Annual Report and Accounts Insight Investment Management … · Insight Investment Management Limited Annual Report and Accounts 2005 Contents 2 Contents Highlights 3 Chairman’s

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Annual Report and Accounts

Insight Investment Management Limited Year ended 31 December 2005

Insight Investment Management Limited Annual Report and Accounts 2005

Contents

2 Contents

Highlights 3

Chairman’s statement 4

Chief Executive’s report 6

Overview 6

Financial highlights 7

Our business 8

Investment management 10

Distribution 16

Operations 17

Risk management 18

Human resources 19

Corporate responsibility 21

Remuneration report 24

Board of directors 26

Annual report and consolidated financial statements 31

Highlights 3

Assets Under Management at 31 December

Colleaguesat 31 December

Customers: Retail 60,237Institutional 307


Assets Under Management

Up £11.0 billion 14%Gross profit

Up £19.1 million 20%

Highlights

2002

July – Clerical MedicalInvestment ManagementLimited rebranded as Insight Investment

September – Name formally changed to Insight InvestmentManagement Limited

2003

January – Insight acquiredRothschild AssetManagement Limited

January – April –Integration of Insight andRothschild teams,establishing a FinancialSolutions Group and Multi-Manager team

October – Insight broughtGatehouse property team on board

2004

January – Proprietary, in-house analysis tools andsoftware developed for multi-manager products

May – Integratedinternational equity teamdeveloped

June – Appointment of Chief Risk Officer

2005

May – Contract to outsourceInvestment Operations toNorthern Trust signed

2002200320042005 £88.7 bn

518

40 60 80 100200

2002200320042005

200 300 400 5001000

Institutional 307

Retail 60,237

2000 3000 4000 5000 6000 700010000

2002200320042005 £88.7 bn

518

40 60 80 100200

2002200320042005

200 300 400 5001000

Institutional 307

Retail 60,237

2000 3000 4000 5000 6000 700010000

Chairman’s statement

4 Chairman’s statement

2005 continued Insight’s track record of evolution,improvement and innovation. During the past three years since its formation and subsequent development it has remained true to its primary aim of making its customers better off. It has delivered this through the pursuit of outstanding performance,innovative investment solutions and the provision of superior service.

Insight continues to place the customer at the heartof its business, which is a key strength in the changingfinancial environment. Its investment activities areincreasingly focused on providing tailored or bespokesolutions which meet the specific needs and concerns ofcustomers rather than the creation of generic products.

This strategy seeks to differentiate Insight from itscompetitors. I have been delighted at the speed withwhich Insight has developed its ability to deliver thisproposition and with the innovative offerings it hasbrought to the market, particularly in terms of liability-driven investment and property fund management.

What Insight has achieved would not have been possible without the continuing commitment of all its dedicated colleagues, and the Board’s thanks go to all those who have delivered this success. We recognise that people are key to its continuedsuccess. Indeed they are the primary differentiator that makes Insight stand out.

The future holds considerable challenges for Insight, particularly as it considers opportunities to take its products and services beyond its traditionalUK markets, to continental Europe or further afield.

However I am convinced that it is in excellent shape, with the right structure, the right strategy and above all, the right people to lead the business, to meet those challenges, and importantly makemore customers better off.

Phil HodkinsonChairman


Chairman’s statement 5

Insight continues to place thecustomer at the heart of its business,which is a key strength in the changingfinancial environment.


Chief Executive’s report

6 Chief Executive’s report

Overview

We launched Insight as an investment business three yearsago with a new vision created to meet the needs of a worldof investors that demanded a different way of looking after their money. Our focus was to get into the right shape to become a new force in asset management. That involved significant investment in people andinfrastructure, the development of attitudes to succeed in the new environment and the re-invention and re-engineering of our investment business.

However, even in the short time since our launch theinvestment world has changed dramatically. The decline in market levels in 2002 and 2003, coupled with fallinginterest rates, has contributed to give both retail andinstitutional owners of securities genuine dilemmas which we can help them to solve. Pension fund surplusesare largely a thing of the past. Deficits have appeared; final salary schemes are closing at a rapid rate and many with-profits funds – the stalwarts of the savings markets inthe 80s and 90s – are similarly closing to new businessand consolidating. Loss of trust in the savings systemamong retail investors is now high in the UK. Customersfeel let down by our industry. They have suffered reallosses and do not understand why investmentorganisations have not protected their savings.

In response to this financial storm, Insight has reinventedits investment platform, modernised its organisationalstructure and equipped its colleagues with the rightinvestment tools and techniques to succeed in thisdifferent and much tougher environment. We have also been quick and flexible in scaling back on strategiesor plans that no longer appear to meet our customers’ needs.

We have put the customer at the heart of our organisation.We are managing portfolios against specific customerrequirements and, across all asset classes, we havedeveloped the capability to deliver absolute returns(positive returns relative to cash). We continue to focus on doing a small number of things really well in the areas where we see increasing demand for our investment skills. We are now a provider of financial solutions that aims to meet the needs of our customers.

We want our customers to become advocates for ourbusiness. We want The Insight Experience to be apleasurable and stress-free experience. This will make us stand out from the investment crowd. We are creating a distinct and unified culture in which we stick to our principles, keep to our values and in the processdeliver the best deal for our customers.



I hope that after reading the following examples of ourachievements during 2005 and insights into our business,you will be as confident as I am that we have thestructures, the strategies and the right colleagues in placeto succeed and make more people better off.

Financial highlights

During 2005 Insight continued to make strong progressaided by the continuing recovery in stock markets.

We also began to see the benefits of our earlyrecognition of the changes in the corporate pensionsindustry. As new international accountancy rules madepension deficits more visible by bringing them onto thebalance sheet, we developed the capability to deliverbespoke solutions to meet specific customer liabilities.

At a high level our 2005 financial figures together with the comparison for 2004 are as shown in the tableopposite. Gross profit rose from £96.9 million in 2004 to £116.0 million in 2005. This is a reflection of thegrowth in assets under management during the period, success in growing the property management divisionand additional fees received from group companies.

Total assets under management ended the year at £88.7 billion, up from £77.7 billion at the start of 2005.Gross fund inflows of £12.7 billion were achieved compared to £10.7 billion in 2004.

Operating expenditure increased from £95.9 million in 2004 to £113.0 million in 2005 largely due to our continued investment in infrastructure, such as the advanced derivatives platform necessary to deliver the investment solutions needed by ourcustomers. In basis point terms our operational cost base has risen up from 12.3 bps to 12.8 bps (using end of year assets under management). However, we still enjoy one of the lowest cost bases in the industry as measured by independentbenchmarking surveys.

We are creating a distinct and unifiedculture in which we stick to ourprinciples, keep to our values and inthe process deliver the best deal for our customers.


Financials 2005 2004

Gross profit £116.0 million £96.9 million

Administration costs £113.0 million £95.9 million

Operating profit £3.0 million £1.0 million

Assets under management £88.7 billion £77.7 billion


Insight distributes its products through a wide range ofthird parties, as can be seen from the following chart:

The range of assets under management is also wide, as shown below:

Our business

We are an investment management company that looksafter other people’s money. We exist to enrich people’slives by making more people better off. That’s not only in monetary terms. We can enrich our customers’ livesby keeping our promises. We can enrich our colleagues’lives by creating an environment in which they can thrive and achieve their potential and we can enrich our shareholders’ lives by giving them confidence thatwe will meet and exceed our business plans.

Our vision identifies what we are and what we are not.

• We are an autonomous business with a verysupportive parent in HBOS.

• We are not a retailer, we are a provider of financialsolutions, selling principally through the intermediated market.

• We focus on our core capabilities where we believe wecan add value, doing a few things really well and nottrying to ‘do a bit of everything’.

• We focus our distribution. Our investment managementis in one location – London. This gives us easy lines ofcommunication, and allows us to develop an alignedand unified culture.

Revenue by source

£116.0 million

£ million

Banks 18.9UK IFAs 36.6UK Institutional (non-insurance) 29.1Non-UK Institutional (non-insurance) 2.9UK Institutional (insurance) 13.1Non-UK 9.0Other 6.4

Assets under management by asset type

£88.7 billion

£ billion

UK Equities 21.1Overseas Equities 8.3UK Fixed Income 33.6Overseas Fixed Income 8.0Property 6.8Cash 9.5Multi-Manager 0.7Private Equity 0.7



We exist to enrich people’s lives bymaking more people better off.

• We provide added value to our clients with our solutions.

Success for us is encompassed in the achievement of our strategic goals, to:

• Be a UK based provider of superior investmentsolutions and customer service;

• Create a respected and trusted investment brand thatwill help our distribution businesses to sell; and

• Profitably grow revenues and in the process createshareholder value.

We also know the factors that will lead to success. They are embedded in our virtuous success cycle.

If we can recruit and retain the best people, createspecific solutions from customer insight, support peopleto deliver results through innovation and teamwork, and have focused products and distribution, then we will have superior investment results and service. Thesefactors, combined with intelligent business management,which includes robust risk management, will lead to profit.

The virtuous success cycle:

• Is the basis for what we believe creates value;

• It guides how our business should operate;

• It shapes our development of strategies and measures;

• It focuses our priorities;

• It is the basis of what we value and celebrate; and

• It describes the key dynamics of our business.

So, as a company, we know strategically what we are,what we want to be, how we will succeed and what thatsuccess will look like. The statements in our virtuoussuccess cycle define our culture, and reflect for ourcolleagues, shareholder and customers what we value –what are our passions. While all aspects of the virtuoussuccess cycle permeate every area of our business, I will use specific examples from different divisions todemonstrate Insight’s achievements in 2005.


Recruit and retain the right people

for Insight

1

XÔ

Our product

Superior investmentresults and service

5

X

XX

=

ProfitSuccess

=

Making more people better off

We create specificsolutions from

customer insight

2

Focused product and distribution

4

Support people to deliverresults through innovation

and teamwork

3

Intelligent businessmanagement

6


Investment ManagementFrom Insight comes solution

Our industry has generally failed its customers, in particular in pensions, by allowing large fundingsurpluses to turn into deficits over the last few years. As a result, the industry is now in the midst of a radicalrethink on how to meet pension fund obligations.

Traditionally, asset managers have focused on offeringclients generic products that were managed againsttypical market benchmarks. This narrow focus within a very segmented chain of responsibility that includedtrustees and consultants, was one of the factors thatcontributed to customers’ unintended exposure to manyof the risks embedded within their liabilities.

We are now seeing the emergence of a new approach to solving problems; an approach based on a morecollaborative partnership between the key players todeliver holistic solutions to the customers; solutions that are based and measured more directly against liabilities.

Financial solutions

While it is now increasingly becoming conventionalwisdom, few recognised the trend just two years ago.Insight, however, reorganised its investment platform to meet the challenges of providing financial solutions.

Success depended on three key factors:

• A flexible investment platform that would allow us to move from an asset to a liability benchmark – tobecome a solution rather than a product provider.

• The technical expertise to deliver solutions, which required the skilful use of derivatives to isolate risks and gain a greater degree of accuracy.

• A robust risk and modelling capability to allow fundmanagers to trade with precision in a variety of newinstruments and cope effectively with a diversity of benchmarks.

The early implementation of programmes to reorganiseour investment division and provide the infrastructurenecessary, has given Insight a head start on the

Insight has demonstrated a clearcommitment to a financial solutionsapproach, and has re-structured itsinvestment platform to deliver it.



competition. However, we will need to continue toinnovate and develop if we are to remain ahead andbecome one of what is likely to be a small number of providers offering solutions based on liabilitybenchmarks. The increasing number of investmentconsultants asking us to pitch to their customers and the new business we are gaining, attests to the validity of our approach and the leading position Insightcurrently enjoys in this area.

The establishment of the Financial Solutions Group was the first step in moving Insight’s investment platform away from product towards solution provision. This team is complementary to the other investmentmanagement areas within Insight, helping them to develop their products alongside liability-driveninvestment (LDI) and other financial solutions. This expertise allows us to provide existing customerswith access to a much broader range of investmentopportunities, and to pitch for mandates in newand growing markets.

The second part of the plan was the building of aninfrastructure that allowed the use and management of derivatives on a large scale.

The latest component of the solution was the creationof absolute return funds. Absolute Insight Limited was launched in May 2005. For institutional customerswho want an investment with enhanced absolute returns combined with downside protection in bear markets, these funds aim to give an annualisedreturn, net of all fees and expenses, that is at least 4% per annum above the return provided by cash. These funds can provide investors with all theadvantages of absolute return products without thedisadvantages generally associated with hedge funds or funds of hedge funds, these being the lack oftransparency, non-UK regulation of the funds themselves, and the risk commensurate with highly geared positions.Investors will have the option of investing via the fund of funds, or investing directly in any of the six underlyingfunds – the UK Equity Market Neutral Fund, the EuropeEquity Market Neutral Fund, the Tactical Asset AllocationFund, the Currency Fund, the Emerging Market DebtFund and the Bond Fund.

Insight has demonstrated a clear commitment to afinancial solutions approach, and has re-structured its investment platform to deliver it.



Fixed Income

Insight has a very strong offering in fixed income. Our highly regarded team of 45 now manages in excess of £51.2 billion of fixed income and cash assets. This compares with £46.2 billion at the end of 2004. There were some substantial mandate gains, includingthe Pension Protection Fund, an organisation which plays a very important role in protecting the benefits of UK pension scheme members and the Charities Aid Foundation.

These organisations were impressed by the wealth ofknowledge and experience of our fixed income team.They also appreciated the excellent and consistentperformance delivered by the portfolios based on a well established process that integrates the views of specialists in UK and international bonds, credit analysis and money market instruments.

Another success within the fixed income area is theInsight Liquidity Funds PLC. This AAA-rated institutionalinvestment vehicle, which aims to provide a flexible and stable alternative to bank deposits, has gone fromstrength to strength. Launched with just one Sterlingdenominated sub-fund in 2003 it now has nine sub-fundsin three currencies – Sterling, Euro and US Dollar.

Not only does it permit customers to select by currency, but it also allows selection according toduration and risk appetite with a number of risk-gradedfunds. The original Sterling Liquidity Fund remains the best performing S&P-rated fund in its sector over the past three calendar years.

Equity

Insight’s equity assets under management now stand at £29.4 billion at the end of 2005. The largestproportion of this is represented by investments in theUK at £21.1 billion, but we also manage in excess of £8.3 billion in overseas markets. We are now well placedto increase our market share as our performanceimproves. Our equity team of 30 now comprises four areas,UK, European, International and Research. Each of theseteams is organised by segment or performance target.

For example the UK equity team has core, alpha, income and smaller companies’ specialists, while globalequities has teams managing global, ethical, Japanese,US and Asian portfolios. The research team provides the foundation on which our equity proposition is built.This team researches companies in which we mightinvest, and provides advice to the fund managers.



Whilst we consider external research, it is often driven by a different agenda from our own. Our research team provides independent analysis on companies. Fund managers rely heavily on our analysts’recommendations and use or challenge them. We steer away from the consensus view in the market, and only invest where we believe we can add value for our customers.

In terms of 2005 launches, two of the Absolute InsightLimited range referred to above – the UK Equity MarketNeutral Fund and the Europe Equity Market Neutral Fund– are managed by members of our equity team using the bottom-up stock-picking expertise that has beendeveloped. The performance generated by the teamshas been excellent so far, delivering the requiredperformance with a very limited amount of risk.

Property

As a result of the funds launched in 2004 we have a solidUK property offering. This includes a range of direct andindirect funds that are well diversified across the retail,office and industrial sectors and designed to giveinvestors a liquid means of investing in commercialproperty. Due to the significant growth of these funds we

have been highly acquisitive again in 2005 purchasing atthe rate of a property a day over the last twelve months.

A natural extension of our capability is to offer customersexposure to the European commercial property market. In 2005 we announced our expansion into Europe with thelaunch of a pan-European property investment fund withan initial target size of Eur600 million – The InsightEuropean Real Estate Trust. The fund is initially targetingacquisitions in the major western continental Europeanmarkets including a special focus on France, Belgium,Spain and Germany and has so far accumulated a portfolioof over Eur300 million (including commitments). It has anincome and growth investment philosophy aiming to out-perform local property markets. We have adopted thesame style of management that has proved successfulwith the Insight Foundation Property Trust (IFPT), acquiringproperties which we can actively manage with the aim ofgenerating above-average income returns.

Over 2005 property assets under management haveincreased from £5.6 billion to £6.8 billion. The propertyinvestment team has also grown to 62, which includesthe recruitment of an experienced and well-respectedteam with expertise in continental European property. For 2006 we are considering specialist sectors in the UK as well as further European expansion.


“We sought to appoint specialistmanagers so that we could adoptmore demanding performancebenchmarks. Insight’s appointmentwas driven by the impressive depth ofexperience of its fixed income teamand its proven investment process.”

Tracey Reddings, Executive Director – Charity Financial Servicesof Charities Aid Foundation


Multi-Manager and Private Equity

During 2005 Insight recruited a new head of alternativeinvestments with responsibility for building the multi-manager and private equity capabilities.

Established just over two years ago, Insight’s multi-manager team aims to develop solutions to matchinvestors’ needs. The team of nine experts in a range ofdisciplines, divide into two areas – one responsible for fundand manager selection and the other for portfolio strategyand construction. At the heart of their process is riskassessment and risk management. The team works hard tounderstand the risk factors in the various funds selectedand in the combination of investments in the portfolios, as well as considering the risk appetite of the customer.

Discussions with investors, combined with researchundertaken during 2003, convinced us that increasinglyinvestors were looking for funds that aimed to provide

positive returns under all market conditions – absolutereturn funds. As a result, the multi-manager teamdeveloped and modelled the Diversified Target ReturnFund. This low to medium risk fund was launched in February 2005 with an objective of delivering positivereturns on an annual basis with the prospect of long termcapital growth commensurate with investment in equities.In a bear market the fund aims to provide a positivereturn while in a bull market it looks to outperform cash.

Insight’s private equity team has more than £700 millionunder management and our customers are amongst the longest-standing private equity investors in the UK,having invested since the early 1980s. The team of fiveis highly experienced with one of the longest trackrecords in the City.

We intend to develop both our multi-manager andprivate equity capabilities and further integrate them into our solution-based investment platform.

“We looked carefully at a number of fund managers before awardingthe business to Insight. We wereimpressed by their depth ofexperience and their ability to tailortheir services to meet the specificneeds of their customers.”


David White, Chief Executive of the Children’s Mutual


Investor Responsibility

Corporate governance and corporate responsibility are of major importance to companies, investors and the public. This topic is therefore very important toInsight’s investment activities.

We are committed to encouraging the highest standardsof corporate governance and corporate responsibility inthe companies in which we invest, and in this connectionin 2005 we joined with Business in the Community andFTSE Group to launch a consultation into effective boardoversight of corporate responsibility.

Insight’s own approach is through regular, well-arguedengagement with the directors and managers ofcompanies. This kind of constructive dialogueencourages companies to improve their governancestandards, while simultaneously building strongrelationships with investors.

Insight’s Investor Responsibility (IR) team is widelyregarded as one of the most accomplished in the assetmanagement industry. It comprises eight full-timeprofessionals who have an average of nine years industry

experience. The work of our specialist IR team is closely linked to our fund management activities through:

• Their provision of valuable input to the fundmanagement process delivered through credit andequity analysts; and

• Company-investor meetings where our analysts andfund managers raise specific corporate governanceand corporate responsibility issues.

Our IR experts conduct extensive issue and sector-based research on priority governance and social,environmental and ethical topics, selected through their own analysis or identified in regular meetings with our investment teams.

A characteristic of Insight’s approach is its commitmentto reporting and disclosure. Insight believes in beingtransparent regarding engagement activity and votingrecommendations, to demonstrate our commitment and to be accountable not only to our customers, but also to companies in which we invest and to the wider society.



Distribution Together nothing is impossible

The prime objective of Insight Investment is to be a UK-based provider of superior investment solutions andcustomer service. That puts the customer at the centreof our business. We must find the solutions which fitthe customers’ needs and provide the service that willencourage them to return to us. We seek customeradvocacy because we believe it is the most effective tool in developing a long-term business.

We aim to get the basics right – to give our customers awell-understood, first-class, consistent and reliable service.If we achieve that then we will be ahead of the competition.

Institutional

Insight has made great strides in developing its institutionaloffering. Its success is reflected in the significant increase in the amount of new business for which we have been incontention since the start of 2005. This could not havebeen achieved without the excellent work carried out by our investment and distribution teams over the past twoyears. During 2005 the distribution team was strengthenedby the recruitment of a head of institutional business.

We now have a substantial and growing pipeline of newbusiness leads, particularly in the areas of fixed income,liability driven investment and property. The opportunitiesfor Insight are increasing and so it is important that wecontinue to strengthen not only our investment teams, but also our business development and client servicecapabilities. We now have over 300 institutional clients and manage funds for them in excess of £32.9 billion.

Retail

Insight’s investment funds are sold through intermediariesand third-party distributors who offer savings andinvestment products to private individuals primarily withinthe UK. With these we develop business partnerships bycollaborating actively in the development of profitable,innovative, customer-relevant investment solutions. One of our very successful and well-established businesspartnerships is with St. James’s Place. Not only have wedeveloped a property fund for them, but we also help themby training their sales force in property and helping them to promote the fund. Property was a new asset class for St. James’s Place when the fund was launched in2004. With the help of their dedicated Insight support, in 2005 they have produced almost £200 million of sales,



“Insight Investment have a wealth of knowledge and experience that will help enable the Pension Protection Fund to deliver its strategic investment objectives.”

“We have been so impressed by the service we have been given byInsight Investment that we now usethat as our benchmark, asking otherfund managers with whom we workto deliver the same level of support.”

which represented 17% of their total life and pensionsbusiness sales for the year. The quality of the service thatInsight provides is highly regarded by St. James’s Place.

The development of these partnerships depends uponthe efforts of our experienced business partnershipsteam which, during the year was strengthened by therebuilding of our IFA sales team.

Operations Focused products and distribution

Insight has the ambitious targets of delivering superiorinvestment performance and excellent customer service.To do this it needs operational and IT platforms that meetthe current needs of the business and have the flexibilityand scalability to adapt to future needs.

Investment Operations

Over the past few years Insight has built a strongoperational platform designed to ensure we operate in the most efficient and cost-effective manner. In line with intelligent business management,we continually review our approach to operational

support to ensure that it reflects best market practiceand delivers the ongoing competitiveness essential toour business model.

Our latest review suggested that considerable funding in investment operations would be needed to meet ourfuture requirements. Over the past few years the marketfor outsourcing has gained momentum. From our initialfeasibility study it became clear that there was a soundand compelling case for outsourcing our investmentoperations function, with significant benefits for Insight,our colleagues, and our customers. In particular,outsourcing would allow us to focus and dedicateresources to our key capabilities – investmentperformance and customer service.

In February 2005 Insight announced, subject to duediligence and contract negotiations, its intention tooutsource a significant part of its investment operationsto Northern Trust. In May the contract was signed. A key factor in Insight’s decision was that we should not lose the expertise built up in our operations team.Under the terms of the agreement 90 Insight colleaguesare to transfer to Northern Trust. The project isprogressing smoothly and we will benefit from theconsiderable resources Northern Trust will devote to this important and growing area of its business.


Andrew Humphries, Divisional Director of St. James’s PlaceLawrence Churchill, Chairman of the Pension Protection Fund


IT

We are determined that colleagues have the very best toolsto do their jobs, and constantly monitor what is availableand seek ways of enhancing the technology we provide.

After substantial efforts in 2003 to integrate the ITplatforms of Rothschild Asset Management and Insight,in 2004 the principal priority for the IT area was to delivera platform that was scalable to meet the needs ofinvestment management to model financial solutions and allow substantial use of derivative instruments.While this programme was virtually complete by early2005, we are continuing to enhance our ability toprocess new and different instruments.

We undertook a substantial programme to refresh ourtechnical infrastructure. Developments during the yearsupported asset management processes such asperformance attribution, stock lending, electronicdealing, investment research and risk management.

Work has already commenced on a number of projectsto further enhance our capability including thereplacement of our modelling applications as well asfurther enhancements to risk management tools.

Risk managementIntelligent business management

The focus for 2005 has been on further embedding a risk culture throughout Insight. Risk is part of our business, not separate from it, and we take abusiness approach to risk rather than the other way around.

We aim for:

• Clear identification and understanding of potential risks;

• Clear thinking about the appropriate level of risk;

• Clear management information to constantly track the status of risks; and

• Clear controls in place to ensure the level of risk taken is a level we and our customers are comfortable with in achieving the desired performance or returns.

In summary, the key elements to achieving success in a risk-aware manner are: identification – appetite –information – control.

Resilient risk managementdifferentiates us from the competition,and gives assurance to our customers that we can deliver results without taking unnecessary or inappropriate risk.



Specific initiatives undertaken in 2005 have included:

• Continuous development of our independent investmentrisk monitoring capacity in line with the expansion of ourinvestment capability, in particular to accommodate ourliability-driven and absolute return activities.

• The business-wide implementation of a control risk self assessment programme to establish clearidentification, ownership and understanding of all risks and controls in each division.

• A new incident reporting system to record and analyse allincidents, losses, breaches and “near misses” to ensurethat we can learn from any issues that have arisen, rectifyas appropriate and put in place additional or enhancedcontrols as quickly and efficiently as possible.

• A business continuity review, including testing of varioussystems and scenarios, to ensure Insight is in the bestshape to recover quickly from unexpected events withminimal impact on our customers’ business.

At Insight, we believe that resilient risk management issomething that differentiates us from the competition,and gives assurance to our customers, colleagues andthe regulators that our business will be conducted in aprudent manner and that we can deliver results withouttaking unneccesary or inappropriate risk.

Human Resources People are key

A key differentiator for Insight is our people. Successfulcompanies are those where everyone in the business isclear about the corporate goals and how their individualrole contributes to the achievement of those goals. The virtuous success cycle and The Insight Experience(TIE), developed by the Executive Management team,underpin that achievement, defining the business modelwe use and the behaviours we adopt both internally and, importantly, to our customers.

TIE behaviours are integral in the way we manage ourcolleagues – from recruitment and orientation, throughindividual objectives to the performance managementprocess, development and recognition. A major focus forus is the assessment of how effectively TIE is embeddedin our processes throughout a colleague’s career with Insight.

We not only assess how our colleagues perform inrelation to TIE behaviours, but we also evaluate howInsight as a company lives up to those same criteria.During 2005 we carried out a TIE-based colleagueopinion survey (as shown on page 20) which providedthe following results.



Of those who participated:

• 78% of colleagues found Insight was either very goodor good at “Sharing the rewards of our success withthem”. Only 4% felt it was poor.

• 80% felt Insight were very good or good at “Making it clear what is expected of them”. Only 3% believed it was poor.

• 85% believed Insight “Treated them fairly” with only 4% finding it poor.

• 81% felt that Insight “Supported a team approach”,with only 4% believing that poor.

Following the survey a number of initiatives werelaunched including:

• A “Total Team” job rotation scheme which allowsindividuals to spend one day per year shadowing

a colleague from another business area. Theirexperience is then shared with other colleagues. This approach is designed to promote greaterunderstanding and cohesion across Insight.

• The embedding of TIE behaviours within theperformance management scheme. This providescolleagues with even greater clarity about theirobjectives. Not only do we define what we wantindividuals to deliver, but we also clarify how we wantthem to deliver. Under this initiative, assessment is notonly made by line managers, but also through the use of 360o feedback.

While we are pleased with the results of this survey, the goal is to continually learn and evolve the variousprocesses that make up our colleague offering. We aredetermined to ensure The Insight Experience remainsrelevant for all our colleagues and customers.



Corporate Responsibility Making More People Better Off

Each year Insight helps to make a difference through the HBOS Foundation. This registered independentcharitable trust established by HBOS plc in 2001, focuses on two guiding themes – money advice and financial literacy, and developing and improvingcommunities. Insight receives £30,000 to distribute in our community to charities that meet the HBOSFoundation criteria.

Two organisations we helped with grants this year wereCreate and A Space. Create, an organisation which aimsto enhance the lives of children in hospitals and hospicesthrough the creative arts, used the grant for their ArtsAdventures programmes. This innovative three-yearproject will take 36 informal, interactive creative artsworkshops each year to young patients at six childrens’hospices and hospital wards in or just outside London.

A Space is school-based and designed to provideservices that meet the health, emotional, psychological,educational and social needs of young people betweenthe ages of 11 and 13. Insight’s grant was used toproduce two DVD’s made in collaboration with children for use in classroom settings as a learningresource. The first, entitled Transitions, recorded children and adults’ views on moving from primary to secondary school. The second, entitled Money Matters, is the result of workshops on financial literacy.

One school that benefits from A Space services isShacklewell Primary School at which a number of Insightcolleagues volunteer regularly as reading, numbers andmentoring partners. Shacklewell also received a grant toenable them to send a number of Year 6 pupils to a farmin Wales as part of the farms for city children initiative.Diane Abbott, the MP for Hackney visited Shacklewell totalk to the pupils about their visit.


“It's always encouraging to hear ofmembers of the corporate arenacontributing to their communities andI'm delighted that some of the mostunderprivileged communities havebeen targeted by Insight Investmentand the HBOS Foundation.”

Diane Abbott, MP for Hackney


Environment

Insight, as a member of the HBOS Group, takes itsenvironmental responsibilities very seriously. It workshard to encourage the achievement of high standards ofcorporate responsibility by companies in which it investsand applies the group’s environmental policy rigorously.The group has set itself some stretching targets toreduce energy and water consumption and improvewaste management.

Since 1999 HBOS has invested more than £3.6 million in energy initiatives, resulting in over £13 million costsavings and a reduction of around 110,000 tonnes ofCO2. During 2005 a new contract was signed withelectricity supplier, E.ON, so that 100% of the energy the group uses comes from renewable sources. This is the first time the group has reached such an agreement. The contract will remain in force until October 2006.

Other environmental impacts:

Procurement and Paper: All Insight’s businesscommunication paper adheres to strict environmentalstandards in terms of recycled fibres and avoidance of harmful chemicals during the production process. All external suppliers conform to ISO14001 standards.

Travel: A series of practical measures to reduce the need for business travel have been adopted.

We have the right structures, the right strategies and the rightcolleagues to reach new heights, and build our business to benefit all our stakeholders.


Impact area Target Period of Target

Energy reduction17.5% per full timeemployee

1 January 2002 - 31 December 2007

Water reduction10% per full timeemployee

1 January 2002 - 31 December 2007

Waste recycling 60%1 January 2002 - 31 December 2007


Waste: General office waste amounts for less than 1% of the HBOS Group’s direct environmental impact.Approximately one quarter of paper waste is beingrecycled and all electrical equipment, including PCs and monitors, are either sold or recycled.

I am very proud of what we have achieved this year. I hope,having read the above, you have a flavour of what we haveachieved at Insight. We have been going for three yearsnow, but with the enthusiasm and excitement of colleaguesInsight still has the atmosphere of a new business.

I have every confidence that we have the right structures,the right strategies and above all the right colleagues toreach new heights, and build our business to benefit allour stakeholders – customers, shareholders and colleagues.

Douglas FerransChief Executive


Remuneration report

24 Remuneration report

Responsibility for remuneration policy rests with theInsight remuneration committee.

Constitution of the committee

The committee determines remuneration policy for Insight.Its members are Phil Hodkinson (chairman), William Govett,Brian Ivory and Louis Sherwood (non-executive directors).Douglas Ferrans, the chief executive, attends thecommittee which is also supported by Insight’s director of human resources, Patrick Margrave. In addition, the committee obtains advice from external consultantson technical aspects of compensation policy.

Policy on remuneration

Insight has adopted total reward principles. It promisesto invest in its people and share the rewards of itssuccess by committing to total rewards that arecompetitive within the industry.

Total rewards include:

• Basic pay, that recognises skill, knowledge, responsibility and accountability; and

• Variable pay, bonuses and the long-term incentive plan(LTIP) that rewards individuals for their contribution toInsight’s success in accordance with their performanceagainst agreed individual and corporate objectives.

A comprehensive performance management system is operated throughout Insight, ensuring remunerationpackages and performance against individual objectivesare closely aligned.To ensure remuneration iscompetitive within the industry, regular benchmarkingcomparisons with other asset management companiesare undertaken. In more detail, the main components of the remuneration package are shown below:

Basic pay – The table below shows the dispersion ofcolleagues across salary ranges.

Basic annual pay ‘£’ % of colleagues within range

0 - 25,000 10.6

25,001 - 50,000 47.2

50,001 - 75,000 17.5

75,001 - 100,000 13.3

100,001 - 125,000 6.3

125,001 - 150,000 3.0

150,000 + 2.1


Remuneration report 25

Insight promises to invest in its peopleand share the rewards of its successby committing to total rewards thatare competitive within the industry.

Variable pay – This divides into a discretionary bonus and the LTIP.

Discretionary bonus – individual bonuses are assessed as noted above.

LTIP – Insight operates a phantom equity scheme linkeddirectly to the growth in the value of the business. Newschemes are launched annually, with the award periodrunning for a maximum of seven years. 50% of theparticipant’s award may be exercised after three years.Individual membership and awards are at the discretionof the remuneration committee.

Grants under the LTIP scheme:

• ‘A’ units behave like ordinary shares in so far as thepotential value of the award on exercise will representthe value of the initial grant plus any increase ordecrease determined by the growth (or decline) in the value of the business.

• ‘B’ units behave like share options and the value ofeach unit is equivalent to the growth in the value of the business only.

The value of the business is reviewed annually andapproved by the remuneration committee in Februaryeach year. As at 31 December 2005, 99 (2004:65)

individuals participated in the scheme; with 7.0 million(2004: 4.7 million) ‘A’ units, and 8.0 million (2004: 5.5million) ‘B’ units in issue.

Other

Pensions – All colleagues are encouraged to plan fortheir retirement. New colleagues become eligible to jointhe defined contribution scheme, operated by HBOS plc. Levels of contribution vary according to age.

Benefits – Largely driven by job grade, some colleaguesare entitled to other benefits such as car allowances. Inaddition, a flexible benefits plan allows individuals to choosethe benefits that best suit their needs. These include awide variety of lifestyle, leisure and health benefits. Inaddition, all colleagues are able to participate in anumber of discretionary HBOS share incentive schemes.

Directors’ contracts

The company may terminate an executive’s employmentby giving not less than 12 months’ notice. The executivemay terminate employment by giving the company notless than six months’ notice.


Board of Directors

26 Board of Directors

Phil Hodkinson – chairman

Phil, 47, joined HBOS plc in September 2001 as chiefexecutive of the Insurance & Investment Division. In 2005 he became group finance director and took over responsibility for HBOS Treasury Services. He joinedHBOS from Zurich Financial Services, having worked in the UK insurance industry for all of his career. In addition, Phil is the board sponsor for HBOS’scorporate responsibility activities and is chairman of the HBOS Foundation. He is also a non-executivedirector of BT Group plc and Business in the Community.He is a Fellow of the Institute of Actuaries.

Douglas Ferrans – chief executive

Douglas, 51, joined HBOS plc as chief executive, assetmanagement in June 2001, and subsequently directed the launch in September 2002 of Insight Investment as the independent asset management business ofHBOS. He began his investment career at ScottishAmicable in 1977 after graduating in mathematics andphysics from Glasgow University. He gained experience

of the full range of business areas before becoming chief executive of Scottish Amicable InvestmentManagers in 1995. In 1997 he joined Britannic AssetManagement as marketing director where he wasresponsible for managing the sales and marketingfunctions. He is a fellow of the Faculty of Actuaries.

Charles Farquharson – head of distribution

Charles, 45, joined Insight Investment as head ofdistribution in January 2005, and became a boarddirector in February. He was previously with Merrill Lynch Investment Managers (formerly Mercury AssetManagement). During this time he worked in a number of senior management roles including companysecretary, head of compliance and head of the legaldepartment. Most recently he was regional head of institutional business.

His first employment on qualifying as a solicitor was in the company department of Simmons & Simmons. He holds a degree in law from St. Catharine’sCollege, Cambridge.


From left to right: Phil Hodkinson, Douglas Ferrans, Charles Farquharson, Keith Lovett, Atul Manek, Abdallah Nauphal

Board of Directors 27

Keith Lovett – chief risk officer

Keith, 48, joined Insight as chief operating officer inJanuary 2002, and in 2004 was appointed chief riskofficer. Trained as an accountant, Keith held a number of finance and IT roles, before moving to PrudentialPortfolio Managers (PPM) in 1990. Between 1990 and1999 he gained experience of a number of differentoperational areas including project, client and suppliermanagement, before becoming head of operations forPPM in 1999 and for M&G after their acquisition byPrudential later that year.

Keith is a member of the Securities Institute and a fellowof the Association of Chartered Certified Accountants.

Atul Manek – chief operating officer

Atul, 43, was appointed head of investment operations inFebruary 2003 when Insight acquired Rothschild AssetManagement (RAM). He was appointed chief operatingofficer and became a board director of InsightInvestment in 2004.

Atul joined RAM in April 2000 as head of operations and technology. Prior to this he had been in the internalconsultancy team at JP Morgan Investment Management,and was director of business projects at Baring AssetManagement. He graduated in 1983 with a degree in economics from Hull University. He is a Chartered Accountant.

Abdallah Nauphal – chief investment officer

Abdallah, 45, was appointed managing director, fixedincome, in February 2003, following Insight’s acquisitionof RAM. In September 2003 he became chief investmentofficer with overall responsibility for the investmentmanagement team. He has more than 20 years’experience in investment markets. His previous rolesinclude chief investment officer (fixed income) at RAMand head of fixed income for Schroder InvestmentManagement. He holds a degree in businessadministration from New England College, together withan MSc in Information Systems and an MBS in Financeand Investments from George Washington University.


28 Board of Directors

Duncan Owen – managing director,property

Duncan, 38, joined Insight Investment in October 2003 asmanaging director of the property division and became aboard director in February 2005. Prior to joining Insight,Duncan was founding partner of Gatehouse InvestmentManagement, where he helped establish and acted asproperty investment manager for a number of UK andEuropean funds. Duncan began his career at Jones LangWootton Fund Management, initially as a propertymanager and an investment surveyor before becomingan equity partner. Duncan holds a BSc from SheffieldUniversity and also studied at INSEAD Business School.He is a qualified Chartered Surveyor.

Brian Ivory, CBE

Brian, 56, was formerly chairman of Highland Distillersplc, having been a director since 1978. He was alsochairman of Macallan-Glenlivet plc from 1996 to 1999and Treasurer of the Scotch Whisky Industry Association.Brian is chairman of the Scottish American InvestmentCompany PLC, a director of Remy Cointreau S.A. and chairman of the National Galleries of Scotland.

In February 1998, Brian was appointed a non-executivedirector of Bank of Scotland and following its mergerwith Halifax in September 2001 he was appointed a non-executive director of HBOS plc and is chairman of its remuneration committee.


From left to right: Duncan Owen, Brian Ivory, William Govett, Louis Sherwood

Board of Directors 29

William Govett

William, 68, was formerly chairman of John Govett & Co,and a director of Legal and General Group and of 3i GroupLtd. He recently retired as chairman of Merrill LynchBritish Smaller Companies Trust.

He is a trustee of the National Art Collections Fund andserved as a trustee of the Tate Gallery from 1988 to 1993.In January 2002, he was appointed to the board of Insight Investment.

Louis Sherwood

Louis, 64, was formerly chairman and chief executive ofGateway Foodmarkets, until the takeover of GatewayCorporation in 1989, chairman of HTV Group plcbetween 1991 and 1997 and chairman of GovettEuropean Technology and Income Trust plc. He iscurrently a non-executive director of Wessex WaterServices Limited. In 1997 he joined the board of Halifaxplc as a non-executive, and was chairman of ClericalMedical Investment Group from 2000 to 2001. From 2001to 2004 Louis was a non-executive director of HBOS plc.



30 Annual report and consolidated financial statements

Annual report and consolidated financial statements



32 Directors’ report

36 Statement of directors’ responsibilities

37 Independent auditors’ report

38 Consolidated income statement

39 Statement of recognised income and expense

40 Consolidated balance sheet

41 Company balance sheet

42 Statement of cash flows

43 Notes to the financial statements

72 Key contacts and corporate information

Directors’ report



The directors present their annual report and theaudited consolidated financial statements for the yearended 31 December 2005.

Principal activities

The principal activity of Insight Investment ManagementLimited (‘the Company’) and its subsidiary andassociated companies (‘the Group’) is the provision ofinvestment management services, investment advisoryservices and the retailing of Open Ended InvestmentCompanies (‘OEICs’) and other investment vehicles.

As at 31 December 2005, the Group was managing£88,743 million (2004: £77,740 million) of assets.

Business review

The Group recorded a profit before tax for the financialyear of £6,009,000 (2004: £3,490,000). The detailedincome statement is set out in page 38.

Business development

The Group’s existing business and future prospects are reviewed by the Chairman on page 4 and the Chief Executive on pages 6 to 23.

Proposed dividend

The directors do not recommend the payment of adividend (2004: nil).

Supplier payment policy

The Group’s suppliers are paid through HBOS plc'scentralised Accounts Payable department.

For the forthcoming period HBOS plc's policy for thepayment of suppliers will be as follows:

• Payment terms will be agreed at the start of therelationship with the supplier and will only be changedby agreement;

• Standard payment terms to suppliers of goods andservices will be 30 days from receipt of a correctinvoice for satisfactory goods or services which havebeen ordered and received unless other terms areagreed in a contract;

• Payment will be made in accordance with the agreedterms or in accordance with the law if no agreementhas been made; and

• Suppliers will be advised without delay when aninvoice is contested and disputes will be settled as quickly as possible.

HBOS plc complies with the Better Payment PracticeCode. Information regarding this Code and its purposecan be obtained from the Better Payment PracticeGroup's website at www.payontime.co.uk.

The Group had trade creditors outstanding at 31December 2005 representing 13 days (2004: 15 days) of purchases.



Directors and directors’ interests

The directors who held office during the year were as follows:

Appointed

Phil Hodkinson – chairman

Charles Farquharson 18 February 2005

Douglas Ferrans

Keith Lovett

Atul Manek

Abdallah Nauphal

Duncan Owen 18 February 2005

William Govett (non-executive)

Brian Ivory (non-executive)

Louis Sherwood (non-executive)

During the year, no director had any beneficial interest in the share capital of the Company or of any Group undertaking other than

in HBOS plc, the ultimate holding company, details of which are set out below.

Directors’ beneficial interests in the ordinary share capital of HBOS plc are as follows:-

At 31 December 2005 At 31 December 2004

Ordinary Shares Ordinary Shares

of 25p each of 25p each

Charles Farquharson 333 0*

Douglas Ferrans 36,303 15,170

Phil Hodkinson 207,648 112,919

Brian Ivory 7,000 7,000

Keith Lovett 19,694 11,053

Atul Manek 4,924 1,097

Duncan Owen 726 393*

Louis Sherwood 2,000 2,000

*as at date of appointment

Directors’ report (continued)



According to the register of directors’ interests, no rights to subscribe for shares in or debentures of HBOS plc, the ultimate holding company were granted to any of the directors or their immediate families, or exercised by them, during the financial year except as indicated below:

At start of year During the year At end of year

Granted Exercised

Number of options

HBOS plc Short Term Bonus Scheme

(25p Ordinary Shares)

Douglas Ferrans 6,334 8,225 1,220 13,339

Phil Hodkinson 20,717 10,255 5,163 25,809

Keith Lovett 5,399 4,133 0 9,532

Atul Manek 548 1,747 0 2,295

HBOS plc All Employee Share Option Plan


Keith Lovett 13,071 0 0 13,071

Atul Manek 7,292 0 0 7,292

Abdallah Nauphal 12,609 0 0 12,609

Duncan Owen 4,266* 0 0 4,266

HBOS plc Sharesave


Douglas Ferrans 3,463 0 0 3,463

Phil Hodkinson 2,970 0 0 2,970

Keith Lovett 3,036 0 0 3,036

Atul Manek 1,607 0 0 1,607

Charles Farquharson 0* 2,473 0 2,473

HBOS plc Long Term Incentive Plan


Phil Hodkinson 201,881 166,252 201,372 166,761

None of the other directors who held office at the end of the financial year had any interest in the shares in, or debentures of, any Group company either at the beginning of the year or at a later date of appointment or at the end of the year.

* as at date of appointment.



Corporate governance

The activities of the Group are overseen by the Risk ControlCommittee of the Treasury and Asset Management Divisionof HBOS plc, the ultimate holding company. The committee,which is chaired by David Shearer (a non-executive directorof HBOS plc), reviews all risk and compliance issuesaffecting the Group, as well as the other companies within the Treasury and Asset Management Division.

In addition to the Risk Control Committee, there are a number of other committees responsible for different aspects of corporate governance of HBOS plcand its major subsidiaries. Further details of thesecommittees and compliance with the Combined Code on corporate governance are included in the HBOS plcAnnual Report and Accounts.

Employees

Full and fair consideration is given to applications foremployment made by disabled persons having regard totheir particular aptitudes and abilities. Appropriate trainingis arranged for disabled persons, including retraining foralternative work of employees who become disabled, topromote their career development within the organisation.Our employee policy is consistent with the HBOS Group-wide policy. Please refer to HBOS plc directors’report for further information.

Political and charitable contributions

The Company made no political contributions during the year. Donations to UK charities amounted to £45,974 (2004: £10,880).

International Financial Reporting Standards

These accounts are prepared in accordance with applicableUnited Kingdom law and with International FinancialReporting Standards, consistent with its ultimate parentcompany, HBOS plc.

Auditor

KPMG Audit Plc, having expressed its willingness to do so,will continue in office as auditor.

By order of the board.

John VealeSecretary33 Old Broad StreetLondonEC2N 1HZ

22 February 2006



Statement of directors’ responsibilities in respect ofthe Annual Report and the financial statements


The directors are responsible for preparing the AnnualReport and the financial statements in accordance withapplicable law and regulations.

Company law requires the directors to prepare financialstatements for each financial year. Under that law theyhave elected to prepare the financial statements inaccordance with IFRSs as adopted by the EU.

The financial statements are required by law to presentfairly the financial position and performance of theCompany; the Companies Act 1985 provides in relationto such financial statements that references in therelevant part of that Act to financial statements giving a true and fair view are references to their achieving afair presentation.

In preparing those financial statements, the directors are required to:

• Select suitable accounting policies and then applythem consistently;

• Make judgements and estimates that are reasonableand prudent;

• State whether they have been prepared in accordancewith IFRSs as adopted by the EU; and

• Prepare the financial statements on the going concern basis unless it is inappropriate to presumethat the Company will continue in business.

The directors are responsible for keeping properaccounting records that disclose with reasonableaccuracy at any time the financial position of theCompany and enable them to ensure that its financialstatements comply with the Companies Act 1985.

They have general responsibility for taking such steps as are reasonably open to them to safeguard the assetsof the company and to prevent and detect fraud andother irregularities.

The directors’ are responsible for the maintenance andintegrity of the corporate and financial informationincluded on the company’s website. Legislation in the UK governing the preparation and dissemination offinancial statements may differ from legislation in other jurisdictions.



Independent auditors’ report to the members ofInsight Investment Management Limited

We have audited the financial statements of InsightInvestment Management Limited for the year ended 31December 2005 which comprise of the IncomeStatement, the Balance Sheet, the Cash Flow Statement,the Statement of Recognised Income and Expense andthe related notes. These financial statements have beenprepared under the accounting policies set out therein.This report is made solely to the Company’s members, as a body, in accordance with section 235 of theCompanies Act 1985. Our audit work has beenundertaken so that we might state to the Company’smembers those matters we are required to state to themin an auditor’s report and for no other purpose. To thefullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Companyand the Company’s members as a body, for our auditwork, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the AnnualReport and the financial statements in accordance withapplicable law and International Financial ReportingStandards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 36.Our responsibility is to audit the financial statements inaccordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and are properlyprepared in accordance with the Companies Act 1985and Article 4 of the IAS Regulation. We also report to youif, in our opinion, the Directors’ Report is not consistentwith the financial statements, if the Company has notkept proper accounting records, if we have not receivedall the information and explanations we require for our audit, or if information specified by law regardingdirectors’ remuneration and other transactions is not disclosed.

We read other information contained in the AnnualReport and consider whether it is consistent with the audited financial statements. We consider the

implications for our report if we become aware of anyapparent misstatements or material inconsistencies withthe financial statements. Our responsibilities do notextend to any other information.

Basis of audit opinion

We conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by theAuditing Practices Board. An audit includes examination,on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes anassessment of the significant estimates and judgementsmade by the directors in the preparation of the financialstatements, and of whether the accounting policies are appropriate to the Company’s circumstances,consistently applied and adequately disclosed. We plannedand performed our audit so as to obtain all the informationand explanations which we considered necessary in orderto provide us with sufficient evidence to give reasonableassurance that the financial statements are free frommaterial misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentation ofinformation in the financial statements.

Opinion

In our opinion the financial statements give a true andfair view, in accordance with IFRSs as adopted by the EU,of the state of the Group and Company’s affairs as at 31 December 2005 and of its profit for the year thenended; and the financial statements have been properlyprepared in accordance with the Companies Act 1985and Article 4 of the IAS Regulation.

KPMG Audit Plc

London

Chartered Accountant

Registered Auditor

22 February 2006




Consolidated income statement

For the year ended 31 December 2005

Note 2005 2004

£000 £000

Revenue 1 135,652 121,420

Cost of sales 2 (19,682) (24,535)

Gross profit 115,970 96,885

Other operating income 3 127 35

Administrative expenses (113,040) (95,940)

Other operating expenses 4 (23) (7)

Operating profit before financing income 3,034 973

Financial income 8 2,917 2,694

Financial expenses 8 (498) (571)

Net financing income 2,419 2,123

Share of post tax profits from joint ventures 13 556 394

Profit before tax 5 6,009 3,490

Income tax 9 (2,642) 3,661

Profit after tax - attributable to equity holders 18 3,367 7,151

The notes on pages 43 to 71 form part of these financial statements.



Statement of recognised income and expense


Group Company

2005 2004 2005 2004

Note £000 £000 £000 £000

Foreign exchange translation differences 86 32 0 0

Profit/(loss) for the year 3,367 7,151 63 (612)

Total recognised income and (expense) for the year 10 3,453 7,183 63 (612)




Consolidated balance sheet

as at 31 December 2005

Note 2005 2004

£000 £000

Assets

Property, plant and equipment 11 1,311 1,629

Intangible assets 12 37,771 38,004

Other investments 13 2,462 1,049

Deferred tax assets 14 3,018 3,221

Total non-current assets 44,562 43,903

Other investments 15 40,277 863

Trade and other receivables 16 48,315 53,247

Cash and cash equivalents 17 25,715 58,926

Total current assets 114,307 113,036

Total assets 158,869 156,939

Equity

Issued capital 9,300 9,300

Share premium 1,000 1,000

Reserves 57,454 57,368

Retained earnings 4,748 1,381

Total equity 18 72,502 69,049

Liabilities

Interest-bearing loans and borrowings 19 7,839 7,839

Other non-current liabilities 20 4,909 2,734

Total non-current liabilities 12,748 10,573

Trade and other payables 21 73,619 77,317

Total current liabilities 73,619 77,317

Total liabilities 86,367 87,890

Total equity and liabilities 158,869 156,939

The financial statements were approved by the board of directors on 22 February 2006 and were signed on its behalf by:

Phil Hodkinson Douglas Ferrans

Chairman Director




Company balance sheet

as at 31 December 2005

Note 2005 2004

£000 £000

Assets

Property, plant and equipment 11 0 0

Other investments 13 53,573 3,100

Deferred tax assets 14 45 35

Total non-current assets 53,618 3,135

Other investments 15 508 0

Trade and other receivables 16 4,201 12,735

Cash and cash equivalents 17 12,540 21,359

Total current assets 17,249 34,094

Total assets 70,867 37,229

Equity

Issued capital 9,300 9,300

Share premium 1,000 1,000

Retained earnings 10,560 10,497

Total equity 18 20,860 20,797

Liabilities

Interest-bearing loans and borrowings 19 4,275 4,275

Total non-current liabilities 4,275 4,275

Trade and other payables 21 45,732 12,157

Total current liabilities 45,732 12,157

Total liabilities 50,007 16,432

Total equity and liabilities 70,867 37,229

The financial statements were approved by the board of directors on 22 February 2006 and were signed on its behalf by:

Phil Hodkinson Douglas Ferrans

Chairman Director




Statement of cash flows


Group Company

2005 2004 2005 2004

Note £000 £000 £000 £000

Cash flows from operating activities

Cash generated from operations 24 6,029 (10,939) 41,280 (23,211)

Income taxes (paid)/refunded (153) 1,225 (330) 947

Net cash from operating activities 5,876 (9,714) 40,950 (22,264)

Cash flows from investing activities

Proceeds from sale of property, plant and equipment 17 72 0 0

Proceeds from sale of investments 346 56 0 0

Interest received 2,897 2,615 1,433 1,258

Dividends received 961 392 0 0

Acquisition of property, plant and equipment 11 (865) (702) 0 0

Acquisition of other investments (41,602) 0 (50,981) 0

Development expenditure 12 (357) (1,262) 0 0

Net cash from investing activities (38,603) 1,171 (49,548) 1,258

Cash flows from financing activities

Interest paid (587) (420) (221) (207)

Net cash from financing activities (587) (420) (221) (207)

Net decrease in cash and cash equivalents (33,314) (8,963) (8,819) (21,213)

Cash and cash equivalents at 1 January 58,926 67,851 21,359 42,572

Effect of exchange rate fluctuations on cash held 103 38 0 0

Cash and cash equivalents at 31 December 17 25,715 58,926 12,540 21,359




Notes to the financial statements

Significant accounting policies

Insight Investment Management Limited (the “Company”)is a company domiciled in the United Kingdom.The consolidated financial statements were authorisedfor issue by the directors on 22 February 2006.

(a) Statement of compliance

The financial statements have been prepared inaccordance with International Financial ReportingStandards (“IFRSs”) and its interpretations as endorsed by the EU and effective (or available for early adoption) at 31 December 2005.

The accounting policies set out below have been applied in respect of the financial year ended 31 December 2005. IAS 32 and IAS 39 only became effective from 1 January 2005. Accordingly, the 2004comparatives do not reflect the provisions of thesestandards, which have been prepared in accordance with the applicable UK accounting standards in force for that period. These are the Company’s first financialstatements on an IFRS basis and therefore the followingexemption under IFRS1 has been applied:

Translation differences

Cumulative translation differences for all foreign operationsare deemed to be zero at 1 January 2004. Any gain orloss on the subsequent disposal of a foreign operationshall exclude translation differences that arose before 1January 2004, but include later translation differences.

An explanation of how the transition to IFRSs has affectedthe reported financial position, financial performanceand cash flows of the Company and Group is provided in note 26.

(b) Basis of preparation

The financial statements are presented in Sterling,rounded to the nearest thousand. They are prepared on

the historical cost basis except for current assetinvestments and other non-current investments, which are stated at their fair value.

Non-current assets are stated at the lower of carryingamount and fair value less costs to sell.

The preparation of financial statements in conformity with IFRSs requires management to make judgements,estimates and assumptions that affect the application ofpolicies and reported amounts of assets and liabilities,income and expenses. The estimates and associatedassumptions are based on historical experience andvarious other factors that are believed to be reasonableunder the circumstances, the results of which form thebasis of making the judgements about carrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from theseestimates. The estimates and underlying assumptionsare reviewed on an ongoing basis. Revisions toaccounting estimates are recognised in the period inwhich the estimate is revised if the revision affects onlythat period, or in the period of the revision and futureperiods if the revision affects both current and future periods.

(c) Foreign currency

Transactions in foreign currencies are translated at theforeign exchange rate ruling at the date of the transaction.Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are translated toSterling at the foreign exchange rate ruling at that date.Foreign exchange differences arising on translation arerecognised in the income statement. Non-monetaryassets and liabilities that are measured in terms ofhistorical cost in a foreign currency are translated usingthe exchange rate at the date of the transaction.

Translation differences arising from the consolidation ofsubsidiary companies are recognised in the foreigncurrency translation reserve.




Notes to the financial statements (continued)

(d) Property, plant and equipment(i) Owned assets

Items of property, plant and equipment are stated at cost as deemed cost less accumulated depreciation (see below) and impairment losses. Property, plant andequipment is assessed for impairment where there is an indication of impairment. Where impairment exists,the carrying amount of the asset is reduced to itsrecoverable amount and the impairment loss recognisedin the income statement. The depreciation charge for the asset is then adjusted to reflect the asset’s revisedcarrying amount. Where parts of an item of property,plant and equipment have different useful lives, they are accounted for as separate items of property,plant and equipment.

(ii) Subsequent costs

The Company recognises in the carrying amount of an item of property, plant and equipment the cost ofreplacing part of such an item when that cost is incurredif it is probable that the future economic benefitsembodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

(iii) Depreciation

The cost of equipment, including fixtures and fittings,vehicles and computer hardware, less estimated residualvalue, is written off in equal installments over expectedlives of the following assets:

Motor vehicles 4 yearsComputer equipment 3 yearsFixtures, fittings and equipment 5 years

(e) Intangible assets(i) Software development costs

Costs associated with the development of software for internal use, subject to de minimis limits, are capitalised only if the software is technically feasible and the Company has both the intent andsufficient resources to complete the development. In addition costs are capitalised only if the asset can be reliably measured, will generate future economic benefits and there is an ability to use or sell the asset.

Only costs that are directly attributable to bringing thatasset into working condition for its intended use areincluded in its measurement. These costs include alldirectly attributable costs necessary to create, produceand prepare the asset to be capable of operating in amanner intended by management. Other developmentexpenditure, including software research developmentcosts, are recognised in the income statement as anexpense as incurred.

Capitalised development expenditure is stated at cost less accumulated amortisation and impairmentlosses. The useful life of software development costs is deemed to be finite and amortisation is charged to the income statement on a straight-line basis over four years.

(ii) Goodwill

Goodwill arising on acquisition is stated at cost less impairment losses.

The carrying value is systematically tested forimpairment at each balance sheet date.




(iii) Other intangible assets

Other intangible assets that are acquired by theCompany are stated at cost less accumulatedamortisation and impairment losses. Amortisation ischarged to the income statement on a straight-line basisover the estimated useful life of other intangible assetsunless such lives are indefinite. Other intangible assetswith an indefinite useful life are systematically tested for impairment at each balance sheet date.

(iv) Subsequent expenditure

Subsequent expenditure on capitalised intangible assetsis capitalised only when it increases the future economicbenefits embodied in the specific asset to which itrelates. All other expenditure is expensed as incurred.

(f) Investments(i) Investment in subsidiaries

Investment in subsidiary undertakings in the Company’sfinancial statements are stated at cost.

(ii) Investment in joint ventures

The Group’s share in joint ventures is stated in theconsolidated balance sheet as the Group’s share of their net assets. The attributable share of results of joint ventures, generally based on audited accounts, is included in the consolidated income statement using the equity method of accounting.

(iii) Current asset investments

Current asset investments are carried at fair value with gains and losses taken to the income statement as they arise.

(g) Trade and other receivables

Trade and other receivables are stated at their cost lessimpairment losses.

(h) Cash and cash equivalents

Cash and cash equivalents comprise solely of cashbalances. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(i) Impairment

The carrying amounts of the Company’s assets, anddeferred tax assets, are reviewed at each balance sheetdate to determine whether there is any indication ofimpairment. If any such indication exists, the asset’srecoverable amount is estimated.

An impairment loss is recognised whenever the carryingamount of an asset or its cash-generating unit exceedsits recoverable amount. Impairment losses arerecognised in the income statement.





(j) Reversals of impairment

An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increasein recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversedif there has been a change in the estimates used todetermine the recoverable amount. An impairment lossis reversed only to the extent that the asset’s carryingamount does not exceed the carrying amount that would have been determined, net of depreciation oramortisation, if no impairment loss had been recognised.

(k) Dividends

Dividends are recognised as a liability in the period inwhich they are declared.

The Company recognises dividend income when theCompany’s right to receive payment is established.

(l) Interest-bearing borrowings

Interest-bearing borrowings are recognised at fair value. Any costs associated with obtaining interest-bearing borrowings are expensed in the period in which they are incurred.

(m) Provisions

A provision is recognised in the balance sheet when theCompany has a present legal or constructive obligationas a result of a past event, and it is probable that anoutflow of economic benefits will be required to settlethe obligation. If the effect is material, provisions aredetermined by discounting the expected future cashflows at a pre-tax rate that reflects current marketassessments of the time value of money and, where appropriate, the risks specific to the liability.

(n) Trade and other payables

Trade and other payables are stated at cost.

(o) Income tax

Income tax on the profit or loss for the year comprisescurrent and deferred tax. Income tax is recognised in theincome statement except to the extent that it relates toitems recognised directly in equity, in which case it isrecognised in equity.

Deferred tax is provided using the balance sheet liabilitymethod, providing for temporary differences between thecarrying amounts of assets and liabilities for financialreporting purposes and the amounts used for taxationpurposes. The following temporary differences are notprovided: goodwill not deductible for tax purposes, theinitial recognition of assets and liabilities that affects neitheraccounting nor taxable profit and differences relating toinvestments in subsidiaries to the extent that they willprobably not reverse in the foreseeable future. The amountof deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assetsand liabilities, using tax rates at the balance sheet date.

(p) Revenue

Revenue comprises:

• Sales and repurchases of units in unit trusts and sharesin OEICs; and

• Fees arising from investment management and otherrelated services.

Management and performance fees are recognised inthe income statement as they are earned.

In accordance with IAS 18, up front fees charged on thesale of shares in OEICs less any associated discounts andinitial commissions have been deferred and recognisedover the average life of investment in the funds.



(q) Pension scheme

All employees performing services on behalf of the groupare contractually employed by HBOS plc. Employees aremembers of a range of HBOS plc Group schemes includingboth money purchase and defined benefit schemes. HBOSplc pay contributions into these schemes of which theproportion relevant to the Group is recharged. Theschemes’ assets, liabilities and any associated costs arefully disclosed in the financial statements of HBOS plc inaccordance with IAS 19 ‘Employee Benefits’.

(r) Financial instruments

A financial asset is derecognised when:

• The rights to the cash flows from the asset expire;

• The rights to the cash flows from the asset andsubstantially all the risks and rewards of ownership of the asset, are transferred;

• An obligation to transfer the cash flows from the assetis assumed and substantially all the risks and rewardsare transferred; or

• Substantially all the risks and rewards are neithertransferred nor retained, but control of the asset is transferred.

A financial liability is derecognised when the obligation is discharged, cancelled or expired.





1. Revenue

2005 2004

£000 £000

Brokerage income 883 1,023

Investment management fees 131,195 115,276

Other 3,574 5,121

135,652 121,420

2. Cost of sales2005 2004

£000 £000

Brokerage expense 660 763

Commission payable and other trading expenses 19,022 23,772

19,682 24,535

3. Other operating income2005 2004

£000 £000

Gain on current asset investments 127 35

4. Other operating expenses2005 2004

£000 £000

Net loss on disposal of property, plant and equipment 23 7

5. Profit before tax2005 2004

£000 £000

Profit before tax is stated after charging:

Auditors remuneration Audit 212 227Assurance services 223 216Tax 17 59Other services 8 20

Depreciation of property, plant and equipment 1,140 1,730Amortisation of intangibles 590 412





6. Personnel expenses

2005 2004

£000 £000

Wages and salaries 53,472 48,000

Compulsory social security contributions 6,416 5,572

Contribution to HBOS plc pension schemes 2,046 2,089

61,934 55,661

7. Remuneration of directors2005 2004

£000 £000

Directors’ emoluments 3,859 3,149

Amounts receivable under long term incentive schemes (note 21) 1,098 1,995

Pension contributions 93 85

5,050 5,229

The highest paid director is also a director of HBOS Insurance and Investment Group Limited. The highest paid director’semoluments are included within the wages and salaries of the Group. The highest paid director’s aggregate emolumentsand pension scheme entitlements are included in the financial statements of HBOS Insurance and Investment Group Limited.

Number of directors

2005 2004

Retirement benefits under defined benefit schemes are accruing to the following

number of directors: 3 3

The number of directors who exercised share options 2 1

The number of directors in respect of whose services shares were received or receivable

under long term incentive schemes 6 4

2005 2004

£000 £000

Compensation for loss of office 0 286





8. Net financing income2005 2004

£000 £000

Interest income 2,917 2,692

Dividend income 0 2

Financial income 2,917 2,694

Interest expense (600) (417)

Net foreign exchange gain/(loss) 102 (154)

Financial expense (498) (571)

Net financing income 2,419 2,123

9. Income taxTax on profit on ordinary activities

2005 2004

£000 £000

Current tax:

Corporation tax charge for the period at a rate of 30% (2004: 30%) 2,559 428

Corporation tax charge/(credit) in respect of earlier periods 289 (945)

2,848 (517)

Deferred tax:

Deferred tax credit for the period at a rate of 30% (2004: 30%) (862) (376)

Deferred tax charge/(credit) in respect of earlier periods 656 (2,768)

(206) (3,144)

Total income tax expense/(income) in income statement 2,642 (3,661)






9. Income tax expense (continued)Reconciliation of effective tax rate

The tax assessed for the period is higher/(lower) than the standard rate of corporation tax in the UK of 30%. The differences are explained below:

2005 2004

£000 £000

Profit on ordinary activities before taxation 6,009 3,490

Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK 1,803 1,047

Effects of:

Non-deductible expenses 1,120 59

Net effect of differing tax rates overseas (370) (456)

Adjustments to tax in respect of prior periods 289 (3,713)

Other timing differences (200) (598)

2,642 (3,661)

10. Income statement of the Company

By virtue of the exemption contained within Section 230 of the Companies Act 1985, the Income Statement of theCompany is not presented. The Company recorded a retained profit for the year of £63,000 (2004: £612,000 loss).





11. Property, plant and equipmentGroup Company

Fixtures, Fixtures,

fittings fittings

Motor Computer and Computer and

vehicles equipment equipment Total equipment equipment Total

£000 £000 £000 £000 £000 £000 £000

Cost

Balance at 1 January 2004 136 5,604 225 5,965 458 3 461

Acquisitions 0 698 4 702 0 0 0

Disposals (50) (2,493) (33) (2,576) 0 0 0

Balance at 31 December 2004 86 3,809 196 4,091 458 3 461


Acquisitions 0 840 25 865 0 0 0

Disposals 0 (48) (62) (110) 0 0 0


Depreciation


Depreciation charge for the year 42 1,625 63 1,730 0 0 0

Disposals (16) (2,458) (23) (2,497) 0 0 0



Depreciation charge for the year 22 1,060 58 1,140 0 0 0

Disposals 0 (33) (34) (67) 0 0 0


Carrying amounts

At 1 January 2004 107 2,440 189 2,736 0 0 0

At 31 December 2004 31 1,478 120 1,629 0 0 0

At 31 December 2005 9 1,243 59 1,311 0 0 0





12. Intangible assetsGroup

Software

development

Goodwill costs Total

Cost £000 £000 £000

Balance at 1 January 2004 36,501 1,120 37,621

Acquisitions 0 1,262 1,262

Balance at 31 December 2004 36,501 2,382 38,883

Balance at 1 January 2005 36,501 2,382 38,883

Acquisitions 0 357 357

Balance at 31 December 2005 36,501 2,739 39,240

Amortisation

Balance at 1 January 2004 0 467 467

Amortisation for the year 0 412 412

Balance at 31 December 2004 0 879 879

Balance at 1 January 2005 0 879 879

Amortisation for the year 0 590 590

Balance at 31 December 2005 0 1,469 1,469

Carrying amounts

At 1 January 2004 36,501 653 37,154

At 31 December 2004 36,501 1,503 38,004

At 31 December 2005 36,501 1,270 37,771

The goodwill is assessed as having an indefinite useful life. As such, the carrying value of the goodwill is not amortised but is assessed

for impairment at the balance sheet date. The recoverable amount of goodwill has been measured on a value in use calculation for the

cash generating units associated with this goodwill and no impairment provision was required at 31 December 2005.

The projected cash flows were based on approved budgets and strategic plans for the next five years, which where then extrapolated

for another ten years with no revenue growth assumed in the last ten years. Management believe that the use of a fifteen year period

is reasonable given the nature of the business. The discount rate applied to the cash flows was 12.1%. Estimated future cash flows

used in the impairment calculations represent management’s best view of likely market conditions. Actual future cash flows may

differ significantly from these estimates, due to the effect of changes in market conditions. These differences may have a material

impact on the asset value and impairment expense reported in future periods.





13. Other investments – non current investmentsGroup Company

2005 2004 2005 2004£000 £000 £000 £000

Shares in group undertakingsAt beginning of the year 0 0 3,100 3,100Additions 0 0 48,488 0

At the end of the year 0 0 51,588 3,100

Interest in joint venturesShare of net assets at the beginning of the year 1,049 1,051 0 0Additions 0 0 203 0Foreign exchange adjustments (14) (6) 0 0Dividends received (961) (390) 0 0Share of retained profits for the year 556 394 0 0

At the end of the year 630 1,049 203 0

Unquoted equity securitiesAt the beginning of the year 0 0 0 0Additions 1,832 0 1,782 0

At the end of the year 1,832 0 1,782 0

Total non-current assets as at 31 December 2,462 1,049 53,573 3,100

Joint venturesThe amounts included in respect of joint ventures in the consolidated accounts of the Group comprise the following:

2005 2004£000 £000

Income StatementTurnover 1,206 980

Profit before tax 780 509

Taxation (224) (115)

Profit after tax 556 394

Balance SheetShare of assetsShare of fixed assets 831 145Share of current assets 131 1,562

962 1,707

Share of liabilitiesDue within one year (332) (658)

Share of net assets 630 1,049





13. Other investments – non current investments (continued)

The Company’s investment in its wholly owned subsidiary undertakings and its joint venture as at 31 December 2005,

included the following:

Country of Principal Class of

incorporation activity shares held

Subsidiary undertakings

Insight Investment Funds Management Limited UK Investment Management Ordinary

Insight Investment Services Limited UK Service Company Ordinary

HBOS Investment Advisor Inc. USA Investment Advisor Ordinary

Insight Investment BV Holland Investment Holding Company Ordinary

Insight Investment Management (Global) Limited UK Investment Management Ordinary

Insight Investment Management (C.I.) Limited Guernsey Investment Management Ordinary

Insight Fund Management Limited UK Investment Management Ordinary

Insight Investment Management (Mediterranean) Limited UK Investment Holding Company Ordinary

Insight Investment Management (UK) Holdings Limited UK Investment Holding Company Ordinary

Insight Investment Management Holdings (Malta) Limited Malta Investment Holding Company Ordinary

Joint venture (40% of share capital held)

Valletta Fund Management Limited Malta Investment Management Ordinary

During the year, the Group undertook a re-organisation resulting in the transfer to the Company of a £48,488,000 investment

in subsidiary undertakings and a £203,000 investment in a joint venture. These investments were transferred from fellow

subsidiary undertakings.





14. Deferred tax assets and liabilitiesGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Deferred tax assets 3,018 3,221 45 35

Deferred tax liabilities 0 0 0 0

Net position 3,018 3,221 45 35

The movement for the year in the deferred tax position was as follows :

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

At 1 January 3,221 1,126 35 261

Credit/(charge) to income for the year 862 376 10 (226)

Prior year adjustments (656) 2,768 0 0

Other movements (409) (1,049) 0 0

Balance carried forward as at 31 December 3,018 3,221 45 35

Deferred tax comprises of:

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

Capital allowances in excess of depreciation 625 494 45 35

General provisions 1,555 823 0 0

Other timing differences 838 1,904 0 0

3,018 3,221 45 35

15. Other investments - currentGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Stocks of shares in OEICs (managers box) 507 863 0 0

Other investments 39,770 0 508 0

40,277 863 508 0

Other investments relate to holdings in a AAA rated Sterling denominated liquidity fund with same day settlement terms.





16. Trade and other receivablesGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Trade debtors 19,420 23,986 250 2,438

Amounts owed by HBOS group undertakings (note 25) 19,013 18,480 3,538 7,054

Corporation tax receivable 108 1,271 0 0

Other debtors 1,593 1,687 413 8

Prepayments and accrued income 8,181 7,823 0 3,235

48,315 53,247 4,201 12,735

17. Cash and cash equivalentsGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Cash at bank and on hand

At beginning of year 58,926 67,851 21,359 42,572

Cash flow (33,211) (8,925) (8,819) (21,213)

At end of year 25,715 58,926 12,540 21,359





18. Capital and reservesReconciliation of movement in capital and reserves

Foreign

currency

Issued Share Capital translation Retained

capital premium reserve reserve earnings Total

Group Note £000 £000 £000 £000 £000 £000

Balance at 1 January 2004 (UK GAAP) 9,300 1,000 57,336 (164) (5,182) 62,290

Change in accounting basis to IFRS 26 0 0 0 164 (588) (424)

Total recognised income and expense 0 0 0 32 7,151 7,183

Balance at 31 December 2004 9,300 1,000 57,336 32 1,381 69,049

Balance at 1 January 2005 9,300 1,000 57,336 32 1,381 69,049

Total recognised income and expense 0 0 0 86 3,367 3,453

Balance at 31 December 2005 9,300 1,000 57,336 118 4,748 72,502

Issued Share Retained

capital premium earnings Total

Company £000 £000 £000 £000

Balance at 1 January 2004 (UK GAAP) 9,300 1,000 11,109 21,409

Change in accounting basis to IFRS 0 0 0 0

Total recognised income and expense 0 0 (612) (612)

Balance at 31 December 2004 9,300 1,000 10,497 20,797

Balance at 1 January 2005 9,300 1,000 10,497 20,797

Total recognised income and expense 0 0 63 63

Balance at 31 December 2005 9,300 1,000 10,560 20,860





18. Capital and reserves (continued)

2005 2004

Issued capital £000 £000

Authorised

Equity: Ordinary shares of £1each 9,500 9,500

Allotted, called up and fully paid

Equity: Ordinary shares of £1each 9,300 9,300

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote

per share at meetings of the Company.

Capital Reserve

The capital reserve relates to capital contributions received by the Company from its immediate parent, HBOS Insurance and

Investment Group Limited.

Foreign currency translation reserve

In accordance with IFRS 1, the foreign currency translation reserve is deemed to be zero on the date of adoption of IFRS (1 January 2004).

On this date, an accumulated loss on foreign currency translation of £164,000 was transferred to retained earnings.

19. Interest-bearing loans and borrowingsGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Non-current liabilities

Amounts owed to HBOS group undertakings -

subordinated loans 7,839 7,839 4,275 4,275

The subordinated loans fall due between one and three years and incur interest at a rate of 0.5 per cent above HBOS plc base rate.

This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and borrowings.

For more information about the Group and Company’s exposure to interest rate risk, see note 22.




20. Other non-current liabilitiesGroup

2005 2004

£000 £000

Long term incentive plan (note 21) 4,909 2,734

21. Trade and other payablesGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Trade payables 14,541 16,907 2 0

Amounts owed to HBOS group undertakings (note 25) 7,923 24,337 45,704 11,845

Corporation tax payable 1,284 163 20 0

Other creditors 11,442 4,149 6 207

Long term incentive plan 3,523 1,735 0 0

Accruals 34,555 29,596 0 105

Deferred income 351 430 0 0

73,619 77,317 45,732 12,157

The long term incentive plan is a phantom equity scheme linked directly to the growth in the value of the business. New schemes

are launched annually, with the award period running for a maximum of seven years. 50% of a participant’s award may be exercised

after three years. Individual membership and awards are at the discretion of the remuneration committee.

Deferred income relates to the net position of up front fees and commissions. In accordance with IAS 18, they have been deferred

upon payment/receipt and recognised over the average life of investment in the funds.




22. Financial instrumentsExposure to credit, interest rate and currency risks arises in the normal course of the Company’s business.

Credit risk

The credit risk to the Company is limited to the non-payment of investment management fees. At the balance sheet date there were

no significant concentrations of credit risk.

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Company does not

require collateral in respect of financial assets.

Foreign currency risk

The Company is exposed to foreign currency risk on management fee debtors and cash balances that are denominated in a currency

other than the Sterling. The currencies giving rise to this risk are primarily U.S. Dollars and Euros.

In respect of other monetary assets and liabilities held in currencies other than Sterling, the Company ensures that the net

exposure is kept to an acceptable level, by buying or selling foreign currencies at spot rates where necessary to address

short-term imbalances.

Interest rate risk

Effective interest rates and maturity analysis

All income-earning financial assets and interest-bearing financial liabilities earn/bear interest on a floating rate basis.

The table on page 62 indicates the periods in which they mature and the effective interest rate earned/borne.




22. Financial instruments (continued)2005 2004

Cash and Current Cash

cash asset Subordinated and cash Subordinated

Group equivalents investments loans equivalents loans

Effective rate 4.3% 4.5% 5.4% 4.3% 4.6%

£000 £000 £000 £000 £000

One year or less 25,715 39,770 0 58,926 0

between one and two years 0 0 (4,275) 0 0

between two and three years 0 0 (3,564) 0 (4,275)

between three and four years 0 0 0 0 (3,564)

between four and five years 0 0 0 0 0

more than five years 0 0 0 0 0

25,715 39,770 (7,839) 58,926 (7,839)

2005 2004

Cash and Current Cash

cash asset Subordinated and cash Subordinated

Company equivalents investments loans equivalents loans

Effective rate 4.3% 4.5% 5.4% 4.3% 4.6%

£000 £000 £000 £000 £000

One year or less 12,540 508 0 21,359 0

between one and two years 0 0 (4,275) 0 0

between two and three years 0 0 0 0 (4,275)

between three and four years 0 0 0 0 0

between four and five years 0 0 0 0 0

more than five years 0 0 0 0 0

12,540 508 (4,275) 21,359 (4,275)




22. Financial instruments (continued)Fair values

The fair values together with the carrying amounts shown in the balance sheet are as follows:

Carrying Fair Carrying Fair

amount value amount value

2005 2005 2004 2004

£000 £000 £000 £000

Other investments 42,739 42,739 1,912 1,912

Trade and other receivables 48,315 48,315 53,247 53,247

Cash and cash equivalents 25,715 25,715 58,926 58,926

Loans and borrowings (7,839) (7,839) (7,839) (7,839)

Trade and other payables (78,528) (78,152) (80,051) (79,834)

Estimation of fair values

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected

in the table.

Other investments

Fair value is based on quoted market prices at the balance sheet date without any deduction for transaction costs.

Trade and other receivables/payables

For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value.

All other receivables/payables greater than one year are discounted at the HBOS plc base rate to determine the fair value.




23. Pension schemesAll employees performing services on behalf of the group are contractually employed by HBOS plc. Employees are members

of the following HBOS plc Group schemes:

Defined benefit schemes

CMIG Superannuation Scheme

Equitable Pension Fund and Life Assurance Scheme

Halifax Retirement Fund

Defined contribution schemes

Halifax Group Money Purchase Scheme

Equitable Money Purchase Scheme

For the defined benefit schemes, it has not been possible to apportion the assets and liabilities of these schemes between

the Group’s members and other members of these schemes.

In accordance with IAS 19 “Employee Benefits” the Group has accounted for these schemes as if they were defined

contribution schemes.

HBOS plc pay contributions into these schemes of which the proportion relevant to the Group is recharged.

During the year, the recharge for these costs was £2,046,000 (2004: £2,089,000)

The schemes’ assets, liabilities and any associated costs are fully disclosed in the financial statements of HBOS plc in

accordance with IAS 19.




24. Cash flow operating activitiesGroup Company

2005 2004 2005 2004

£000 £000 £000 £000

Profit/(loss) for the year 3,367 7,151 63 (612)

Adjustments for:

Tax 2,642 (3,661) 340 (721)

Depreciation 1,140 1,730 0 0

Loss on disposal of property, plant and equipment 23 7 0 0

Amortisation of intangibles 590 412 0 0

Dividend income 0 (2) 0 0

Interest income (2,917) (2,692) (1,445) (1,302)

Interest expense 600 417 220 209

Share of results in joint ventures (556) (394) 0 0

Changes in working capital:

Decrease/(increase) in trade and other receivables 3,816 (8,962) 8,546 (1,489)

(Decrease)/increase in trade and other payables (2,676) (4,945) 33,556 (19,296)

Cash generated from continuing operations 6,029 (10,939) 41,280 (23,211)

25. Related partiesAs at 31 December 2005, the Company was a wholly owned subsidiary undertaking of HBOS Insurance and Investment Group

Limited, which is registered in England and Wales and operates in the United Kingdom.

HBOS plc is the ultimate parent undertaking and heads the largest higher group of undertakings for which Group accounts are

drawn up and of which the Company is a member. Copies of the financial statements of HBOS plc may be obtained from HBOS plc,

The Mound, Edinburgh, EH1 1YZ, which is its principal place of business.




25. Related parties (continued)At the end of the year, the Group and Company had the following balances with related parties:

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

Debtors

Group undertakings

Clerical Medical Investment Group Limited 9,135 10,914 2,900 3,503

Halifax Investment Fund Managers Limited 5,299 841 0 840

Halifax Life Limited 2,633 331 0 0

Clerical Medical International Asset Management

Luxembourg SA 768 778 0 778

Halifax General Insurance Limited 0 4,232 0 0

Clerical Medical Managed Funds Limited 0 1,218 0 0

Insight Investment Funds Management Limited 0 0 130 1,168

Other related companies 1,178 166 508 765

19,013 18,480 3,538 7,054

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

Creditors

Group undertakings

The Governor and Company of the Bank of Scotland (3,530) (6,739) (3) (109)

Clerical Medical Investment Group Limited 0 (2,762) 0 0

HBOS Financial Services (Holdings) Limited (178) (2,055) 0 (2,055)

Insight Investment Management (UK) Holdings Limited 0 0 (45,400) 0

Insight Investment Management Holdings (Malta) Limited 0 0 (203) 0

Insight Investment Services Limited 0 0 0 (9,620)

Intermediary parent

Halifax plc (3,076) (9,151) 0 0

HBOS Insurance and Investment Group Limited (1,096) (2,841) 0 0

Other related companies (43) (779) (98) (61)

(7,923) (24,337) (45,704) (11,845)




25. Related parties (continued)During the year, income was received from the following related parties for the provision of investment management services.

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

Group undertakings

Clerical Medical Investment Group Limited 21,939 22,822 760 22,728

Clerical Medical Managed Funds Limited 11,675 8,954 571 8,954

Halifax Investment Fund Managers Limited 12,412 8,663 547 8,663

Clerical Medical Investment Asset Management

Luxembourg SA 4,304 4,304 174 4,304

Halifax Life Limited 6,712 3,452 378 3,452

St. James’s Place Capital plc 2,411 1,535 0 0

Insight Investment Fund Management Limited 0 0 1,027 4,131

Other related companies 1,837 546 68 1,115

61,290 50,276 3,525 53,347

During the year the following related parties received investment management fee rebates:

Group Company

2005 2004 2005 2004

£000 £000 £000 £000

Group undertakings

Clerical Medical Investment Group Limited (10,446) (15,868) (278) (6,146)

Other related companies (1,253) (806) 0 0

(11,699) (16,674) (278) (6,146)

At the end of the year the Group had subordinated loans due to HBOS Financial Services Limited of £4,275,000 (2004: £4,275,000)

and HBOS Insurance and Investment Group Limited of £3,564,000 (2004: £3,564,000). During the year the Group incurred interest

on these loans of £420,000 (2004: £363,000).

During the year the Group incurred costs recharged from Bank of Scotland plc of £38,589,000 (2004: £23,636,000), Halifax plc

£57,646,000 (2004: £49,387,000) and HBOS Insurance and Investment Group Limited of £9,933,000 (2004: £3,763,000).

The recharged costs principally include payroll costs, Accounts Payable services and premises charges.




Key management personnel

During the year, key management personnel’s remuneration was as follows:

2005 2004

£000 £000

Short term employee benefits 4,033 3,318

Amounts receivable under long term incentive schemes (note 21) 1,172 2,049

Pension contributions 103 96

Compensation for loss of office 0 286

5,308 5,749

26. Explanation of transition to IFRSAs stated in significant accounting policies, note (a), these are the Company’s first consolidated financial statements prepared in

accordance with IFRSs.

The accounting policies applied in preparing the financial statements are set out in the significant accounting policies on pages 43 to 47.

In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements

prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has

affected the Company’s and Group’s financial position, financial performance and cash flows is set out in the following tables and

the notes that accompany the table.




26. Explanation of transition to IFRS (continued)Effect of transition to IFRS 1 January 2004

Software Foreign

UK development currency Up front

GAAP costs reserve fees IFRS

Note A Note C Note D

£000 £000 £000 £000 £000

Assets

Property, plant and equipment 3,389 (653) 0 0 2,736

Intangible assets 36,501 653 0 0 37,154

Other investments 1,051 0 0 0 1,051

Deferred tax assets 1,126 0 0 0 1,126

Total non-current assets 42,067 0 0 0 42,067

Other investments 919 0 0 0 919

Trade and other receivables 44,207 0 0 0 44,207

Cash and cash equivalents 67,851 0 0 0 67,851

Total current assets 112,977 0 0 0 112,977

Total assets 155,044 0 0 0 155,044

Equity

Issued capital 9,300 0 0 0 9,300

Share premium 1,000 0 0 0 1,000

Reserves 57,172 0 164 0 57,336

Retained earnings (5,182) 0 (164) (424) (5,770)

Total equity 62,290 0 0 (424) 61,866

Liabilities

Interest-bearing loans and borrowings 7,839 0 0 0 7,839

Other non-current liabilities 3,786 0 0 0 3,786

Total non-current liabilities 11,625 0 0 0 11,625

Trade and other payables 81,129 0 0 424 81,553

Total current liabilities 81,129 0 0 424 81,553

Total liabilities 92,754 0 0 424 93,178

Total equity and liabilities 155,044 0 0 0 155,044




70

26. Explanation of transition to IFRS (continued)Effect of transition to IFRS 31 December 2004

Software Foreign

UK development currency Up front

GAAP costs Goodwill reserve fees IFRS

Note A Note B Note C Note D

£000 £000 £000 £000 £000 £000

Assets

Property, plant and equipment 3,132 (1,503) 0 0 0 1,629

Intangible assets 32,495 1,503 4,006 0 0 38,004

Other investments 1,049 0 0 0 0 1,049

Deferred tax assets 3,221 0 0 0 0 3,221

Total non-current assets 39,897 0 4,006 0 0 43,903

Other investments 863 0 0 0 0 863

Trade and other receivables 53,247 0 0 0 0 53,247

Cash and cash equivalents 58,926 0 0 0 0 58,926

Total current assets 113,036 0 0 0 0 113,036

Total assets 152,933 0 4,006 0 0 156,939

Equity

Issued capital 9,300 0 0 0 0 9,300

Share premium 1,000 0 0 0 0 1,000

Reserves 57,204 0 0 164 0 57,368

Retained earnings (2,031) 0 4,006 (164) (430) 1,381

Total equity 65,473 0 4,006 0 (430) 69,049

Liabilities

Interest-bearing loans and borrowings 7,839 0 0 0 0 7,839

Other non-current liabilities 2,734 0 0 0 0 2,734

Total non-current liabilities 10,573 0 0 0 0 10,573

Trade and other payables 76,887 0 0 0 430 77,317

Total current liabilities 76,887 0 0 0 430 77,317

Total liabilities 87,460 0 0 0 430 87,890

Total equity and liabilities 152,933 0 4,006 0 0 156,939




71 Key contacts and corporate information

26. Explanation of transition to IFRS (continued)The effect of IFRS adjustments on the income statement for the year ended 31 December 2004 is as follows:

Effect of

UK transition to

GAAP IFRS IFRS

Note £000 £000 £000

Gross profit D 96,891 (6) 96,885

Other operating income 35 0 35

Administrative expenses B (99,946) 4,006 (95,940)

Other operating expenses (7) 0 (7)

Operating(loss)/profit before financing costs (3,027) 4,000 973

Financial income 2,694 0 2,694

Financial expenses (571) 0 (571)

Net financing income 2,123 0 2,123

Share of post tax profits from joint ventures 394 0 394

Income tax credit 3,661 0 3,661

Profit for the period 3,151 4,000 7,151

A In accordance with IAS 38 ‘intangible assets’, software development costs of £1,503,000 have been reclassified from property,

plant and equipment as at 31 December 2004.

B Due to the goodwill being assessed as having an indefinite life, the intangible amortisation charged in 2004 under UK GAAP

has been reversed in accordance with IAS 38, where the goodwill is now subject to an impairment review at balance sheet date.

This has resulted in a decrease in administrative expenses under IFRS in 2004 of £4,006,000 when compared to UK GAAP.

C In accordance with IFRS 1, the foreign currency translation reserve is deemed to be zero on the date of adoption of

IFRS (1 January 2004). On this date, an accumulated loss on foreign currency translation of £164,000 was

transferred to retained earnings.

D In accordance with IAS 18, up front fees charged on the sale of shares in OEICs have been apportioned into a brokerage fee

recognised at the inception of the contract and a front end investment management fee deferred and recognised over the

average life of investment in the funds. This has resulted in a reduction in opening retained earnings as at 1 January 2004

of £424,000 and a £6,000 reduction in revenue for the year ended 31 December 2004.


72 Annual Report and Accounts 2005


Key contacts and corporate information 72

Key contacts and corporate information

Registered Office33 Old Broad StreetLondonEC2N 1HZ

AuditorKPMG Audit Plc8 Salisbury SquareLondon EC4Y 8BB

RegulatorFinancial Services Authority25 The North ColonnadeCanary WharfLondon E14 5HZ

Solicitor and Company SecretaryJohn Veale33 Old Broad StreetLondon EC2N 1HZ

Business Switchboard020 7930 5474

Retail business

Gordon Phillipshead of group and retail business020 7321 1291

David Aldreddirector, Europe020 7321 1996

Martyn Gilbeydirector, HBOS Group, partnerships and affinities020 7321 1128

Lawrence Hawthorndirector, UK partners020 7321 1576

Frank McGarrydirector, intermediary sales020 7321 1655

Sean O’Sullivandirector, partner development 020 7321 1388

Investor Services0845 777 2233

Intermediary Services0845 850 6050

Dealing services0845 850 0861 (09:30 to 17:30)



Institutional business

Sarah Aitkenhead of institutional business020 7321 1096

Roger Price-Haworthhead of UK institutional business development020 7321 1297

Denise Saberhead of european business development020 7321 1582

Communications

Press Office020 7321 1358

Annie Dixonhead of corporate communications020 7321 1113

Property business

Duncan Owenmanaging director, property020 7321 1677

Philip Gadsdenhead of external funds (property)020 7321 1679

Chris Ludlamdirector, property fund development020 7321 1959

Alan Tripphead of group property funds020 7321 1019

Telephone calls may be recorded



Annual Report and Accounts 75


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