Performance during the year: The Company's revenue earnings for the period were 6.44p per Package Unit, 4.9% higher than the total of 6.14p reported at the same stage last year.....

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Chairman's Statement & Management Report as at 31 May 2015

This advance was derived from increases in ordinary dividends received over the review period from the majority of companies held by the Company, aided by the dollar's strength against sterling. As at the year end, the historic dividend yield on the mid-market price of the Company's Package Units was 3.8%, compared with the yield of 3.3% on the FTSE All-Share Index.

On a net asset value (NAV) basis, each Package Unit delivered a total return of 8.8% over the 12 months to 31 May 2015. This was above the returns of the FTSE 350 Higher Yield Index and the FTSE All-Share Index, which rose 2.6% and 7.5% respectively over the same period.

Over the review period, the discount to NAV narrowed from 4.9% to 3.3%, the mid-market price at the period end being 176.0p and the NAV 182.06p. On a mid-market price basis each Package Unit produced a total return of 10.7%.

This performance continues the Company's impressive long-term record, which has seen its NAV return exceed that of the FTSE All-Share Index over one, two, three, four, five and 10 years, and since inception.

For a detailed description of the management of the portfolio during the period, I refer you to the Investment Review on pages 5 and 6 of the Annual Report and Financial Statements for the year ended 31 May 2015.


During the 12 months to 31 May 2015, the Company has declared total dividends of 6.6p per Income share, comprising two interim dividends of 1.5p, a third interim of 1.6p and a fourth interim of 2.0p. This represents an increase of 8.2% compared with the total of 6.1p per Income share for the previous year. The increase is well above the latest annual rate of inflation (1.0% in May) as measured by the Retail Prices Index (RPI).

Unhelpfully for dividend payouts, sterling strengthened against the dollar in the first half of 2014 and a significant proportion of UK companies report their earnings in the US currency. However, a currency headwind turned into a tailwind in the second half of 2014 and that has continued into the first half of 2015 as the dollar has strengthened. So far this year, dividend announcements have generally been positive and we have seen a continuation of the trend in special dividends, with, notably for the Company, Synthomer, Direct Line, Booker and Jupiter Fund Management all returning spare cash to shareholders. In addition, the market's dividend cover is positive and the outlook for corporate earnings growth remains encouraging, despite the prospect of curbs in government spending, the slowdown in the resources sectors and dividend cuts by the supermarket operators.
Therefore, and in the absence of unforeseen circumstances, the Directors expect to increase dividend payments in the current year, enhanced by drawing further on the revenue reserves, which we plan to distribute in full when we declare the fourth interim dividend in 2016.

Recent market conditions

UK equities made satisfactory progress during the Company's financial year, but the market experienced some volatility in the process as concerns over global growth and monetary policy decisions challenged risk appetite. In particular, in 2014 share prices were in decline from the autumn, as falling commodity prices bore down on the resources sectors and investors worried about the extent of the slowdown in China and deflation taking hold in the Eurozone.

However, from the beginning of 2015 sentiment improved markedly, boosted by the European Central Bank's announcement of a huge monetary stimulus programme, which it has indicated will last well into next year. In addition, a weak first quarter for the US economy and a decline in inflation in the UK was treated as good news by investors as the data was interpreted as delaying the timing of the first upward move in interest rates since the financial crisis, with the US now expected to take the lead later this year.

Notably in the UK, an important milestone was passed in March this year when the blue chip FTSE 100 Index of larger companies broke through the 7,000 mark, finally surpassing the high reached 15 years ago during the short-lived Dotcom boom.

Changes to Investment Policy

The Company is approaching the end of its planned life and is due to be wound up on 17 March 2017. .

The Board believes it would be beneficial to Shareholders as a whole, for the Company to have the ability to use derivatives, including equity index options, in certain market conditions during the run up to the wind-up date, so as to lock in a proportion of the value of the Company's assets while retaining exposure to a market increase, if it is in the best interests of Shareholders to do so.

M&G has considerable expertise in the use of derivative instruments which are used across a broad range of its funds. The Board has instructed the manager to keep under review, and advise the Board upon, opportunities for the cost-effective employment of such instruments as described above while balancing the benefits of such protection against the costs of such a strategy.

The aggregate exposure of the Company to derivatives will not exceed 35% of its gross assets at the time at which any derivative contract is entered into.

The revised investment policy of the Company, with the proposed changes highlighted in green, can be found at pages 10 and 11 of the Annual Report and Financial Statements for the year ended 31 May 2015.

In order to approve the proposed changes to the investment policy of the Company, Shareholders will need to approve Ordinary Resolution 10 as set out in the Notice of Annual General Meeting (on page 39 of the Annual Report and Financial Statements for the year ended 31 May 2015) together with each Special Resolution 1 as set out in the Notices of Separate General Meetings of each of the Zero Dividend Preference, Income and Capital Shareholders (on pages 36 to 38 of the Annual Report and Financial Statements for the year ended 31 May 2015).

The Board believes that these changes proposed to the investment policy of the Company are in the best interests of the Company, the Shareholders as a whole and each class of Shareholders, and it unanimously recommends that you vote in favour of the resolutions noted above on which you are entitled to vote.

This does not imply any commitment to the eventual use of derivatives; we merely seek the ability to use these powers if it seems desirable.

VAT litigation

In the 2014 Annual Report and Financial Statements, I reported that the Court of Appeal was due to hear an appeal in October 2014 in relation to the High Court judgement in the case being coordinated by PWC on behalf of a number of investment trusts in liquidation. The Court of Appeal heard the appeal and its judgement allows investment trusts to recover historic VAT payments on investment management fees directly from HMRC. However the Supreme Court has recently granted leave for an appeal against the Court of Appeal's judgement. It is hoped that the Supreme Court will hear the appeal in early 2016 and that by the time of the next Report and Accounts we will have had its judgement. The timing of the judicial process is however outside our control.

Treasury shares

Over the 12 months to 31 May 2015, no Package Units were bought by the Company to hold in treasury. There are currently no Package Units held in treasury.


In May, the market briefly rallied in response to the re-election of the Conservatives with an overall majority for a new parliamentary term, as the result removed the prospect of increased levies and regulation on the corporate sector under a Labour administration. However, the outcome of the election means that the UK now faces further austerity measures and the potential consequences of a referendum on its continued membership of the European Union in at most two years' time, and the possible effect on business of a vote in favour of an exit. In the short term, the remainder of 2015 is likely to prove quite testing as investors fret about US interest rates and Greece. Encouragingly, dividend announcements outside the resources sectors have generally been positive so far this year on the back of a satisfactory earnings season and a stronger US dollar. Companies also continue to return cash to shareholders in the form of special dividends and share buybacks, which is helping to underpin the market. A more broad-based recovery is likely to occur when companies start to increase their capital expenditure, which in turn should result in a pickup in productivity - this remains low and was acknowledged by the Chancellor in a post-election speech to the CBI to be holding back the economy. Mergers and acquisitions have returned after two years of relative inactivity, as companies seek to take advantage of low borrowing costs and strong share prices, in a somewhat unsatisfactory alternative to organic growth, to increase their earnings.

Against this backdrop, I remain confident that the Company's consistent investment approach and diversified portfolio is well placed to continue delivering above-market returns and increase its dividend again this year.



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