SCOTTISH MORTGAGE INVESTMENT TRUST PLC Chairman's Statement
It is my great privilege to write to you for the first time as Chairman of Scottish Mortgage having taken up the role on 29 June 2017. I joined the Board in 2009 in the fall out of the Global Financial Crisis, when the share price stood at a discount of some 12%. 'Challenging' but valuable experience that has informed my contribution over the years.
My experience at Scottish Mortgage has also included serving under two Chairmen - the late Sir Donald MacKay and John Scott; that too has been valuable experience for which I am very grateful. I hope that the current Board and the Managers can do justice to the legacy we have inherited for the continuing benefit of all shareholders.
Long term performance continues to be the yardstick by which the Board measures the results of the Managers' endeavours for Scottish Mortgage. I would encourage all shareholders to focus on these figures and it is a pleasure to report that Scottish Mortgage's long term performance record, measured over the last five and ten years, remains very strong and amongst the best in the investment trust sector and beyond. This is true both of the share price and net asset value (NAV) returns.
For more than a decade now, the Managers have remained steadfast in their approach. Their consistency and clarity of purpose has proved its value to shareholders over time, despite some exceptionally challenging phases in global financial markets over that same period.
The table below shows the five and ten year total returns for the Company to 31 March 2018, alongside the Association of Investment Companies (AIC) Global Sector average for comparison.
Total Return % | Five Years | Ten Years |
NAV | 171.6 | 287.8 |
Share Price | 184.5 | 334.7 |
FTSE All-World Index | 73.3 | 159.4 |
Global Sector Av - NAV | 94.1 | 178.1 |
Global Sector Av - share price | 111.6 | 218.1 |
Source: AIC/Morningstar. NAV after deducting borrowings at fair valuefor five years. NAV after deducting borrowings at par for ten years.
Earnings and Dividends
The Board firmly supports the Managers in the single-minded pursuit of the investment philosophy to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. They have created a portfolio of the very best long term growth companies from around the world, both listed and unlisted. One common characteristic of many of these businesses is the retention and investment of most if not all of their earnings to support future growth. This tends to result in a relatively low level of dividend income for your Company. Whilst for this financial year our income has seen a rise compared with the previous one, it remains low overall; this year's earnings per share were 1.20 pence, up just over 12% on last year (1.07 pence).
The portfolio's earnings would be insufficient to pay a dividend equivalent to last year's 3.00 pence per share, even taken together with our remaining revenue reserves (0.47 pence per share). Scottish Mortgage's aim is defined in terms of total return. Shareholders gave overwhelming support at the 2014 AGM for the Company's stated intention to be able to supplement the dividend from its distributable capital reserves. These reserves are predominantly the realised investment gains.
The Board understands that many shareholders value the income from Scottish Mortgage's dividend and it has set out its policy and intentions in this area very clearly in recent years. The Board has highlighted that, while returns for Scottish Mortgage's shareholders will predominantly come through capital appreciation, a modest and growing dividend will also be paid. The Board will continue to keep the position under review. The 2017 Interim Report made clear that the Board would use the power to supplement the Company's earnings from capital once the revenue reserve was exhausted, in order to do this.
Given the strength of the long run capital returns and the Company's investment objective, together with the clear guidance given in the past, the Board has decided that a modestly increased dividend would be appropriate this year. This will be paid from a combination of earnings, the remainder of the revenue reserve and the capital reserve. The Board is therefore recommending a final dividend of 1.68 pence per share, providing a total distribution for the year of 3.07 pence per share, a year-on-year increase of just over 2%.
Low Cost
Put simply, lower charges directly translate into shareholders keeping more of the returns generated from the investment of their capital. Ensuring that Scottish Mortgage has one of the lowest cost ratios in the sector remains an important objective of the Board, supported by the Managers. In addition to using its growing scale to progressively reduce costs for shareholders for many years now, the management fee has also been revised - most recently at the start of this accounting period. The introduction of a new tiered annual management charge (AMC) from 1 April 2017 helps to ensure that shareholders will continue to reap additional benefits from the Company's growth. The previous AMC of 0.3% only applies on the first £4 billion of assets under management and thereafter it falls to 0.25%. I am delighted to report that as a result, for the financial year to 31 March 2018, Scottish Mortgage's 'Ongoing Charges Ratio' (OCR) fell to 0.37%, down from 0.44% the previous year. This is an almost 16% reduction on what was already one of the lowest cost ratios in the sector.
The Board has also decided that it would be appropriate to revise the allocation of the management and borrowing costs to reflect better the split of returns between capital and income. From 1 April 2018, all of these costs will be allocated to capital. This is a change from the current allocation of 75 per cent to capital and 25 per cent to revenue. The total costs will not be affected by this change in accounting treatment and the distinction is somewhat arbitrary given the changing nature of investment returns, as discussed in recent years and above.
Investment Strategy
As I highlighted at the start, two distinctive aspects of Scottish Mortgage are the clarity of its investment proposition and the consistency with which it has been applied. The Board continues to believe that these clearly differentiate Scottish Mortgage in a crowded field, where many 'talk a good game' but where far fewer have consistently lived up to the inherent challenges of long term investment. The statement of the Managers' Core Investment Beliefs has been included within the Annual Report and Financial Statements for the last 5 years. This year, Tom Slater has also reviewed this in his section of the report. I would urge all shareholders and those considering making an investment to read both these pieces and James Anderson's report.
Opportunities to Learn More About Scottish Mortgage
The Board and Managers believe it is important that all shareholders and prospective investors are able to develop a clear understanding of the investment approach taken for the Company.
One of the best ways to do this is to hear directly from those responsible for the management of your investment. The Company's Annual General Meeting (AGM) is held in Edinburgh and this year it will be at the Merchants' Hall, at 4.30pm on 28 June 2018. As is always the case, not only will shareholders be able to vote on the resolutions for the management of the Company and question the Directors, but the joint managers will present on the portfolio and also take shareholders' questions. I hope as many of you as possible will be able to attend.
Recognising that not everyone will be able to attend the AGM, the Managers have invested considerable resources in developing other opportunities for investors to hear their views and learn about the investment approach taken. There is a large amount of information on the Company and the portfolio available through the Company's website: www.scottishmortgageit.com.
More recently, the Managers have created an additional site, www.resoluteoptimism.com which looks at the broader context around the portfolio companies and explores issues around the responsible use of investment capital and the financial industry. There is a related Resolute Optimism twitter feed (@SMTOptimism) which flags new articles on the Resolute Optimism site and also highlights interesting external pieces of news and information, thought-provoking commentaries and events.
Further, in recent years the Managers have hosted a series of Scottish Mortgage Investor Forums around the country to ensure that more investors have the opportunity to hear from them directly. The 2017 Forums in Birmingham, York and London were all very well attended. The first Forum of 2018 has already been held in Brighton and there are two more to come, in London in June and in Manchester in October. Further details can be found on page 73 of the Annual Report and Financial Statements, and on the Company's website: www.scottishmortgageit.com
Gearing and Borrowing Policy
The Board of Scottish Mortgage remains committed to the strategic use of borrowings for the Company, in the belief that gearing the portfolio in this way will enhance the long term returns for shareholders. The Board views this as a significant advantage of the investment trust structure.
As previously announced, in April 2017 the Board took the opportunity to lock in borrowings of £125 million in long term, fixed rate, senior, unsecured private placement notes, denominated in sterling through the private placement debt market. This was achieved at a blended rate of a little over 3 per cent.
As a result of the continued strength of the portfolio's performance, particularly of the publicly listed companies, the gearing level continued to fall over this financial year. The impact of growth on the level of gearing is clearly illustrated in the table on the ten year record of Capital on page 25 of the Annual Report and Financial Statements. The level of debt has increased by only 10% as compared to a three-fold increase in assets. Given current market costs of borrowing, the Board is of the view that the appropriate level of gearing is higher than the current level (as at the end of March 2018). The Board has therefore taken steps to increase the Company's borrowings. These have included organising to borrow further funds in the private placement market, once again to lock in attractive long term borrowing rates. Further announcements will be made when arrangements have been finalised.
Liquidity
The Company's shares continue to benefit from a good level of liquidity on the London Stock Exchange. In addition, the Company has continued to support this liquidity in normal market conditions through the operation of its long standing liquidity policy, which is set out on page 7 of the Annual Report and Financial Statements.
Over the twelve months to 31 March 2018, the Company issued 50.8 million shares from Treasury and bought back 14.0 million shares resulting in a net inflow of £145 million. The level of net issuance was illustrative of the strength of demand for Scottish Mortgage over the period.
Corporate Brokers
The corporate brokers are instrumental in applying the liquidity policy, and the new arrangements which took effect from the start of this financial year have been very effective, which is testimony to Cenkos Securities plc and Jefferies Hoare Govett operating well as joint brokers.
Outlook
In considering the outlook at the start of this financial year, my predecessor John Scott noted, 'a number of political risks, from President Trump's unpredictable approach to policy making, to questions over North Korea's true intentions, to the escalation of the troubles in the Middle East…'. Sadly those political risks remain the same today. However the task of the Board also remains the same, as John noted: 'to consider the outlook in the context of the portfolio of Scottish Mortgage...'
To have been unduly focused on the headline topics 12 months ago might have led an investor to miss the importance of the extraordinary operational growth which was taking place at a number of the world's largest companies.
The Board believes the following areas to be amongst the most relevant considerations for the long term prospects for Scottish Mortgage:
1. The continual rise and development of China, in particular of its world leading digital economy.
2. The spread across all industries of the gathering and computer-facilitated use of data.
3. The structural shifts in the global healthcare industry and the industrialisation of biology.
4. The long run shift in much of the transportation infrastructure to electric and autonomous vehicles.
5. Shifts in energy generation to renewable sources and the proliferation of energy storage solutions for domestic and commercial use.
6. Greater social, political and regulatory scrutiny of large corporations.
The approach of the Managers, focused on the long term fundamental characteristics of businesses, favours the selection of companies which are adopting the advances in technology to enable them to provide what their customers want or need. This should offer the potential for durable growth in the long run.
However, the above should not be taken to suggest that the path to any success will be smooth. Progress is almost always bumpy and stock markets tend to exacerbate these swings. There will be times when share prices diverge from company fundamentals and during such periods the companies in Scottish Mortgage's portfolio may fall out of favour. No attempt will be made to mitigate short-term volatility and the Board will continue to stand resolutely behind the Managers during such times.
Whatever the precise trajectory of stock markets turns out to be over the coming years, the Board and the Managers strongly believe that attractive long term returns continue to be available to those who can turn time to their advantage. Scottish Mortgage offers investors the potential to share in the value created by some of the best growth businesses in the world over the coming decade, in new or old industries and whether they be public or private companies.
Finally, in addition to thanking my Board colleagues for their diligence over the year and James Anderson and Tom Slater for their insight and continuing success for shareholders, I would like to thank our professional advisers and the teams at Baillie Gifford that provide the support necessary to best look after your interests, and you, the shareholders, for your continued support.
Fiona McBain
Chairman of the Board
22 May 2018
Past performance is not a guide to future performance.
See disclaimer at end of this document.
Managers' Review
As the late, great Hans Rosling wrote 'It is not a question of intelligence. Everyone seems to get the world devastatingly wrong. Not only devastatingly wrong but systematically wrong.' We agree. Therefore highly educated but deluded human beings believe the world to be far worse than it is given the advances in global health, wealth and well-being that 'are too slow, too fragmented, or too small one-by-one to ever qualify as news'. It's this 'secret silent miracle of human progress'that convinces us to remain optimistic about the investment opportunities despite the understandably lurid headlines of our age.
But the investment world is devastatingly and systematically wrong in quite another manner. It does not understand the nature of investment returns, their origins or what may predict their occurrence. Investment returns are not generated by surveying the entire available field and adjusting correlations to the index by overweighting and underweighting according to marginal advantages and disadvantages, perceived risk of volatility, macroeconomic trends or comparative valuation.
Investment is a far more dramatic and extreme universe than that. It's not a well-behaved machine that cranks out returns to owners of all equities merely pausing to reflect the supposed laws of asset pricing relative to cash and bonds. Instead quite extraordinary returns flow to a tiny fraction of the companies in existence. This is articulated in more detail by Tom Slater below.
The companies that have the opportunity to deliver exceptional returns tend to share initial characteristics. They address potentially huge markets at early stages, they are run for the long-term by founders or their descendants, and they zig and zag to adjust to developing circumstances rather than imposing a spread sheet on reality. It's these sort of companies that we need to identify.
Moreover, great results are only attainable if patience is the mantra for investors as well as for founders. It's the persistent compounding of exponential returns that matters. So our task is not just to identify companies that possess extraordinary characteristics. It's to own them for a prolonged period. All too often excessive fear of events and headlines and a misguided desire to lock in past profits lead investors to chop down trees when they are but saplings. All great companies endure through periods of struggle. All great shares endure periods of dramatic underperformance. It is only in retrospect that success appears smooth and inevitable.
What is so remarkable about this era for growth investors is that we have been offered the chance to own a set of compelling companies that have the characteristics that denote the potential for greatness at extreme scale. The combination of digitalisation and globalisation has led to hitherto unimaginable opportunities for a cadre of founder led companies of the utmost ambition. It's therefore natural enough that the corporate trees can continue to grow at previously incomprehensible scale. It's appropriate yet again to cite Amazon in all of these regards. It's not normal for a company of its size to achieve 43% sales growth, it's abnormal to have a cloud computing business with accelerating growth as it hits a $20 billion run rate or to see the Prime subscription service exceed 100m customers. These are all opportunities that Amazon invented.
Not Just Silicon Valley
Silicon Valley attracts headlines. Its companies have also contributed disproportionately to the returns enjoyed by global investors over recent years. But for Scottish Mortgage shareholders the focus on this area can become a little too intense. This isn't just a reference to the rather different culture nurtured by Seattle's Amazon or San Diego's Illumina but also to much wider considerations.
We should stress that our major investments are not confined to the West Coast of America - let alone to Silicon Valley. We go wherever any companies demonstrate the characteristics that offer the potential for greatness at scale. More often than not such companies herd together in clusters of mutual emulation.
Eastern China
Over the next twenty years we consider it likely that Chinese companies will create the most value. It seems equally likely that almost all of these will be found in the hubs of Eastern China. Shenzhen, Hangzhou (not Shanghai) and Beijing appear the epicentres of potential. As in America, the concentration of returns will be notable not just geographically but in the rise of a small number of remarkable companies.
This has certainly been the pattern of the last twelve months. During the period under review Alibaba and Tencent came to be recognised for what they are - dominant, thoughtful and highly sophisticated network companies with the technological and managerial abilities to extend their leadership into most segments of the Chinese economy and increasingly into international markets.
We think these two behemoths are at least the overall equal of their American peers in vision and abilities. They are both more at ease with their home society and government than is the case in America. Unlike most of their US counterparts both Alibaba and Tencent are prepared to reinvest in their businesses in order to redeploy their extraordinary cash flows. We far prefer this policy to the passive generation of vast cash piles. Only Amazon of the US internet giants has a similar attitude. Tencent and Alibaba share with Amazon the ability to grow at 40-50% over long periods of time. So this is no longer geographically confined to America but it is historically unprecedented.
As elsewhere the recent pattern has been for the next generation of Chinese companies to grow up in private. But privacy should not be mistaken for lack of ambition. Given that funding at scale is available from Tencent, Alibaba and Baidu as well as a vigorous venture capital system, remaining unquoted is no obstacle to scale and, as elsewhere, allows investment to occur without the impatience of public markets. We can only reflect on the comparative appeal of the frequently hysterical and always opinionated daily news gauntlet that Tesla endures versus the quiet progress of its Chinese equivalent NIO (in which we now have a holding). We would expect our exposure to Chinese unquoted companies to grow over the coming year.
We see no evidence that the Chinese economic and corporate miracle is fading - indeed rather the reverse. The increasing scale, wealth, education and sophistication of the domestic market are likely to mean that the opportunities will become more, rather than less, alluring. Just as Scottish Mortgage 100 years ago had to confront America becoming the leading economy and the stock market with the most opportunities so we must acknowledge a similar transition today. It would be no surprise if China replaces the United States as the leading geographical location for Scottish Mortgage's assets. 100 years ago there was much murmuring in the Annual Reports that Canada or Argentina might be more appealing. We are more single minded.
Surprising Successes
Our commitment to China and to the beneficiaries of exponential change has been consistent and frequently discussed in these pages. What may be less well-known to shareholders is that we've been fortunate enough to own a group of European companies that have delivered quite excellent business and share price performance over a prolonged period. Sometimes the degree of success has surprised the Managers.
Such is the case in our ownership of first Fiat Chrysler and then its Ferrari spin-off. Given the economics and maturity of the internal combustion engine this may seem unlikely territory for growth investors - so much so that we acknowledge that we may have been the beneficiaries of luck rather than good judgment. But we have believed for many years that Fiat Chrysler has outstanding leadership. It is prepared to be radical in thinking about the auto industry from first principles. This led to a preparedness to abandon the search for volumes to focus instead on a limited number of special brands. Ferrari itself is the lodestar of this approach with a mere 8,398 cars translating into operating earnings of €775m in 2017. Both figures have the potential to grow in the decades ahead.
Similar excellence in luxury brand development has been the driving force behind the progress of Kering. The growth of its Gucci division has been exceptional. But behind this rests a patient and thoughtful approach that has created a luxury clothing group that should endure into future generations. It is tribute to the sustained efforts of the Pinault family.
It is often assumed that whilst Europe retains historic brands, it lacks technology expertise and is bereft of businesses of the scale of America and China. This is an exaggeration. The most impressive European technological and commercial feat of the last thirty years has been the emergence of ASML, from a near bankrupt affiliate of Philips, to global leadership and now dominance of the lithography industry. Without ASML's achievements Moore's Law would have stumbled. Without Moore's Law the transformation of communications and the internet would have withered away.
But though ASML enabled the rise of the global platform companies, until now Europe could not boast such a company of its own. But it is possible that Spotify may fill this void. We have been investors in Spotify as a private company during a phase of intense and challenging work to establish music streaming with consumers and as a business model in the face of the entrenched interests of labels and competition from Apple, Amazon and Tencent. We suspect that Spotify would not have succeeded in becoming the global leader if it had been a quoted company during this period. But we are happy that it has now emerged into public markets. We have purchased more shares since the Scottish Mortgage year end.
Current Challenges
We regard it as inevitable that there will always be major holdings in your portfolio that are topics of either popular concern or intense investment discussion in our own minds. Sometimes these categories overlap. In recent months, we have found that external questioning has been almost exclusively focussed on just two stocks - Facebook and Tesla - which have generated headline after headline. Thus far this attention has generated little reaction in stock prices but some comments on each may be worthwhile.
We have reduced our holding in Facebook. This was initially provoked by a concern dating to last summer that Facebook was too focussed on monetising its astonishing reach solely through advertising. We thought this was both unduly limiting and potentially mistaken. We did not expect this anxiety to be translated into public drama so rapidly. We continue to discuss the relevant ethical and financial issues with management but for now we are content to be shareholders but at a lower level.
Tesla is a rather different case. We need to be clear that the 'production hell' that Elon Musk spoke of entering has been both more persistent and at a lower circle of hell than we thought likely. But we do not believe that it is likely to fundamentally endanger the intense brand loyalty that has been built. We still believe that the business model is intact. We cannot be certain in these opinions but we think the rewards for shareholders if they prove to be justified considerably outweigh the risks. As ever we do not want to interrupt the potential for exponential compounding. We therefore believe it appropriate to resist the temptation to give into hysterical headlines and storm of hedge fund criticism that is the daily round at present. We intend to endure.
Future Challenges
We are fully aware that Scottish Mortgage has enjoyed the rewards of an uncommonly long bull market. Although we remain delighted at the progress and prospects of our portfolio it would be unrealistic to exclude the possibility of market setbacks. Indeed it would be foolish to rule out such an occurrence at any time.
But beyond the compulsion to take profits that most shareholders exhibit we do not share the presumption that Scottish Mortgage is doomed to suffer unduly in a bear market. To us the underlying cause of the next market retreat is most likely to be the dawning realisation that broad swathes of the stock market that have been assumed to be strong and stable in difficult market conditions are instead acutely vulnerable to severe setbacks. From consumer staples, to traditional retailers to TV moguls to oil and utility behemoths to traditional pharmaceuticals and back to banks and insurance companies we see long-standing business models that are already showing signs of intense strain. In the next decade we fear that strain will morph into permanent collapse.
It seems to us that this is a far greater cause for concern than the perennial and excessive angst that the valuation of the great global growth companies that we are invested may be ahead of some traditional metrics. We believe that Scottish Mortgage is insurance against a world utterly changed just as much as it is the beneficiary of extraordinary corporate achievements.
James Anderson
Evolution of Core Beliefs
We first stated our Core Beliefs in the Annual Report of 2013 and we've included this statement in our reports ever since. It still accurately captures how we approach investment. This year I've updated it for the developments in our thinking and evolution of our investment philosophy over the intervening years. The original stands. What follows is an addendum.
We are optimists. In a world where limiting volatility and avoiding downside is the dominant investor mentality, we focus unashamedly on the drivers and implications of corporate success. Limiting volatility can make sense for an overall investment portfolio but we doubt the benefits of using equities to meet this objective. The asymmetric payoff structure (you can make far more if you're right about a stock than you can lose if you're wrong) is the fundamental attraction of investing in equity markets. Whilst we have long believed in the impact of a small number of exceptional companies, even we are surprised by how narrowly returns have been shown to extend within the market. Our own research demonstrates that in the past thirty years approximately five percent. of stocks have returned at least five-fold in any five-year period. Over longer time horizons, this power law is even more dramatic. Academic work on the past ninety years of US data shows that over half of the excess return from equities came from just 90 companies. Investors enjoy little (if any) reward for taking the risk of owning the median stock in the market. Instead it is the outsized impact of a small number of exceptional companies that dominate the payoff structure.
In this context we have defined our core task more narrowly: to identify companies that have sufficient opportunity to deliver such outlying returns and to own them for long enough without interference so that the return accrues to our shareholders. We previously noted our investment time horizon to be at least five years. In practice, for businesses where our conviction has remained steadfast and our difference from the market view is clear, we have held the shares for far longer. Today all of our top ten holdings have been held for more than five years and two have been held for more than ten.
Whilst listed equity markets currently remain the principle focus of our investments, the nature of capital markets has changed and our search for outliers has moved with it. Some of our most successful investee companies have benefited from (and indeed created) new growth models with dramatically lower financing requirements than has been the case historically. Access to online distribution has grown the addressable market for breakthrough businesses by an order of magnitude. The ability to harness third party infrastructure has drastically reduced the capital intensity of growth. This has made new companies less dependent on external financing. As a consequence, their boardrooms are not dominated by early financial investors looking to realise their gains and these companies are remaining private longer. They are being selective about their shareholders and they are reluctant to accept the burdens that accompany public status.
We are determined to own the most promising Growth companies in the world. To maintain our opportunity set we have expanded our operations in private markets. This has little impact on our investment process. Access to fluctuating daily quotations for our holdings is more often a distraction than an advantage for a fund with permanent capital. We are preoccupied with company fundamentals and increasingly indifferent to a company's private or public status. As access to the most promising private companies is dependent on relationships and reputation our task becomes more important, as it is much harder for our shareholders to invest directly. Our scale and commitment to low costs allows us to do this without changing our fee structure.
As we make these investments we are providing more primary capital to businesses and directly funding investment in future economic growth. The role of public equity markets in providing such investment capital has diminished. Declining holding periods and frenzied speculation around newsflow is the norm. More insidiously, the demand for immediate returns pressures companies to pay out their cashflows to shareholders rather than investing in their future. Professional management teams incentivised to maximise share prices have been happy to oblige, resulting in a declining proportion of cash flow being devoted to research and development or capital expenditure across the market. Such investments are needed more than ever in a world that is experiencing rapid change. Our holdings in public markets are heavily focused on companies whose ownership or management structure allows them to ignore such demands.
Whilst we expressed our scepticism of the value of routine information in our original document, we didn't articulate where more useful counsel might lie or suggest that we ought to play our part in ensuring its existence. Some of you may have attended the book festivals we sponsor or read some of the shortlisted titles for the Baillie Gifford Prize for Non-fiction. We have invested in supporting interesting authors and sought to enhance our investment thinking with their insight. We have built relationships with academics and universities. We are funding research which we hope will inform our long run thinking on companies. At the same time, our time horizon is facilitating a different type of relationship with the management teams with whom we invest. They find little of value or interest in the endless cycle of quarterly updates. They delight in having less frequent and more in-depth discussion about the longer-term development of their business. Getting to listen to the entrepreneurs and visionaries that have built some of these outstandingly successful franchises is a hugely valuable input to our investment approach.
In turn, this is challenging us to re-evaluate our long-held belief that there is no opportunity for informational advantage in markets. Such inputs seem largely neglected in a world where 'colour on the quarter's numbers' is the main preoccupation of so-called investors. For instance, we first invested in Alibaba back in 2012 as a private company. Through our patient ownership and ongoing support, we have earned the opportunity to speak with the company's senior management. We believe the growth of the Chinese consumer economy is a transformational force in the global economy and there is no one better placed to help us understand its implications.
Dialogue with management is a valuable input but the relationship extends in both directions. The investment management industry has ceded much of its role in the governance of companies to the vested interests of activist investors. We must do better. Ensuring strong governance and engaging with our holdings on matters of substance is our responsibility. More than that, it is essential if we are to be seen as attractive shareholders by our investee companies and if we are to maximise the returns we can generate on your behalf.
Tom Slater
Thirty Largest Holdings and Twelve Month Performance
Name | Business | Fair value 31 March 2018 £'000 | % of total assets | Absolute Performance† % | Contribution to absolute performance# % | Fair Value 31 March 2017 £'000 |
Amazon.com | Online retailing and cloud computing | 661,339 | 9.9 | 45.5 | 3.7 | 510,086 |
Tencent Holdings | Internet services | 500,986 | 7.5 | 62.7 | 3.7 | 308,730 |
Alibaba Group | Online retailing and financial services | 497,643 | 7.5 | 51.5 | 2.9 | 273,626 |
Illumina | Biotechnology equipment | 433,312 | 6.5 | 23.5 | 1.4 | 318,103 |
Tesla Inc | Electric cars, autonomous driving and solar energy | 324,503 | 4.9 | (14.8) | (0.5) | 366,984 |
Baidu | Online search engine | 265,268 | 4.0 | 15.4 | 1.0 | 237,505 |
Inditex | Global clothing retailer | 239,840 | 3.6 | (19.6) | (0.7) | 297,098 |
Kering | Luxury goods producer and retailer | 231,740 | 3.5 | 66.8 | 1.7 | 104,970 |
ASML | Lithography | 207,437 | 3.1 | 33.1 | 0.7 | 110,439 |
Ferrari | Luxury automobiles | 195,553 | 2.9 | 44.6 | 1.4 | 148,851 |
Netflix | Subscription service for TV shows and movies | 195,159 | 2.9 | 78.1 | 1.4 | 98,605 |
Zalando | International online clothing retailer | 151,205 | 2.3 | 19.8 | 0.5 | 108,578 |
Nvidia | Visual computing | 143,346 | 2.2 | 90.3 | 1.2 | 51,904 |
Ctrip.com | Travel agent | 137,095 | 2.1 | (15.4) | (0.4) | 131,093 |
Social networking site | 130,886 | 2.0 | 0.5 | 0.6 | 257,167 | |
Alphabet | Holding company for Google and associated ventures | 128,777 | 1.9 | 11.1 | 0.6 | 199,136 |
Bluebird Bio Inc | Provider of biotechnological products and services | 124,535 | 1.9 | 67.4 | 0.8 | 68,486 |
Kinnevik | Investment company | 108,283 | 1.6 | 23.2 | 0.4 | 90,981 |
Atlas Copco | Engineering | 106,975 | 1.6 | 10.6 | 0.2 | 107,723 |
Workday | Enterprise information technology | 93,244 | 1.4 | 36.2 | 0.5 | 60,431 |
Intuitive Surgical | Surgical robots | 89,464 | 1.3 | 44.1 | 0.7 | 75,393 |
Housing Development Finance Corporation | Indian mortgage provider | 84,710 | 1.3 | 9.1 | 0.2 | 78,537 |
Delivery Hero | Online food delivery service | 67,124 | 1.0 | 53.8* | 0.4 | - |
Renishaw | Electronic equipment | 65,218 | 1.0 | 46.4 | 0.5 | 45,076 |
BASF | Chemicals | 62,695 | 0.9 | (6.2) | (0.2) | 118,852 |
| Spotify Technology SA u | Online music streaming service | 62,505 | 0.9 | 71.2 | 0.4 | 22,428 |
Rocket Internet | Internet start-up factory | 61,456 | 0.9 | 59.3 | 0.4 | 38,422 |
Uptake Technologies Inc Series D Pref.u | Designs and develops enterprise software | 60,814 | 0.9 | (4.7)* | - | - |
Svenska Handelsbanken | Banking | 55,543 | 0.8 | (13.6) | (0.1) | 48,280 |
| Grail Inc Series B Pref. u | Clinical stage biotechnology company | 53,485 | 0.8 | (10.8) | (0.1) | 59,978 |
5,540,140 | 83.1 |
† Absolute performance (in sterling terms) has been calculated on a total return basis over the period 1 April 2017 to 31 March 2018.
# Contribution to absolute performance (in sterling terms) has been calculated to illustrate how an individual stock has contributed to the overall return. It is influenced by both share price performance and the weighting of the stock in the portfolio, taking account of any purchases or sales over the period.
* Figures relate to part-period returns where the equity has been purchased during the period.
uDenotes unlisted investment
Source: Baillie Gifford/StatPro and underlying data providers.
See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Distribution of Assets
At 31 March 2018 % | At 31 March 2017 % | ||
North America | 48.1 | 47.9 | |
South America | - | 0.5 | |
Europe | 27.7 | 30.3 | |
United Kingdom | 2.9 | 4.4 | |
Eurozone | 19.9 | 19.6 | |
Developed Europe (non euro) | 4.9 | 5.9 | |
Rest of Europe | - | 0.4 | |
Africa and Middle East | - | 0.4 | |
Asia | 24.2 | 20.9 | |
China | 22.5 | 18.5 | |
India | 1.7 | 2.1 | |
Rest of Asia | - | 0.3 | |
Total assets (before deduction of loans and debentures) | 100.0 | 100.0 | |
Key Performance Indicators
The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:
¾ the movement in net asset value per ordinary share (after deducting borrowings at fair value);
¾ the movement in the share price;
¾ the movement of net asset value and share price performance compared to the Benchmark;
¾ the premium/discount (after deducting borrowings at fair value);
¾ ongoing charges ratio;
¾ revenue return; and
¾ dividend per share.
An explanation of these measures can be found in the Glossary of Terms at the end of this announcement.
The one, five and ten year records of the KPIs are shown on pages 5, 6 and 25 of the Annual Report and Financial Statements.
In addition to the above, the Board considers performance against other companies within the AIC Global Sector.
Future Developments of the Company
The outlook for the Company is set out in the Chairman's Statement and the Managers' Report above.
Related Party Transactions
The Directors' fees for the year and Directors' interests are detailed in the Directors' Remuneration Report on pages 37 and 38 in the Annual Report and Financial Statements.
No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.
Management Fee Arrangements
2018 Revenue £'000 | 2018 Capital £'000 | 2018 Total £'000 | 2017 Revenue £'000 | 2017 Capital £'000 | 2017 Total £'000 | |
Investment management fee | 4,495 | 13,484 | 17,979 | 3,558 | 10,674 | 14,232 |
Details of the Investment Management Agreement are disclosed on page 28 of the Annual Report and Financial Statements. The annual management fee is 0.30% on the first £4 billion of total assets less current liabilities (excluding short term borrowings for investment purposes) and 0.25% thereafter. For the year to 31 March 2017 the management fee was 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes). The management fee is calculated quarterly and levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co; however the OEICs' share class held by the Company does not itself attract a management fee. The Company's holding in the Baillie Gifford Global Discovery OEIC was sold during the year to 31 March 2017.
The investment management fees for the years to 31 March 2018 and 31 March 2017 were charged 25% to revenue and 75% to capital (with effect from 1 April 2018 the investment management fee will be charged 100% to capital, see Chairman's Statement above).
Principal Risks
As explained on page 33 of the Annual Report and Financial Statements there is a process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below:
Financial Risk- the Company's assets consist mainly of listed securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 19 to the Financial Statements on pages 58 to 64 of the Annual Report and Financial Statements. To mitigate these risks, the Board considers at each meeting various metrics including portfolio concentration, regional and industrial sector weightings, top and bottom stock contributors to performance and contribution to performance by industrial sector. The Managers provide the rationale for stock selection decisions and both the investment strategy and portfolio risk are formally considered in detail at least annually.
Unlisted Investments- the Company's risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater than for listed investments.
To mitigate this risk, the Board considers the unlisted investments in the context of the overall investment strategy and provides guidance to the Managers on the maximum exposure to unlisted investments. The investment policy limits the amount which may be invested in unlisted companies to 25 per cent of the total assets of the Company, measured at time of purchase.
Investment Strategy Risk -pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or an ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their net asset value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy, the investment portfolio and its performance, the level of discount/premium to Net Asset Value at which the shares trade and movements in the share register.
Discount Risk -the discount/premium at which the Company's shares trade relative to its net asset value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.
Regulatory Risk- failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.
Custody and Depositary Risk- safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber security incidents. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.
Operational Risk- failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.
Leverage Risk- the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found on page 69 of the Annual Report and Financial Statements and the Glossary of Terms at the end of this announcement.
Political Risk- Political developments are closely monitored and considered by the Board. The Board has noted the Government's intention that the UK should leave the European Union on 29 March 2019. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.
Viability Statement
In accordance with provision C2.2 of the UK Corporate Governance Code that the Directors assess the prospects of the Company over a defined period, the Directors have elected to do so over a period of 10 years. The Directors continue to believe this period to be appropriate as the investment objective of the Company is aimed at investors with a 5 to 10 year investment horizon and, subject to the assumptions detailed below, the Directors do not expect there to be any significant change to the current principal risks facing Scottish Mortgage nor to the adequacy of the controls in place to effectively mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a 10 year period.
Assumption 1
There is no significant adverse change to the regulatory environment and tax treatment enjoyed by UK investment trusts.
Assumption 2
The Company does not suffer sustained inadequate relative investment performance with the current or any successor fund managers such that the Company fails to maintain a supportive shareholder base.
Using the long term expectations of shareholders as the main determinant of the chosen assessment period, the Directors have conducted a robust assessment of the principal risks and uncertainties facing the Company (as detailed above) and in particular the impact of market risk where a significant fall in global equity markets would adversely impact the value of the investment portfolio. In reviewing the viability of the Company, the Directors have considered the key characteristics of the Company which include an investment portfolio that takes account of different degrees of liquidity, with moderate levels of debt and a business model where substantially all of the essential services required are outsourced to third party providers; this outsourcing structure allows key service providers to be replaced at relatively short notice where necessary.
The Directors have also considered the Company's leverage and liquidity in the context of fixed term debentures, the private placement loan notes issued during the year and short term bank loans, the revenue projections, the readily realisable nature of the listed portfolio which could be sold to provide funding if necessary and its stable closed ended structure. Specific leverage and liquidity stress testing was conducted during the year. The Directors have concluded that these sustainable long term characteristics provide a high degree of flexibility to the Company and afford an ability to react so as to mitigate both controllable and most external uncontrollable risks and events in order to ensure the long term prosperity of the business.
Based upon the Company's processes for monitoring operating costs, share price premium/discount, the Managers' compliance with the investment objective, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Board believes that the prospects of the Company are sound and the Directors are able to confirm that they have a reasonable expectation that it will continue in operation and meet its liabilities as they fall due over a period of at least 10 years..
Going Concern
In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern.
The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 19 to the Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis.
Accordingly, the Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement above which assesses the prospects of the Company over a period of 10 years, that the Company will continue in operational existence for a period of at least 12 months from the date of approval of these Financial Statements.
Financial Instruments
As an Investment Trust, the Company invests in listed and unlisted securities and makes other investments so as to achieve its investment objective of maximising total return, whilst also generating dividend growth, from a focused and actively managed global portfolio. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.
These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility. Risk provides the potential for both losses and gains and in assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.
The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.
Market Risk
The fair value of future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 9 and on pages 21 to 24 of the Annual Report and Financial Statements.
Currency Risk
Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.
The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.
Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.
Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.
As at 31 March 2018 | Investments £'000 | Cash and cash equivalents £'000 | Loans, loan notes and debentures £'000 | Other debtors and creditors £'000 | Net exposure £'000 |
US dollar | 4,235,597 | 25,986 | (231,679) | (690) | 4,029,214 |
Euro | 1,335,236 | - | - | 159 | 1,335,395 |
Hong Kong dollar | 500,986 | - | - | - | 500,986 |
Swedish krona | 333,306 | 3,798 | - | - | 337,104 |
Indian rupee | 84,710 | - | - | 162 | 84,872 |
Total exposure to currency risk | 6,489,835 | 29,784 | (231,679) | (369) | 6,287,571 |
Sterling | 156,180 | 5,190 | (254,036) | (7,149) | (99,815) |
6,646,015 | 34,974 | (485,715) | (7,518) | 6,187,756 |
As at 31 March 2017 | Investments £'000 | Cash and cash equivalents £'000 | Loans, loan notes and debentures £'000 | Other debtors and creditors £'000 | Net exposure £'000 |
US dollar | 3,311,569 | 67,547 | (359,856) | (890) | 3,018,370 |
Euro | 1,055,007 | - | - | 998 | 1,056,005 |
Hong Kong dollar | 308,730 | - | - | - | 308,730 |
Swedish krona | 246,984 | - | - | 1,865 | 248,849 |
Brazilian real | 27,277 | - | - | 546 | 27,823 |
Danish krone | 47,104 | - | - | - | 47,104 |
Indonesian rupiah | 17,659 | - | - | - | 17,659 |
Indian rupee | 78,537 | - | - | - | 78,537 |
Total exposure to currency risk | 5,092,867 | 67,547 | (359,856) | 2,519 | 4,803,077 |
Sterling | 205,471 | 9,096 | (149,710) | 5,657 | 70,514 |
5,298,338 | 76,643 | (509,566) | 8,176 | 4,873,591 |
Currency Risk Sensitivity
At 31 March 2018, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the Financial Statement amounts.
The analysis is performed on the same basis for 2017.
2018 £'000 | 2017 £'000 | |
US dollar | 201,461 | 150,919 |
Euro | 66,770 | 52,800 |
Hong Kong dollar | 25,049 | 15,437 |
Swedish krona | 16,855 | 12,442 |
Indian rupee | 4,244 | 3,927 |
Danish krone | - | 2,355 |
Brazilian real | - | 1,391 |
Indonesian rupiah | - | 883 |
314,379 | 240,154 |
Interest Rate Risk
Interest rate movements may affect directly:
¾ the fair value of the investments in fixed interest rate securities;
¾ the level of income receivable on cash deposits;
¾ the fair value of the Company's fixed-rate borrowings; and
¾ the interest payable on the Company's variable rate borrowings.
Interest rate movements may also impact upon the market value of the Company's investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.
The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.
The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value at fair value.
The interest rate risk profile of the Company's financial assets and liabilities at 31 March is shown below:
Financial Assets
2018 | 2017 | |||||
Fair value £'000 | Weighted average interest rate | Weighted average period until maturity* | Fair value £'000 | Weighted average interest rate | Weighted average period until maturity* | |
Floating rate: | ||||||
Brazilian bonds (index linked) | - | - | - | 27,277 | 9.7% | 28 years |
Cash and short-term deposits: | ||||||
Other overseas currencies | 29,784 | - | n/a | 67,547 | - | n/a |
Sterling | 5,190 | 0.3% | n/a | 9,906 | 0.1% | n/a |
*Based on expected maturity date.
The cash deposits generally comprise call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the Interbank market rates.
Financial Liabilities
The interest rate risk profile of the Company's bank loans and debentures (at amortised cost) and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31 March are shown below.
Interest Rate Risk Profile
The interest rate risk profile of the Company's financial liabilities at 31 March was:
2018 £'000 | 2017 £'000 | ||
Floating rate | - US$ denominated | 231,679 | 291,883 |
Fixed rate | - Sterling denominated | 254,036 | 149,710 |
- US$ denominated | - | 67,973 | |
485,715 | 509,566 | ||
Maturity Profile
The maturity profile of the Company's financial liabilities at 31 March was:
2018 | 2017 | |||||
Within 1 year £'000 | Between 1 and 5 years £'000 | More than 5 years £'000 | Within 1 year £'000 | Between 1 and 5 years £'000 | More than 5 years £'000 | |
Repayment of loans and debentures | 231,679 | 95,000 | 155,675 | 359,856 | 20,000 | 125,675* |
Accumulated interest on loans and debentures to maturity date | 18,799 | 62,141 | 91,284 | 18,060 | 52,487 | 33,022 |
250,478 | 157,141 | 246,959 | 377,916 | 72,487 | 158,697 | |
*Includes £675,000 irredeemable debenture stock.
Interest Rate Risk Sensitivity
An increase of 100 basis points in bond yields as at 31 March 2018 would have decreased total net assets and total return on ordinary activities by £nil (2017 - £3,729,000) and would have increased the net asset value per share (with borrowings at fair value) by 2.69p (2017 - increased by 0.55p). A decrease of 100 basis points would have had an equal but opposite effect.
Other Price Risk
Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets.
The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the benchmark. The Board provides guidance to the Managers on the level of unlisted investments.
Other Price Risk Sensitivity
Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 21 to 24 of the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial sector and a list of the 30 largest investments by their aggregate market value are contained above.
91.2% (2017 - 93.8%) of the Company's net assets are invested in quoted equities. A 3% increase in quoted companies equity valuations at 31 March 2018 would have increased net assets and net return after taxation by £169,276,000 (2017 - £137,125,000). A decrease of 3% would have had an equal but opposite effect.
16.2% (2017 - 14.4%) of the Company's net assets are invested in unlisted securities. The fair valuation of the unlisted investments is influenced by the estimates, assumptions and judgements made in the fair valuation process (see 1 (b) on page 48 of the Annual Report and Financial Statements). A sensitivity analysis is provided below which recognises that the valuation methodologies employed involve different levels of subjectivity in their inputs. The sensitivity analysis below applies a wider range of input variable sensitivity to the multiples methodology as it involves more significant subjective estimation than the recent transaction method (the risk of over or under estimation is higher due to the greater subjectivity involved, for example, in selecting the most relevant measure of sustainable revenues and identifying appropriate comparable companies).
As at 31 March 2018 | Impact | |||
Valuation Basis | Fair Value of Investments £'000 | Variable Input Sensitivity (%) | £'000 | % of Net Assets |
Recent Transaction | 748,271 | ±10 | ±74,827 | ±1.2 |
Multiples | 214,568 | ±20 | ±42,914 | ±0.7 |
Net Asset Value† | 40,656 | ±10 | ±4,066 | ±0.1 |
Total | 1,003,495 | ±121,807 | ±2.0 | |
As at 31 March 2017 | Impact | |||
Valuation Basis | Fair Value of Investments £'000 | Variable Input Sensitivity (%) | £'000 | % of Net Assets |
Recent Transaction | 447,257 | ±10 | ±44,726 | ±0.9 |
Multiples | 213,236 | ±20 | ±42,648 | ±0.9 |
Net Asset Value† | 39,750 | ±10 | ±3,975 | ±0.1 |
Total | 700,243 | ±91,349 | ±1.9 | |
* Impact on net assets and net return after taxation.
† Unlisted fund investments held at net asset values produced by the relevant fund administrators using appropriate fair valuation principles.
Liquidity Risk
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk is potentially significant but the majority of the Company's assets are investments in quoted securities that are believed to be readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.
The Company has the power to take out borrowings, which give it access to additional funding when required.
Credit Risk
This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
This risk is managed as follows:
¾ where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;
¾ the Board regularly receives information from the Investment Managers on the credit ratings of those bonds and other securities in which the Company has invested;
¾ the Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. For the period up to the date of these Financial Statements, the Depository delegated the custody function to The Bank of New York Mellon SA/NV. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board;
¾ investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations at the same time as any transfer of cash or securities away from the Company is completed;
¾ transactions involving derivatives, and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers of the creditworthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and
¾ cash is held only at banks that are regularly reviewed by the Managers.
The Company owns a number of unquoted preference share securities. Some of these may have been classified as debt by the issuer. There are no material amounts past due in relation to these securities. As these instruments (alongside the ordinary share securities) have been recognised at fair value through profit and loss, the fair value takes into account credit, market and other price risk.
Credit Risk Exposure
The maximum exposure to direct credit risk at 31 March was:
2018 £'000 | 2017 £'000 | |
Fixed interest investments | - | 27,277 |
Cash and short term deposits | 34,974 | 76,643 |
Debtors and prepayments | 2,764 | 16,293 |
37,738 | 120,213 |
None of the Company's financial assets is past due or impaired.
Fair Value of Financial Assets and Financial Liabilities
The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the Balance Sheet with the exception of long term borrowing. Long term borrowings in relation to debentures are included in the accounts at the amortised amount of net proceeds after issue, plus accrued finance costs in accordance with FRS 102. The fair value of bank loans is calculated with reference to government bonds of comparable maturity and yield. A comparison with the fair value (closing offer value) is as follows:
2018 | 2017 | |||||
Par/nominal £'000 | Book £'000 | Fair £'000 | Par/nominal £'000 | Book £'000 | Fair £'000 | |
8-14% stepped interest debenture stock 2020 | 20,000 | 20,704 | 25,339 | 20,000 | 20,932 | 27,295 |
6.875% debenture stock 2023 | 75,000 | 74,821 | 85,629 | 75,000 | 74,784 | 95,250 |
6-12% stepped interest debenture stock 2026 | 50,000 | 53,093 | 81,177 | 50,000 | 53,319 | 83,028 |
4.5% irredeemable debenture stock | 675 | 675 | 713 | 675 | 675 | 712 |
Total debentures | 145,675 | 149,293 | 192,858 | 145,675 | 149,710 | 206,285 |
£45 million 3.05% 2042 | 45,000 | 44,890 | 47,762 | - | - | - |
£30 million 3.30% 2044 | 30,000 | 29,927 | 31,696 | - | - | - |
£30 million 3.12% 2047 | 30,000 | 29,926 | 31,819 | - | - | - |
Total unsecured loan notes | 105,000 | 104,743 | 111,277 | - | - | - |
Fixed rate loans | - | - | 67,973 | 68,083 | ||
Floating rate loans | 231,679 | 231,679 | 291,883 | 291,883 | ||
Total borrowings | 485,715 | 535,814 | 509,566 | 566,251 | ||
All short term floating rate borrowings are stated at fair value, which is considered to be equal to their par value.
Deducting long term borrowings at fair value would have the effect of reducing the net asset value per share from 443.5p to 439.9p. Taking the market price of the ordinary shares at 31 March 2018 of 442.2p, this would have given a premium to net asset value of 0.5% as against a discount of 0.3% on a debt at book basis. At 31 March 2017 the effect would have been to reduce the net asset value from 358.7p to 354.6p. Taking the market price of the ordinary shares at 31 March 2017 of 366.1p, this would have given a premium to net asset value of 3.2% as against a premium of 2.1% on a debt at book basis.
Deducting long term borrowings at par value would have the effect of increasing the net asset value per share from 443.5p to 443.7p. Taking the market price of the ordinary shares at 31 March 2018 of 442.2p, this would have given a discount to net asset value of 0.3% as against a discount of 0.3% on a debt at book basis. At 31 March 2017 the effect would have been to increase the net asset value from 358.7p to 359.0p. Taking the market price of the ordinary shares at 31 March 2017 of 366.1p, this would have given a premium to net asset value of 2.0% as against a premium of 2.1% on a debt at book basis.
Capital Management
The capital of the Company is its share capital and reserves as set out in notes 13 and 14 of the Annual Report and Financial Statements together with its borrowings (see notes 11 and 12 of the Annual Report and Financial Statements). The objective of the Company is to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out above. The Company has the authority to issue and buy back its shares (see page 7 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in notes 13 and 14 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loans, loan notes and debentures which are detailed in notes 11 and 12 of the Annual Report and Financial Statements.
Subsequent Events
Subsequent to the year end, the US$40 million one year revolving loan with The Royal Bank of Scotland plc ('RBS') was replaced on 11 April 2018 with a US$80 million three year revolving loan with RBS.
Unlisted investments:
The holding in Mobike Ltd Series F Pref was sold on 20 April 2018 due to the company being bought by Internet Plus Holdings Ltd. The sale realised a loss of £237,000.
Spotify Technology SA listed on 3 April 2018. The closing price on the first day of trading represented an uplift of 25.0% from the price at 31 March 2018.
Unity Biotechnology Inc listed on 3 May 2018 by way of an initial public offering. The closing price on the first day of trading represented an uplift of 9.2% from the price at 31 March 2018.
Alternative Investment Fund Managers (AIFM) Directive
In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors.
AIFM Remuneration
In accordance with the Directive, the AIFM remuneration policy is available at www.bailliegifford.com or on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's relevant reporting period are available at www.bailliegifford.com.
Leverage
The Company's maximum and actual leverage levels (see Glossary of Terms at the end of this announcement) at 31 March 2018 are shown below:
Gross method | Commitment method | |||
Maximum limit | 2.50:1 | 2.00:1 | ||
Actual | 1.08:1 | 1.08:1 |
Investments
As at 31 March 2018 | Level 1* £'000 | Level 2 £'000 | Level 3* £'000 | Total £'000 |
Equities/funds | 5,604,854 | 37,666 | - | 5,642,520 |
Unlisted ordinary shares | - | - | 168,083 | 168,083 |
Unlisted preference shares | - | - | 835,412 | 835,412 |
Total financial asset investments | 5,604,854 | 37,666 | 1,003,495 | 6,646,015 |
As at 31 March 2017 | Level 1* £'000 | Level 2 £'000 | Level 3* £'000 | Total £'000 |
Equities/funds | 4,565,355 | 5,463 | - | 4,570,818 |
Debt securities | - | 27,277 | - | 27,277 |
Unlisted ordinary shares | - | - | 146,381 | 146,381 |
Unlisted preference shares | - | - | 553,862 | 553,862 |
Total financial asset investments | 4,565,355 | 32,740 | 700,243 | 5,298,338 |
* Includes funds and Level 2 equity investments.
Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 102, the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly
observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
The valuation techniques used by the Company are explained in the accounting policies on page 48 of the Annual Report and Financial Statements.
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they are required to prepare the Financial Statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these Financial Statements, the Directors are required to:
¾ select suitable accounting policies and then apply them consistently;
¾ make judgements and estimates that are reasonable and prudent;
¾ state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;
¾ assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
¾ use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
Under section 454 of the Companies Act 2006 the Directors have the authority to revise the Financial Statements if they do not comply with the Act, making such revisions in accordance with the Companies (Revision of Defective Accounts and Reports) Regulations 2008 so as to give a true and fair view as if they were prepared and approved by the Directors as at the date of the original Financial Statements and accordingly do not take account of the events which have take place after the date on which the original Financial Statements were approved (See note 1 'Principal Accounting Policies' on page 48 of the Annual Report and Financial Statements).
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in Respect of the Annual Financial Report
We confirm that to the best of our knowledge:
¾ the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
Fiona McBain
22 May 2018
Income Statement
For the year ended 31 March 2018 | For the year ended 31 March 2017 | |||||
Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | |
Gains on investments | - | 1,203,348 | 1,203,348 | - | 1,354,245 | 1,354,245 |
Currency gains/(losses) | - | 21,129 | 21,129 | - | (42,958) | (42,958) |
Income (note 2) | 30,663 | - | 30,663 | 27,796 | - | 27,796 |
Investment management fee | (4,495) | (13,484) | (17,979) | (3,558) | (10,674) | (14,232) |
Other administrative expenses | (3,929) | - | (3,929) | (3,544) | - | (3,544) |
Net return before finance costs and taxation | 22,239 | 1,210,993 | 1,233,232 | 20,694 | 1,300,613 | 1,321,307 |
Finance costs of borrowings | (5,490) | (16,471) | (21,961) | (4,837) | (14,510) | (19,347) |
Net return before taxation | 16,749 | 1,194,522 | 1,211,271 | 15,857 | 1,286,103 | 1,301,960 |
Tax | (48) | - | (48) | (1,721) | - | (1,721) |
Net return after taxation | 16,701 | 1,194,522 | 1,211,223 | 14,136 | 1,286,103 | 1,300,239 |
Net return per ordinary share (note 4) | 1.20p | 85.80p | 87.00p | 1.07p | 97.31p | 98.38p |
The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.
Balance Sheet
At 31 March 2018 £'000 | At 31 March 2017 £'000 | |
Fixed assets | ||
Investments held at fair value through profit or loss | 6,646,015 | 5,298,338 |
Current assets | ||
Debtors | 2,764 | 16,293 |
Cash and cash equivalents | 34,974 | 76,643 |
37,738 | 92,936 | |
Creditors | ||
Amounts falling due within one year (note 6) | (241,961) | (367,973) |
Net current liabilities | (204,223) | (275,037) |
Total assets less current liabilities | 6,441,792 | 5,023,301 |
Creditors | ||
Amounts falling due after more than one year (note 6) | (254,036) | (149,710) |
6,187,756 | 4,873,591 | |
Capital and reserves | ||
Share capital | 71,086 | 71,086 |
Share premium account† | 352,375 | 216,808 |
Capital redemption reserve | 19,094 | 19,094 |
Capital reserve† | 5,741,352 | 4,537,789 |
Revenue reserve | 3,849 | 28,814 |
Shareholders' funds | 6,187,756 | 4,873,591 |
Net asset value per ordinary share (after deducting borrowings at book)* | 443.5p | 358.7p |
Ordinary shares in issue† (note 8) | 1,395,363,209 | 1,358,569,485 |
* See Glossary of Terms at the end of this announcement.
Statement of Changes in Equity
For the year ended 31 March 2018
Share £'000 | Share premium account† £'000 | Capital redemption reserve £'000 | Capital Reserve†# £'000 | Revenue reserve# £'000 | Shareholders' funds £'000 | |
Shareholders' funds at 1 April 2017 | 71,086 | 216,808 | 19,094 | 4,537,789 | 28,814 | 4,873,591 |
Net return after taxation | - | - | - | 1,194,522 | 16,701 | 1,211,223 |
Ordinary shares bought back into treasury (note 8) | - | - | - | (62,951) | - | (62,951) |
Ordinary shares sold from treasury (note 8) | - | 135,567 | - | 71,992 | - | 207,559 |
Dividends paid during the year (note 5) | - | - | - | - | (41,666) | (41,666) |
Shareholders' funds at 31 March 2018 | 71,086 | 352,375 | 19,094 | 5,741,352 | 3,849 | 6,187,756 |
For the year ended 31 March 2017
Share £'000 | Share premium account† £'000 | Capital redemption reserve £'000 | Capital Reserve†# £'000 | Revenue reserve# £'000 | Shareholders' funds £'000 | |
Shareholders' funds at 1 April 2016 | 71,086 | 116,410 | 19,094 | 3,197,092 | 53,762 | 3,457,444 |
Net return on ordinary activities after taxation | - | - | - | 1,286,103 | 14,136 | 1,300,239 |
Ordinary shares bought back into treasury (note 8) | - | - | - | (19,558) | - | (19,558) |
Ordinary shares issued from treasury (note 8) | - | 100,398 | - | 74,152 | - | 174,550 |
Dividends paid during the year (note 5) | - | - | - | - | (39,084) | (39,084) |
Shareholders' funds at 31 March 2017 | 71,086 | 216,808 | 19,094 | 4,537,789 | 28,814 | 4,873,591 |
The Capital Reserve balance at 31 March 2018 includes investment holding gains of £3,392,070,000 (31 March 2017 - gains of £2,647,822,000).
† The Capital Reserve and Share Premium Account as at 31 March 2016 and 31 March 2017 have been restated - see note 8.
# The Revenue Reserve and the Capital Reserve (to the extent it constitutes realised profits and subject to the removal, intended since the 2014 Annual General Meeting, of a restriction in the Articles of Association) are distributable.
Cash Flow Statement
Year to 31 March 2018 £'000 £'000 | Year to 31 March 2017 £'000 £'000 | ||||
Cash flows from operating activities | |||||
Net return before taxation | 1,211,271 | 1,301,960 | |||
Gains on investments | (1,203,348) | (1,354,245) | |||
Currency (gains)/losses | (21,129) | 42,958 | |||
Finance costs of borrowings | 21,961 | 19,347 | |||
Overseas withholding tax refunded | 316 | 124 | |||
Overseas withholding tax incurred | (2,128) | (1,755) | |||
Changes in debtors and creditors | 4,295 | 443 | |||
Cash from operations | 11,238 | 8,832 | |||
Interest paid | (20,972) | (19,484) | |||
Net cash outflow from operating activities | (9,734) | (10,652) | |||
Cash flows from investing activities | |||||
Acquisitions of investments | (938,385) | (723,418) | |||
Disposals of investments | 800,627 | 686,952 | |||
Net cash outflow from investing activities | (137,758) | (36,466) | |||
Equity dividends paid | (41,666) | (39,084) | |||
Ordinary shares bought back into treasury | (62,884) | (19,574) | |||
Ordinary shares sold from treasury | 212,687 | 169,422 | |||
Bank loans repaid | (132,775) | (37,903) | |||
Bank loans drawn down and loan notes issued | 136,921 | - | |||
Net cash inflow from financing activities | 112,283 | 72,861 | |||
(Decrease)/increase in cash and cash equivalents | (35,209) | 25,743 | |||
Exchange movements | (6,460) | 6,927 | |||
Cash and cash equivalents at start of period | 76,643 | 43,973 | |||
Cash and cash equivalents at end of period* | 34,974 | 76,643 | |||
* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.
Notes to the Financial Statements
1. | These Financial Statements were approved by the Board of Directors on 22 May 2018 in replacement of those originally approved by the Board on 11 May 2018. They have been prepared as at that earlier date, but include revisions to include (see note 14 of the Annual Report and Financial Statements and the Statement of Changes in Equity) that the Company's realised capital profits are not distributable under a restriction in its current Articles of Association; that restriction is in contradiction of the intent of the resolution passed by the Shareholders in 2014. The Financial Statements for the year to 31 March 2018 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and on the basis of the accounting policies set out below which are unchanged from the prior year and have been applied consistently. | |||||||||||||
2. | Income | Year to 31 March 2018 £'000 | Year to 31 March 2017 £'000 | |||||||||||
Income from investments | 30,283 | 27,752 | ||||||||||||
Other income | 380 | 44 | ||||||||||||
30,663 | 27,796 | |||||||||||||
3. | Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting has been further sub-delegated to Baillie Gifford Overseas Limited. The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Investment Management Agreement is terminable on not less than six months' notice. The annual management fee for the year to 31 March 2018 was 0.30% on the first £4 billion of total assets less current liabilities (excluding short term borrowings for investment purposes) and 0.25% on the remaining assets. The investment management fees for the years to 31 March 2018 and 31 March 2017 were charged 25% to revenue and 75% to capital (with effect from 1 April 2018 the investment management fee will be charged 100% to capital - see Chairman's Statement). | |||||||||||||
4. | Net Return per Ordinary Share | Year to 31 March 2018 £'000 | Year to 31 March 2017 £'000 | |||||||||||
| Revenue return on ordinary activities after taxation | 16,701 | 14,136 | ||||||||||||
| Capital return on ordinary activities after taxation | 1,194,522 | 1,286,103 | ||||||||||||
| Total net return | 1,211,223 | 1,300,239 | ||||||||||||
| Weighted average number of ordinary shares in issue | 1,392,180,470 | 1,321,667,362 | ||||||||||||
| Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares (excluding treasury shares) in issue during the year. There are no dilutive or potentially dilutive shares in issue. | ||||||||||||||
5. | Ordinary Dividends | 2018 | 2017 | 2018 £'000 | 2017 £'000 | |||||||||
| Amounts recognised as distributions in the year: | ||||||||||||||
| Previous year's final (paid 3 July 2017) | 1.61p | 1.58p | 22,264 | 20,795 | ||||||||||
| Interim (paid 1 December 2017) | 1.39p | 1.39p | 19,402 | 18,289 | ||||||||||
3.00p | 2.97p | 41,666 | 39,084 | |||||||||||
| Also set out below are the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £16,701,000 (2017 - £14,136,000). | ||||||||||||||
5. | Ordinary Dividends (Ctd) | |||||||||||||
2018 | 2017 | 2018 £'000 | 2017 £'000 | |||||||||||
Dividends paid and payable in respect of the year: | ||||||||||||||
Interim dividend per ordinary share (paid 1 December 2017) | 1.39p | 1.39p | 19,402 | 18,289 | ||||||||||
Proposed final dividend per ordinary share (payable 2 July 2018) | 1.68p | 1.61p | 23,442 | 22,264 | ||||||||||
3.07p | 3.00p | 42,844 | 40,553 | |||||||||||
If approved the final dividend will be paid on 2 July 2018 to all shareholders on the register at the close of business on 8 June 2018. The ex-dividend date is 7 June 2018. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 11 June 2018. | ||||||||||||||
6. | Creditors falling due within one year include drawings under the following borrowing facilities: Borrowing facilities at 31 March 2018 A 1 year US$40 million revolving loan facility has been arranged with The Royal Bank of Scotland plc. A 2 year US$85 million revolving loan facility has been arranged with The Royal Bank of Scotland plc. A 2 year US$200 million revolving loan facility has been arranged with National Australia Bank Limited. At 31 March 2018 drawings were as follows: The Royal Bank of Scotland plc US$40 million (revolving facility) at an interest rate (at 31 March 2018) of 2.255% per annum. US$85 million (revolving facility) at an interest rate (at 31 March 2018) of 2.764% per annum. National Australia Bank Limited US$200 million (revolving facility) at an interest rate (at 31 March 2018) of 2.623% per annum. At 31 March 2017 drawings were as follows: The Royal Bank of Scotland plc US$165 million (revolving facility) at an interest rate (at 31 March 2017) of 1.525% per annum. US$85 million (fixed rate facility) at an interest rate of 1.945% per annum. National Australia Bank Limited US$200 million (revolving facility) at an interest rate (at 31 March 2017) of 1.792% per annum. During the year the US$165 million 1 year revolving loan with The Royal Bank of Scotland plc ('RBS') was repaid and replaced with a US$40 million 1 year revolving loan with RBS. The US$85 million 3 year fixed rate loan with RBS was refinanced with a US$85 million 2 year revolving loan with RBS. Subsequent to the year end, on 11 April 2018, the $40 million 1 year revolving loan with RBS was replaced with a US$ 80 million 3 year revolving loan with RBS. During the year the Company issued the following private placement unsecured loan notes and are included within creditors falling due after more than one year: ¾ £45 million at a coupon of 3.05% maturing on 7 April 2042. ¾ £30 million at a coupon of 3.30% maturing on 6 April 2044. ¾ £30 million at a coupon of 3.12% maturing on 6 April 2047. A further unsecured loan note was agreed for funding on 30 September 2020 to refinance the £20 million 8-14% stepped interest debenture stock maturing on 30 September 2020: ¾ £20 million at a coupon of 3.65% maturing on 6 April 2044. | |||||||||||||
7. | The fair value of borrowings at 31 March 2018 was £535,814,000 (2017 - £566,251,000). Net asset value per share (after deducting borrowings at fair value) was 439.9p (2017 - 354.6p). | |||||||||||||
8. | 2018 Number of Shares | 2017 Number of shares | ||||||||||||
| Share capital: Ordinary shares of 5p each | ||||||||||||||
| Allotted, called up and fully paid | 1,395,363,209 | 1,358,569,485 | ||||||||||||
| Treasury shares | 26,367,671 | 63,161,395 | ||||||||||||
| Total | 1,421,730,880 | 1,421,730,880 | ||||||||||||
The Company's authority permits it to hold shares bought back 'in treasury'. Such treasury shares may be subsequently either sold for cash (at, or at a premium to, net asset value per ordinary share) or cancelled. In the year to 31 March 2018 a total of 14,006,276 (2017 - 7,005,000) ordinary shares with a nominal value of £700,000 (2017 - £350,000) were bought back at a total cost of £62,951,000 (2017 - £19,558,000) and held in treasury. At 31 March 2018 the Company had authority to buy back a further 191,711,909 ordinary shares. Between 1 April and 9 May 2018 no further shares were bought back into treasury. Under the provisions of the Company's Articles the share buy-backs were funded from the capital reserve. In the year to31 March 2018, the Company sold 50,800,000 ordinary shares from treasury at a premium to net asset value, with a nominal value of £2,540,000 raising net proceeds of £207,559,000 (31 March 2017 - 53,050,000 ordinary shares raising net proceeds of £174,550,000). At 31 March 2018 the Company had authority to issue or sell from treasury a further 121,286,948 ordinary shares. Between 1 April and 9 May 2018 the Company sold a further 8,800,000 shares from treasury raising proceeds of £41,768,000. Share Premium Account Where the sale of shares held in treasury results in proceeds in excess of the weighted average purchase price paid by the Company to repurchase the shares, the excess must be transferred to the Company's Share Premium Account. In prior years, when shares held in treasury were subsequently sold, the proceeds of the sale were reflected in full in the Capital Reserve. Consequently, an adjustment has been made between the Capital Reserve and the Share Premium Account and the prior year disclosures have been restated accordingly. The effect of this adjustment as at 1 April 2016 has been to increase Share Premium to £116,410,000 from Nil and decrease Capital Reserve to £3,197,092,000 from £3,313,502,000. For the year ended 31 March 2017, the credit to Share Premium for the year has been increased to £100,398,000 from Nil with the in year movement on Capital Reserve decreased to £74,152,000 from £174,550,000. This has resulted in revised Share Premium and Capital Reserve balances of £216,808,000 and £4,537,789,000 respectively at 31 March 2017 and forms the restated opening position at 1 April 2017. There is no impact on total reserves in the current or prior periods arising from this restatement. | ||||||||||||||
9. | Transaction costs on purchases amounted to £332,000 (2017 - £261,000) and transaction costs on sales amounted to £383,000 (2017 - £312,000). | |||||||||||||
10. | The Annual Report and Financial Statements will be available on the Managers' website www.scottishmortgageit.com‡on or around 29 May 2018. | |||||||||||||
Glossary of Terms Total Assets Total assets less current liabilities, before deduction of all borrowings. Net Asset Value Also described as shareholders' funds. Net Asset Value (NAV) is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue. Net Asset Value (Borrowings at Fair Value) Borrowings are valued at an estimate of their market worth. Net Asset Value (Borrowings at Par Value) Borrowings are valued at their nominal par value. Net Asset Value (Borrowings at Book)/Shareholders' Funds Borrowings are valued at adjusted net issue proceeds. Net Liquid Assets Net liquid assets comprise current assets less current liabilities, excluding borrowings. Discount/Premium As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium. Total Return The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes xd. Ongoing Charges Ratio The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value). The ongoing charges have been calculated on the basis prescribed by the Association of Investment Companies. Gearing At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. Gearing represents borrowings at par less cash and cash equivalents (including any outstanding trade or foreign exchange settlements) expressed as a percentage of shareholders' funds. Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds. Leverage For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other. Active Share Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index. |
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Scottish Mortgage Investment Trust plc published this content on 29 May 2018 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 29 May 2018 12:07:09 UTC
