iimia INVESTMENT TRUST PLC
PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS
The Company commenced trading on 6 April 2004, and it is my pleasure to put before you the second
annual report covering the year 1 May 2005 to 30 April 2006.
During the year Nick Greenwood and his team identified many opportunities within the closed-ended
sector. Despite hedging away market risk and holding cash balances from time to time, your Company’s
net asset value rose over the year from a restated 109.73p to 152.01p, representing an increase of 39%.
Over the same period, the MSCI World Index (in sterling) rose by 31%. Our benchmark, being LIBOR
plus 2% rose by 6.9%, and as a result we were pleased that the Investment Manager earned a
performance fee, which, in accordance with the provisions of the agreement, was capped at £772,000
(inc VAT). The Company’s shares have traded close to Net Asset Value in a narrow band ranging
between a 3% premium and a 4% discount.
At the start of the Company’s financial year there were 21,018,884 shares in issue. During the year a
further 600,000 shares were allotted under the block listing arrangements. In June 2005, 111,769 shares
were bought into treasury to add to the 665,000 shares already in treasury at the beginning of the year.
Later in the same month all 776,769 shares then held within treasury were re-issued at premium resulting
in an overall profit of £82,000. Subsequent to the financial year end a further 509,095 shares were issued
on 25 May 2006 at a premium under the block listing.
Following the Company’s successful placing and offer for new shares, which closed on 1 June 2006, a
further 9,115,966 new shares were issued increasing the issued share capital to 31,243,945 shares. The
new shares were placed at a premium, therefore avoiding NAV dilution for existing shareholders. The
Board is pleased with the outcome of the fundraising which, notwithstanding difficult market conditions,
has increased the size of the Company by over 40% and significantly broadened its shareholder base.
The fundraising was also a good opportunity to develop what will hopefully be a long and rewarding
relationship with the sponsors to the issue, Intelli Corporate Finance Limited. Intelli became part of the
iimia Investment Group on 28 September 2005 and are therefore a sister company to your company’s
Investment Manager, iimia plc.
The increase in the Company’s size and the anticipated improved liquidity in its shares have facilitated
the introduction of a “floor” into the Board’s discount management policy, under which the Company
intends to purchase shares through the market in the event of the share price moving to a discount of
more than 3% to the NAV per share.
The Company’s current investment objective is to achieve absolute returns, through exploiting
inefficiencies in the pricing of closed-end funds. The Board is proposing, subject to shareholder approval
at the Annual General Meeting, that the Company’s investment mandate be broadened to permit it to
invest in all types of open-ended funds onshore and offshore and in any class of security in an investment
fund. As a result the Investment Manager will have access to opportunities within the open-ended fund
sector which are currently not available or under represented in the closed-end funds sector. However it
is the intention of the Board that investment in open-ended funds be limited to a maximum of 25% of the
The Company does not propose to pay any dividends in respect of the period under review.
Global Financial markets have now entered a long-anticipated correction phase. Momentum has broken
down and it is difficult to envisage equity markets regaining their poise during the traditionally quiet
Turmoil is beneficial to our style as it creates mispricing and anomalies within the closed-ended sector.
We expect to use this period to exploit opportunities to build positions in order to structure the portfolio so
that it demonstrates greater conviction behind our core themes. We retain an ‘equity-centric’ stance as
we believe equities remain attractively priced relative to other major asset classes.
The Board is confident that Nick Greenwood and his team can take advantage of the recent setback in
markets to identify attractive investment opportunities in which to invest the proceeds of the recent share
Anthony Townsend, Chairman
23 June 2006
Investment Manager’s Report
The period under review witnessed some of the most benign conditions that investors have seen in recent
memory. Abundant liquidity drove virtually all asset classes steadily higher throughout the year. This was
fuelled by the ability to borrow cheaply and reinvest in a quest for higher returns than the low cost of debt.
As a result of markets moving only upwards for an extended period of time, volatility has declined to a
generational low. In these circumstances, we have retained a highly equity-centric stance within the
By far the biggest contributor to performance was the position in SR Europe Investment Trust plc, which
appreciated more than fourfold. Interestingly, the next two investments that contributed the most were
Edinburgh Worldwide Investment Trust plc and Perpetual Japan Investment Trust plc. We have been
rewarded for our patience. Given the fact that we were in a bull phase, negative returns were hard to
come by. Excluding our market hedges, the biggest drag was Aberdeen Development Capital plc where
problems arose at one of the trust’s largest assets. Another negative was the cash balances that were
held from time to time.
Our invested position has ranged between 80% and 104%. However it is timely to remind shareholders
that we are not compelled by our mandate to remain fully invested should opportunities to make positive
returns relative to cash on deposit become less numerous. This figure is likely to fall below the 80% figure
at certain points within the investment cycle.
Discounts within the Investment Trust sector have continued to narrow. For some time the team at iimia
has held the view that discounts are effectively trending to zero. At the moment this remains very much a
minority view. Most commentators attribute the phenomenon to the natural cyclical effect of a rampant
three year bull market. Traditionally discounts are driven by sentiment within the London stock market.
However we believe that buoyant equity markets have obscured structural changes within the sector.
These have been brought about in part by the influences of activist investors many of whom are
structured as hedge funds. These represent the market at work.
The evolution of sophisticated hedging techniques has meant that it is no longer sustainable for
mainstream trusts to remain on double digit discounts. A trader merely needs to accumulate sufficient
shares to force some kind of reconstruction or wind up. By simultaneously owning derivatives that offset
much of the market risk acquired along with the stake in the trust, these investors make straightforward
profits from the elimination of the discount.
Hedge funds need to continuously make money for their backers, as these tend to be fickle. A manager
enduring a quiet patch will quickly suffer redemptions as their investors melt away much quicker than in
the case of traditional funds. Hence there is a faint air of desperation surrounding the arbitrageurs that
continue to threaten investment trusts. Therefore one of our core themes is increased corporate activity
within the sector. We don’t expect much activity until a correction or bear phase develops. Initially
discounts will widen allowing the activists to acquire loose stock. These positions will form the platform
from which the next round of attacks will be launched. Once these come to fruition, we expect that the
boards of many trusts will react to witnessing their peers being broken up by introducing much tighter
discount control mechanisms. Amongst the next group of victims could be trusts which fail to honour their
buyback policies. Failure to follow through on these promises will alienate supportive shareholders and
allow their share registers to be populated by hostile names. This whole merry go round will continue until
discounts are too narrow to allow the hedge funds to cover their costs. For now the sector will continue to
enjoy an “all boats rise with the tide” run where trusts’ share prices continue to outperform their underlying
portfolios. This trend should benefit the Trust’s entire portfolio, however Close Finsbury Eurotech Trust
plc and Alliance Trust plc, which briefly came under attack after the year end, are most directly affected.
Generally the themes behind the portfolio’s construction have not altered much during the past twelve
months. For example, we still favour funds managed by boutiques. These tend to be smaller and more
flexible than those run by the larger groups. This allows the managers to get all their ideas into their
portfolios, as the number of shares required to make a meaningful contribution to performance is small
enough to be bought in the market. The spectacular performance of SR Europe Investment Trust plc is
testament to what is achievable. We retain holdings in EP Global Opportunities Trust plc and The
Establishment Investment Trust plc where prior to striking out on their own, the personnel have many
years of experience with major companies behind them. A newer boutique position that has recently
become our second largest investment is Artemis Alpha Trust plc after a violent sell off in May provided
the opportunity to start rebuilding our holding. There are three strands behind our decision to invest.
Firstly it is an attractive way of subcontracting our exposure to junior resource stocks, which reflects
another of our themes. Secondly, the largest investment within the trust is in the unlisted fund
management company, Artemis. Organic growth combined with the strong momentum this business has
in a bull market, leads us to believe that the value of this stake will have appreciated since its last
valuation and that it represents “ hidden value”. Finally Artemis Alpha’s remuneration policy recreates the
reward structure of a hedge fund. Our interests as shareholders are firmly aligned with those of the
One of the more recent themes is energy shortages. Developments in resource rich nations such as
Venezuela, Bolivia and Russia demonstrate that governments are increasingly using the shortages in the
west as a political weapon. Furthermore we are concerned by research that suggests that the Saudi
oilfields are more mature than the house of Saud would like the world to believe. In addition to our stake
in Artemis Alpha we are obtaining exposure to the effects of these trends via Impax Environmental
Markets plc and City Natural Resources High Yield Trust plc.
Our stances on technology and favouring growth over value are linked. In recent years, markets have
rewarded companies that have handed back cash to shareholders via higher dividends and share
buybacks. Managements have responded by reducing investment in order to maximise free cash flow.
Ratings for faster and slower growing stocks have compressed and price earnings ratios demanded for
both are broadly similar. The technology sector has been directly affected as much of their output
represents somebody else’s capital expenditure. We expect that as the global economy slows, that this
will trigger a rotation back into growth stocks. We bought into this theme too early and positions such as
Herald Investment Trust plc have figured amongst the laggards in our portfolio over the past year.
Nevertheless we remain convinced that rotation will occur and we have recently been adding to exposure.
We spent the early months of the year fretting that we had too much of the portfolio in Japan, only to
spend the second half concerned that we had too little! We’ve had to be patient with our exposure to the
Tokyo market. Our style is to establish positions in investment areas long before they become consensus.
In the meantime the open market prices of the trusts we own are driven by perception, which frequently
lags well behind reality. In this instance we were a long way ahead of crowd, to the extent that at times
we wondered whether we had misjudged the situation and on several occasions re-evaluated our
analysis. We remain convinced that Japan has finally shaken off the aftermath of the bubble and is in the
early stage of a bull market. In the event of market setbacks, we will look to build up further our positions
in Japanese specialist trusts.
Gartmore Irish Growth Fund plc performed in a similar manner to our Japanese investments, lagging
badly during the early months, only to surge in the final weeks to return in excess of 44% over the period.
There remains the probability that abandoning control over domestic interest rate policy to the European
Central Bank will lead to an Irish asset bubble. Whilst this would clearly be unhealthy in the medium term,
Irish equities would initially rise significantly.
One theme that will disappear by the time the next annual report is published is hard closes. In the
coming year, trusts such as ISIS UK Select Trust plc, Active Capital Trust plc, Henderson Eurotrust plc
and Charter Pan European Trust plc all have dates which will lead to cash being handed back or undergo
some form of capital reconstruction.
The newest theme is low volatility. In the first paragraph, it was noted that volatility has recently touched
generational lows. This has hastened the emergence of a number of structured products, many traded on
the investment trust pitches. These funds package derivatives in a way that offers an attractive array of
outcomes for investors. When volatility normalises at a higher level we doubt that the associated rise in
the fundamental value of these derivatives will be properly reflected in the market quotes of these trusts.
Therefore towards the end of the period, positions were taken BNP Paribas European Shield and
Japanese Accelerated Performance Fund.
Recent launches across a range of specialist areas, reflect the fact that the investment trust sector has
entered a period of evolution. This has allowed creativity and entrepreneurial spirit to return. Both were
key drivers behind the success of the investment trust concept. This could not have happened at a better
time, as the fashion within the City is now to eschew closet tracking and to welcome more specialist,
focused and illiquid mandates, typified by many institutions embracing the core and satellite strategy.
These are ideally accessed via closed ended funds and a reinvigorated investment trust industry has
embraced the opportunity. Whereas not so long ago there was a handful of new trust launches each year,
primary activity is now positively frenzied. In fact during Cheltenham week alone, one trust broker was
signing off on five new launches.
This new breed offer exposure to a wide range of asset classes such as Asian income, eastern European
property, leases on retirement homes, wind farms, mortgage backed securities, hedge funds and private
equity on the Indian subcontinent. The list is endless. The majority are not traditional investment trusts,
more often they are AIM listed and domiciled on Guernsey. Nevertheless they look, smell and feel like
investment trusts, as they are closed ended and the usual market makers trade their shares. In fact the
Association of Investment Trust Companies (‘AITC’) has moved admirably swiftly with the times and plans
to drop the “T” from its title. This new generation has much in common with the spirit of the early pioneers,
such as River & Mercantile and Scottish American, which financed a wide array of ventures such as
farming the prairies, American railroads and the development of Argentina.
It will be interesting to see how well the sector’s analysts cope with monitoring such an increasingly wide
range of opportunities. A wind farm generates much electricity but no cosy daily net asset value. They
may miss a subtle change in Bulgarian planning law or the success of a particular printing works in
Bangalore. For better or worse, the share prices of the new breed and the underlying fundamentals will
get badly out of synch. This will provide some spectacularly large profits for those who make the effort to
analyse these new more esoteric trusts. Although new breed will probably not form one of our themes
until 2007, we have started to put our toe in the water. Small holdings have been acquired in Economic
Lifestyle, London Asia, Renewable Energy Generation and India Capital Growth.
The iimia Investment Trust has all the “tools in the box” for operating in sideways and falling markets.
Hedging away unintended risks in a bull market has reduced the risk profile of the portfolio however it can
make performance look pedestrian relative to excitement on offer elsewhere. Nevertheless, we will not be
operating in an upwards-only market forever. The tightening of monetary policy we have witnessed in
recent weeks may signal the end of the notorious carry trade. The removal of surplus liquidity from the
world’s capital markets will usher in a challenging period. However, we are relatively sanguine about
equities, particularly in Japan, Asia and larger companies here in the UK. These never looked expensive
relative to other asset classes and any weakness would quickly lead to dividend yields rising to attractive
levels. Furthermore, turmoil in financial markets will create plenty of mispricings and market inefficiencies
for us to take advantage of in our specialist area of closed ended funds. The move to order driven trading
on the London Stock Exchange SETS system has dramatically increased the short-term volatility of
investment trusts. However it will be important to keep our nerve during what promises to be a difficult
Nick Greenwood, iimia plc
The Directors announce the unaudited statement of results for the year ended 30 April 2006 as
INCOME STATEMENT (unaudited)
for the year ended 30 April 2006
Year ended 30 April 2006 Period 20 January 2004 to
30 April 2005
Revenue Capital Total* Revenue Capital Total*
£’000 £’000 £’000 £’000 £’000 £’000
Gains on investments at fair
value through profit and loss - 10,009 10,009 - 2,790 2,790
Dividends and Interest 349 - 349 295 - 295
Investment management fee (163) (772) (935) (139) (196) (335)
Exchange (losses)/gains - (149) (149) - 96 96
Other expenses (193) - (193) (272) - (272)
Return on ordinary activities (7) 9,088 9,081 (116) 2,690 2,574
before finance costs and taxation
Interest payable (72) - (72) (40) - (40)
Return on ordinary activities
before taxation (79) 9,088 9,009 (156) 2,690 2,534
Taxation on ordinary activities - - - - - -
Return on ordinary activities
after taxation (79) 9,088 9,009 (156) 2,690 2,534
pence pence pence pence pence pence
Return per Ordinary share:
Basic and Diluted (0.37) 42.29 41.92 (0.76) 13.03 12.27
Weighted Average number of shares in issue, used to calculate return per Ordinary Share.
Ordinary shares 21,491,213 20,636,884
The total column of this statement is the income statement of the Company. The supplementary
revenue return and capital return columns have been prepared in accordance with the AITC’s SORP.
* Comparatives have been restated in accordance with the adoption of FRS 25 and FRS 26 as
disclosed in the notes at the end of this announcement.
These accounts are unaudited and are not the Company’s statutory accounts.
All revenue and capital items in the above statement derive from continuing operations. No
operations were acquired or discontinued in the period. There are no recognised gains or losses
other than those passing through the Income Statement.
BALANCE SHEET (unaudited)
for the year ended 30 April 2006
30 April 2005
30 April 2006 (Restated*)
Investments held at fair value
through profit or loss 32,761 22,821
Debtors 554 493
Cash at bank 1,887 2,092
Creditors - amounts falling due
Within one year 2,339 3,071
Net current assets /(liabilities) 102 (486)
Net assets 32,863 22,335
Share capital 216 210
Share premium account 3,054 2,249
Special reserve 18,050 18,050
Capital reserve – realised 4,972 1,565
Capital reserve – unrealised 6,806 1,125
Own shares held in Treasury - (708)
Revenue reserve (235) (156)
Total equity attributable to
equity shareholders 32,863 22,335
Net asset value per Ordinary
share 152.01 109.73
Number of Ordinary shares used
for the calculation of the Net
Asset Value. 21,618,884 20,353,884
*Comparative figures have been restated in accordance with the adoption of FRS 25 and FRS 26 as
disclosed in the notes at the end of this announcement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS (unaudited)
Share Capital Capital Own
Share premium Special reserve reserve Shares Revenue
capital account reserve realised unrealised held in reserve Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
At 30 April 2005 as previously stated 210 2,249 18,050 1,565 1,384 (708) (156) 22,594
Adjustment required by adoption of
FRS26 - - - - (259) - - (259)
At 30 April 2005 as restated 210 2,249 18,050 1,565 1,125 (708) (156) 22,335
Movement in the year
Return for the year - - - 3,407 5,681 - (79) 9,009
Issue of Ordinary share capital 6 723 - - - - - 729
Ordinary shares purchased and held in - - - - - (124) - (124)
Ordinary shares sold from Treasury - 82 - - - 832 - 914
As at 30 April 2006 216 3,054 18,050, 4,972 6,806 - (235) 32,863
As at 20 January 2004 - - - - - - - -
movement for the period 10 January
2004 to 30 April 2005 as restated
As previously reported
Return for the period - - - 1,565 1,125 (156) 2,534
Issue of Ordinary share capital 210 20,810 - - - - - 21,020
Costs of issue - (511) - - - - - (511)
Transfer to Special reserve (18,050) 18,050 - - - - -
Ordinary shares purchased and held in
Treasury - - - - - (708) - (708)
As at 30 April 2005 as restated 210 2,249 18,050 1,565 1,125 (708) (156) 22,335
* Comparatives have been restated in accordance with the adoption of FRS25 and FRS26 as disclosed in the notes at the end of this announcement.
STATEMENT OF CASH FLOWS (unaudited)
for the year ended 30 April 2006
Year ended January 2004 to
30 April 30 April
Net cash outflow from operating activities (225) (71)
Returns on investments and servicing of
Interest paid (73) (36)
Capital expenditure and financial investment
Purchases of investments (29,989) (35,515)
Sales of investments 29,425 15,935
(Losses)/gains on hedging contracts (177) 102
Net cash outflow from capital expenditure and
financial investment (741) (19,478)
Net cash outflow before financing (1,039) (19,585)
Proceeds of Ordinary share issue 729 21,020
Expenses of issue (6) (511)
Ordinary shares purchased and held in
Treasury (124) (708)
Ordinary shares sold from Treasury 914 -
Revolving credit facility repaid (2,263) -
Revolving credit facility drawn down 1,593 1,806
Net cash inflow from financing 843 21,607
(Decrease) / increase in cash (196) 2,022
1. BASIS OF PREPARATION
This financial information has been prepared under the historical cost convention as
modified by the revaluation of certain investments and in accordance with applicable law
and Accounting Standards (“UK GAAP”) in the United Kingdom and with the Statement of
Recommended Practice “Financial Statements of Investment Trust Companies” (‘SORP’)
issued in January 2003 and revised December 2005. The accounting policies are
unchanged from those used in the last annual financial statement except where stated in
notes 2 and 3 below.
2. CHANGES IN ACCOUNTING POLICIES
These financial statements have been prepared using accounting standards (‘revised UK
GAAP’) which have been issued to begin the process of converging UK Standards with
International Financial Reporting Standards.
With effect from 1 May 2005, the Company has adopted the following Financial Reporting
Standards (‘FRS’), FRS 25 Financial Instruments: Disclosure and Presentation and FRS
26 Financial instruments: Measurement.
All investments held by the Company are classified as held at ‘fair value through
profit or loss.’ In arriving at fair value, the new accounting standards require that bid
prices are used where they are readily and regularly available from an exchange. The
Company has valued its investments at bid price. Previously investments were valued at
Where there have been changes in accounting policy, comparatives for the previous
periods have been restated.
3. RESTATEMENT OF RESERVES AND THE PREVIOUS PERIOD’S RESULTS
Capital reserves – unrealised
Balance brought forward as
previously reported 1,384
Change in valuation of investments
from mid to bid prices (259)
As restated 1,125
Period 20 January 2004 to 30 April 2005
Revenue Capital Total
£’000 £’000 £’000
Return On Ordinary Activities
As previously reported (156) 2,949 2,793
Movement in valuation of
investments from mid to bid prices - (259) (259)
As restated (156) 2,690 2,534
4. PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS
The preliminary announcement was approved by the Board of Directors on 23 June 2006.
This preliminary announcement is not the company's statutory accounts. The statutory
accounts for the period ended 30 April 2005 have been delivered to the Registrar of
Companies and received an audit report which was unqualified, did not include a
reference to any matters to which the auditors drew attention by way of emphasis without
qualifying the report, and did not contain statements under section 237(2) and (3) of the
Companies Act 1985. The statutory accounts for the year ended 20 April 2006 have not
yet been approved, audited or filed. The statutory accounts for the year ended 30 April
2006 will be finalised on the basis of this preliminary announcement and will be delivered
to the Registrar of Companies following the Annual General Meeting.