US Dollar Total 31/05/2007 Japanese Yen UK Sterling* US Dollar Total £’000 42 273,033 6 273,081 £’000 1,804 238,635 3 240,442 * Including £269,399,281 (31/05/2007: £235,847,373) in respect of the Fund’s liability to redeem all shares. The floating rate financial liabilities include a Sterling denominated overdraft that in the period bore interest based on the London Inter Bank Offer Rate (LIBOR). Maturity of financial liabilities The financial liabilities of the Fund as at 31 May 2008 are payable either within one year or on demand, as were the financial liabilities of the previous year ended 31 May 2007. Fair values of financial assets and liabilities There is no material difference between the value of the financial assets and liabilities, as shown in the balance sheet and their fair value. Page 86 Stewardship International Fund Distribution table for the period from 1 December 2007 to 31 May 2008 Net Income Equalisation Distribution payable 31/07/2008 pence per share Distribution paid 31/07/2007 pence per share pence per share pence per share 31/05/2008 Group 1: Shares purchased prior to 1 December 2007. Group 2: Shares purchased from 1 December 2007 to 31 May 2008. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 2.0878 1.3563 0.7315 2.0878 2.0878 1.6052 1.6052 Accumulation 1.0459 0.7974 0.2485 1.0459 1.0459 0.6449 0.6449 Accumulation 0.6144 0.1786 0.4358 0.6144 0.6144 0.0655 0.0655 Income 0.8560 0.6992 0.1568 0.8560 0.8560 0.3090 0.3090 Page 87 Stewardship International Fund Distribution table for the period from 1 June 2007 to 30 November 2007 Net Income Equalisation Distribution paid 31/01/2008 pence per share Distribution paid 31/01/2007 pence per share pence per share pence per share 30/11/2007 Group 1: Shares purchased prior to 1 June 2007. Group 2: Shares purchased from 1 June 2007 to 30 November 2007. Class 1 Group 1 Group 2 Class 1 Group 1 Group 2 Class 2 Group 1 Group 2 Class 4 Group 1 Group 2 Income 1.2884 0.6515 0.6369 1.2884 1.2884 1.1654 1.1654 Accumulation 0.4073 0.1738 0.2335 0.4073 0.4073 0.2868 0.2868 Accumulation Income - Page 88 Stewardship International Fund CORPORATE SHAREHOLDERS Dividend distribution A shareholder liable to UK corporation tax receives these income distributions and associated tax credits as franked investment income to the extent that the gross income from which the distributions are made is itself franked investment income. Where the gross income from which the distributions are made is not wholly franked investment income, part of the distributions are received as an annual payment from which income tax at the lower rate is deemed to have been deducted. A shareholder liable to UK corporation tax receives these distributions, excluding equalisation, as follows; Date Share Class 31/05/2008 30/11/2007 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income 1 – Income 1 – Accumulation 2 – Accumulation 4 – Income Franked Investment Income* (%) 7.84 7.84 7.84 7.84 9.28 9.28 Unfranked Investment Income** (%) 92.16 92.16 92.16 92.16 90.72 90.72 * Proportion of the total income distribution, excluding equalisation, together with the tax credit, which is received as franked investment income. ** Proportion of the total income distribution, excluding equalisation, which is deemed to be received as an annual payment after deduction of income tax at the lower rate and is liable to corporation tax. It is not franked investment income. Page 89