Trading Update

    RNS Number : 8880B
  Chameleon Trust PLC
  22 August 2008
   

    CHAMELEON TRUST PLC     


    Investment Objective
    Chameleon Trust plc ("the Company") is a special situations investment trust with the objective of generating capital profits through
investment in ordinary shares of selected UK quoted companies. Chameleon Trust plc works within a market framework that aims to shift its
focus from capital growth to capital preservation at different stages in the stock market cycle.

    Scope of Statement
    Further to the Board's intention to recommend the voluntary liquidation of the Company and its subsequent roll over into an open ended
investment company ("OEIC"), the Company is attaching hereto unaudited accounts for the year ended 31 May 2008, and providing an update on
the Company's performance to the period ending 31 July 2008. As a consequence of the re-structuring and liquidation, no audited accounts
will be presented.

    Investment Performance
    The Company's net asset value ("NAV") per share stood at 102.2p at the end of May 2008 - a fall of 21.5% from the previous year. The
Company's share price fell by 21%. By way of reference the FTSE All-Share Index fell by 10.4% over the same period, whilst the more
economically sensitive FTSE Smallcap Index fell by 24.8%. The Company's under-performance over the period can generally be attributed to
three key factors. The first is the cost of the substantial restructuring of the portfolio that took place after the appointment of Stephen
Grant as lead Manager of the Company in June 2007. To highlight the extent of the restructuring, it is useful to note that at the time of
the last Annual Report and Accounts the Company had 51 equity investments. At the end of May 2008, this number had reduced to 28, and at the
end of July 2008, the number had fallen further to 22. Of the 51 investments held at the end of May 2007, only 12 were retained at the end
of July 2008. Many of the investments removed from the portfolio were small and illiquid, and as such there were significant costs in their realisation. The second factor affecting the relative
performance has been the portfolio's high average exposure to smaller companies. Over the course of the year, this has been reduced but it
still proved to be a drag on performance. Lastly, one of the very few areas to generate positive returns over the period was the natural
resources sector. Whilst our Managers retained a relatively high exposure to oil producers, they took a contrarian view over mining stocks.
The substantial outperformance of this sector over the course of the year was undoubtedly an opportunity missed, although recent moves in
commodity prices may suggest that the underlying analysis was correct.

    Since the end of May 2008, stock markets have continued to be weak reflecting a slowing of global economic growth, with the FTSE All
Share Index falling by almost 10.8%. FTSE Smaller Companies Index has fallen by 12.8%. Adjusted for the payment of the interim dividend
announced on 18 August 2008, the NAV of the Company has fallen by 11.1% over the same period.

    Portfolio Detail
    In analysing performance in more detail both the banking and housebuilding sectors were significant detractors to performance. In April
2008, the Royal Bank of Scotland announced a £12 billion rights issue to bolster its balance sheet. Shortly thereafter, there was a £4
billion cash call by HBOS. Whilst unwelcome, investors saw this as the first step in addressing the lending freeze which is curtailing
economic activity. Most investors still harbour concerns that the banking sector requires additional capital as the round of asset
write-downs is not yet complete. Despite the capital raised across the banking sector, corporate and personal borrowing remains expensive.
Lloyds TSB suffered from the general weakness in the banking sector, despite raising its interim dividend by 2%. The Managers believe that
Lloyds TSB's yield is highly attractive and has no requirement to raise additional equity capital.

    In retrospect, the Managers were too early in their decision to purchase housebuilders Barratt Developments and Bellway. They
underestimated the impact of the credit crunch on the availability of mortgage funds. Although activity levels in the UK housing market are
running at historically very low levels this should not obscure their belief that housebuilding shares offer significant opportunity at
current valuations. The Managers are less bearish than consensus on land values for two principal reasons: firstly, there remains a shortage
of new houses in the UK and this is a long term structural problem; secondly, land with planning permission is still a relatively scarce
asset. Bellway has low financial gearing and sells on a substantial discount to the value they would ascribe to its landbank. Barratt was a
large detractor of value as difficult trading gave rise to concerns that it would struggle to service its debt. In addition, there were
fears of asset write-downs relating to its acquisition of Wilson Bowden. 

    The Managers have been well invested in the oil sector to the benefit of shareholders. BP, one of the larger investments, produced
updates materially ahead of consensus estimates. Investments in Premier Oil and Bowleven were positively correlated to movements in the spot
oil price. Although the Managers do not believe that the economics of either business is overly influenced by small changes in the spot oil
price, evidence suggests this is still the principal determinant of short term share price direction. 

    PV Crystalox Solar enjoyed a series of earnings upgrades for the first half of 2008. Its forward order commitments give a high degree of
forecast visibility. However, there remains a degree of execution risk involved with its plant extension and expansion plans rely on
cooperative fiscal regimes in Germany and Spain. Kewill Systems, in its year end update indicated that its results would be ahead of
expectations. The Managers remain of the view that Kewill has strengthened its competitive position and whilst not immune to economic
slowdown, its end markets are driven by legislation and tracking requirements. Xaar benefitted from favourable reception of its platform 3
products at the quadrennial DRUPA industry showcase and the belief that there were still attractive growth opportunities for its Platform 1
products in the Far East. Wolfson Microelectronics has been a volatile performer as industry news continues to paint a highly mixed picture.
The Managers were encouraged by the Chairman's recent share purchases and the strength of its balance sheet which has over $80m of cash.  

    Key Portfolio Changes
    The portfolio is more concentrated into a small number of investments and our intention is that when fully invested the portfolio should
contain a maximum of 30 names - the optimum target is 25. The Managers have taken a negative stance towards the mining sectors. They believe
that commodities have been driven by speculators and that action to curb inflation in China and India will slow economic growth in these
countries. Whilst it is probably still too early to be positioned aggressively in oversold areas such as media and retailers, they believe
that the major structural repositioning will be away from commodity sectors into those areas which investors believe are beneficiaries of
falling commodity prices. 

    In general the focus has been to invest in larger more liquid companies with an international bias to their business. Although there are
still small company investments in the portfolio, the Managers believe that this is an area that investors will shun until recovery is well
established and economic conditions more stable.  

    Key new investments were - Morgan Crucible, a producer of advanced industrial materials; Wolfson Microelectronics, a global supplier of
mixed signal semiconductors for audio applications and Victrex, a manufacturer of a high performance thermoplastic, which sells to a
diversified customer base. 

    The Managers exited their investment in the Royal Bank of Scotland given growing doubt that its balance sheet could withstand a further
series of writedowns - which was subsequently borne out by the rights issue. The sale was implemented prior to the fund raising. The
position has been re-established very recently at lower prices. The appreciation in Bowleven's share price meant that its valuation factored
in a significant discovery of oil reserves. The risk/reward balance appeared out of kilter. They exited Barratt Developments when it became
apparent that recovery in the housing market was further away than originally anticipated. 

    The growth in hedge funds has increased volatility in financial markets. The Board endorses the Managers' investment approach which
seeks to establish the intrinsic worth of a business. The Managers believe this is best achieved through an understanding of its market
position and dynamics; its competitive strengths; the cash it generates and the cash required to finance future growth; and the role of
management in increasing shareholder wealth.  

    Traffic Lights
    The tenor of recent comment from companies - especially those exposed to the UK - points to a sharp slowdown in economic activity which
began sometime in the second quarter. In the Managers' opinion there will be further reductions in earnings estimates. However, corporate
balance sheets are relatively robust and the Managers expect that dividend growth (out with the financial sector) will continue. The yield
on equities is approaching that of 10 year gilts which historically has been a very strong buy signal. 

    Investor appetite for risk remains fragile and is likely to remain so until clearer evidence emerges that banks are past the worst in
terms of write downs. This is most apparent in the compression of investment horizons but as confidence increases the Managers anticipate
that investment horizons will lengthen and they further anticipate that share prices will become more resilient in the face of bad news.  

    In summary, given the support to equities from valuations the Managers believe that we remain in a fallow market phase. 

    Dividend
    On 18 August 2008, the Board announced an interim dividend of 1.10p, to be paid on 22 September 2008, to all members on the Register at
close of business on 29 August 2008. The payment of this interim dividend was required in order that the Company retained it's investment
trust status under Section 842 of the Income & Corporations Taxes Act 1988 ahead of its forthcoming reconstruction.

    Future Proposals
    On 27 March 2008 the Company announced its intention to bring forward its proposals for a scheme of reconstruction under Section 110 of
the Insolvency Act 1986 (the 'Scheme'). Under the Scheme the Company will be wound up under a members' voluntary liquidation and each
investment in the Company will be rolled over in a tax efficient manner and exchanged for shares in a new OEIC to be managed by Revera Asset
Management Limited. Further details of the Scheme are to be announced with the publication of a further circular to Shareholders convening
the meetings required to obtain Shareholder approval for the implementation of the scheme. It is now expected that the Scheme circular will
be posted in late September 2008 and the Scheme will be implemented in early October 2008, subject to all regulatory approvals having been
obtained. 

    Outlook
    For much of the last five months our cash has been approximately 25% of the portfolio. Although the Managers can see value in share
ratings, thus far they have been unwilling to commit to many new investment propositions given their concern over earnings visibility. 

    For all financial markets the health of the US economy is paramount. Although the US has not hit the recession that many feared, there
is still considerable debate over the efficacy of the combined efforts of the Fed and tax rebates on the real economy. The US economy
remains finely balanced which supports a more cautious stance. 

    The Board is disappointed that changes made to the portfolio have not yielded stronger investment performance. However, the Board also
recognises that the Managers' investment instincts are contrarian and the Board believes that the issues are timing related rather than
attributable to poor stock selection. The Managers' approach may be unfashionable in the short term but the Board believes that the current
market dislocation can be viewed as an opportunity to make money, especially in well financed businesses. 

    The Managers do not expect share valuations to re-rate quickly. The two necessary conditions of a normalising of credit markets and
investors regaining confidence in earnings forecasts require time. However, in more difficult economic conditions, businesses with strong
cashflows can still progress through a combination of enhanced competitive positioning and/or through dividend growth. 

    In summary, the Managers would expect markets to be volatile as company profits reflect the economic slowdown. Whilst it never feels
like it at the time, bear markets present investors with great buying opportunities. There is nothing to suggest this one will be any
different.  

    Martin Ritchie
    Chairman  Income Statement
    Year ended 31 May 2008



                                                    Revenue               Capital               Total
                                                    return                return
                                 Notes              £'000                 £'000                 £'000


 Losses from investments held                       -                     (3,616)               (3,616)
 at fair value through profit
 or loss
 Investment income                                  392                   -                     392
 Other operating income                             29                    1                     30
                                                    -----------           ----------            ----------
                                                                                                -
 Gross revenue and capital                          421                   (3,615)               (3,194)
 losses
 Management fees                                    (46)                  (92)                  (138)
 Other administrative expenses                      (184)                 -                     (184)
                                                    -----------           ----------            ----------
                                                                                                -
 Net return/(loss) on ordinary                      191                   (3,707)                 (3,516)
 activities before finance
 costs and taxation
 Finance costs                                      -                     -                     -
                                                    -----------           ----------            ----------
 Net return/(loss) on ordinary                      191                   (3,707)               (3,516)
 activities before taxation
 Taxation on net return on                          -                     -                     -
 ordinary activities                                -----------           -----------           ----------
                                                                                                -
 Net return/(loss) on ordinary                      191                   (3,707)               (3,516)
 activities after taxation                          ======                ======                ======
 Return/(loss) per share         2                  1.46p                 (28.36)p              (26.89)p

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


 All items in the above statement derive from continuing operations.


 The Company has no recognised gains or losses other than those disclosed in the income statement.

      
 Reconciliation of Movements in Shareholders' Funds
 Year ended 31 May 2008


                                            Share     Capital
                                 Share      premium   redemption  Capital   Revenue  Distributable 
                                 capital    account   reserve     reserves  reserve  reserve         Total
                                 £'000      £'000     £'000       £'000     £'000    £'000           £'000
 At 31 May 2007                  131        3,936     11          3,893     42       9025            17,038
 Net (loss)/return for the       -          -         -           (3,707)   191      -               (3,516)
 period
 Repurchase of shares            -          -         -           -         -        (615)           (615)
 Expenses of repurchases         -          -         -           -         -        (5)             (5)
 Dividends paid (note 6)         -          -         -           -         (43)     -               (43)
                                 ---------  --------  ---------   --------  -------  ----------      -------
                                 -          -                     -         ---                      ---
 At 31 May 2008                  131        3,936     11          186       190      8,405           12,859
                                 =====      =====     =====       =====     =====    =====           ======

      
    Balance Sheet 
    as at 31 May 2008
                                                        Notes  £'000

 Fixed assets
 Investments held at fair value through profit or loss      3
                                                               11,547
                                                               ----------
                                                               -
 Current assets
 Debtors                                                4      110
 Cash at bank                                                  1,282
                                                               ----------
                                                               -
                                                               1,392
 Creditors: amounts falling due within one year             5     
                                                               (81)
                                                               ----------
                                                               -
 Net current liabilities                                       1,311
                                                               ----------
                                                               -
 Total net assets                                              12,858
                                                               =======
 Capital and reserves
 Called up share capital                                       131
 Share premium account                                         3,936
 Capital redemption reserve                                    11
 Capital reserves                                              185
 Revenue reserve                                               190
 Distributable reserve                                         8,405
                                                               ----------
                                                               --
 Equity shareholders' funds                                    12,858
                                                               =======

    The unaudited interim accounts were approved by the Directors on 18 August 2008 and signed on their behalf by:


    Martin Ritchie
    Chairman

      

    Notes to the Financial Statements
    1. Accounting Policies
    (a) Basis of preparation
    For the accounting period beginning on 1 June 2006 the Company had the option to prepare its Financial Statements in accordance with
International Financial Reporting Standards ('IFRS'), as adopted by the International Accounting standards Board ('IASB'). The Board has
elected to continue to adopt UK Generally Accepted Accounting Principles ('UK GAAP') and therefore adopt the new Financial Reporting
Standards issued as part of the programme to converge UK GAAP with IFRS.

    The Financial Statements have been prepared under the historical cost convention, as modified to include the revaluation of investments
in accordance with the Companies Act 1985, applicable Accounting Standards and with the Statement of Recommended Practice for "Financial
Statements of Investment Trust Companies" issued by the Association of Investment Companies revised December 2005 (the revised SORP).

    (b) Income
    Income from equity shares is brought into the Revenue Return of the Income Statement on the ex-dividend date. Where no ex-dividend date
is available, dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not
expected to be received. The fixed returns on debt securities and non-equity shares are recognised on a time apportionment basis so as to
reflect the effective yield on the debt securities and shares. Provision is made for any fixed income not expected to be received. Interest
receivable from cash and deposits and interest payable are accrued to the end of the year.

    (c) Expenses
    All expenses are accounted for on an accruals basis. Expenses are charged to the Revenue Return of the Income Statement except as
follows:

    - expenses which are incidental to the acquisition of an investment are included within the cost of the 
  investment.
    - expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of 
  the investment.
    - expenses are charged to realised capital reserves where a connection with the maintenance or 
  enhancement of the value of the investments can be demonstrated. In this the management fee has been 
  allocated 1/3 to revenue and 2/3 to realised capital reserves to reflect the Company's investment policy  
  and prospective income and capital growth.

    (d) Taxation
    Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date,
where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred
at the Balance Sheet date. Deferred tax is not provided on permanent differences. Deferred tax assets are only recognised to the extent that
it is considered more likely than not that there will be future taxable profits from which the future reversal of underlying timing
differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in
the Financial Statements which are capable of reversal in one or more subsequent periods.

    Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing
differences are expected to reverse, based on tax rates and laws enacted or substantively enacted at the Balance Sheet date.

    (e) Valuation of Investments
    Listed investments have been designated by the Board as held at fair value through the profit or loss and accordingly are valued at fair
value deemed to be bid market prices for quoted investments.

    Changes in the fair value of investments held at fair value through the profit or loss and gains and losses on disposal are recognised
in the Income Statement as "Gains or losses on investments held at fair value through profit or loss". Also included within this caption are
transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment
and the bid price at the date of purchase. All purchases and sales are accounted for on a trade date basis.

    2. Return per share
    The return per share is based on 13,073,115 weighted average number of ordinary shares.

    3. Investments held at fair value through profit or loss

                                         £'000

 Valuation at start of year              16,851
 Unrealised appreciation                 (27)
                                         --------
                                         --

 Book cost at start of year              16,824
 Acquisitions at cost                    13,584
 Disposals at cost                       (15,270)
 Realised losses                         (1,629)
 SORP amortisation                       (1)
                                         --------
                                         ---
                                          
 Book cost at 31 May 2008                13,508

 Unrealised depreciation at 31 May 2008  (1,961)
                                         --------
                                         ---

 Valuation at 31 May 2008                11,547
                                         ======

    4. Debtors
                                 £'000
 Prepayments and accrued income  110
                                 --------
                                 ---
                                 110
                                 ======

    5. Creditors: amounts falling due within one year
           £'000
 Accruals  (81)
           -------
           ----
           (81)
           ======

    6. Dividends
    The dividends of £43,000 paid were regarded for Section 842 of the Income and Corporation Taxes Act 1988 as payable in the year ended 31
May 2007.

    No further distribution has been made by the Company at this time.

    The proposed dividend for the year ended 31 May 2008 is 1.10p per ordinary share, to be paid on 22 September 2008 to all members on the
Register at close of business on 29 August 2008.



    For further information, please contact:

    Susan Venables
    BNP Paribas Secretarial Services Limited
    Secretary
    Tel: [phone]


    22 AUGUST 2008


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