TIDMSMT
RNS Number : 5837Z
Scottish Mortgage Inv Tst PLC
27 May 2016
Scottish Mortgage Investment Trust PLC
Circular and Annual Financial Report
Scottish Mortgage Investment Trust PLC ('the Company') has today
published a circular (the "Circular") containing notice of the
Annual General Meeting of the Company. In addition to the customary
business conducted at an annual general meeting the notice also
includes a resolution, as outlined in the Chairman's Statement
below, seeking approval to amend the Company's investment policy to
stipulate that the maximum amount which may be invested in
companies not listed on a public market shall not exceed 25 per
cent of the total assets of the Company, measured at the time of
purchase.
Full details of all the resolutions are set out in the Circular.
Copies of the Circular are available for inspection during normal
business hours on any weekday (Saturdays, Sundays and public
holidays excepted) at the offices of Baillie Gifford & Co,
Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.
A copy of the Circular will also be available free of charge via
the National Storage Mechanism at
http://www.morningstar.co.uk/uk/NSM
Expected Timetable
Latest time and date for receipt of 4.30 p.m. on 23 June
forms of direction 2016
Latest time and date for receipt of 4.30 p.m. on 28 June
forms of proxy 2016
Annual General Meeting 4.30 p.m. on 30 June
2016
A copy of the Annual Report and Financial Statements for the
year ended 31 March 2016 has been submitted electronically to the
National Storage Mechanism and will shortly be available for
inspection at http://www.morningstar.co.uk/uk/NSM
The Circular and Annual Report and Financial Statements for the
year ended 31 March 2016 are also available on Scottish Mortgage's
page of the Baillie Gifford website
at:http://www.scottishmortgageit.co.uk
The unedited full text of those parts of the Annual Report and
Financial Statements for the year ended 31 March 2016 which require
to be published by DTR 4.1 is set out on the following pages.
Baillie Gifford & Co Limited
Company Secretaries
27 May 2016
Chairman's statement
I am pleased to say that the Scottish Mortgage portfolio has
continued to produce good long term returns for shareholders. The
past financial year, taken in isolation, has not been as strong as
recent years, either in terms of the NAV performance or our own
share price, but I hope that my earlier statements have been
consistent in warning that not every year can be expected to
produce the stellar results that we have been fortunate to see in
the past.
I would stress once again that such flat periods are to be
expected and are consistent with the approach taken for Scottish
Mortgage. Indeed, I would go so far as to suggest that shareholders
should expect that there will be periods when our investment
approach is out of favour, when there is a disconnect between share
prices and the underlying fundamentals of the companies, and in
such circumstances our share price may well suffer. A pleasing
outcome of the last twelve months was that good individual company
results managed to reverse share price falls, mitigating broader
negative sentiments which might otherwise have had a greater impact
on the portfolio, for example regarding China, healthcare and
technology.
In the context of a five year investment horizon, a single
twelve month period is an insufficient time over which to evaluate
the investment approach taken for Scottish Mortgage. Neither the
Managers nor the Board make any attempt to mitigate the effects of
short term market gyrations. The portfolio is invested in
individual businesses which have the potential to offer
extraordinary growth over the long term.
Over the past twelve months, behind the turbulent movement in
their share prices, a number of the companies in the portfolio have
reported strong operational results, reaping the benefit of prior
years' capital investment. Looking ahead, the level of continued
investment by the companies which Scottish Mortgage holds should
provide a strong base for future growth and returns. This is
particularly pleasing to see against a wider backdrop of slowing
investment and companies which have been returning cash to their
shareholders.
The table below shows the five and ten year total returns in
percentage terms to 31 March 2016 alongside the Association of
Investment Companies (AIC) Global Sector average for
comparison.
Total Return (%) Five Ten years
years
---------------------- ------- ----------
NAV 71.0 156.4
---------------------- ------- ----------
Share price 91.1 202.2
---------------------- ------- ----------
FTSE All-World Index 48.0 92.9
---------------------- ------- ----------
Global Sector Av -
NAV 46.4 87.9
---------------------- ------- ----------
Global Sector Av -
share price 52.8 91.5
---------------------- ------- ----------
Source: AIC/Morningstar
Past performance is not a guide to future performance.
Earnings and Dividends
Scottish Mortgage is clear in its focus as a growth-oriented
investment trust. Our objective is to maximise total returns to
shareholders but, in light of the growth investment mandate, the
likelihood is that the majority of returns in the portfolio will
come through capital appreciation, as distinct from dividend
income, over the longer term.
Our income has fallen again this year, reflecting several
aspects of our investment policy: our holdings in quoted companies
have been moving away from higher income-paying stocks, in favour
of longer term growth investments, and we hold more unquoted
companies, which currently provide little by way of income. This
year's earnings per share were 1.66p, 26% lower than in
2014/15.
The Board has encouraged the Managers to pursue a total return
policy, without regard to the expected split between dividends and
capital gains, believing that this is the best way to deliver value
to shareholders in the long run. While we believe that Scottish
Mortgage is held by investors mainly interested in capital growth,
your Board nonetheless recognises the importance to many of our
shareholders of the income from their holdings in the Company.
After careful consideration and notwithstanding the drop in our
income we are recommending an increased final dividend, providing a
total distribution for the year of 2.96 pence per share, which is
some 1% higher than that paid in 2014/15. To achieve this, we are
once again having to use our reserves to supplement the income we
have earned during the period. Once the final dividend is approved
and paid, the remaining reserves will stand at 2.5 pence per
share.
At this level, we are unlikely to have sufficient income and
revenue reserves to continue to pay a comparable dividend over the
coming years from these two sources alone. The Company is, however,
permitted to make distributions from capital profits. The Board
will be willing to do this in order to continue to grow our
dividend payments so long as it believes that the total returns
being earned by the Company over the long run justify this. The
Baillie Gifford savings scheme, and many other platforms, give
shareholders an opportunity to re-invest dividends in the Company,
and the Board hopes that shareholders who have no immediate need of
income will take advantage of this facility.
Changes to Investment Policy
Currently, whilst Scottish Mortgage's investment policy
specifically lists 'unquoted entities' amongst the permissible
investments, there are no formal parameters set out with regard to
such. Given the rising level of these investments within the
Scottish Mortgage portfolio and the changing nature of the
investment opportunities being seen by the Managers, the Board is
of the view that this is an appropriate moment to provide clarity
for shareholders on the maximum level such investments might reach
over time.
The level of the investments in private or unquoted companies
within the portfolio has been rising over the past few years and
was around 12% at 31 March 2016. The investment case for holding
such companies within the Scottish Mortgage portfolio, as well as
the reasons why the Board believes the Managers have a competitive
advantage in investing in this area, were set out in the Interim
Report to 30 September 2015. In addition, the Managers' Review in
the Annual Report and Financial Statements will contain a more
detailed exploration of this aspect of the portfolio. As always, I
would encourage shareholders to read the Managers' commentary
below.
Whilst Scottish Mortgage has long been able to make investments
in private companies, the increase in the level and number of such
unlisted investments within the portfolio in recent years has been
in direct response to a shift in the balance within the capital
markets between the providers and consumers of capital, rather than
a change in the Managers' investment philosophy and approach. The
Managers remain committed long term investors in strong growth
companies. In order to maintain the breadth of their investment
opportunities, the Managers have sought to utilise the flexibility
of the closed ended capital structure of Scottish Mortgage to
invest in a number of private companies. The Managers believe that
this will provide them with a greater opportunity to continue to
deliver long term returns for shareholders in the future.
Historically, the Board has provided guidance to the Managers on
the appropriate maximum level for such investments within the
portfolio; this guidance has been reviewed and it is now proposed
to adapt it to reflect developments in the corporate funding
markets, whereby emerging companies are able to finance themselves
for much longer before coming to public markets. The Board believes
this shift in the functioning of capital markets is likely to
persist, rendering the flexibility to undertake investments ahead
of public offerings of increasing importance for growth investors
across the world. The Board supports the Managers in their belief
that investments made in the unquoted companies within the
portfolio are entirely consistent with their investment philosophy
and recognises that the Managers are agnostic as to whether a
company chooses to remain private, or list on a public market.
Thus the Company is tabling an Ordinary Resolution at the
Scottish Mortgage Annual General Meeting (AGM) on 30 June to seek
permission from shareholders to amend the Company's Investment
Policy to stipulate that the maximum amount which may be invested
in companies not listed on a public market shall not exceed 25 per
cent of the total assets of the Company, with this test applied by
reference to the current values of unquoted holdings and total
assets at the time of the intended purchase of the next investment
not listed on a public market.
This Resolution also asks shareholders to approve other minor
changes to the Investment Objective and Policy; these are intended
as simplifications and clarifications of the text, not as
substantive changes to the existing policy. The wording of the
current and proposed Investment Objective and Policy is set out on
pages 7 and 8 of the Circular dated 27 May 2016 and sent to
shareholders with the Annual Report and Financial Statements.
The Board believes that all of these changes are in the best
interests of the Company and shareholders as a whole and it is
unanimous in recommending that you vote in favour of all of the
Resolutions, as the Directors intend to do in respect of their own
holdings.
Gearing
The Board of Scottish Mortgage remains committed to the
strategic use of gearing, in the belief that it is in the long term
interests of shareholders to be geared into prospective long run
equity market returns. No attempt is made to deploy short term
tactical gearing shifts, or to express a view on future near term
market moves, as we do not believe this to be one of our
competitive advantages. Accordingly, gearing levels were maintained
throughout the year.
The Board will continue to monitor the appropriate level of
gearing for the long term and is mindful that further rises in the
allocation to private companies within the portfolio may result in
it becoming appropriate to reduce the level of borrowing so as to
keep a broadly consistent level of gearing relative to the listed
equity portion of Shareholders' Funds.
Buybacks and Share Issuance
Despite some dramatic swings in sentiment in the broader equity
markets throughout the past 12 months, Scottish Mortgage continued
to see a reasonably sustained level of demand, with the Company's
shares trading around, or at a small premium to, NAV for much of
the period.
In line with the stated policy of aiding the efficient
functioning of the market in its shares, Scottish Mortgage both
sold shares from Treasury from time to time and, on one occasion,
bought back a small number of shares, when there were supply and
demand imbalances building up in the market. The balance of these
operations was heavily in favour of our issuing shares and we were
able to attract additional net capital of GBP180 million, growing
the Company by some 5%.
It is the Board's intention to continue this liquidity
management policy in normal market conditions, with regard to share
issuance and share buybacks, as it believes this to be in the
interest of all shareholders. The Company has 109 million shares
remaining in Treasury and the Board is once again seeking the
necessary shareholder approvals to continue to undertake such
transactions in the Company's own shares.
Low Cost
Keeping costs low for shareholders continues to be a priority
for the Board and an important competitive advantage for Scottish
Mortgage, given the erosive effect of high costs on compounded
returns to shareholders.
I am therefore delighted to announce that, for the year to 31
March 2016, Scottish Mortgage's 'Ongoing Charges Ratio' has fallen
once again, this year by over 6% to 0.45%, from 0.48% the previous
year. This figure remains one of the lowest reported in the
investment trust sector.
Board and AGM
I would like to take this opportunity to thank Gordon McQueen
for his considerable number of years of service to the Company as a
Director and in particular for his dedication and diligence in his
role as Chairman of the Audit Committee. He has decided that, after
more than fifteen years on the Board of Scottish Mortgage, he will
not stand for re-election at the forthcoming AGM. We wish him all
the very best in his future endeavours.
Gordon will be succeeded in his role as Audit Committee Chairman
by Justin Dowley, who joined the Board last year and brings us many
years of commercial and financial experience. We also welcome to
the Board Professor Patrick Maxwell who was appointed at the start
of the current financial year and, like Justin, stands for election
at the forthcoming AGM. Amongst other distinguished roles, Patrick
holds the position of Regius Professor of Physic at Cambridge
University and it is, I hope, appropriate to point out that
'Physic' is a mediaeval term for what we now know as Medicine;
given your Company's increasing exposure to life science
businesses, we look forward to Patrick's contributions in this and
other fields.
The Annual General Meeting will be held in Edinburgh at the
Merchants' Hall, at 4.30pm on 30 June 2016. The joint Managers of
the Trust, James Anderson and Tom Slater, will make a presentation
to shareholders on the investments and take questions. I do hope
you will be able to attend.
Scottish Mortgage Forum for Individual Investors
In recent years, the Board has been pleased to see considerable
growth in the number of individual shareholders investing directly
through execution-only platforms, but we realise that it can be
difficult for many shareholders to attend the AGM, which is always
held in Edinburgh. In order to provide our broad investor base with
the opportunity to hear directly from those investing their assets,
the Managers are holding a series of shareholder events, starting
with a session in London on 22 June. For further details on this
event please see page 61 of the Annual Report and Financial
Statements or the Scottish Mortgage website
www.scottishmortgageit.com.
Investment Strategy
The Statement of the Managers' core investment beliefs is
included below. The stability of their core investment philosophy
and the consistency with which the Managers have applied this to
the portfolio over many years is one of Scottish Mortgage's key
strengths.
This style of investing requires commitment and a willingness to
look through short term market gyrations. Both the Managers and the
Board believe true investment risk is the permanent loss of
capital. It cannot be encapsulated or even meaningfully estimated
by measuring volatility over the short term relative to a market
average. Where short term share price moves disconnect
significantly from companies' fundamentals, this may provide even
more attractive opportunities for the Managers.
Outlook
Scottish Mortgage's portfolio offers shareholders access to some
of the most exciting growth companies across the world, whether
they be public or private, which are themselves aiming to change
the future of a wide range of industries over the coming years. We
do not try to disguise the fact that our portfolio is a
concentrated one and in many cases invested in businesses (of which
Tesla is a prime example) whose intention is to disrupt the present
incumbents and which has been constructed in accordance with the
convictions of our Managers and with no heed to benchmarks or
indices.
The Board acknowledges that there are some very obvious risks in
the world, be they political in nature as countries negotiate their
future relationships; or economic, as much of the world struggles
with low growth, zero interest rates and a radically different
supply/demand balance for fossil fuels. I will confine my comments
on 'Brexit' to noting that, by the time we meet in Edinburgh at the
end of June, the result will be known.
There are many threats out there and your Board spends a great
deal of its time thinking about risk and trying to understand how
well diversified our portfolio really is. We also have a suspicion
that the real hazard is what one American politician tried to
articulate as the 'unknown unknowns'. Beyond ensuring that we are
properly diversified from a political, geographical and industrial
perspective, we focus on the opportunities which such events may
offer to Scottish Mortgage if and when they occur. We believe
strongly in two things: first, that passive investing is no longer
an adequate approach if investors wish to preserve capital in the
medium term - there are simply too many competitive threats to
established businesses, many of which will not survive. Secondly,
that many of the companies in our portfolio offer the potential for
growth based on structural rather than cyclical changes over the
long term.
Looking to the future, the Board believes that, through the
consistent application of its long term growth investment strategy,
Scottish Mortgage offers its shareholders a real alternative to
other investment vehicles. We are about as far removed from being
an 'index tracker' as it is possible to be and we offer an active
investment management approach at a very competitive cost.
John Scott
Chairman
18 May 2016
Past performance is not a guide to future performance.
Managers' review
It has been a year of sound and fury. In conventional terms it
has signified very little. Markets and our portfolio ended the 12
months little changed in prices after varied and frenetic zigzags
throughout the period. Mr. Market has been more than usually
emotional in his moods but has ended up back much where he was a
year ago.
Equally the shape of the portfolio is familiar. The top 5
holdings are in the same companies for the second year running. We
still own 29 of the top 30 shares from the previous year.
Despite the indecision of markets we believe that the last year
may come to be seen as one of those rare occasions when the world
we are likely to inhabit underwent radical change. Naturally many
of the shifts have long antecedents and may still be but dimly
grasped but this should not be allowed to disguise the reality of
extraordinary change. With such a backdrop it is not surprising
that ructions have been frequent and market progress halting -
there are many companies and investment approaches that are raging
against the dying of the old lights. This process is bound to be
uncomfortable.
Last year we concluded that we needed to concentrate on three
new questions in order both to convey the direction of our thoughts
to shareholders and to assess whether our views and portfolio are
productive and meaningful interpretations of the investment world.
So far we think all three of these questions retain their
relevance.
Will major and accelerating improvements in core technologies
lead to progress in healthcare, energy and transportation analogous
to those in information technology in recent years? Or will secular
stagnation and limited productivity gains dominate?
This seems to us to have become the central debate of our
investing - perhaps even our economic - times. It needs scarcely be
added that the predominant mood in markets, politics and the media
is that we are condemned to an era of pervasive doom and gloom. The
academic version of this is perhaps best captured by Robert
Gordon's 'The Rise and Fall of American Growth' but the market
version has been buttressed by the widespread belief that low
stated GDP growth and minimal inflation are indicators of distress
and justification for negative government bond yields in several
countries. In equity terms this has been matched by an assumption
that this must mean that we are condemned to a low return world and
by a chronic lack of confidence that active investment management
is worthwhile.
We disagree with this vision of futility. Unfortunately the more
the investment world endorses these pessimistic mantras the more
likely they become. If the world's savings are merely tied up in
bonds yielding little or nothing issued by governments attempting
little or nothing or in seeking out those quoted companies that
have the least conceivable need of capital or desire to invest in
uncertain future growth then we can hardly be surprised if
stagnation is the result. The only compensation is that the returns
for those few who aspire to more are likely to rise as competition
falls.
But the simplest reason we do not adhere to the dystopian
version of the investment world is that it has been badly
misguided. Ultimately for equity investors the economic context as
defined by GDP growth, government deficits, inflation and bond
yields is at best of minor and unclear relevance to markets and at
worst a dangerous distraction. What matters is the creation of
wealth by companies. This has already happened in the 21st century
in quite astonishing scale. Whilst cynics, value investors and
commentators can argue all they like as to the precisely 'correct'
valuations afforded to the great (predominately) technology driven
companies of our era even the most dedicated and morose cannot wish
away their existence. That Apple and Alphabet (Google) are the two
largest companies in the world by market capitalization is hardly a
figment of fevered speculation but of levels of profitability that
even conservative valuation principles cannot ignore. For an equity
investor this ought to matter far more than endless speculation
over the odds of a quarter point rise in the Federal Reserve's
monetary settings or the trajectory of UK GDP growth (or otherwise)
in 2016.
What matters still more and next is whether the extraordinary
value creation of the recent past can be replicated or bettered in
the future. We think that it can. Indeed we think that the chances
that this is so in the future have increased and are
increasing.
The evidence that this is so appears to us to be particularly
compelling in the fields of transportation and energy. Until
recently we thought that the mutually reinforcing trio of electric
vehicles, autonomous vehicles and renewable energy would require at
the very least five years (and more probably a decade) to become a
significant economic influence. This did not mean that we regarded
these areas as unfit for investment but that we felt the lengthy
time frames and inevitable uncertainties of technological and
competitive clarity combined with bureaucratic and selfinterested
inertia and obstructionism by incumbents did require more than our
usual patience and willingness to be wrong in return for
significant upside potential. Our position sizing reflected
this.
This has proven unduly conservative. That this is so is
principally to the credit of Tesla. Whilst the underlying trends
have been supportive, the ability to tie the strands together, to
apply the necessary capital, to thereby drive down the cost of
batteries and storage, to manufacture from scratch and to build
electric vehicles of performance and allure has transformed the
probabilities and the time scale involved. Sheer ambition
matters.
The extraordinary success of the Model 3 unveiling seems to us
to be one of those rare moments that have meaning beyond the
normal. In the first two days Tesla received 232,000 orders (with a
$1,000 reservation fee) and a potential $8.1bn in revenue. In
comparison in the first two days of the original iPhone in 2007
Apple sold 270,000 units for $135m. Whether electric vehicles have
come of age or not Tesla itself most certainly has. By 2020 the
impact on the mass market ought to be apparent. By 2030 Musk
believes the entire market will be 100% electric and 100%
autonomous. Given the sustained improvement in performance and
price electric vehicles will, he suggests, be cheaper even if the
price of oil 'goes to zero'. Tesla's Autopilot already seems to
have cut accident rates by 50%. We have bought more Tesla
shares.
Our contentions that healthcare is embarking on a path of
radical reinvention survive - but they have not advanced as much as
those surrounding transportation and energy. It's tempting to say
that this is unsurprising as healthcare is complex, highly
politicized and at the mercy of incumbent interests. But this may
be indulgent: all these apply to energy and transport too and the
economic and personal motivations ought to be at least as strong in
creating pressure for healthcare improvements. Equally it is
unclear that the breakthroughs that are occurring in healthcare are
less significant than in transportation. Our experience over the
last year has been that of listening to expert industry veterans
repeating as in a mantra that they do not like to use the term
'cure' but that this is what they are observing at least at the
conceptual level. At an individual company level it is not even
obvious that the time and capital required are out of kilter with
that expended by Tesla. But at an industry level this translates
into a very high barrier. Immunotherapy oncology is a clear
example. The clinical testing for each specific type of cancer
usually runs into billions of dollars and as genomic science
progresses, the indications become more and more specific. It is
only in rare instances that an appeal to the public directly can
accelerate the process. Illumina's non-invasive Down's syndrome
test has been a clear instance of such a success.
Eventually we do believe that the promise of new technologies in
healthcare will reward patient investors. From genomics to
immunotherapy to gene editing and therapy the methodology, the
proofs of concept and the economics are falling into place. Much of
what is needed now is the building out of scale, data, training and
experience.
Which companies will prove to have the greatest profitability
resilience and longevity?
We wrote last year about the risks that matter to us as
investors. Tom Slater pointed out that we do not believe that risk
can be defined as volatility and that doing so indeed detracts from
the ability to discern true risk in the form of a permanent loss of
capital.
We would now go further than in the past. It seems to us that
there is usually no longevity without volatility. As with states
and individuals, exaggerated stability leads to complacency and an
inability to respond to changed circumstances. From the storied
supposed safety of newspaper franchises (even Warren Buffett
believed in this one for too long) to the downfall of notable food
retailers ('people will always need food') decades of effortless
prosperity proved a recipe for disaster. Barnes & Noble and
Borders proved much more prone to permanent loss of capital than
the volatile and supposedly risky Amazon. Investors redouble the
problem. In the search for low volatility positive returns they
push companies to manage for stability, cash-flow and dividends
thereby frequently undermining the necessary investment. Many then
gear up their portfolios and trading position on the basis that
these stocks are virtually riskless according to the models.
These considerations seem to us to be likely to be even more
relevant in the future. On the one hand the rise of low volatility
and passive investing are clear. They unduly support the apparently
stable and the complacent large. On the other the direct assault on
the businesses of the apparently secure is rapidly growing. If Musk
is right about transportation in 2030 then whither oil companies or
the inventors of the combustion engine? If personalized medicine
and early cures do indeed arrive then what happens to the trillions
in market capitalization enjoyed by the exploiters of questionable
blockbuster drugs and unquestionably unjustified pharmaceutical
price inflation? Valeant's demise is likely to be the lead
indicator of much greater pain.
In contrast we increasingly believe that the business models and
mentalities of the (frequently volatile) companies that make up the
bulk of the Scottish Mortgage portfolio have the capability to
enjoy long as well as profitable lives. We noted last year that
from their very long-term visions to their low capital requirements
and strong networks, there might be reason to doubt the all too
prevalent assumption that the internet platform companies of today
would turn out to be the inflated but near identical brethren of
the 1990's bubble.
The last year has provided substantial practical evidence of
this in ways that have both helped and hindered our results. In
both the US and China, the current evidence is that instead of the
power of the internet incumbents being threatened by the next
innovation, rather their reach and authority has expanded, thereby
squeezing both smaller competitors and the pre-internet behemoths.
For good or ill Tencent, Alibaba and Baidu appear to control
directly or indirectly almost the entire internet ecosystem in
China. At the same time they are starting to encroach on the world
of finance and banking in an apparently remorseless manner. In
America the clearest example may be Facebook. It has used its data,
insights and financial power in a manner that appears to be
extending its reach and potential longevity as each new technology
and business model comes into view. Through analyzing and buying
Instagram, WhatsApp and Oculus Rift Facebook has made itself the
leading presence in emergent areas rather than disappearing as AOL
or My Space did. What we have to acknowledge is that this dominant
position has increasingly come at the cost of the smaller players
in the market. The prospects of Twitter and LinkedIn have
soured.
Corporations, states and citizens. Who wins?
Beneath so many of the headlines of the last year lurks the
increasingly acrimonious battle for the share of the spoils of
economies and societies. It is not possible to assume any longer
that the effortless dominance of capital over labour, or in popular
terms the 1% over the 99%, will continue as it has done since the
late 1970's. From Donald Trump to Yanis Varoufakis many of the most
colourful people and episodes over the last year have explored such
issues. But almost as frequently the relative power of the state
and the corporate sector has been the issue at stake. From iPhone
encryption to Google's tax affairs tensions have grown. Once again
this has not been confined to the west. Facebook has been involved
in both a vitriolic argument about Indian Internet access at low
cost and an elaborate minuet with the Chinese authorities, who in
turn seem increasingly unsure whether to be proud of the
modernizing impact of their technology companies or scared of their
allure to a querulous middle-class.
Whilst these issues continue to rise up the agenda we find it
hard to come to any conclusions as to what the likely impact and
resolutions will be at this stage. This is principally because none
of the parties to these messy struggles seems to be very convincing
in conveying its case. Noise levels are high. Our own sole
conviction is that we should use our limited influence to persuade
the companies in which we invest that they are better thinking of
their long-run credibility than their short-run profit
maximization. We are quite prepared to be outspoken about these
issues.
Concluding Observations
We find ourselves in a very strange environment. The investment
world appears to be becoming ever more self-referential, ever more
short-term, ever more obsessed by positioning and macroeconomic
soothsaying. Neither building great companies nor sensibly
allocating precious capital resources appears to be of much
interest.
As we have discussed the market mood is full of pessimism and
negativity. We need to reiterate in closing that to us this is
misguided. The opportunities for fundamental, long-term growth
investment do not turn on stated GDP growth or on central banks or
overall corporate earnings. They are instead dependent on the
skills, circumstances and opportunities available to build great
businesses at scale with high and persistent returns. The flow of
such companies, quoted and unquoted and frequently at quite
enormous scale, seems to us to have increased and be increasing.
The territory is fertile.
James Anderson
Investing in private companies for Scottish Mortgage
Scottish Mortgage's portfolio of unlisted companies has been
growing and we believe there are some tremendous opportunities to
deploy capital in this area. Our reputation as a long-term
supportive shareholder helps us to get access to appealing growth
businesses and our scale enables us to invest in them at a cost
that few can match.
Why are a growing number of our investment ideas coming from
outside of the listed sphere? Our philosophy and process are
unchanged and we are not becoming early stage venture capitalists.
What has changed is that the capital cost of building a company has
collapsed. Ten years ago, businesses had to buy servers,
infrastructure and software. Today they use free development tools
and pay a fee to Amazon Web Services to host their infrastructure.
Ten years ago, their addressable market was the three hundred
million people that could access a website using a desktop
computer, most of whom were in the United States. Today there are
more than three billion people across the globe accessing the
Internet with a mobile device, which means breakthrough businesses
can achieve huge scale whilst raising only modest amounts of
capital.
Without pressure from dominant early funding partners wanting to
recoup their capital, the attitude of the entrepreneurs involved
has changed. They are staying private longer, avoiding the burdens
of the public markets and being selective about their investors.
They are listing at a time and on terms to suit their businesses.
This provides a challenge for public market investors if they wish
to retain their opportunity set. This was starkly illustrated by
the listing of Alibaba in September 2014 at a market capitalisation
of over $150bn. A great deal of value creation had taken place
before it became a listed company.
Retaining private status allows companies to make decisions in a
different way from those beholden to stock markets. It allows
founders to think long-term and invest in projects without
immediate payoffs. Such an approach is often difficult for listed
companies. The average holding period across major stock markets
has declined significantly and as a result, the focus on quarterly
earnings statements has increased, as has the demand for
predictable and increasing short-term profitability. This forces
decisions to be taken in a different way, which we believe is
increasingly detrimental to the chances of long-term outsized
returns. As a result, unlisted companies may have a structure that
confers an advantage over our investment time horizon.
Scottish Mortgage has two important assets when seeking unlisted
investments. The first is our reputation as a long-term and
supportive custodian. We've held Amazon shares in size for over ten
years and that kind of behaviour stands out amidst short-termism
elsewhere. This matters because the management teams involved are
careful about whom they will allow onto their shareholder register.
Just because companies don't want to go public, it doesn't mean
they don't have financing requirements and, for rapidly scaling
companies, this can require the resources of public market
investors. Our second asset is our structure.
Being closed-ended means that we can own these investments on a
long-term time horizon. We do not have the liquidity constraints of
open-ended funds or the limited life constraints of most venture
capital structures.
As outlined elsewhere in this report, we value our unlisted
holdings using the International Private Equity and Venture Capital
guidelines. An important element of this accounting approach is
that we regularly estimate the price at which a company would trade
if there were a market in its shares. We are concerned that this
pushes us to become the conduit through which exaggerated stock
market volatility is transmitted to unlisted companies. We do not
wish to make it harder for the management of investee companies to
take long-term decisions, thereby eroding one of the key advantages
that originally attracted us to them. Within the context of the
guidelines we therefore aim to have a robust and thoughtful
valuation process that emphasises the evolving performance of these
businesses and does not simply reflect stock market noise.
We are in the fortunate position to get the opportunity to
invest in unlisted companies with great potential and remarkable
management teams. We need to continue to earn a reputation as
desirable shareholders to ensure that we remain able to invest in
the best growth companies available globally. We are excited about
the prospects for long-term returns and committed to keeping the
costs of investing low.
Tom Slater
The Managers' core investment beliefs
Whilst fund managers claim to spend much of their careers
assessing the competitive advantage of companies they are
notoriously reluctant to perform any such analysis on themselves.
The tendency is to cite recent performance as evidence of skill
despite the luck, randomness and mean-reverting characteristics of
most such data. If this does not suffice then attention turns to a
discussion of the high educational qualifications, hard work and
exotic remuneration packages that the fund manager enjoys.
Sometimes the procedural details of the investment process are
outlined with heavy emphasis on risk controls. Little attention is
given to either the distinctiveness of the approach or the
strategic advantages the manager might enjoy in order to make
imitation improbable. We think we should try to do better than
this.
3/4 We are long term in our investment decisions. It is only
over periods of at least five years that the competitive advantages
and managerial excellence of companies becomes apparent. It is
these characteristics that we want to identify and support. We own
companies rather than rent shares. We do not regard ourselves as
experts in forecasting the oscillations of economies or the mood
swings of markets. Indeed we think that it is hard to excel in such
areas as this is where so many market participants focus and where
so little of the value of companies lies. Equally Baillie Gifford
is more likely to possess competitive advantages for the good of
shareholders when it adopts a long term perspective. We are a 100
year old Scottish partnership. We think about our own business over
decades not quarters. Such stability may not be exciting but it
does encourage patience in this most impatient of industries. We
only judge our investment performance over five year plus time
horizons. In truth it takes at least a decade to provide adequate
evidence of investment skill.
3/4 The investment management industry is ill-equipped to deal
with the behavioural and emotional challenges inherent in today's
capital markets. Our time frame and ownership structure help us to
fight these dangers. We are besieged by news, data and opinion. The
bulk of this information is of little significance but it implores
you to rapid and usually futile action. This can be particularly
damaging at times of stress. Academic research argues that most
individuals dislike financial losses twice as much as they take
pleasure in gains. We fear that for fund managers this relationship
is close to tenfold. Internal and external pressures make the
avoidance of loss dominant. This is damaging in a portfolio
context. We need to be willing to accept loss if there is an equal
or greater chance of (almost) unlimited gain.
3/4 We are very dubious about the value of routine information.
We have little confidence in quarterly earnings and none in the
views of investment banks. We try to screen out rather than
incorporate their noise. In contrast we think that the world offers
joyous opportunities to hear views, perspectives and visions that
are barely noticed by the markets. There is more in the investment
world than the Financial Times or Wall Street Journal describe.
3/4 We are global in stock selection, asset allocation and
attribution. We are active not passive - or far worse - index plus
in stock selection. Holding sizes reflect the potential upside and
its probability (or otherwise) rather than the combination of the
market capitalisation and geographical location of the company and
its headquarters. We do not have sufficient confidence in our
top-down asset allocation skills to wish to override stock
selection. We do not have enough confidence in our market timing
abilities to wish to add or remove gearing at frequent intervals.
We do, however, have strong conviction that our portfolio should be
comparatively concentrated, and that it is of little use to
shareholders to tinker around the edges of indices. We think this
produces better investment results and it certainly makes us more
committed shareholders in companies. We suspect that selecting
stocks on the basis of the past (their current market
capitalisation) is a policy designed to protect the security of
tenure of asset managers rather than to build the wealth of
shareholders. Companies that are large and established tend to be
internally complacent and inflexible. They are often vulnerable to
assault by more ambitious and vibrant newcomers.
3/4 We are Growth stock investors. Such has been the preference
for Value and the search to arbitrage away minor rating
differentials that investors find it very hard to acknowledge the
extraordinary growth rates and returns that can be found today. The
growth that we are particularly interested in is of an explosive
nature and often requires minimal fixed assets or indeed capital.
We think of it as 'Growth at Unreasonable Prices' rather than the
traditional discipline of 'Growth at a Reasonable Price'. We need
to be willing to pay high multiples of immediate earnings because
the scale of future potential and returns can be so dramatic. On
the stocks that flourish the valuation will have turned out to be
derisorily low. On the others we will lose money.
3/4 We believe that it is our first duty to shareholders to
limit fees. Both the investment management fee (0.30%) and ongoing
charges ratio (0.45% as at 31 March 2016) are low by comparative
standards but at least adequate in absolute terms. We think that
the malign impact of high fees is frequently underestimated. The
difference between an ongoing charges ratio of 0.45% and one of
1.5% may not appear great but if the perspective is altered to
think of costs as a percentage of expected annual returns then the
contrast becomes obvious. If annual returns average 10% then this
is the difference between removing approximately 5% or 15% of your
returns each year. Nor do we believe in a performance fee. Usually
it undermines investment performance. It increases pressure and
narrows perspective.
Thirty largest holdings and twelve month performance at 31 March
2016
Fair
Fair
value Value
Contribution
31 March % of Absolute to absolute 31 March
2016 total Performance performance(#) 2015
Name Business GBP'000 assets % % GBP'000
======================= ======================= ========== ========= ============= ================= ===========
Amazon.com Online retailer 330,117 8.3 64.4 5.7 305,142
Illumina Biotechology equipment 291,722 7.4 (9.8) (1.2) 299,082
International clothing
Inditex retailer 231,567 5.9 10.1 0.7 195,943
Baidu Online search engine 228,621 5.8 (5.5) (0.2) 254,498
Tencent Holdings Internet services 190,964 4.8 11.1 0.7 257,783
Tesla Motors Electric cars 185,552 4.7 26.4 0.5 67,764
Social networking
Facebook site 179,697 4.6 43.3 1.7 125,367
Alibaba Group Online retailer 164,129 4.1 (1.9) 0.0 151,530
Alphabet (formerly
Google) Online search engine 155,518 3.9 40.8 1.4 110,504
Atlas Copco Engineering 87,657 2.2 (15.7) (0.4) 102,647
Luxury goods producer
Kering and retailer 86,183 2.2 (2.9) 0.0 91,043
BASF Chemicals 78,624 2.0 (19.4) (0.5) 100,452
Prudential International insurance 76,256 1.9 (19.3) (0.5) 98,001
Kinnevik Investment company 68,867 1.7 (9.9) (0.2) 78,408
International clothing
Zalando retailer 68,231 1.7 35.9 0.5 50,308
Intuitive Surgical Surgical robots 67,644 1.7 22.9 0.4 55,041
Apple Computer technology 58,850 1.5 (8.1) (0.1) 56,263
Rolls-Royce Group Aerospace equipment 56,982 1.4 (26.8) (0.6) 48,957
Novozymes Enzyme manufacturer 54,045 1.4 2.8 0.1 53,251
Fiat Chrysler
Automobiles Automobiles 54,015 1.4 (22.5) (0.7) 149,890
Internet startup
Rocket Internet factory 44,793 1.1 (41.6) (0.7) 60,655
ASML Holding Lithography 42,067 1.1 3.9 0.1 40,744
Housing Development
Finance Corporation Mortgage bank 42,009 1.1 (17.0) (0.3) 51,219
Data integration
Palantir Technologies software and
Inc(u) service provider 41,479 1.1 23.2 0.3 33,682
Reckitt Benckiser Consumer goods company 40,319 1.0 18.6 0.2 34,742
Semiconductor and
software design
ARM Holding company 40,108 1.0 (7.6) (0.1) 43,707
Subscription service
for TV shows
Netflix and movies 36,264 0.9 31.1* 0.1* -
Ctrip.com Travel agent 35,752 0.9 56.0 0.4 22,939
Online directory
service for local
Thumbtack Inc(u) businesses 34,787 0.9 6.4* 0.1* -
Digital advertising
You & Mr Jones(u) agency 34,787 0.9 6.1* 0.1* -
======================= ======================= ========== ========= ============= ================= ===========
3,107,606 78.6
=============================================== ========== ========= ============= ================= ===========
Absolute performance (in sterling terms) has been calculated on
a total return basis over the period 1 April 2015 to 31 March
2016.
(#) 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 in the period.
(*) Figures relate to part-period returns where the equity has
been purchased during the period.
(u) Denotes unlisted investment
Source: Baillie Gifford/StatPro.
Past performance is not a guide to future performance.
Distribution of assets
At At
31 March 31 March
2016 2015
% %
==================================== ========== ==========
North America 46.4 38.7
South America 0.4 1.2
Europe 33.7 37.7
United Kingdom 8.6 9.3
Eurozone 18.6 20.6
Developed Europe (non euro) 5.8 6.2
Rest of Europe 0.7 1.6
Africa and Middle East 0.4 -
Asia 19.1 22.4
China 16.9 19.6
India 1.7 2.1
Japan 0.2 0.3
Rest of Asia 0.3 0.4
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:
- the movement in net asset value per ordinary share (after
deducting borrowings at fair value);
- the movement in the share price;
- the movement of net asset value and share price performance
compared to the Benchmark;
- the premium/discount (after deducting borrowings at fair
value);
- ongoing charges ratio;
- revenue return; and
- dividend per share.
The one, five and ten year records of the KPIs are shown on
pages 5, 6 and 21 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 on pages 2 to 4 and the Managers' Report on pages 10 to
13 of the Annual Report and Financial Statements.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors'
Remuneration Report on Page 31 of 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
2016 2016 2016 2015 2015 2015
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========= ========= ========= =========
Investment management
fee 2,881 8,642 11,523 2,562 7,685 10,247
======================= ========= ========= ========= ========= ========= =========
Details of the Investment Management Agreement are disclosed on
page 24 of the Annual Report and Financial Statements. Baillie
Gifford & Co Limited's annual management fee is 0.30% of total
assets less current liabilities (excluding short term borrowings
for investment purposes). The management fee is levied on all
assets, including holdings in. The management fee is 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.
Principal Risks
As explained on page 27 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 50 to 55 of the Annual
Report and Financial Statements. To mitigate this risk, 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
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.
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.
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 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 breaches of cyber security. To mitigate this
risk, the Board receives six monthly reports from the Depositary
confirming safe custody of the Company's assets. 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 accounting
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.
Premium/Discount Volatility - the premium/discount at which the
Company's shares trade can change. To mitigate this risk, the Board
monitors the level of premium/discount and the Company has
authority to issue new shares and buy back its existing shares when
deemed by the Board to be in the best interests of the Company and
its shareholders.
Leverage Risk - the Company may borrow money for investment
purposes. If the investments fall in value, any borrowings will
magnify the extent 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. The majority of the Company's
investments are in quoted securities that are readily realisable.
Further information on leverage can be found in note 20 on page 55
of the Annual Report and Financial Statements and the Glossary of
Terms on page 61 of the Annual Report and Financial Statements.
Political Risk - the Board is aware that the forthcoming UK
Referendum on its membership of the European Union introduces
elements of political uncertainty which may have practical
consequences for the Company and its Managers. Developments are
being closely monitored and considered by the Board and the
Managers.
Viability Statement
In accordance with provision C2.2 of the UK Corporate Governance
Code (published by the Financial Reporting Council in September
2014) 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 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 on pages 8 and 9 of
the Annual Report and Financial Statements) 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 and short term
bank loans, the revenue projections, the readily realisable nature
of the portfolio which could be sold to provide funding if
necessary and its stable closed end structure. 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 Directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the Financial Statements.
Financial Instruments
As an Investment Trust, the Company invests in listed and
unlisted equities 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 45 to 46 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.
Loans
Cash and and debentures Other debtors
As at 31 March Investments cash equivalents GBP'000 and creditors* Net exposure
2016 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== =================== ================ ================= ===============
US dollar 2,389,758 11,196 (347,874) (656) 2,052,424
Euro 745,466 - - (7,018) 738,448
Hong Kong dollar 190,964 - - - 190,964
Swedish krona 156,525 - - - 156,525
Brazilian real 17,241 - - 408 17,649
Danish krone 54,045 - - 61 54,106
Polish zloty 5,270 - - - 5,270
Japanese yen 7,826 - - 68 7,894
Indonesian rupiah 12,933 - - - 12,933
Indian rupee 42,009 - - 114 42,123
Total exposure
to
currency risk 3,622,037 11,196 (347,874) (7,023) 3,278,336
Sterling 300,087 32,777 (150,080) (3,676) 179,108
=================== ============== =================== ================ ================= ===============
3,922,124 43,973 (497,954) (10,699) 3,457,444
=================== ============== =================== ================ ================= ===============
* Includes net non-monetary assets of GBP34,000.
Loans
Cash and and debentures Other debtors
As at 31 March Investments cash equivalents GBP'000 and creditors* Net exposure
2015 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== =================== ================ ================= ===============
US dollar 2,028,021 18,442 (336,814) (1,073) 1,708,576
Euro 787,193 - - 636 787,829
Hong Kong dollar 257,783 - - - 257,783
Swedish krona 181,055 - - - 181,055
Brazilian real 38,110 - - 1,111 39,221
Danish krone 53,251 - - 61 53,312
Polish zloty 7,909 - - - 7,909
Japanese yen 10,362 38 - 61 10,461
Turkish lira 12,544 - - - 12,544
Indonesian rupiah 14,940 - - - 14,940
Indian rupee 51,219 - - 78 51,297
=================== ============== =================== ================ ================= ===============
Total exposure
to
currency risk 3,442,387 18,480 (336,814) 874 3,124,927
Sterling 304,901 58,063 (150,407) (4,266) 208,291
=================== ============== =================== ================ ================= ===============
3,747,288 76,543 (487,221) (3,392) 3,333,218
=================== ============== =================== ================ ================= ===============
* Includes net non-monetary assets of GBP12,000.
Currency Risk Sensitivity
At 31 March 2016, 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 2015.
2016 2015
GBP'000 GBP'000
=================== ========= =========
US dollar 102,621 85,429
Euro 36,922 39,391
Hong Kong dollar 9,548 12,889
Swedish krona 7,826 9,053
Indian rupee 2,106 2,565
Danish krone 2,705 2,666
Brazilian real 883 1,961
Polish zloty 264 395
Japanese yen 395 523
Turkish lira - 627
Indonesian rupiah 647 747
163,917 156,246
=================== ========= =========
Interest Rate Risk
Interest rate movements may affect directly:
3/4 the fair value of the investments in fixed interest rate securities;
3/4 the level of income receivable on cash deposits;
3/4 the fair value of the Company's fixed-rate borrowings; and
3/4 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
2016 2015
Weighted Weighted Weighted Weighted
average average Fair average average
Fair interest period value interest period
value rate until GBP'000 rate until maturity*
GBP'000 maturity*
=========================== ========== ========== =========== ========== ========== =================
Floating rate:
Brazilian bonds (index
linked) 17,241 11.0% 29 years 38,110 10.9% 30 years
=========================== ========== ========== =========== ========== ========== =================
Cash and short-term
deposits:
Other overseas currencies 11,196 - n/a 18,480 - n/a
Sterling 32,777 0.3% n/a 58,063 0.3% 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:
2016 2015
GBP'000 GBP'000
==================================== ========= =============================
Floating
rate - US$ denominated 114,799 111,149
Fixed
rate - Sterling denominated 150,079 150,407
- US$ denominated 233,076 225,665
=================================== ========= =============================
497,954 487,221
==================================== ========= =============================
Maturity Profile
The maturity profile of the Company's financial liabilities at
31 March was:
2016 2015
Between Between
Within 1 and More than Within 1 and More than
1 year 5 years 5 years 1 year 5 years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================== ========= ========= ========== ========= ========= ==========
Repayment of loans
and debentures 288,736 79,139 125,675* 111,149 225,665 145,675*
Accumulated interest
on loans and debentures
to maturity date 18,094 55,125 44,209 17,795 58,414 59,595
========================== ========= ========= ========== ========= ========= ==========
306,830 134,264 169,884 128,944 284,079 205,270
-------------------------- ========= ========= ========== ========= ========= ==========
* Includes GBP675,000 irredeemable debenture stock.
Interest Rate Risk Sensitivity
An increase of 100 basis points in bond yields as at 31 March
2016 would have decreased total net assets and total return on
ordinary activities by GBP2,177,000 (2015 - GBP5,481,000) and would
have increased the net asset value per share (with borrowings at
fair value) by 0.84p (2015 - increased by 0.94p). 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 18 to 20 in the Annual Report and Financial Statements. In
addition, a geographical analysis of the portfolio, an analysis of
the investment portfolio by broad industrial or commercial sector
and a list of the 30 largest investments by their aggregate market
value are contained in the Strategic Report.
99.5% (2015 - 106.8%) of the Company's net assets are invested
in quoted equities. A 3% increase in quoted companies equity
valuations at 31 March 2016 would have increased total assets and
total return on ordinary activities by GBP103,177,000 (2015 -
GBP106,766,000). A decrease of 3% would have had an equal but
opposite effect.
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:
3/4 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;
3/4 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;
3/4 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. The Depositary has
delegated the custody function to Bank of New York Mellon SA/NV
London Branch. 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;
3/4 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;
3/4 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
3/4 Cash is held only at banks that are regularly reviewed by the Managers.
Credit Risk Exposure
The maximum exposure to direct credit risk at 31 March was:
2016 2015
GBP'000 GBP'000
============================== ========= =========
Fixed interest investments 17,241 38,110
Cash and short term deposits 43,973 76,543
Debtors and prepayments 4,051 3,693
============================== ========= =========
65,265 118,346
============================== ========= =========
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 FRS102. 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:
2016 2015
Par/nominal Book Fair Par/nominal Book Fair
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================= ============ ========= ========= ============ ========= =========
8-14% stepped interest
debenture stock 2020 20,000 21,134 29,540 20,000 21,315 30,702
6.875% debenture stock
2023 75,000 74,747 89,044 75,000 74,710 92,948
6-12% stepped interest
debenture stock 2026 50,000 53,523 85,927 50,000 53,707 89,725
4.5% irredeemable debenture
stock 675 675 649 675 675 651
============================= ============ --------- ========= ============ ========= =========
Total debentures 145,675 150,079 205,160 145,675 150,407 214,026
============================= ============ ========= ========= ============ ========= =========
Fixed rate loans 233,076 233,687 225,665 227,178
============================= ============ ========= ========= ============ ========= =========
Floating rate loans 114,799 114,799 111,149 111,149
============================= ============ ========= --------- ============ ========= =========
Total borrowings 497,954 553,646 487,221 552,353
============================= ============ ========= ========= ============ ========= =========
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 263.8p to
259.2p. Taking the market price of the ordinary shares at 31 March
2016 of 262.5p, this would have given a premium to net asset value
of 1.3% as against a discount of 0.5% on a debt at par basis. At 31
March 2015 the effect would have been to reduce the net asset value
from 268.0p to 262.4p. Taking the market price of the ordinary
shares at 31 March 2015 of 267.2p, this would have given a premium
to net asset value of 1.8% as against a discount of 0.3% on a debt
at par basis.
Capital Management
The capital of the Company is its share capital and reserves as
set out in notes 13 and 14 in the Annual Report and Financial
Statements together with its borrowings (see notes 11 and 12 in the
Annual Report and Financial Statements). The objective of the
Company is to maximise total return, whilst also generating
dividend growth, from a focused and actively managed global
portfolio. The Company's investment policy is set out on page 7 of
the Annual Report and Financial Statements (the Board are proposing
changes to the investment objective and policy - see the Circular
which is being sent to Shareholders with this Annual Report). 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 on pages 8 and 9 and on pages 27 and 28 of the Annual Report
and Financial Statements. The Company has the authority to issue
and buy back its shares (see page 25 of the Annual Report and
Financial Statements) and changes to the share capital during the
year are set out in notes 13 and 14. The Company does not have any
externally imposed capital requirements other than the covenants on
its loans which are detailed in notes 11 and 12 of the Annual
Report and Financial Statements.
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. 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) and the numerical
remuneration disclosures in respect of the AIFM's first relevant
reporting period (year ended 31 March 2016) are available at
www.bailliegifford.com.
The Company's maximum and actual leverage levels (see Glossary
of Terms on page 61 of the Annual Report and Financial Statements)
at 31 March 2016 are shown below:
Leverage
Gross Commitment
method method
=============== ======== ===========
Maximum limit 2.50:1 2.00:1
Actual 1.14:1 1.5:1
================= ======== ===========
Investments
As at Level 1 Level 2 Level 3 Total
31 March 2016 GBP'000 GBP'000 GBP'000 GBP'000
======================== ========== ========= ========= ==========
Listed equities/funds 3,415,656 23,580 - 3,439,236
Listed debt securities - 17,241 - 17,241
Unlisted equities - - 465,647 465,647
======================== ========== ========= ========= ==========
Total financial asset
investments 3,415,656 40,821 465,647 3,922,124
======================== ========== ========= ========= ==========
As at Level 1 Level 2 Level 3 Total
31 March 2015 GBP'000 GBP'000 GBP'000 GBP'000
======================== ========== ========= ========= ==========
Listed equities/funds 3,535,168 23,686 - 3,558,854
Listed debt securities - 38,110 - 38,110
Unlisted equities - - 150,324 150,324
======================== ========== ========= ========= ==========
Total financial asset
investments 3,535,168 61,796 150,324 3,747,288
======================== ========== ========= ========= ==========
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 - investments with quoted prices in an active
market;
Level 2 - investments whose fair value is based directly on
observable current market prices or is
indirectly being derived from market prices; and
Level 3 - investments whose fair value is determined using a
valuation technique based on assumptions
that are not supported by observable current market prices or
are not based on observable
market data.
The valuation techniques used by the Company are explained in
the accounting policies on page 40 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,
the Directors' Remuneration Report and the Financial Statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial
Statements for each financial year. Under that law they have
elected to prepare the Financial Statements in accordance with
applicable law and UK Accounting Standards (UK Generally Accepted
Accounting Practice). Under company law the Directors must not
approve the Financial Statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
In preparing these Financial Statements, the Directors are required
to:
3/4 select suitable accounting policies and then apply them consistently;
3/4 make judgements and accounting estimates that are reasonable and prudent;
3/4 state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
3/4 prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the Financial Statements and the Directors' Remuneration Report
comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
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 have delegated responsibility to the Managers for
the maintenance and integrity of the Company's pages on the
Managers' website. Legislation in the United Kingdom governing the
preparation and dissemination of Financial Statements may differ
from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed
within the Directors and Managers section, confirms that, to the
best of their knowledge:
3/4 the Financial Statements, which have been prepared in
accordance with applicable law and UK Accounting Standards (UK
Generally Accepted Accounting Practice), give a true and fair view
of the assets, liabilities, financial position and net return of
the Company;
3/4 the Annual Report and Financial Statements 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; and
3/4 the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces.
By order of the Board
John Scott
18 May 2016
Income statement
For the year ended For the year ended
31 March 2016 31 March 2015
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ============= ============== ==================== ============= ============== ==============
(Losses)/gains on
investments - (6,647) (6,647) - 747,859 747,859
Currency losses - (7,212) (7,212) - (32,287) (32,287)
Income (note 2) 32,910 - 32,910 38,964 - 38,964
Investment
management fee (2,881) (8,642) (11,523) (2,562) (7,685) (10,247)
Other
administrative
expenses (3,176) - (3,176) (3,315) - (3,315)
================== ============= ============== ==================== ============= ============== ==============
Net return before
finance costs and
taxation 26,853 (22,501) 4,352 33,087 707,887 740,974
Finance costs of
borrowings (4,568) (13,704) (18,272) (4,452) (13,357) (17,809)
================== ============= ============== ==================== ============= ============== ==============
Net return on
ordinary
activities before
taxation 22,285 (36,205) (13,920) 28,635 694,530 723,165
Tax on ordinary
activities (857) - (857) (1,095) - (1,095)
================== ============= ============== ==================== ============= ============== ==============
Net return on
ordinary
activities after
taxation 21,428 (36,205) (14,777) 27,540 694,530 722,070
================== ============= ============== ==================== ============= ============== ==============
Net return per
ordinary share
(note 4) 1.66p (2.81p) (1.15p) 2.24p 56.50p 58.74p
================== ============= ============== ==================== ============= ============== ==============
The total column of this statement is the profit and loss
account of the Company.
All revenue and capital items in this statement derive from
continuing operations.
Balance sheet
At 31 March 2016 At 31 March 2015
GBP'000 GBP'000
====================================================== ================ ================
Fixed assets
Investments held at fair value through profit or loss 3,922,124 3,747,288
Current assets
Debtors 4,051 3,693
Cash and cash equivalents 43,973 76,543
====================================================== ================ ================
48,024 80,236
====================================================== ================ ================
Creditors
Amounts falling due within one year (303,486) (118,234)
====================================================== ================ ================
Net current liabilities (255,462) (37,998)
------------------------------------------------------ ---------------- ----------------
Total assets less current liabilities 3,666,662 3,709,290
Creditors
Amounts falling due after more than one year (209,218) (376,072)
====================================================== ================ ================
3,457,444 3,333,218
====================================================== ================ ================
Capital and reserves
Called up share capital 71,086 71,086
Capital redemption reserve 19,094 19,094
Capital reserve 3,313,502 3,173,033
Revenue reserve 53,762 70,005
====================================================== ================ ================
Shareholders' funds 3,457,444 3,333,218
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at fair value) (note 7) 259.2p 262.4p
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at par) 263.8p 268.0p
====================================================== ================ ================
Ordinary shares in issue (note 8) 1,312,524,485 1,245,674,485
====================================================== ================ ================
Statement of changes in equity
For the year ended 31 March 2016
Share Capital Shareholders'
capital Capital redemption reserve reserve* Revenue reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 1 April 2015 71,086 19,094 3,173,033 70,005 3,333,218
Net return on ordinary activities
after taxation - - (36,205) 21,428 (14,777)
Ordinary shares bought back (note 8) - - (3,199) - (3,199)
Ordinary shares issued (note 8) - - 179,873 - 179,873
Dividends paid during the year (note
5) - - - (37,671) (37,671)
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 31 March 2016 71,086 19,094 3,313,502 53,762 3,457,444
===================================== ======== ========================== ========= =============== =============
For the year ended 31 March 2015
Share Capital Shareholders'
capital Capital redemption reserve reserve* Revenue reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 1 April 2014 71,086 19,094 2,429,523 78,010 2,597,713
Net return on ordinary activities
after taxation - - 694,530 27,540 722,070
Ordinary shares bought back (note 8) - - (13,730) - (13,730)
Ordinary shares issued (note 8) - - 62,710 - 62,710
Dividends paid during the year (note
5) - - - (35,545) (35,545)
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 31 March 2015 71,086 19,094 3,173,033 70,005 3,333,218
===================================== ======== ========================== ========= =============== =============
* The Capital Reserve balance at 31 March 2016 includes
investment holding gains of GBP1,533,836,000 (31 March 2015 - gains
of GBP1,776,507,000).
Cash flow statement
Year to Year to
31 March 2016 31 March 2015
GBP'000 GBP'000 GBP'000 GBP'000
==================================================== ==================== ===================
Cash flows from operating activities
==================================================== ========= ========= ========= ========
Net return on ordinary activities before taxation (13,920) 723,165
Net losses/(gains) on investments 6,647 (747,859)
Currency losses 7,212 32,287
Finance costs of borrowings 18,272 17,809
Overseas withholding tax refunded 935 1,377
Overseas withholding tax incurred (1,792) (2,469)
Changes in debtors and creditors (216) 2,647
==================================================== ========= ========= ========= ========
Cash from operations 17,138 26,957
Interest paid (18,422) (18,104)
==================================================== ========= ========= ========= ========
Net cash (outflow)/inflow from operating activities (1,284) 8,853
==================================================== ========= ========= ========= ========
Cash flows from investing activities
Acquisitions of investments (619,851) (668,702)
Disposals of investments 445,699 650,501
Realised currency gain 3,848 2,496
==================================================== ========= ========= ========= ========
Net cash outflow from investing activities (170,304) (15,705)
==================================================== ========= ========= ========= ========
Equity dividends paid (37,671) (35,545)
Ordinary shares bought back (3,184) (29,337)
Ordinary shares sold from treasury 179,873 62,710
Bank loans repaid (111,963) (234,746)
Bank loans drawn down 111,963 298,608
==================================================== ========= ========= ========= ========
Net cash inflow from financing activities 139,018 61,690
(Decrease)/increase in cash and cash equivalents (32,570) 54,838
Cash and cash equivalents at start of period 76,543 21,705
==================================================== ========= ========= ========= ========
Cash and cash equivalents at end of period* 43,973 76,543
==================================================== ========= ========= ========= ========
* Cash and cash equivalents represent cash at bank and short
term money market deposits repayable on demand.
Notes to the financial statements
1. The Financial Statements for the year to 31 March 2016 have been prepared in accordance with
The Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102')
which the Company must adopt for its financial year ending 31 March 2016. Following the application
of the new reporting standard and the AIC's issued Statement of Recommended Practice, there
has been no impact on the Company's Income Statement, Balance Sheet or Statement of Changes
in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for the
period previously reported. The Cash Flow Statement reflects the presentational requirements
of FRS 102, which are different to FRS 1. In addition, the Cash Flow Statement reconciles
to cash and cash equivalents whereas under previous UK GAAP the Cash Flow Statement reconciled
to cash.
===========================================================================================================
2. Income Year to Year to
31 March 31 March
2016 2015
GBP'000 GBP'000
================================================================== ================= ====================
Income from investments and interest receivable 32,673 38,660
Other income 237 304
====================================================================== ================= ====================
32,910 38,964
====================================================================== ================= ====================
3. Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been
appointed by the Company as its Alternative Investment Fund Manager (AIFM) and Company Secretary.
The investment management function has been delegated to Baillie Gifford & Co. The management
agreement can be terminated on six months' notice. The annual management fee is 0.30% of total
assets less current liabilities (excluding short term borrowings for investment purposes),
calculated quarterly.
===========================================================================================================
4. Net Return per Ordinary Share Year to Year to
31 March 31 March
2016 2015
GBP'000 GBP'000
========================================================== ====== ================= ====================
Revenue return on ordinary activities after taxation 21,428 27,540
Capital return on ordinary activities after taxation (36,205) 694,530
============================================================== ====== ================= ====================
Total net return (14,777) 722,070
============================================================== ====== ================= ====================
Weighted average number of ordinary shares in issue 1,290,467,928 1,229,231,951
====================================================================== ================= ====================
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
each period. There are no dilutive or potentially dilutive shares in issue.
5. Ordinary Dividends 2016 2015 2016 2015
GBP'000 GBP'000
========================================================== ====== ================= ======== ==========
Amounts recognised as distributions in the year:
Previous year's final (paid 6 July 2015) 1.55p 1.52p 19,758 18,646
Interim (paid 4 December 2015) 1.38p 1.38p 17,913 16,899
============================================================== ====== ================= ======== ==========
2.93p 2.90p 37,671 35,545
============================================================== ====== ================= ======== ==========
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
GBP21,428,000 (2015 - GBP27,540,000).
2016 2015 2016 2015
GBP'000 GBP'000
========================================================== ====== ================= ======== ==========
Dividends paid and payable in respect of the year:
Interim dividend per ordinary share (paid 4 December 2015) 1.38p 1.38p 17,913 16,899
Proposed final dividend per ordinary share (payable 4 July
2016) 1.58p 1.55p 20,738 19,308
============================================================== ====== ================= ======== ==========
2.96p 2.93p 38,651 36,207
============================================================== ====== ================= ======== ==========
If approved the final dividend will be paid on 4 July 2016 to all shareholders on the register
at the close of business on 10 June 2016. The ex-dividend date is 9 June 2016. The Company's
Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend
is 13 June 2016.
===========================================================================================================
6. The bank loans falling due within one year comprise: US$165million, US$50 million and US$200
million (2015 - US$165million).
The bank loans falling due in more than one year comprise: US$85 million (2015 - US$50 million,
US$200 million and US$85 million).
7. The fair value of borrowings at 31 March 2016 was GBP553,646,000 (2015 - GBP552,353,000).
Net asset value per share (after deducting borrowings at fair value) was 259.2p (2015 - 262.4p).
===========================================================================================================
8. 2016 2015
Number of shares Number of shares
========================================================== ====== ================= ====================
Share capital: Ordinary shares of 5p each
Allotted, called up and fully paid 1,312,524,485 1,245,674,485
Treasury shares 109,206,395 176,056,395
============================================================== ====== ================= ====================
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 2016 a total of 1,250,000 (2015 - 6,625,000)
ordinary shares with a nominal value of GBP63,000 (2015 - GBP331,000) were bought back at
a total cost of GBP3,199,000 (2015 - GBP13,730,000) and held in treasury. At 31 March 2016
the Company had authority to buy back a further 187,762,580 ordinary shares.
Under the provisions of the Company's Articles the share buy-backs were funded from the capital
reserve.
In the year to 31 March 2016, the Company sold 68,100,000 ordinary shares from treasury at
a premium to net asset value raising net proceeds of GBP179,873,000 (31 March 2015 - 25,600,000
ordinary shares raising net proceeds of GBP62,710,000). At 31 March 2016 the Company had authority
to issue or sell from treasury a further 151,588,672 ordinary shares.
===============================================================================================================
9. Transaction costs on purchases amounted to GBP275,000 (2015 - GBP393,000) and transaction
costs on sales amounted to GBP325,000 (2015 - GBP473,000).
None of the views expressed in this document should be construed
as advice to buy or sell a particular investment.
- ends
This information is provided by RNS
The company news service from the London Stock Exchange
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