Foreign & Colonial Investment Trust PLC : Annual Financial Report

Date:5th March 2012

Contact:        Jeremy Tigue                                             

F&C Management Limited                      

020 7011 5440

FOREIGN & COLONIAL INVESTMENT TRUST PLC

Audited Statement of Results

for the year ended 31 December 2011

Summary of Results

Net asset value per share down 6.7% to 322.86p

(debt at market value)

Annual dividend per share up 5.2% to 7.10p

Share price down 6.8% to 288.50p

The Chairman's Statement

Dear Shareholder,

In a difficult year we had strong returns from our private equity portfolio and very strong growth in income. The net asset value per share fell by 6.7% to 322.86 pence and the share price fell by 6.8% to 288.5 pence. Your total dividend is increasing for the forty first consecutive year to 7.10 pence per share.

Performance

There were two opposing trends affecting markets and our own performance in 2011. The first and negative trend was increasing political and economic uncertainty. The problems in the Eurozone unsettled investors across the world. In the US there was a political confrontation over the government's debt ceiling. There were serious political protests in several Middle Eastern and African countries. In Japan there was a devastating earthquake, tsunami and nuclear accident. There were persistent worries about global economic growth and the long term impact of the financial crisis.

The second and positive trend was the strong performance from individual companies in both our public and private equity portfolios. For the year as a whole this was outweighed by the poor economic news but it gives us confidence for the future.

Our net asset value total return was -4.8% compared with -5.1% for our benchmark (40% FTSE All-Share and 60% FTSE WI World ex UK indices) and -9.3% for the AIC Global Growth sector.

The biggest positive influence on our performance was our private equity portfolio. This rose by 13.8% as the underlying companies within our portfolio produced strong results. Cash distributions from our private equity portfolio more than doubled to £66.9m and we reached an important milestone in September when cash distributions exceeded cash being invested for the first time. In our public equity portfolio we benefited from good stock selection in the US and Europe. The US performed better than all other markets while emerging markets had a very poor year. We also made a well timed increase in gearing when investors were very cautious in the late summer so our gearing level was at the highest level in the last twenty years at the end of September.

Income and Dividends

We had a very strong year for dividend growth in all markets. The largest contributors were the resumption of dividends from BP and a special dividend from Vodafone. Net revenue per share rose 20.1%. Our total expense ratio fell to 0.50% of our total assets, the lowest level in the last five years. Keeping tight control of costs is an important responsibility of the Board and one we are determined to continue.

An interim dividend of 3.00 pence per share was paid in September 2011 and your Board is recommending a final dividend of 4.10 pence to be paid on 11 May 2012. The total dividend for the year will therefore be 7.10 pence an increase of  5.2% on 2010 and ahead of the 4.8% rise in the Retail Price Index.

We are very proud of our record of long term dividend growth stretching back over four decades and are very conscious of the importance of dividends to shareholders. We have been able to increase the dividend in the last three years despite the worst environment for dividends in the last eighty years as a result of our earlier prudence in increasing revenue reserves.We expect to be able to increase your dividend again in 2012.

Board

Sir Michael Bunbury will retire from the Board immediately following the AGM having served for over fourteen years. Sir David Clementi, who was appointed chairman of Virgin Money in October 2011 will also retire owing to this increase in his time commitments. We are sorry to lose such excellent Directors and I thank them both for their contributions to the Board. I should make particular mention of Sir Michael's work as chairman of the Audit and Management Engagement Committee and additional responsibilities concerning the private equity portfolio.. We wish both Directors well for the future.

There have been no new appointments since Sarah Arkle and Nicholas Moakes joined the Board in March of last year. Max Ward retired in May. The Nomination Committee assesses the composition of the Board in terms of the skills and experience required for the stewardship of a company investing in an internationally diversified portfolio. As such, the Nomination Committee and the Board recognise the value of diversity inclusive of gender and seek appointments that contribute to it. All appointments continue to be made on merit without the restraints of numerical diversity targets.

Management reappointment

Each year the Board formally reviews F&C's performance as Manager and whether their reappointment is in the interest of shareholders. The Board decided to reappoint F&C as the Manager and will continue to monitor developments at F&C very carefully.

The future

Five years after the first signs of the global financial crisis it is clear that it will be many more years before its full impact has worked through economies and markets. As a result global economic growth will continue to be weaker and share prices more volatile than in the 1980s and 1990s. For 2012 itself the issues we are most concerned about are the problems of the Eurozone, the risk of a sharp slowdown in China, political uncertainty in the Middle East, the US presidential election and continuing imbalances in the global economy.

We expect profits and dividend growth to be much slower in 2012 than in 2011 and we do not think there will be substantial takeover activity to support share prices.

Despite all the uncertainties markets have made a strong start to 2012 and investors are more optimistic than six months ago. We are not sure if this will continue but we believe Foreign & Colonial's own prospects look promising for three reasons.

Firstly our private equity portfolio has started to produce a positive cash flow.

Secondly, as our £110m debenture approaches maturity in 2014 we can look forward to far lower borrowing costs.

Thirdly, our portfolio of strong individual corporate names should generate further growth in income, allowing us to continue to increase your dividend.

Simon Fraser                                                                                            

Chairman
2 March 2012

Forward -looking statements

This document may contain forward-looking statements with respect to the financial condition, results of operations and business of the Company. Such statements involve risk and uncertainty because they relate to future events and circumstances that could cause actual results to differ materially from those expressed or implied by forward-looking statements. The forward looking statements are based on the Directors' current view and on information known to them at the date of this document. Nothing should be construed as a profit forecast.

PRINCIPAL RISKS

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach, are described below:

Risk description: Objective and strategy

Inappropriate objective and strategy in relation to investor demands in a rapidly changing financial services and savings market.

Mitigation:The Board regularly reviews the Company's position as a leading savings vehicle. Strategic issues, including its role as a global growth investment trust are considered annually.

Risk description: Management resource, stability and controls

The Manager is the main service provider and its failure to continue operating effectively could put in jeopardy the business of the Company.

Mitigation:The Board meets regularly with senior management of the Manager and its Internal Audit function, and has access to publicly available information indicative of its financial position and performance.

The Board has contingency arrangements to facilitate the ongoing operation of the business in the event of any such failure. The management contract can be moved at short notice.

Risk description: Investment policy, gearing, currency and derivatives

Inappropriate asset allocation, sector and stock selection, currency exposure, and use of gearing and derivatives leading to investment underperformance.

Mitigation: Investments are primarily in a diversified spread of international publicly listed equities with exposure to their underlying currencies. Investment policy and performance is reviewed with the Fund Manager at each Board meeting, along with the monitoring of cash and borrowing levels as well as options written for the purpose of income enhancement. The ability of the Company to gear up via long-term and short-term borrowings, in currencies matching those to which the portfolio is exposed, enables it to take a long-term view of the countries, markets and currencies in which it is invested, and ride out short-term volatility. The Board approves all borrowing facility agreements and has set a limit on gearing and option writing. Derivatives may also be used for the purpose of hedging foreign currencies, although to date none has.

Risk description: Private equity

The majority of the underlying private equity investments are in unlisted companies. Such investments may prove difficult or impossible to realise.

Mitigation: Private equity risks are mitigated by investing in a spread of direct, secondary, venture capital, buyout and mezzanine fund of funds and by the wide spread of underlying private equity firms, which in turn have diversified investment portfolios and vintage years.

Risk description: Service providers

Administrative errors or control failures by or between service providers could be damaging to the interests of investors and the Company.

Mitigation:The Board receives regular reports from the Manager on its oversight of service providers which, for the administration of the F&C savings plans, includes audit site visits; monthly technical compliance monitoring; monthly service delivery meetings; quarterly financial crime prevention forums; and the detailed review and investigation of breaches and complaints. Arrangements are also in place to mitigate other service providers risks, including those relating to safe custody.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year.  Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).  Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.  In preparing these financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates that are reasonable and prudent;

·      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively;

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.  They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on www.foreignandcolonial.com website, which is maintained by F&C. he content 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. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, confirm that, to the best of their knowledge:

·      the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the company; and

·      the directors' report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Simon Fraser

Chairman

2 March 2012

INCOME STATEMENT

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

A statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

BALANCE SHEET

Distribution of total assets less current liabilities (excluding loans) at 31 December 2011; United Kingdom: 37.0%; North America: 29.7%; Europe ex UK: 14.9%; Japan: 4.6%; Emerging Markets 13.8%.

CASH FLOW STATEMENT

Notes

1    NETRETURN PER SHARE

2    DIVIDENDS

The Directors have proposed a final dividend in respect of the year ended 31 December 2011 of4.10pper share payable on 11 May 2012 to all shareholders on the register at close of business on 13 April 2012.

3   FINANCIAL RISK MANAGEMENT

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of Section 1158 of the Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company's investment objective is to secure long-term growth in capital and income through a policy of investing primarily in an internationally diversified portfolio of public listed equities, as well as unlisted securities and private equity, with the use of gearing. In pursuing the objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board of Directors, together with F&C Management Limited ("the Manager"), is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported Balance Sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK Accounting Standards and best practice, and include the valuation of financial assets and liabilities at fair value except as noted in (d) below in respect of debenture stocks. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity and other financial securities including derivatives held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board's policies for managing these risks within the Company's objective include: risk diversification - no more than 5% of the portfolio may be invested in unlisted securities, excluding private equity investments, and no single investment maybe made which exceeds 10% of the value of the portfolio at the time of acquisition; currency exposure borrowings are limited to the amounts and currencies commensurate with the portfolio's exposure to those currencies; and gearing - borrowings including the debentures' value at market value - should not normally exceed 20% of shareholders funds. Options may only be written on quoted stocks and the total nominal exposure is limited to a maximum of 5% of the UK portfolio at the time of investment for both put and call options. The Board meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio.

The Company's other assets and liabilities may be denominated in currencies other than Sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. The Company does not normally hold significant cash balances. Borrowings are limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby  limiting the Company's exposure to future changes in foreign exchange rates. Debenture stocks were issued as part of the Company's planned gearing. All contracts and compliance with them, including the Debentures trust deeds, are agreed and monitored by the Board. Gearing may be short or long-term in Sterling and foreign currencies, and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility.

Income earned in foreign currencies is converted to Sterling on receipt. The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

(b) Liquidity risk exposure

The Company is required to raise funds to meet commitments associated with financial instruments, private equity investments and share buybacks. These funds may be raised either through the realisation of assets or through increased borrowing. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the large number of quoted investments held in the Company's portfolio (496 at 31 December 2011); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of ongoing overdraft and loan facility agreements. Cash balances are held with approved banks, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The Company has loan facilities of £175m. The 11.25% Debenture Stock is governed by a trust deed and is redeemable in 2014 or at an earlier date or dates at the Company's behest. The Perpetual Debenture Stock is also governed by a trust deed and is redeemable at par only on the security becoming enforceable. The Board does not therefore consider the repayment of these debenture stocks as a likely short-term liquidity issue.

At 31 December 2011 the company had £142 million of outstanding commitments to private equity investments, payable over more than one year.

(c) Credit risk and counterparty exposure

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. The Board approves all counterparties used in such transactions, which must be settled on the basis of delivery against payment (except where local market conditions do not permit).

A list of pre-approved counterparties is maintained by the Manager and regularly reviewed by the Board. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Payments in respect of private equity investments are made only to counterparties with whom a contracted commitment exists. Cash and deposits are held with approved banks.

The Company has an ongoing contract with the Custodian for the provision of custody services. The contract was reviewed and updated in 2010. Details of securities held in custody on behalf of the Company are received and reconciled monthly.

The Company has a separate agreement with the Custodian, covering stock lending arrangements. Details of stocks on loan and collateral held,and the income derived from stock lending activities, are received and reviewed regularly for compliance with rules set out in the agreement.

To the extent that F&C carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk continuously through regular meetings with the management of F&C (including the Fund Manager) and with F&C's Internal Audit function. In reaching its conclusions, the Board also reviews F&C's parent group's annual Audit and Assurance Faculty Report, Group Accounts and other public information indicative of its financial position and performance.

The Company had no credit-rated bonds or similar securities in its portfolio at the year end (2010: none) and does not normally invest in them. None of the Company's financial assets are past their due date or impaired.

(d) Fair Values of financial assets and liabilities

The assets and liabilities of the Company are, in the opinion of the Directors, reflected in the balance sheet at fair value, or at a reasonable approximation thereof, except for the debentures which are carried at par value in accordance with Accounting Standards. The fair value of the debentures, derived from their quoted market price at 31 December 2011, was £132,513,000 (2010: £141,874,000). Borrowings under overdraft and loan facilities are short-term in nature and hence do not have a value materially different from their capital repayment amount. Borrowings in foreign currencies are converted into Sterling at exchange rates ruling at each valuation date.

The fair value of investments quoted on active markets is determined directly by reference to published price quotations in these markets.

Unquoted investments, including private equity investments, are valued based on professional advice and assumptions that are not wholly supported by prices from current market transactions or by observable market data. The Directors make use of recognised valuation techniques and may take account of recent arm's length transactions in the same or similar investments. With respect specifically to investments in private equity funds or partnerships, the underlying managers provide regular valuations to the Directors, based on the latest information available to the managers and not necessarily co-terminous with the reporting dates of the Company. The Directors review the valuations for consistency with the Company's accounting policies and with fair value principles.

(e) Capital Risk Management

The objective of the Company is stated as being to provide shareholders with long-term growth in capital and income. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to:

·      issue and buy back share capital within limits set by the shareholders in general meeting;

·      borrow monies in the short and long-term; and

·      pay dividends to shareholders out of current year revenue earnings as well as out of brought forward revenue reserves.

4    REPORT AND ACCOUNTS

The Report and Accounts will be posted to shareholders on or around 23 March 2012 and  copies may be obtained thereafter during normal business hours from the Company's Registered Office, Exchange House, Primrose Street, London EC2A 2NY. Copies are available on the internet atwww.foreignandcolonial.com .

By order of the Board

F&C Management Limited, Secretary, Exchange House, Primrose Street, London EC2A 2NY

2 March 2012