Half-yearly report

1/29/2010, 5:26 PM (Source: GlobeNewswire)
M&G High Income Investment Trust P.L.C.
Second Interim Results
30 November 2009


Chairman's Statement & Interim Management Report
During the period, the Company's revenue earnings per Package Unit were 2.59p compared to
3.6p to November 2008, reflecting the adverse affect of reduced dividend receipts described
below. As at the period end, the mid-market price yield on the Company's Package Units was
4.4%, compared with the yield of 3.4% on the FTSE All-Share Index. On a net asset value (NAV)
basis, each Package Unit delivered a total return of 16.6% over the six months to 30 November
2009, compared with a negative return of 18% over the year to 31 May 2009. This was below the
returns of 19.7% and 17.9% respectively from the FTSE All-Share Index and the FTSE 350 Higher
Yield Index over the same period. As at the end of the review period, there was a market price
discount on the Company's Package Units of 6.6% to the NAV, compared with 6.9%as at 31 May
2009, the mid-market price at the period end being 111p and the NAV 118.82p. On a mid-market
price basis, the Company's Package units produced a total return of 17.1% over the review
period ending 30 November 2009. As a result of the tiered management fee agreed as part of the
M&G Income and Recovery Investment Companies schemes of reconstruction, the cost of running
the company reduced to 1.02% for the year to 30 November 2009 compared to 1.22% for the year
to 30 November 2008. 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 'Interim Financial
Statements for the six month's ended 31 December 2008 (unaudited)'.
Dividend

In respect of the review period, the Company declared two quarterly dividends of 1.20p per
Income Share, making a total of 2.40p. This compares with a total of 4.30p per Income Share
declared in the same period last year, which included a second interim dividend of 2.20p,
together with a special dividend of 0.90p. This represented a temporary change in the phasing
of the Company's dividend policy to accommodate the M&G Income Investment Company Limited and
the M&G Recovery Investment Company Limited's schemes of reconstruction. In the current year,
we intend to revert to the normal practice of paying a higher fourth interim dividend. The
Company's revenue continued to be adversely affected by reductions in dividend payments by a
number of companies held in its portfolio. Given these circumstances, it is not surprising to
report a fall in earnings per package unit over the period. However, even though the general
outlook for dividends remains somewhat uncertain, the Directors are hopeful that dividend
receipts for the rest of the year and revenue reserves will be sufficient to enable them to
declare total dividends for the financial year ending 31 May 2010 of 5.85p, though this is not
a dividend or profit forecast.
Recent market conditions

The relatively strong recovery in equity and corporate bond markets over the review period
represented a welcome contrast to the extremely challenging conditions which had prevailed in
financial markets during the previous year. This enabled the Company to deliver the positive
total returns above. Nevertheless, although high yielding shares benefited from improving
investor sentiment, lower yielding sectors (particularly mining) led the market rally,
resulting in a modest underperformance from the FTSE 350 Higher Yield Index relative to the
FTSE All-Share Index. Performance over the period was also held back by the bond portfolio,
which delivered positive returns, but significantly lagged the equity portion. Our defensive
stance has made it difficult to outperform all equity indices over recent periods. Over three
and five years, during which the FTSE 350 Lower Yield Index consistently outperformed its
higher yield equivalent by a substantial margin, the Company's Package Unit NAV total return
has been below that of the FTSE All-Share Index, although the overall return since inception
in 1997 remains higher than that index.
An EU problem

 I would like to draw your attention to the EU proposal to further rewrite the regulation of
investment markets in the shape of the Alternative Investment Fund Managers ('AIFM')
Directive. The AIFM has probably been conceived by France and Germany to curtail the
activities of UK managed Private Equity and Hedge Funds. However, such is the opaque and
rather less-than-democratic process of the EU in creating new legislation that our Investment
Trust sector could be severely disadvantaged with no apparent benefits to shareholders. At
worst, investment trusts could be forced to wind up. So seriously are we and other investment
trust boards taking this that we have written to as many European officials and MEPs as we can
identify in having an interest in our fate. While the 'debate' is still in progress, which
will not be for much longer, I would urge all shareholders to write to their MEPs with the
message that our venerable, respected and well regulated investment trusts should not be
casually sideswiped by EU officials who appear to have been unaware of our existence. This
subject is well explained in the Q and A's on the Association of Investment Companies'
website:
www.aitc.co.uk/Documents/Technical/AICaifmQandAbriefing2.pdf

Outlook

Following the prolonged recession, a modest return to growth appears to be underway in the UK,
with the Treasury now forecasting an expansion rate of between 1% and 1.5% for the 2010/11
financial year. However, the recovery is widely described as being 'fragile' and subject to
significant potential headwinds. Chief among these is the exceptionally poor state of
government finances, which will require a combination of substantial tax rises and meaningful
cuts in public spending by whichever political party wins the forthcoming general election.
Radical action could well undermine the tentative revival in consumer confidence, increase
unemployment and reverse the recent pick-up in house prices. However, insufficient action
would carry even more risks, potentially exposing the UK to a major loss of confidence by
financial markets, resulting in a possible run on sterling and a sharp rise in gilt yields.
Such a crisis would inevitably take its toll on confidence among the public, business and
investors. The recent Pre-Budget Report included a forecast that inflation would rise in the
short term to around 3%on a Consumer Prices Index (CPI) basis, before drifting down to below
2% by the end of 2010. Such an outcome would enable base rates to remain low, although a
higher level of inflation, brought about by a further spike in commodity prices and the impact
of sterling's weakness on imports, might force the Bank of England to move sooner to tighten
monetary policy. A further uncertainty is the likely effect on the economy and on gilt prices
from the removal of government stimulus measures, particularly the Bank of England's £200
billion asset purchase programme. In summary, we would be unwise to anticipate a 'normal'
recovery from a 'normal' recession. Given the uncertainties about the outlook for the UK
economy, it is fortunate that the UK stockmarket derives the bulk of its profits from overseas
where prospects are generally better than at home. Moreover, the financial position of the
corporate sector is typically much stronger than that of both households and the government.
Consensus forecasts point to a rebound in company profits of around 20% in 2010, providing
scope for a partial restoration of recent savage dividend cuts. Equity valuations are
reasonable by historic standards and fund managers still retain plenty of cash. The outlook
for UK government bonds (gilts) appears less favourable, with rising issuance and the end of
the Bank of England's purchase scheme likely to push yields higher. While there may be some
upside in selected situations, such an outcome would be detrimental to corporate bond prices.
The generally defensive composition of the Company's portfolio should enable it to perform
relatively well if some of the potential risks outlined above come to pass. In particular,
following their significant underperformance relative to the FTSE All-Share Index over the
past five years, valuations of higher yielding shares appear anomalously low, rather as they
did at the peak of the dotcom boom in 2000. We see no reason to alter our investment strategy,
with its focus on value and income generation.
F C Carr
(Chairman)


Income statement (unaudited)

For the  six months ended            For year ended

30 November 2009 30 November 2008              31 May 2009

Revenue Capital Total Revenue Capital Total Revenue Capital Total

£000 £000 £000 £000 £000 £000 £000 £000 £000

-------- -------- ------ -------- -------- ------- -------- ------- --------

Net gains /
(losses) on -   29,255 29,255 -   (13,812) (13,812) -   (8,160) (8,160)
investments

Income 5,509 -   5,509 2,571 -   2,571 7,248 -   7,248

Investment (333) (677) (1,010) (131) (266) (397) (373) (758) (1,131)
management fee

Other expenses (92) -   (92) (88) -   (88) (176) -   (176)

------- ------- ------ ------- ------- ------- ------ -------- --------

Net return
before finance 5,084 28,578 33,662 2,352 (14,078) (11,726) 6,699 (8,918) (2,219)
costs and tax

Finance costs: -   (5,570) (5,570) -   (1,736) (1,736) -   (5,779) (5,779)
Appropriations

Finance costs: (2,848) -   (2,848) (3,802) -   (3,802) (6,779) -   (6,779)
Dividends

------- ------- ------ ------- ------- ------- ------ -------- --------

Net return on
ordinary 2,236 23,008 25,244 (1,450) (15,814) (17,264) (80) (14,697) (14,777)
activities
before tax

Tax on
ordinary -   -   -   -   -   -   -   -   -
activities

------- ------- ------ ------- ------- ------- ------ -------- --------

Net return on
ordinary 2,236 23,008 25,244 (1,450) (15,814) (17,264) (80) (14,697) (14,777)
activities
after tax

------- ------- ------ ------- ------- ------- ------ -------- --------

Return per
Zero Dividend -   2.84p 2.84p -   2.66p 2.66p - 5.21p 5.21p
Preference
Share

Revenue
earnings / 2.59p 11.71p 14.30p 3.60p (18.64)p (15.04)p 6.04p (9.98)p (3.94)p
return per
Income Share

Return per -   -   -   -   (5.55)p (5.55)p -   (3.27)p (3.27)p
Capital Share

Total return
per Income and 2.59p 11.71p 14.30p 3.60p (24.19)p (20.59)p 6.04p (13.25)p (7.21)p
Growth Unit

Total return
per Package 2.59p 14.55p 17.14p 3.60p (21.53)p (17.93)p 6.04p (8.04)p (2.00)p
Unit


The total column of this statement is the profit and loss account of the
Company. The revenue return and capital return columns are supplementary to this
and are prepared under the guidance published by the Association of Investment
Companies.
All items in the above statement derive from continuing operations. No
operations were acquired or discontinued during the period.
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.
The Company's Zero Dividend Preference and IncomeShares meet the definition of a
liability under FRS 25 and therefore Capital shares are the Company's only
Equity shares.  This does not affect the rights and benefits of each class. The
breakdown of the net assets attributable to shareholders in terms of the share
capital and reserves is given in note 10.

Reconciliation of movements in Equity (Capital) shareholders' funds (unaudited)


For the  six months ended 30.11.09 30.11.08

£000 £000

---------- ----------

Capital return on ordinary activities 23,008 (15,814)
after tax

Net (gains) / losses attributable to (23,008) 12,185
Income Shareholders

---------- ----------

Net movement in net assets attributable -   (3,629)
to Equity shareholders

Opening net assets attributable to -   3,629
Equity shareholders

---------- ----------

Closing net assets attributable to - -
Equity shareholders

---------- ----------





Balance sheet
(unaudited)



As at 30.11.09  30.11.08 31.05.09

£000 £000 £000

------- ------- -------

Fixed assets

Portfolio of investments 230,539 138,978 198,335

------- ------- -------

Current assets

Debtors 2,123 2,908 2,353

Cash at bank and short-term deposits 801 2,215 3,842

------- ------- -------

2,924    5,123 6,195

------- ------- -------

Total financial assets 233,463 144,101 204,530

Creditors: Amounts falling due within one (50) (3,003) (1,644)
year

------- ------- -------

Total assets less current liabilities[a] 233,413 141,098 202,886

Creditors: Amounts falling after more
than one year:

Share classes defined as liability:

  Zero Dividend Preference Shares (124,601) (79,264) (119,243)

  Income Shares (108,812) (61,834) (83,643)

------- ------- -------

Net assets attributable to Equity - - -
shareholders

------- ------- -------



Total Share Capital and Reserves attributable to Equity shareholders
comprise: (unaudited)

30.11.09  30.11.08 31.05.09

£000 £000 £000

  ------- ------- -------

Called up share capital 1,964 1,368 1,967

Share premium account 3,427 4,043 3,427

Capital redemption reserve 2,382 2,362 2,379

Special reserve 5,451 5,555 5,464

Capital reserve       - Investment holding gains / - - -
(losses)

                               - Other capital (13,224) (13,328) (13,237)
reserves

  ------- ------- -------

Total Share Capital and Reserves attributable to -   -   -
Equity shareholders

  -------- ------- --------

[a] Total assets less current liabilities represents the net assets attributable
to all shareholders.

The net assets attributable to shareholders have been calculated in accordance
with the Company's Articles of Association and the net asset values (per share)
applicable to each class of shareholding as shown below.
The Company's Zero Dividend Preference and Income Shares meet the definition of
a liability under FRS 25 and therefore Capital shares are the Company's only
Equity shares.  This does not affect the rights and benefits of each class. The
breakdown of the net assets attributable to shareholders in terms of the share
capital and reserves is given in note 10.
The Condensed Financial Statements have been prepared in accordance with the
Statement: Half Yearly Financial Reports issued by the Accounting Standards
Board.
Responsibility statements
To the best of our knowledge and belief:
a) the Interim Management 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 the Company faces; and
b) the financial statements, prepared in accordance with United Kingdom
Accounting Standards, give a true and fair view of the assets, liabilities,
financial position and losses of the Company.





As at 30.11.09 30.11.08 31.05.09

-------- -------- --------

Net asset value per Zero
Dividend Preference 63.43p 57.93p 60.61p
Share

Net asset value per 55.39p 45.20p 42.51p
Income Share

Net asset value per - - -
Capital Share

Net asset value per 55.39p 45.20p 42.51p
Income & Growth Unit

Net asset value per 118.82p 103.13p 103.12p
Package Unit





  Cash flow statement (unaudited)

                  For the  six For the year ended
months ended


    30.11.09  30.11.08 31.05.09

£000 £000 £000 £000 £000 £000

-------- -------- ------ -------- -------- -------

Net cash inflow
from operating   4,447 1,792 4,866
activities

Servicing of
finance

Dividends paid   (4,201) (2,142) (5,426)
(non-equity)

Financial
investment

Capital -     298 298
distributions

Purchase of (42,013)   (10,373) (37,665)
investments

Sale of 39,013   7,921 34,921
investments

-------   ------ -------

  (3,000) (2,154) (2,446)

Financing

Repurchase of
Package Units (287) -   (1,596)
(including
related costs)

Shares issued -     2,321 6,046
for cash

Share issue -     (416) (416)
costs

-------   ------ -------

  (287) 1,905   4,034

  ------- ------- -------

Net (decrease) /   (3,041) (599) 1,028
increase in cash

  ------- ------- -------




Notes to the Financial Statements


1. Principal activity

The Company was incorporated on 23 December 1996 and is a split capital
investment trust company.  The affairs of the Company have been conducted with
the objective of enabling it to seek HM Revenue & Customs approval as an
investment trust for the purposes of Section 842 of the Income and Corporation
Taxes Act 1988.
2. Accounting policies
The interim financial statements have been prepared in accordance with the
historical cost convention, as modified by the revaluation of investments, in
accordance with applicable United Kingdom Accounting and Financial Reporting
Standards, and the Statement of Recommended Practice: 'Financial Statements of
Investment Trust Companies and Venture Capital Trusts' (SORP) issued by the
Association of Investment Companies (AIC) in January 2009.
During the period, the Company adopted the AIC SORP issued in January 2009
resulting in the reclassification of Capital Shares (being the most sub-ordinate
of the share classes) as equity, in accordance with FRS 25. The Zero Dividend
Preference Shares and Income Shares continue to meet the definition of a
liability under FRS 25 and have been treated as such. This has resulted in
presentational changes to the Balance Sheet. In addition, note 10 to the
financial statements disclose the amount of the Capital Reserves that is
Investment Holding Gain or Loss.


3. Investments: At fair value through profit or loss

30.11.09  30.11.08 31.05.09

Capital Capital Capital

£000 £000 £000

------- ------- -------

Realised gains / (losses) on sales of
investments 2,336 (1,641) (5,729)

Increase in unrealised appreciation /
(depreciation) 26,919 (12,469) (2,729)

Capital distributions -   298 298

------- ------- -------

Net gains / (losses) on investments 29,255 (13,812) (8,160)

------- ------- -------


4. Income

30.11.09  30.11.08 31.05.09

Revenue Revenue Revenue

Income from investments £000 £000 £000

------- ------- -------

Interest on debt
securities 720 239 839

Property Income dividends 88 5 40

Overseas dividends 5 17 33

Stock dividends 291 2 261

UK dividends 4,362 2,265 6,012

------- ------- -------

5,466 2,528 7,185

------- ------- -------

Other income

------- ------- -------

Bank interest 2 38 43

HM Revenue & Customs interest -   5 5

Underwriting commission 41 -   15

------- ------- -------

43 43 63

------- ------- -------

------- ------- -------

Total income  5,509 2,571 7,248

------- ------- -------

Total income comprises:

------- ------- -------

Dividends 4,746 2,289 6,346

Interest 722 282 887

Other income 41 -   15

  ------- ------- -------

5,509 2,571 7,248

------- ------- -------

5.
Investment
management
fee

30.11.09 30.11.08

Revenue Capital Total Revenue Capital Total

£'000 £'000 £'000 £'000 £'000 £'000

------------ ----------- ----------- ------------ ----------- -------

Investment
management
fee 333 677 1,010 131 266 397

------------ ----------- ----------- ------------ ----------- -------



31.05.09

Revenue Capital Total

£'000 £'000 £'000

------------ ----------- ---------

 Investment
management
fee 373 758 1,131

------------ ---------- ---------


The Company's investment manager is M&G Investment Management Limited (MAGIM).
 The investment management contract between the Company and MAGIM may be
terminated by either party giving not less than one year's written notice of
termination, although in certain circumstances it may be terminated with
immediate effect.

MAGIM receives an annual fee, payable monthly in advance, equal to the following
tiered rates per annum of the mid market value of the Company's total assets
less its current liabilities at the beginning of the relevant month.
1% on the first £75m
0.9% on the next £125m
0.8% on the excess over £200m


6. Finance costs: Appropriations

This constitutes an appropriation of reserves in respect of the premium to issue
proceeds payable to holders of Zero Dividend Preference Shares on redemption.
The appropriation for the year represents the increase in redemption value of
the amounts originally subscribed.


7. Finance costs: Dividends

30.11.09  30.11.08 31.05.09

Revenue Revenue Revenue

Dividends (payable to Income Shareholders) £000 £000 £000

------- ------- -------

Fifth interim: 0.25p paid  25 August 2009[a] 491 -   -

Fourth interim: 2.2p paid  22 August 2008 -   1,178 1,178

Special Dividend: 0.6p paid  22 August 2008 -   321 321

First interim: 1.2p paid  25 November 2009
(2008: 1.2p) 2,357 643 643

Second interim: 2.2p paid  25 February 2009
(2008: 1.2p)[a] -   1,178 1,178

Special Dividend interim: 0.9p paid  25 February
2009   (2008: nil)[a] -   482 482

Third interim: 1.2p paid  22 May 2009 (2008:
1.2p) -   -   1,624

Fourth interim: 1.0p payable  25 August 2009
(2008: 2.2p)[a] -   -   1,353

------- ------- -------

2,848 3,802 6,779

------- ------- -------

[a] This is a change in the distribution pattern of dividend payments for the
year ended 31st May 2009, with a second quarterly dividend of 2.20p and a
special dividend of 0.90p reflecting the decision of the Board to pay out the
majority of the current revenue reserves ahead of the rollover of M&G Income
Investment Company Limited into the Company. The ex-dividend date for both
dividends was 29th October 2008 and they were paid to Income Shareholders on the
register at the close of business on 31 October 2008. Also on 19 March 2009 the
Board declared a fourth interim dividend of 1.0p per Income Share, in respect of
the year ending 31 May 2009, representing substantially all of the revenue
reserves of the Company before the rollover of M&G Recovery Investment Company
Limited completed. This dividend was paid on 25 August 2009 to Income
Shareholders on the register at the close of business on 27 March 2009. The
ex-dividend date was 25 March 2009.  The dividends were also paid to holders of
Income & Growth Units and Package Units.
On 26 January 2010 the Board declared a second interim dividend of 1.2p (2009:
2.2p) per Income Share totalling £2,357,000 (2009: £1,178,000), payable on 25
February 2010 to Income Shareholders on the register at the close of business on
5 February 2010. The ex-dividend date is 3 February 2010.
The dividend will also be payable to holders of Income & Growth Units and
Package Units.


8. Earnings / returns per share

30.11.09  30.11.08 31.05.09

a) Return per Zero Dividend ------- ------- -------
Preference Share

Appropriations £5,570,000 £1,736,000 £5,779,000

Weighted average shares in issue
during the period 196,470,437 65,383,651 110,848,036

------- ------- -------

Return per share  2.84p 2.66p 5.21p

------- ------- -------



b) Revenue earnings per Income ------- ------- -------
Share

Net revenue return on ordinary
activities after tax £2,236,000 £(1,450,000) £(80,000)

Finance costs: Dividends £2,848,000 £3,802,000 £6,779,000

------- ------- -------

Revenue return attributable to
shareholders £5,084,000 £2,352,000 £6,699,000

Weighted average shares in
issue during the period 196,470,437 65,383,651 110,848,036

------- ------- -------

Revenue earnings per share 2.59p 3.60p 6.04p

------- ------- -------



  ------- ------- -------

Capital return attributable to
Income Shareholders (note 8c) £23,008,000 £(12,815,000) £(11,068,000)

Weighted average shares in
issue during the period 196,470,437 65,383,651 110,848,036

------- ------- -------

Capital return per Income
share 11.71p (18.64)p (9.98)p

------- ------- -------



c) Return per Capital Share ------- ------- -------

Net capital return on ordinary
activities after tax £23,008,000 £(15,814,000) £(14,697,000)

(Gains) / losses offset
against Income Shares £(23,008,000) £12,185,000 £11,068,000

  ------- ------- -------

Net capital return
attributable to Capital
shareholders -   £(3,629,000) £(3,629,000)

Weighted average shares in
issue during the period 196,470,437 65,383,651 110,848,036

------- ------- -------

Return per share -   (5.55)p (3.27)p

------- ------- -------

d) Package units

The earnings and returns per Package Unit are calculated by reference to its
component shares.



9. Share capital (equity and non-equity)

30.11.09  30.11.08 31.05.09

Allotted, called up and fully paid: £000 £000 £000

------- ------- -------

196,448,306 (2008: 136,827,539) Zero Dividend
Preference Shares of 1p each 1,964 1,368 1,967

196,448,306 (2008: 136,827,539) Income Shares of
1p each 1,964 1,368 1,967

196,448,306 (2008: 136,827,539) Capital Shares
of 1p each 1,964 1,368 1,967

------- ------- -------

During the period the Company repurchased and cancelled 300,000 Package Units at
an average cost of 95p per Package Unit costing £286,000.
The Company's Zero Dividend Preference and Income Shares meet the definition of
a liability under FRS 25 and therefore the Capital Shares comprise the Company's
equity shares.
The Company has authorised share capital of £29,850,000 (2008: same) consisting
of 995,000,000 (2008: same) shares of each class.

10. Capital and reserves attributable to shareholders

As at 30.11.09  30.11.08 31.05.09

  £000 £000 £000

------- ------- -------

Called up share capital 5,893 4,105 5,902

Share premium account 135,743 80,737 135,743

Capital redemption reserve 15,615 15,555 15,606

Zero Dividend Preference Shares appropriation
reserve 28,517 20,104 23,230

Special reserve 36,712 37,395 36,716

Capital reserve       - Investment holding gains
/ (losses)               26,207 (10,452) (712)

                               - Other capital
reserves (20,064) (7,530) (16,153)

Revenue reserve 4,790 1,184 2,554

------- ------- -------

Net assets attributable to shareholders  233,413 141,098 202,886

------- ------- -------

Zero Dividend Preference Shares 124,601 79,264 119,243

Income Shares 108,812 61,834 83,643

------- ------- -------

Total non-equity shares 233,413 141,098 202,886

Capital Shares (equity) -   -   -

------- ------- -------

Net assets attributable to shareholders  233,413 141,098 202,886

------- ------- -------

Under the terms of the Company's Articles of Association sums standing to the
credit of the Special Reserve are available for distribution only by way of
redemption or purchase of any of the Company's own shares. The Company may only
distribute accumulated 'realised' profits.
The Institute of Chartered Accountants of England and Wales has issued guidance
(TECH 01/08), stating that profits arising out of a change in fair value of
assets, recognised in accordance with the Accounting Standards may be
distributed provided the relevant assets can be readily converted into cash.
Securities listed on recognised stock exchanges are generally regarded as being
readily convertible into cash and hence unrealised profits in respect of such
securities currently included within Investment holding gains may be regarded as
distributable under Company Law.
11. Interim report

A copy of the interim report will be posted to all Shareholders on 9 February
2010. It will not be advertised in the press, but copies are available from the
registered office, Laurence Pountney Hill, London EC4R 0HH.

12. Abridged results

The abridged balance sheet for the year ended 31 May 2009 is based on financial
statements which carry an audit report that is unqualified and includes no
matters of adverse comment.



Portfolio of investments
As at 30 November 2009


Holding £'000   %


Oil & gas producers 15.90

179,362 BG Group 1,978 0.86

3,096,955 BP 17,854 7.74

969,417 Royal Dutch Shell 'B' 16,839 7.30


  Chemicals   1.04

134,893 Johnson Matthey 2,005 0.87

250,034 Yule Catto 393 0.17


  Mining   2.98

159,445 Anglo American 4,155 1.80

152,875 Lonmin 2,726 1.18


  Aerospace & defence   0.48

340,337 BAE Systems 1,116 0.48


  Construction &   0.69
materials

2,636,323 Low & Bonar 883 0.38

554,205 Marshalls 542 0.24

30,301 Morgan Sindall 157 0.07


  Electronic & electrical equipment   0.28

250,000 Halma 563 0.24

18,393 Renishaw 99 0.04


  General industrials   0.75

994,826 Smith (D.S.) 1,111 0.48

65,838 Smiths Group 627 0.27


  Support services   4.95

100,000 Acal 136 0.06

353,501 Bunzl 2,215 0.96

485,783 Davis Service Group 1,957 0.85

82,051 De La Rue 782 0.34

856,414 Electrocomponents 1,422 0.62

1,740,101 Filtrona 3,009 1.31

911,893 Hays 897 0.39

150,000 Premier Farnell 232 0.10

705,988 Smiths News 741 0.32


  Beverages   1.42

320,533 Diageo 3,282 1.42


  Food producers   3.90

386,922 Tate & Lyle 1,612 0.70

412,877 Unilever 7,374 3.20


  Leisure goods   0.90

541,242 Vitec Group 2,073 0.90


  Personal goods   0.80

708,964 PZ Cussons 1,855 0.80


  Tobacco   3.63

355,430 British American Tobacco 6,593 2.86

100,131 Imperial Tobacco 1,778 0.77


  Pharmaceuticals & biotechnology   10.29

314,229 AstraZeneca 8,528 3.70

640,659 BTG 1,051 0.46

1,122,333 GlaxoSmithKline 14,125 6.13


  Food & drug retailers   1.01

1,943,913 Booker Group 889 0.39

440,341 Sainsbury (J.) 1,418 0.62


  General retailers   2.25

853,361 Halfords Group 3,512 1.52

318,100 Home Retail Group 937 0.41

69,000 Mothercare 428 0.19

5,649 NEXT 112 0.05

200,000 Topps Tiles 179 0.08


  Media   2.59

36,706 British Sky Broadcasting 195 0.08
Group

244,980 Daily Mail & General Trust 'A' 1,016 0.44
(non-voting)

210,806 Pearson 1,748 0.76

661,424 Reed Elsevier 3,015 1.31


  Travel & leisure   0.91

16,123 Compass Group 69 0.03

758,785 Ladbrokes 996 0.43

571,184 William Hill 1,026 0.45


  Fixed line   2.15
telecommunications

1,822,493 BT Group 2,553 1.10

1,714,804 Cable & Wireless 2,430 1.05




  Mobile telecommunications   5.30

8,934,569 Vodafone Group 12,218 5.30


  Electricity   0.58

118,681 Scottish & Southern Energy 1,326 0.58


  Gas, water &   5.15
multi-utilities

1,376,155 Centrica 3,490 1.51

445,516 National Grid 2,938 1.27

250,000 Northumbrian Water Group 674 0.29

45,555 Pennon Group 226 0.10

217,671 Severn Trent 2,283 0.99

480,070 United Utilities 2,287 0.99


  Banks   7.47

2,428,315 HSBC Holdings 17,231 7.47


  Equity investment   0.38
instruments

500,000 Blackrock Commodities Income Investment Trust 600 0.26

200,000 Ecofin Water & Power Opportunities 264 0.12

40,000 Ecofin Water & Power Opportunities (Subscription 5 -
shares)


  Financial services   1.40

334,918 Close Brothers Group 2,304 1.00

22,337 London Stock Exchange 168 0.07

86,798 Provident Financial 769 0.33


  Life insurance   3.32

485,147 Aviva 1,803 0.78

746,956 Legal & General Group 577 0.25

410,433 Prudential 2,567 1.11

405,000 Resolution 336 0.15

1,136,472 Standard Life 2,373 1.03


  Non-life insurance   0.86

118,082 Jardine Lloyd Thompson 499 0.22
Group

1,262,128 RSA Insurance Group 1,474 0.64


  Real estate investment   3.03
trusts

300,000 Alpha Pyrenees Trust 87 0.04

271,475 Great Portland Estates 760 0.33

436,424 Land Securities Group 2,876 1.25

173,486 Mucklow (A&J) Group 581 0.25

823,922 Segro 2,667 1.16


  Software & computer   1.70
services

1,827,320 Sage Group 3,910 1.70


  Non-convertible preference shares   2.24

1,500,000 Aviva 8.75% Cum. Irrd. 1,807 0.78
Pref.

750,000 General Accident 8.875% Cum. Irrd. 863 0.37
Pref.

650,000 Lloyds Banking Group 6.475% Non-cum. Irrd. Pref. 442 0.19

1,610,000 Lloyds Banking Group 9.25% Non-cum. Irrd. Pref. 1,071 0.46

300,000 Lloyds Banking Group 9.75% Non-cum. Irrd. Pref. 205 0.09

250,000 Royal & Sun Alliance 7.375% Cum. Irrd. 245 0.11
Pref.

500,000 Standard Chartered 7.375% Non-cum. Irrd. Pref. 552 0.24



  'AAA' credit rated   4.06
bonds

£650,000 Finland (Republic of) 9.375% 2010 659 0.29

£4,350,000 Treasury 4.75% 2015 4,794 2.08

£3,600,000 Treasury 5% 2012 3,890 1.69


  'AA' credit rated   0.70
bonds

£400,000 BP Capital Markets 404 0.18
5.75% 2010

£700,000 GE Capital UK Funding FRN 2010 700 0.30

£500,000 Land Securities Capital Markets Var. Rate 2013 509 0.22


  'A' credit rated bonds   2.38

£300,000 BAA Funding Var. Rate 2015 299 0.13

£500,000 E.ON International Finance 6.375% 2012 548 0.24

£304,000 France Telecom 5% 2016 311 0.13

£215,000 France Telecom 7.5% 2011 231 0.10

£250,000 France Telecom 8% 2017 305 0.13

£950,000 HSBC Holdings Var. Rate 1,099 0.48
2018

£255,000 London Merchant Securities 6.5% 2026 256 0.11

£800,000 London Stock Exchange Var. Rate 2016 817 0.35

£500,000 National Grid Gas 6% 2017 542 0.24

£1,000,000 UBS London 6.375% 2016 1,090 0.47


  'BBB' credit rated   3.10
bonds

£1,000,000 Anheuser-Busch InBev 6.5% 2017 1,086 0.47

£700,000 British Telecommunications Var. Rate 809 0.35
2016

£350,000 Compass Group 7% 2014 390 0.17

£840,000 Deutsche Telekom 7.125% 2012 931 0.40

£700,000 DWR Cymru Financing Var. Rate 2036 741 0.32

£500,000 Imperial Tobacco Finance 5.5% 2016 506 0.22

£500,000 Imperial Tobacco Finance 6.25% 2018 523 0.23

£300,000 Kingfisher 5.625% 2014 310 0.14

£200,000 Rentokil Initial 200 0.09
5.75% 2016

£500,000 Sutton Bridge Financing 8.625% 2022 312 0.14

£300,000 Thames Water Utilities Finance 304 0.13
4.75% 2010

£1,000,000 WPP Group 6% 2017 1,010 0.44


  Bonds with no credit   1.41
rating

£500,000 Blue Circle Industries 10.75% 2013 599 0.26

£750,000 Brixton 5.25% 2015 729 0.32

£775,000 Heineken 7.25% 2015 856 0.37

£700,000 John Lewis 6.375% 2012 740 0.32

£300,000 Shaftesbury 8.5% 2024 328 0.14


------------------------------------------------------------------------------
Total portfolio of 230,539 100.00
investments
------------------------------------------------------------------------------

The interim report will not be advertised in the press, but copies are available
from the registered office,
Laurence Pountney Hill, London, EC4R 0HH.

J. P.  McClelland
Secretary



[HUG#1378813]







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