Annual Financial Report

RNS Number : 2534S

Edinburgh Worldwide Inv Trust PLC

19 December 2016

 

Edinburgh Worldwide Investment Trust plc

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 October 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 Annual Report and Financial Statements for the year ended 31 October 2016 including the Notice of Annual General Meeting are also available on Edinburgh Worldwide's page of the Baillie Gifford website at:http://www.edinburghworldwide.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 October 2016 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co Limited

Company Secretaries

19 December 2016

Chairman's Statement

Performance

In the year to 31 October 2016 the Company's net asset value per share, when calculated by deducting borrowings at fair value, increased by 18.0% and the share price by 10.3%. The comparative index, the S&P Global Small Cap Index, increased by 29.0% in sterling terms during this period. Over the course of the year the discount to net assets with borrowings deducted at fair value averaged 9.2% and stood at 11.6% as at 31 October 2016. Although the Company's absolute returns over the year are encouraging the relative return has been hindered by the overweight exposure to Healthcare and Biotechnology stocks. The performance of Alnylam Pharmaceuticals and IP Group in particular has hurt.

The Board and Managers believe in the merits of investing in less mature entrepreneurial businesses and holding them whilst they develop over the long term, despite the inevitable 'bumps' that might be encountered over the period. Operationally the majority of holdings in the portfolio continue to perform and develop as hoped. Greater detail on the performance of the underlying holdings in the portfolio can be found within the Managers' Review on pages 10 and 11 of the Annual Report and Financial Statements.

Over the thirteen years that Baillie Gifford has been managing the Company's assets, net asset value per share has increased by 273%, the share price by 315% and the comparative index* by 233% in total return terms.

Borrowings

The Company has a five year fixed rate multi-currency loan from National Australia Bank Limited, expiring in September 2019. At present, drawings are €9.4 million, US$25.6 million and £7.5 million, with a weighted average interest rate of 2.81%.

As the Managers invest in companies that are believed to have long term attractions, the Company will typically maintain gearing to maximise potential returns. Invested equity gearing ranged between 6.0% and 12.5% over the course of the year and stood at 8.8% at the financial year end (2015 - 9.8%).

Unlisted Investments

The Company is permitted to invest up to 5% of total assets in unlisted equity investments, in aggregate, at time of acquisition. Two holdings were purchased over the course of the past financial year, Skyscanner Holdings and Unity Biotechnology, taking the portfolio weighting in unlisted equity investments to 2.8% of total assets (2015 - 1.7% of total assets), invested in four holdings as at the Company's year end. Since then it has been announced that Ctrip.com, a Chinese online travel company, is close to acquiring Skyscanner, with the transaction expected to be completed by the end of 2016. The ability to invest in unlisted equities through a closed ended vehicle is one of the notable benefits of the investment trust structure and a differentiating factor versus open ended peers. The Board and Managers are excited by the business models of the remaining investments and their potential as long term investments within the portfolio.

Earnings and Dividend

The Company's objective is that of generating capital growth. Consequently, the Managers do not invest in companies based on the level of income they may pay out as dividends.

This year the net revenue return per share was a deficit of 0.12p (2015 - deficit of 0.18p), so the Board is recommending that no final dividend be paid. Should the level of underlying income increase in future years, the Board will seek to distribute the minimum permissible to maintain investment trust status by way of a final dividend.

Management Fee

The Board maintains close scrutiny of costs and is keen to ensure that shareholder value is not unfairly eroded through charges. Earlier this year the Company announced a change in the calculation of its management fee, with the introduction of a further reduced stepped tier of 0.55% at £250m of net assets with effect from 1 September 2016. This follows on from the changes and simplification in fee structure announced in 2013 and results in further cost savings to the benefit of shareholders.

The annual management fee payable to the Company's Investment Managers and Secretaries, Baillie Gifford & Co Limited, is now as follows: 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets. There is no separate secretarial fee. The fees are calculated on a quarterly basis and further information is contained in note 3 on page 38 of the Annual Report and Financial Statements.

The Board

I am standing down as Chairman and retiring from the Board at the conclusion of the Company's Annual General Meeting taking place on Tuesday 24 January 2017. I am pleased to confirm that Mr Henry Strutt will replace me as Chairman, relinquishing his responsibility as Chair of the Company's Audit and Management Engagement Committee. This position will be filled by Mr Donald Cameron.

Mr Mungo Wilson has joined the Board; his biography is set out on page 19 of the Annual Report and Financial Statements. His appointment is subject to ratification by shareholders at the forthcoming Annual General Meeting.

I firmly believe that your Company has a dynamic, experienced and engaged Board that provides excellent oversight of, and challenge to, the Managers, as well as other service providers, on your behalf. The Board and Baillie Gifford have a healthy relationship and understanding and I leave in the knowledge that your Company is in capable hands.

Investment Outlook

The macro economic backdrop continues to provoke bouts of notable market volatility from which very few companies are sheltered. For example, uncertainty surrounds the terms of the UK's exit from the European Union and the direction of Mr Trump's economic policies. Immature, innovative, fast-growing businesses are not immune from exhibiting price volatility. However, periods of volatility provide opportunities for long term discerning investors to invest in growth companies at attractive valuations. Your Board and Managers believe that business fundamentals ultimately prevail over the investment cycle. Successful smaller companies create and exploit their own long term opportunities despite the economic conditions at any given time. Being a patient investor often brings rewards. As mentioned last year, being able to identify the companies that value innovation, which have both a cultural acceptance of it and a means to develop commercial opportunities around it, is key to unearthing the market leaders of the future and is a key focus for the Managers.

An overview of the portfolio is provided by the Managers on pages 10 and 11 of the Annual Report and Financial Statements.

Annual General Meeting

The Annual General Meeting of the Company will be held at Baillie Gifford's offices in Edinburgh at 12 noon on Tuesday, 24 January 2017. The Company will once again be seeking to renew its share buyback, issuance and treasury share powers. Further information on these resolutions can be found on pages 21 and 22 of the Annual Report and Financial Statements.

Douglas Brodie and John MacDougall, the portfolio's Manager and Deputy Manager, will give a presentation and answer any questions. The Board will also be available to respond to any questions that you may have. I hope that you will be able to attend.

David HL Reid

Chairman

8 December 2016

* MSCI All Countries World Index (in sterling terms) until 31 January 2014, thereafter the S&P Global Small Cap Index (in sterling terms). The index data has been chain linked to form one comparative index figure. Figures are total return with net asset value at par.

Past performance is not a guide to future performance.

Managers' Review

The combination of a divisive US Presidential election, the UK voting for 'Brexit' and a collapse in the value of sterling yielded a turbulent and atypical environment during the Company's financial year. Given this backdrop, and as suggested in the Interim Report, we are not overly surprised that economic and geo-political factors are preoccupying the market's attention of late. Whilst global stock markets have proved to be comparatively robust in dollar terms over the past year (and strong in sterling terms) the prevailing backdrop of uncertainty has seemingly tilted markets towards risk aversion and an environment where short term sentiment and thematic influences have held sway. Such periods tend to be transient but are rarely sympathetic to our long term fundamental approach of identifying attractive growth companies early in their lifecycle and retaining ownership of successful companies as they grow and thrive. Ours is a patient approach that strives to understand fully the problem a company is looking to solve and implicitly recognises that the success (or failure) of smaller companies is most often determined by the individual company's actions.

The enduring nature of innovation and business development implies to us that our approach never really goes out of fashion. However, we recognise that at times the stock market can work to a very different agenda and the uncertain economic and political outlook has resulted in a market that currently craves stability and visibility. These are attributes that many of our more immature companies cannot yet offer. We have long thought of the economic and political environment as being the canvas upon which businesses paint a picture. Recent developments have undeniably left the canvas somewhat frayed around the edges but we believe this is unlikely to detract from the picture that will ultimately emerge over the coming years and decades. Moreover, we sense that as innovation accelerates and technology broadens out the available palette of colours has increased significantly; short term worrying about the canvas potentially misses the emergence of a masterpiece.

With regard to the Company's underperformance, versus the comparative index, over the year to 31 October 2016 we observed two prominent contributing themes. First, the significant exposure within the portfolio to healthcare companies, particularly earlystage biotechnology businesses, which in aggregate performed poorly. Second, the high exposure to UK-listed companies; post the Brexit vote the UK market has been one of the weaker developed-world equity markets and the Company's positioning towards younger, less proven businesses penalised us further. The overall shape of the portfolio, be it exposure to industries or geographies, is determined by the stock ideas that we uncover. We don't embark on our task with a preconceived notion as to what or where is interesting. Furthermore we have a strong preference for companies that are innovating to serve global end markets thereby not overly restricting a holding's success to the prospects of a particular region or currency. Our exposure to healthcare companies is built upon us unearthing many attractive investment opportunities which we think, in aggregate, can ultimately yield therapies and technologies that could profoundly change what we can expect from healthcare over the coming decades. Based on our observations we believe that healthcare can transition from a highly centralised system to a much more personalised, data-led and patient-empowered one. We would highlight the holdings in businesses such as Dexcom (continuous blood glucose monitoring for diabetics) and Oxford Nanopore Technologies (cost effective DNA sequencing) as being representative of this trend. Whilst our long term optimism on healthcare remains undiminished we recognise that investor sentiment towards the sector deteriorated markedly over the past year. Early in the financial year heightened investor risk aversion impacted negatively on the share prices of many of our biotechnology holdings and latterly this was exacerbated by fears that drug pricing in the US might come under increased scrutiny. In several cases we opportunistically added to our existing healthcare holdings and used share price weakness to start a new position in a number of exciting, albeit early stage, companies.

The holding in the electronic bond trading platform MarketAxess again made a notable positive contribution to performance. We have long admired the combined attractions of liquidity and transparency that MarketAxess has pioneered in bond trading markets and are pleased that its offering is broadening out beyond US investment grade bonds. Despite the shares having performed well, we continue to see a substantial opportunity ahead for the company as scale and network effects work to its advantage, resulting in ever greater trading volumes flowing through the platform. On a less positive note, the holding in Alnylam Pharmaceuticals, the gene silencing company, performed poorly due in part to disappointing clinical trial data for one of its drugs in development. The safety-related termination of a drug, being developed for a rare heart disorder, is a disappointing development and an unexpected result. The company has not yet been able to explain fully the observed safety profile but, in our opinion, it is unlikely to be representative of a fundamental issue with the company's technology and gene silencing approach. We await further insights on this trial, and the many other clinical trials Alnylam is currently conducting, with interest as we continue to believe that gene silencing offers significant potential in a broad range of therapeutic settings.

We acquired a number of new holdings in the period. The purchases of Skyscanner, LendingTree and Pacira Pharmaceuticals were commented on in the Interim Report. New holdings in the second half of the year included Adaptimmune Therapeutics, Trupanion and Unity Biotechnology. Adaptimmune is a biotechnology company trying to harness the power of a patient's immune system to treat a wide range of cancers. The company has developed a highly efficient way of engineering proprietary 'T' cell receptor molecules that are specific for targets known to be expressed by cancer cells. There are several companies developing T cell therapies to treat cancer, with most using approaches dependent upon antibody based recognition of the cancer (versus the T cell receptor based approach developed by Adaptimmune). The advantages of Adaptimmune's approach are two-fold: first the range of targets is much greater as its approach enables it to look into the cancer cell whereas antibody approaches are limited to targets on the outside of a cancer cell; and second, its approach more closely resembles the body's own cancer fighting mechanisms thereby avoiding some of the extreme side effects associated with other treatments. Trupanion provides medical insurance for pets in the under-served North American market. The company's strong focus on creating value for both pet owners and vets through more comprehensive coverage, robust data-led pricing and simpler claims processing is addressing the key reasons why product penetration has remained so low (1-2%), relative to other countries (e.g. 25% in the UK). When combined with the efforts of its direct salesforce, building relationships with thousands of vet practices around the country, we believe Trupanion has a significant growth opportunity ahead of it. Unity Biotechnology is an early stage unlisted biotech company working on senescent cells (dormant cells which have ceased to divide). Biological mechanisms such as senescence naturally act to limit tumour risk, but if left unchecked these cells can promote age related pathologies, including a decline in regenerative capacity. By pursuing therapies that selectively clear senescent cells in particular tissues, the ambition is to limit, or even reverse, age related conditions such as glaucoma and osteoarthritis.

The holdings in Wirecard, Oisix, Barco and Senomyx were sold due to concerns over their future growth potential and the holding in LinkedIn was sold following a takeover offer from Microsoft. Post the year end it was also announced that Skyscanner, the unlisted travel search website held in the portfolio, was to be acquired by Ctrip.com, China's largest online travel company

Investment Philosophy

Most small businesses are destined to stay small given their limited scope for both structural growth and meaningful differentiation. Such businesses constitute the bulk of the smaller companies' universe yet are of no appeal to us. However, what is intriguing about the smaller companies' universe is that it contains a subset of immature but potentially high growth companies. By identifying attractive growth companies earlier we seek to benefit from growth at an earlier stage in a company's lifecycle and retain ownership of successful companies as they grow and thrive; we see our role as investing in what are potentially the larger companies of the future as opposed to the smaller companies of today.

We are looking to concentrate on the part of the market where we believe our analytical effort and the pursuit of genuinely transformational growth can be better exploited. The focus at time of initial investment is on younger, more immature companies that are global and exhibiting strong growth.

It is important to remember that big successful ideas typically start out as small, tentative and unproven. Early iterations are easy to dismiss as unworkable but experimentation with, and evolution of, an initially raw concept can, over time, yield huge commercial relevance. Our philosophy involves weighing up what is proven and tangible alongside what has promise and long term potential. Integral to this approach is recognising the role of innovation in business development; it provides the fuel for business creation, growth and long term competitive differentiation. Consequently, identifying companies that value innovation, having both a cultural acceptance of it and a means to develop commercial opportunities around it, is fundamental to our investment approach.

Growth companies, especially those which are young and hard to model, are difficult businesses to value. The wide range of potential outcomes and profitability that is heavily skewed to future years is a combination of uncertainties that many investors struggle with. We do not have all the answers but by approaching the challenge with a genuine long term perspective, accepting a degree of uncertainty, backing robust innovation and entrepreneurial management, we believe we are well positioned to identify the smaller businesses most likely to shape the world in which we live. As technological advancements encroach into an increasing pool of opportunity, the rate and extent of growth that a small business can achieve, in a relatively short period of time, is almost unrecognisable to that of a few years ago. Innovative smaller businesses that are unburdened by the legacy of historic business practices, or those willing to adapt to change, are best positioned to harness this opportunity.

Portfolio and Equity Performance as at 31 October 2016

Name	Business	Fair value 2016 £'000	% of total assets	Performance†		Fair value 2015 £'000
				Absolute %	Relative %
MarketAxess	Electronic bond trading platform	20,394	6.7	89.5	44.0	10,905
IP Group	Intellectual property   commercialisation	8,238	2.7	(37.2)	(52.3)	11,698
4D Pharma	Bacteria derived novel therapeutics	7,930	2.6	(2.0)	(25.6)	8,039
IPG Photonics	High-power fibre lasers	7,770	2.5	48.5	12.8	5,231
iRobot	Domestic and military robots	7,585	2.5	114.5	62.9	2,344
Tesla Motors	Electric cars	7,271	2.4	20.9	(8.2)	6,017
Alnylam Pharmaceuticals	Therapeutic gene silencing	6,552	2.1	(48.1)	(60.6)	9,723
Ocado	Online food retailer	5,431	1.8	(27.0)	(44.6)	6,764
Zillow Class C	US online real estate portal	4,961	1.6	52.4	15.7	3,258
Temenos	Banking software	4,834	1.6	75.5	33.3	3,990
Dexcom	Real time blood glucose monitoring	4,674	1.5	18.8	(9.8)	3,932
Wayfair	Online furniture and homeware   retailer	4,652	1.5	0.4	(23.8)	2,335
LendingTree	Online loan marketplace	4,582	1.5	69.6*	23.7*	-

 

Name		Business		Fair value 2016 £'000		% of total assets		Performance†				Fair value 2015 £'000
								Absolute %		Relative %
GrubHub	Online and mobile platform for   restaurant pick-up and delivery   orders		4,371		1.4		105.7		56.2		931
Financial Engines	Investment advisory firm		4,295		1.4		9.7		(16.7)		3,956
Start Today	Internet fashion retailer		4,286		1.4		99.1		51.2		3,048
Genus	Animal breeding services		4,133		1.4		30.8		(0.7)		3,206
Next	Provides online property information		4,113		1.3		43.4		8.9		3,361
Cosmo Pharmaceuticals	Therapies for gastrointestinal   diseases		3,977		1.3		20.4		(8.6)		3,325
Galapagos	Clinical stage biotechnology   company		3,855		1.3		58.7		20.5		2,430
TripAdvisor	Online travel review platform		3,829		1.3		(3.1)		(26.4)		5,994
Splunk	Data diagnostics		3,819		1.3		35.6		3.0		2,817
Infomart Corp	Internet platform for restaurant   supplies		3,777		1.2		61.2		22.5		1,652
Novadaq Technologies	Medical systems for intra-surgical   imaging		3,715		1.2		7.7		(18.2)		3,449
SEEK	Online recruitment portal		3,647		1.2		58.2		20.1		2,369
Renishaw	Measurement and calibration   equipment		3,629		1.2		39.5		6.0		2,654
Seattle Genetics	Antibody conjugates based   biotechnology		3,620		1.2		57.9		19.9		3,047
Puretech Health	IP commercialisation focused on   health care		3,608		1.2		(10.1)		(31.7)		2,543
ASOS	Online fashion retailer		3,570		1.2		61.3		22.5		2,772
M3	Online medical database		3,492		1.1		97.0		49.6		3,541
Xeros Technology Group	Commercial laundry manufacturer		3,479		1.1		(16.6)		(36.7)		3,580
MonotaRO	Online business supplies		3,475		1.1		19.3		(9.4)		4,945
Aerovironment	Small unmanned aircraft systems		3,456		1.1		31.7		0.0		2,566
Imagination Technologies	Graphics semiconductor designer		3,435		1.1		2.0		(22.5)		3,363
Dialog Semiconductor	Analogue chips for mobile phones		3,432		1.1		33.4		1.3		2,572
Stamps.com	Website for postage services		3,379		1.1		62.4		23.4		5,251
Xing	Professional networking		3,325		1.1		31.2		(0.3)		2,554
Oxford Nanopore    Technologies‡	Novel DNA sequencing technology		3,306		1.1		2.0		(22.5)		3,000
Genmab	Therapeutic antibody company		3,241		1.1		110.5		59.9		2,695
Faro Technologies	Designs and develops measurement   devices		2,951		1.0		25.7		(4.5)		2,028
EPAM Systems	Outsourced software and services		2,883		1.0		5.0		(20.2)		5,740
Teradyne	Semiconductor testing equipment   manufacturer		2,860		0.9		52.5		15.8		1,895
Digital Garage	Internet business incubator		2,788		0.9		53.9		16.9		1,833
Abcam	Scientific reagent supplier		2,777		0.9		46.9		11.6		2,336
Peptidream	Drug discovery platform		2,661		0.9		173.9		108.1		1,353
Pacira Pharmaceuticals	Development, commercialisation and   manufacturing of proprietary   pharmaceutical products		2,605		0.9		(38.4)*		(49.3)*		-
Ellie Mae	Provides technology solutions to   automate mortgage origination   process		2,602		0.9		44.2*		12.1*		-
Rightmove	UK online property portal		2,577		0.8		(1.6)		(25.3)		2,647
Kingdee International   Software	Enterprise management software		2,541		0.8		24.1		(5.8)		2,041
National Instruments     Corp	Instrumentation equipment used in   research and testing		2,516		0.8		19.4		(9.3)		2,157
Exa	Simulation software and services		2,503		0.8		84.3		40.0		1,351
Zillow Class A	US online real estate portal		2,458		0.8		35.6		3.0		1,809
Trupanion	Pet health insurance provider		2,452		0.8		22.5*		17.1*		-
Xero	Cloud-based accounting software		2,439		0.8		48.6		12.8		1,659
Xaar	Ink jet printing technology		2,410		0.8		(16.2)		(36.3)		2,915
Morphosys	Therapeutic antibodies		2,315		0.8		(10.0)		(31.7)		2,566
Victrex	High-performance thermo-plastics		2,227		0.7		(2.3)		(25.8)		2,351

 

Name	Business	Fair value 2016 £'000	% of total assets	Performance†		Fair value 2015 £'000
				Absolute %	Relative %
AAC Technologies	Miniature acoustic components	2,212	0.7	91.9	45.8	2,296
Power Integrations	Analogue integrated circuits	2,208	0.7	62.5	23.4	1,372
Yoox Net-A-Porter	Online luxury fashion retailer	2,192	0.7	6.6	(19.0)	2,056
Cellectis	Biotech focused on genetic   engineering	2,177	0.7	(15.7)	(36.0)	2,231
Digimarc	Digital watermarking technology	2,109	0.7	78.9	35.9	675
SDL	Language translation services	2,093	0.7	12.7	(14.4)	1,858
Codexis	Manufacturer of custom industrial   enzymes	2,067	0.7	97.3	49.9	627
Basware	Software solutions for financial   transactions	2,045	0.7	11.6	(15.3)	1,800
Skyscanner‡	Flight metasearch platform	2,000	0.7	0.0*	(21.0)*	-
Foundation Medicine	Develops cancer diagnostic   technology	1,859	0.6	28.1	(2.7)	1,449
Stratasys	3D printer manufacturer	1,794	0.6	(5.2)	(28.0)	1,892
Tissue Regenix	Regenerative medical devices	1,770	0.6	2.8	(21.9)	1,672
Souq Group Class A   Pref.‡	Middle East e-commerce website	1,638	0.5	26.5	(3.9)	1,295
Unity Biotechnology Inc   Series B Pref.‡	Biotechnology company seeking to   develop anti ageing therapies	1,638	0.5	(0.1)*	0.9*	-
Oxford Instruments	Produces advanced instrumentation   equipment	1,509	0.5	32.7	0.8	1,159
Ceres Power Holding	Developer of fuel cells	1,506	0.5	39.1	5.7	821
Zumtobel	Commercial lighting	1,499	0.5	(2.0)	(25.5)	1,546
Avacta Group	Analytical reagents and   instrumentation	1,465	0.5	(33.5)	(49.5)	2,173
Nanoco	Quantum dot manufacturer	1,365	0.4	0.0	(24.1)	1,372
China Financial Services	Small and medium-sized enterprises   lending in China	1,334	0.4	55.2	17.9	907
Adaptimmune   Therapeutics ADR	Clinical stage biopharmaceutical   company	1,321	0.4	(33.6)*	(36.5)*	-
Horizon Discovery	Customised cell lines to aid drug   discovery	1,303	0.4	(1.1)	(24.9)	1,313
On Deck Capital	Provider of capital finance to   businesses	1,302	0.4	(15.1)*	(34.7)*	-
hVIVO (formerly   Retroscreen Virology)	Outsourced pre-clinical analytical   services	1,284	0.4	(35.1)	(50.7)	1,717
Ricardo	Automotive engineer	1,264	0.4	4.3	(20.8)	1,242
Suss Microtec	Fabrication and inspection equipment	1,146	0.4	16.0	(11.9)	984
Aduro Biotechnology	Immunotherapy services provider	1,145	0.4	(44.0)*	(58.0)*	-
Acacia Research	Patent licenser	1,065	0.4	12.9	(14.2)	958
Bioamber	Bioengineering company	1,055	0.3	(21.1)	(40.1)	1,339
Ilika	Discovery and development of   materials for mass market   applications	1,007	0.3	(29.3)	(46.3)	1,155
Thin Film Electronics	Develops printed, rewritable memory   media	960	0.3	34.9	2.5	711
Nanocarrier	Drug delivery technology	923	0.3	33.9	1.7	969
C4X Discovery Holdings	Rational drug design and optimisation	891	0.3	64.5	24.9	465
Sarine Technologies	Systems for diamond grading and   cutting	820	0.3	36.2	3.5	613
Summit Therapeutics	Drug discovery and development	799	0.3	52.7	16.0	521
Foamix Pharmaceuticals	Drug reformulation technology	724	0.2	41.0	7.1	513
Fusionex	Software for data analytics	585	0.2	(48.7)	(61.1)	1,123
Applied Graphene   Materials	Manufactures graphene nanoplatelets	516	0.2	(23.1)	(41.6)	208
Evola Holdings	Yeast-based industrial biotechnology	258	0.1	(56.4)	(66.9)	1,324
Velocys	Gas to liquid technology	162	0.1	(38.4)	(53.3)	267

Name	Business	Fair value 2016 £'000	% of total assets	Performance†		Fair value 2015 £'000
				Absolute %	Relative %
Intelligent Energy   Holdings	Developer of modular fuel cells	68	0.0	(87.7)	(90.7)	589
GI Dynamics	Develops and markets medical   devices	18	0.0	(8.6)	(30.6)	19
China Lumena New   Materials	Mines, processes and manufactures   natural thenardite products	0	0.0	0.0	(31.7)	0.0
Ensogo	South East Asian e-commerce	0	0.0	(100.0)	(131.7)	647
Total equities		292,799	95.8
Net current assets		12,721	4.2
Total assets at fair value#		305,520	100.0

†    Absolute and relative performance has been calculated on a total return basis over the period 1 November 2015 to 31 October 2016 (performance figures for investments bought during the period are part-period returns - see note below). Absolute performance is in sterling terms; relative performance is against S&P Global Small Cap Index (in sterling terms).

*     Figures relate to part-period returns where equity has been purchased during the period.

#    Before deductions of loan

‡    Denotes unlisted security.

Source: Baillie Gifford/StatPro.

Past performance is not a guide to future performance.

Distribution of total assets* by industry

		Industry Analysis 31 October 2016 % of total assets*		Portfolio Weightings (relative to comparative index†) at 31 October 2016 % points overweight/(underweight)
Equities:	Biotechnology	13.4		11.2
	Capital Markets	10.8		7.5
	Software	8.4		5.3
	Internet Software and Services	8.1		6.2
	Electronic Equipment, Instruments and Components	6.7		3.9
	Internet and Direct Marketing Retail	6.7		6.1
	Pharmaceuticals	5.0		3.4
	Semiconductors and Semiconductor Equipment	4.7		2.7
	Health Care Equipment and Supplies	3.2		0.8
	Life Sciences Tools and Services	3.1		2.2
	Household Durables	2.5		0.8
	Automobiles	2.4		2.3
	Professional Services	2.3		1.0
	Chemicals	2.0		(1.3)
	IT Services	1.9		(0.6)
	Internet and Catalogue Retail	1.8		1.8
	Technology Hardware, Storage and Peripherals	1.7		1.1
	Thrifts and Mortgage Finance	1.5		0.8
	Health Care Technology	1.4		1.1

		Industry Analysis 31 October 2016 % of total assets*		Portfolio Weightings (relative to comparative index†) at 31 October 2016 % points overweight/(underweight)
	Machinery	1.4		(2.6)
	Media	1.4		(0.9)
	Trading Companies and Distributors	1.1		(0.4)
	Aerospace and Defence	1.1		(0.2)
	Electrical Equipment	1.0		(0.1)
	Insurance	0.8		(2.4)
	Speciality Retail	0.5		(1.8)
	Consumer Finance	0.4		(0.2)
	Diversified Financial Services	0.4		(0.1)
	Energy Equipment and Services	0.1		(1.3)
	Net Current Assets	4.2
Total assets*		100.0
* Total assets before deduction of bank loan.

† S&P Global Small Cap Index (in sterling terms). Weightings exclude industries where the Company has no exposure.

Distribution of total assets

Geographical Analysis

		31 October 2016 %	31 October 2015 %
North America		45.5	39.3

	USA	45.5	39.3
Europe		37.2	43.3
	United Kingdom	25.4	29.2
	Eurozone	8.5	10.4
	Developed Europe (non euro)	3.3	3.7
Africa and Middle East		0.5	0.5
	UAE	0.5	0.5
Asia		10.6	12.0
	Japan	8.3	8.3
	China	1.3	2.3
	Hong Kong	0.7	0.9
	India	-	0.3
	Singapore	0.3	0.2
Australasia		2.0	1.8
	Australia	1.2	1.2
	New Zealand	0.8	0.6
Total equities		95.8	96.9
Net current assets		4.2	3.1
Total assets*		100.0	100.0

 

Sectoral Analysis

		31 October 2016 %		31 October 2015 %
Consumer Discretionary		15.2		15.8
Energy		0.1		0.1
Financials		13.9		11.2
Health Care		26.1		27.0
Industrials		7.0		7.9
Information Technology		31.5		32.2
Materials		2.0		2.7
Net Current Assets		4.2		3.1
Total assets*		100.0		100.0

 * Total assets before deduction of loans

Investment Changes

	Valuation at 31 October 2015 £'000	Net acquisition/ (disposals) £'000	Appreciation/ (depreciation) £'000	Valuation at 31 October 2016 £'000
Equities:
North America
USA	101,690	10,342	26,965	138,997
Europe
United Kingdom	76,523	8,189	(6,054)	77,658
Eurozone	26,653	(4,518)	3,828	25,963
Developed Europe (non euro)	9,233	(3,822)	4,606	10,017
Africa and the Middle East
UAE	1,295	-	343	1,638
Asia
Japan	21,467	(8,594)	12,462	25,515
China	5,951	(4,298)	2,222	3,875
Hong Kong	2,296	-	(84)	2,212
India	763	(761)	(2)	-
Singapore	613	-	207	820
Australasia
Australia	3,035	-	630	3,665
New Zealand	1,659	-	780	2,439
Total equities	250,178	(3,462)	46,083	292,799
Net current assets	7,977	1,375	3,369	12,721
Total assets	258,155	(2,087)	49,452	305,520

Key Performance Indicators

The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:

¾ the movement in net asset value per ordinary share compared to the comparative index;

¾ the movement in the share price;

¾ the premium/(discount) of the share price to the net asset value per share; and

¾ the ongoing charges.

The one, five and ten year records for the KPIs can be found on pages 4, 5 and 6 of the Annual Report and Financial Statements respectively.

Future Developments of the Company

The outlook for the Company for the next 12 months is set out in the Chairman's Statement and the Managers' Review.

Share Buy-backs and Share Issuances

The Company currently has powers to buy back shares at a discount to net asset value per share (NAV) for cancellation or retention as treasury shares as well as to issue shares/sell treasury shares at a premium to NAV.

Related Party Transactions

Details of the management contract are set out in the Directors' Report on page 20 of the Annual Report and Financial Statements. The management fee payable to the Manager by the Company for the year, as disclosed in note 3, was £1,743,000 (2015 - £1,660,000) of which £471,000 (2015 - £407,000) was outstanding at the year end, as disclosed in note 11 of the Annual Report and Financial Statements.

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 28 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

Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co.

The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than three months' notice. Compensation fees would only be payable in respect of the notice period if termination by the Company were to occur sooner. With effect from 1 September 2016 the annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets. Prior to 1 September 2016 the fee was 0.95% on the first £50m of net assets and 0.65% on the remaining net assets. Management fees are calculated and payable quarterly. The Board is of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence on performance.

The details of the management fee are as follows:

	2016 £'000		2015 £'000
Investment management fee	1,743		1,660
	1,743		1,660

Principal Risks

As explained on pages 24 and 25 of the Annual Report and Financial Statements there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The principal risks associated with the Company are as

follows:

Financial Risk - the Company's assets consist mainly of listed securities and its principal 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 18 to the Financial Statements on pages 44 to 48 of the Annual Report and Financial Statements. To mitigate this risk, at each Board meeting the composition and diversification of the portfolio by geographies, sectors and capitalisation are considered along with sales and purchases of investments. Individual investments are discussed with the Managers as well as the Managers' general views on the various investment markets and sectors. A strategy meeting is held annually.

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 and Management Engagement 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 cyber hacking. 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. In addition, the existence of assets is subject to annual external audit and 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 and Management Engagement Committee and any concerns investigated.

Small Company Risk - the Company has investments in smaller, immature companies which are generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller, immature companies may do less well in periods of unfavourable economic conditions. To mitigate this risk, the Board reviews the investment portfolio at each meeting and discusses the merits and characteristics of individual investments with the Managers. A spread of risk is achieved by holding stocks classified across at least fifteen industries and six countries.

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.

Operational Risk - failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster.

The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other third party providers are reviewed by Baillie Gifford on behalf of the Board.

Discount/Premium Volatility - the discount/premium at which the Company's shares trade can widen. To mitigate this risk, the Board monitors the level of discount/premium and the Company has authority to buy back its own shares or issue shares (including authority to sell shares held in treasury) when deemed by the Board to be in the best interest of the Company and its shareholders.

Leverage Risk - the Company may borrow money for investment purposes (sometimes known as 'gearing' or 'leverage'). 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 gearing levels are discussed by the Board and Managers at every Board meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in listed securities that are readily realisable. Further information on leverage can be found in note 19 on page 48 and the Glossary of Terms on page 57 of the Annual Report and Financial Statements.

Political and Associated Economic Risk - the Board is of the view that political change in areas in which the Company invests or may invest may have practical consequences for the Company. Political developments are closely monitored and considered by the Board. The Board has noted the results of the UK referendum on continuing membership of the European Union. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014, the Directors have assessed the prospects of the Company over a minimum period of five years. The Directors believe this period to be appropriate as it is reflective of the longer term investment strategy of the Company, and over which, in the absence of any adverse change to the regulatory environment and the favourable tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing the Company nor to the adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period.

In considering the viability of the Company, the Directors have conducted a robust assessment of each of the Company's principal risks and uncertainties detailed on pages 7 and 8 of the Annual Report and Financial Statements and in particular the impact of a significant fall in the global equity markets on the value of the Company's investment portfolio. All of the key operations required by the Company are outsourced to third party providers and alternative providers could be engaged at relatively short notice if necessary. The Directors have also considered the Company's leverage and liquidity in the context of the fixed rate loan which is due to expire in September 2019, the income and expenditure projections and the fact that the Company's investments comprise mainly readily realisable quoted equity securities which can be sold to meet funding requirements if necessary.

Based on the Company's processes for monitoring operating costs, share price discount/premium, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years as a minimum.

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 below.

The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis.

Accordingly, the Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement above, that the Company will continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements.

Financial Instruments

As an Investment Trust, the Company invests in equities and makes other investments so as to meet its investment objective of achieving long term capital growth. 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.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or 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 of Directors 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.

(i) 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 Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The 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 overseas 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.

At 31 October 2016	Investments £'000		Cash and deposits £'000		Bank Loan £'000		Other debtors and creditors* £'000		Net exposure £'000
US dollar	142,680		13,160		(20,968)		(57)		134,815
Yen	25,515		-		-		14		25,529
Euro	21,986		-		(8,440)		33		13,579
Swiss franc	9,069		-		-		-		9,069
Hong Kong dollar	6,087		-		-		-		6,087
Australian dollar	3,665		-		-		-		3,665
Danish krone	3,241		-		-		-		3,241
New Zealand dollar	2,439		-		-		-		2,439
Norwegian krone	960		-		-		-		960
Singapore dollar	820		-		-		-		820
Indian rupee	-		-		-		-		-
Total exposure to currency risk	216,462		13,160		(29,408)		(10)		200,204
Sterling	76,337		84		(7,500)		(513)		68,408
	292,799		13,244		(36,908)		(523)		268,612

* Includes net non-monetary assets of £36,000.

At 31 October 2015	Investments £'000		Cash and deposits £'000		Bank Loan   £'000		Other debtors and creditors* £'000		Net exposure £'000
US dollar	107,264		2,647		(16,576)		482		93,817
Yen	21,467		-		-		1,894		23,361
Euro	23,328		-		(6,723)		2,598		19,203
Swiss franc	8,639		-		-		-		8,639
Hong Kong dollar	5,244		-		-		-		5,244
Australian dollar	3,035		-		-		-		3,035
Danish krone	2,695		-		-		-		2,695
New Zealand dollar	1,659		-		-		-		1,659
Norwegian krone	711		-		-		-		711
Singapore dollar	613		-		-		-		613
Indian rupee	-		-		-		726		726
Total exposure to currency risk	174,655		2,647		(23,299)		5,700		159,703
Sterling	75,523		87		(7,500)		(457)		67,653
	250,178		2,734		(30,799)		5,243		227,356

* Includes net non-monetary assets of £17,000.

Currency Risk Sensitivity

At 31 October 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 £'000		2015 £'000
US dollar	6,741		4,691
Yen	1,277		1,168
Euro	679		960
Swiss franc	453		432
Hong Kong dollar	304		262
Australian dollar	183		152
Danish krone	162		135
New Zealand dollar	122		83
Norwegian Krone	48		35
Singapore dollar	41		31
Indian rupee	-		36
	10,010		7,985

(ii) Interest Rate Risk

Interest rate movements may affect directly:

¾  the fair value of investments in fixed interest rate securities;

¾  the level of income receivable on cash deposits;

¾  the fair value of fixed-rate borrowings; and

¾  the interest payable on any 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.

The interest rate risk profile of the Company's financial assets and liabilities at 31 October is shown below:

Financial Assets

The Company's interest rate risk exposure on its financial assets at 31 October 2016 amounted to £13,244,000 (2015 - £2,734,000), comprising of its cash and short term deposits.

The cash deposits generally comprise overnight 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 bank base rate.

Financial Liabilities

The interest risk profile of the Company's financial liabilities and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31October are shown below.

Interest Rate Risk Profile

	2016 £'000	2015 £'000
The interest rate risk profile of the Company's financial liabilities at 31 October was:
Fixed rate      - Sterling denominated	7,500	7,500
- US$ denominated	20,968	16,576
- Euro denominated	8,440	6,723
	36,908	30,799

Maturity Profile

The maturity profile of the Company's financial liabilities at 31 October was:
	2016 £'000	2015 £'000
In less than one year
- accumulated interest	1,038	870
In more than one year, but not more than five years
- repayment of loan	36,908	30,799
- accumulated interest	1,987	2,538
	39,933	34,207

Interest Rate Risk Sensitivity

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

(iii) 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 Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 9 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the 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 comparative index: investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the comparative index.

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 13 to 15 of the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio and an analysis of the investment portfolio by broad industrial or commercial sector is given on pages 16 and 17 of the Annual Report and Financial Statements.

105.8% (2015 - 108.1%) of the Company's net assets are invested in quoted equities. A 10% increase in quoted equity valuations at 31 October 2016 would have increased total assets and total return on ordinary activities by £28,422,000 (2015 - £24,588,000). A decrease of 10% 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 not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board monitors the exposure to any one holding.

The Company has the power to take out borrowings, which gives it access to additional funding when required. The Company's borrowing facilities are detailed in note 12 in the Annual Report and Financial Statements and the maturity profile of its borrowings are set out on page 46 of the Annual Report and Financial Statements.

Borrowings Falling Due after more than One Year

	2016 £'000		2015 £'000
National Australia Bank Limited multi-currency loan	36,908		30,799

Borrowing facilities

The five year fixed rate facility with National Australia Bank Limited of €9.4m, US$25.6m and £7.5m, expires on 30 September 2019. The drawings were as follows:

At 31 October 2016 and 31 October 2015

National Australia Bank Limited:

€9,400,000 at an interest rate of 1.59% per annum.

US$25,600,000 at an interest rate of 3.14% per annum.

£7,500,000 at an interest rate of 3.12% per annum.

The main covenants relating to the loan facility with National Australia Bank Limited are: total borrowings shall not exceed 35% of the Company's adjusted gross assets and the minimum adjusted gross assets shall be £110m.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

¾ where the 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;

- the Board regularly receives information from the Managers on the credit ratings of those bonds and other securities in which the Company has invested;

- 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 Managers monitor the Company's risk by reviewing the Custodian's internal control reports and reporting its findings to the Board;

- investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the 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 before any transfer of cash or securities away from the Company is completed;

- 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 Managers of the creditworthiness of that counterparty; and

- cash is only held at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The maximum exposure to credit risk at 31 October was:

	2016 £'000	2015 £'000
Cash and short term deposits	13,244	2,734
Debtors and prepayments	127	5,801
	13,371	8,535

None of the Company's financial assets are past due or impaired (2015 - none).

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 borrowings. The fair values of the Company's borrowings are shown below.

	2016	2016		2015	2015
	Book £'000	Fair* £'000		Book £'000	Fair* £'000
Fixed rate loan	36,908	37,895		30,799	31,394
Total long term borrowings	36,908	37,895		30,799	31,394

*    The fair value of the bank loan is calculated with reference to government bonds of comparable yield and maturity.

Capital Management

The capital of the Company is its share capital and reserves as set out in note 14 together with its borrowings (see note 12 of the Annual Report and Financial Statements). The objective of the Company is the achievement of long term capital growth by investing primarily in listed companies throughout the world. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on page 25, pages 7 and 8 and pages 24 and 25, respectively of the Annual Report and Financial Statements. The Company has the ability to buy back its shares (see pages 21 and 22 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in note 13 of the Annual Reports and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loan which are detailed in note 12 of the Annual Report and Financial Statements.

Investments

As at 31 October 2016	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	284,217	-	-	284,217
Unlisted equities	-	-	8,582	8,582
Total financial asset investments	284,217	-	8,582	292,799

As at 31 October 2015	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	245,883	-	-	245,883
Unlisted equities	-	-	4,295	4,295
Total financial asset investments	245,883	-	4,295	250,178

Investments in securities are financial assets designated at fair value through profit or loss. In accordance with Financial Reporting Standard 102, the tables above provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1:        using unadjusted quoted prices for identical instruments in an active market;

Level 2:       using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and

Level 3:       using inputs that are unobservable (for which market data is unavailable).

The valuation techniques used by the Company are explained in the accounting policies on page 35 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's remuneration policy is available at www.bailliegifford.com or on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) are also available at www.bailliegifford.com.

The Company's maximum and actual leverage levels (see Glossary of Terms on page 57 of the Annual Report and Financial Statements) at 31 October 2016 are shown below:

Leverage

	Gross Method	Commitment Method
Maximum limit	2.50:1	2.00:1
Actual	1.14:1	1.14:1

 

Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual 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 including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'.

Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that year. In preparing these Financial Statements, the Directors are required to:

¾  select suitable accounting policies and then apply them consistently;

¾  make judgements and accounting estimates that are reasonable and prudent;

¾  state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

¾  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 laws and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, a Directors' Remuneration Report and a 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 page of 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 Management section, confirm that, to the best of their knowledge:

¾  the Financial Statements, which have been prepared in accordance with applicable law and UK Accounting Standards including FES 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾  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 performance, business model and strategy; and

¾  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

David HL Reid

Chairman

8 December 2016

 

Income Statement

	For the year ended 31 October 2016			For the year ended 31 October 2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	46,083	46,083	-	23,245	23,245
Currency (losses)/gains	-	(2,740)	(2,740)	-	479	479
Income (note 2)	1,178	-	1,178	1,106	-	1,106
Investment management fee	(436)	(1,307)	(1,743)	(415)	(1,245)	(1,660)
Other administrative expenses	(483)	-	(483)	(498)	-	(498)
Net return before finance costs and taxation	259	42,036	42,295	193	22,479	22,672
Finance costs of borrowings	(239)	(719)	(958)	(220)	(660)	(880)
Net return on ordinary activities before taxation	20	41,317	41,337	(27)	21,819	21,792
Tax on ordinary activities	(81)	-	(81)	(63)	-	(63)
Net return on ordinary activities after taxation	(61)	41,317	41,256	(90)	21,819	21,729
Net return per ordinary share (note 3)	(0.12p)	84.31p	84.19p	(0.18p)	44.52p	44.34p

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as there is no other comprehensive income.

 

Balance Sheet

	At 31 October 2016 £'000	At 31 October 2015 £'000
Fixed assets
Investments held at fair value through profit or loss	292,799	250,178
Current assets
Debtors	127	5,801
Cash and cash equivalents	13,244	2,734
	13,371	8,535
Creditors
Amounts falling due within one year	(650)	(558)
Net current assets	12,721	7,977
Total assets less current liabilities	305,520	258,155
Creditors
Amounts falling due after more than one year (note 5)	(36,908)	(30,799)
Net assets	268,612	227,356
Capital and reserves
Called up share capital	2,450	2,450
Share premium	82,180	82,180
Special reserve	35,220	35,220
Capital reserve	147,942	106,625
Revenue reserve	820	881
Shareholders' funds	268,612	227,356
Net asset value per ordinary share (after deducting borrowings at fair value) (note 5)	546.13p	462.74p
Net asset value per ordinary share (after deducting borrowings at par)	548.14p	463.95p
Ordinary shares in issue	49,004,319	49,004,319

 

Statement of Changes in Equity

For the year ended 31 October 2016

	Called up share capital £'000	Share premium £'000	Special Reserve £'000	Capital* reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 November 2015	2,450	82,180	35,220	106,625	881	227,356
Net return on ordinary activities after taxation	-	-	-	41,317	(61)	41,256
Dividends paid during the year (note 4)	-	-	-	-	-	-
Shareholders' funds at 31 October 2016	2,450	82,180	35,220	147,942	820	268,612

For the year ended 31 October 2015

	Called up share capital £'000	Share premium £'000	Special Reserve £'000	Capital* reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 November 2014	2,450	82,180	35,220	84,806	1,706	206,362
Net return on ordinary activities after taxation	-	-	-	21,819	(90)	21,729
Dividends paid during the year (note 4)	-	-	-	-	(735)	(735)
Shareholders' funds at 31 October 2015	2,450	82,180	35,220	106,625	881	227,356

*       The capital reserve as at 31 October 2016 includes investment holdings gains of £50,479,000 (2015 - gains of £18,934,000).

Cash Flow Statement

	For the year ended 31 October 2016		For the year ended 31 October 2015
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation*		41,337		21,792
Net gains on investments		(46,083)		(23,245)
Currency losses/(gains)		2,740		(479)
Finance costs of borrowings		958		880
Overseas tax incurred		(81)		(66)
Changes in debtors and creditors		50		78
Cash from operations		(1,079)		(1,040)
Interest paid		(944)		(879)
Net cash outflow from operating activities		(2,023)		(1,919)
Cash flows from investing activities
Acquisitions of investments	(38,768)		(38,913)
Disposal of investments	47,932		33,290
Net cash inflow/(outflow) from investing activities		9,164		(5,623)
Cash flows from financing activities
Equity dividends paid (note 4)		-		(735)
Net cash outflow from financing activities		-		(735)
Increase/(decrease) in cash and cash equivalents		7,141		(8,277)
Exchange movements		3,369		416
Cash and cash equivalents at 1 November		2,734		10,595
Cash and cash equivalents at 31 October		13,244		2,734

*              Dividends received in the year amounted to £1,173,000 (2015 - £1,119,000)

 

Notes

1.			The Financial Statements for the year to 31 October 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 October 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) from 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 net funds/debt. The Company has early adopted the amendments to section 34 of FRS 102 regarding fair value hierarchy disclosures. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company and its investment manager, who are subject to the UK's regulatory environment, are also UK based.
2.			Income		2016 £'000		2015 £'000
			Income from investments		1,178		1,105
			Deposit interest		-		1
					1,178		1,106
3.			Net return per ordinary share Revenue 2016  Capital Total Revenue 2015 Capital Total Net return on ordinary activities after taxation (0.12p) 84.31p 84.19p (0.18p) 44.52p 44.34p
			Revenue return per ordinary share is based on the net revenue loss on ordinary activities after taxation of £61,000 (2015 - net revenue loss of £90,000) and on 49,004,319 ordinary shares, being the weighted average number of ordinary shares in issue during each year. Capital return per ordinary share is based on the net capital gain for the financial year of £41,317,000 (2015 - net capital gain of £21,819,000) and on 49,004,319 ordinary shares, being the weighted average number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue.
4.	Ordinary dividends			2016		2015		2016 £'000	2015 £'000
	Amounts recognised as distributions in the year:
	Previous year's final (paid 5 February 2015)			Nil		1.50p		Nil	735
	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. There is no revenue available for distribution by way of dividend for the year (2016 - revenue loss of £61,000; 2015 - revenue loss £90,000).
				2016		2015		2016 £'000		2015 £'000
		Dividends paid and payable in respect of the year:
		Proposed final dividend per ordinary share		Nil		Nil		Nil		Nil

Notes (Ctd)

5.	The five year fixed rate facility with National Australia Bank Limited of €9.4m, US$25.6m and £7.5m, expires on 30 September 2019. The drawings were as follows: At 31 October 2016 and 31 October 2015 National Australia Bank Limited: €9,400,000 at an interest rate of 1.59% per annum. US$25,600,000 at an interest rate of 3.14% per annum. £7,500,000 at an interest rate of 3.12% per annum. The main covenants relating to the loan facility with National Australia Bank Limited are: total borrowings shall not exceed 35% of the Company's adjusted gross assets and the minimum adjusted gross assets shall be £110m. The fair value of borrowings at 31 October 2016 was £37,895,000 (2015 - £31,394,000). Net asset value per share (after deducting borrowings at fair value) was 546.13p (2015 - 462.74p).
6.	The Company incurred transaction costs on purchases of £26,000 (2015 - £29,000) and on sales of £17,000 (2015 - £22,000).
7.	At the Annual General Meeting on 28 January 2016 the Company renewed its authority to purchase shares in the market, in respect of 7,345,747 ordinary shares (equivalent to approximately 14.99% of its issued share capital at that date). No shares were bought back during the years to 31 October 2016 or 2015. At 31 October 2016 the Company had authority to buy back 7,345,747 ordinary shares.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

- ends -

 

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