Annual Financial Report
Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Annual Financial Report
A copy of the Annual Report and Financial Statements for the year ended 31 March 2017 of Scottish Mortgage Investment Trust PLC 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 March 2017 including the Notice of Annual General Meeting is also available on Scottish Mortgage's page of the Baillie Gifford website at: www.scottishmortgageit.com
The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 March 2017 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
26 May 2017
Chairman's Statement
Somewhat breaking with convention for statements of this kind, I would like to open by saying some words about my predecessor as Chairman of Scottish Mortgage, Sir Donald MacKay, who died last November at the age of 79. Sir Donald was a remarkable man, whose intelligence and acumen were appreciated by governments and businesses alike. His contribution to the development of this Company was profound, for it was largely under his watch that the Managers were encouraged to pay less attention to benchmarks and what their competitors were up to, and spend more time following their investment beliefs, with greater freedom to back businesses anywhere in the world likely to benefit from the transformational changes we are experiencing, and thus with the potential to deliver exceptional returns for our shareholders.
As I hope is clear to all, the results have been excellent: we have for some time been the UK's largest conventional investment trust, in March we were admitted to the FTSE 100 index, and our investment performance bears comparison with the very best. Although Sir Donald stepped down at the end of 2009, much of what has since been achieved at Scottish Mortgage can trace its roots to decisions taken under his stewardship. I am therefore delighted to report that the strong record of performance continues, especially when measured over five and ten year periods, both in terms of the share price and net asset value (NAV) returns. The table below shows the five and ten year total returns for the Company to 31 March 2017, alongside the Association of Investment Companies (AIC) Global Sector average for comparison.
|
|
Total Return % |
|
|
|
Five Years |
Ten Years |
|
NAV |
146.6 |
236.3 |
|
Share Price |
177.3 |
302.2 |
|
FTSE All-World Index |
97.3 |
148.7 |
|
Global Sector Av - NAV |
95.3 |
127.9 |
|
Global Sector Av - share price |
109.6 |
141.9 |
Source: AIC/Morningstar and relevant underlying index providers.
As it happens, the performance over the last financial year has also been very healthy, with a rise in the NAV per share of over 38% (on a total return basis). Whilst this is obviously pleasing to shareholders, I wish to highlight the importance of judging Scottish Mortgage on the basis of its long term approach.
However good the 12 month figures, I would urge shareholders to focus on the five and ten year performance record, as this is the test which your Board feels best represents the Managers' success or otherwise in following the stated investment policy of the Company. Over any given twelve month period performance may be at least as much due to the fluctuating obsessions of broader markets or geopolitics as any change in the businesses underlying the investments; in the past year, to take one example, performance was flattered by the devaluation of sterling. It is only over the longer term that the impact of investing in individual companies can be said to come to the fore.
Earnings and Dividends
As we experienced in the previous financial year, our income for the period has fallen as the companies in the portfolio have found more productive uses for their capital than returning it to shareholders. This year's earnings per share were 1.07p, down 36% on 2015/16.
The Company's investment objective is to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. The Managers of Scottish Mortgage have been relentless in pursuing this growth focused investment mandate. The Board believes this clarity of proposition and purpose is valued by shareholders. The Board therefore has no desire to deflect the Managers from their focus on finding the best growth companies of the future, and encourages them not to dilute their approach by investing in companies which do not fit this objective, in order to pursue a secondary goal of income production.
Whilst the stated investment objective explicitly provides for both capital and income growth, shareholders will be aware from earlier Annual Reports and other statements that the clear expectation should be that this balance will be heavily in favour of capital appreciation over the long term, in line with this growth focused approach. Yet the Board also acknowledges that many of our shareholders appreciate even the modest income component of the total return from their Scottish Mortgage holding.
We are recommending an increased final dividend, providing a total distribution for the year of 3.00 pence per share (2015/16 - 2.96p), an increase of just over 1%. In order to achieve this, given the low level of income in the portfolio, it will be necessary to utilise most of the remaining revenue reserve which, once the final dividend is approved and paid, will stand at just over 0.5 pence per share.
The Board takes this opportunity to repeat the guidance given earlier as to its intentions regarding the future payment of dividends by the Company. Shareholders have already granted the Company the power to pay dividends from capital profits but, thanks to the revenue reserve, to date these have not been needed. Absent a significant (and unexpected) uplift in income from the portfolio, next year the Board will be obliged either to cut the dividend, or to make use of its power to continue to pay a comparable dividend, supplemented from capital profits as well as the remainder of the revenue reserve. In view of the explicit dividend growth component of the Company's investment objective, the Board wishes to make clear to shareholders that it would be willing to make such distributions from capital profits, in order to sustain or modestly increase our dividend, provided that the Board is of the view that the total returns being earned by the Company over the long run justify this. This policy was set out in some detail in my Statement last year.
Low Cost
For the year to 31 March 2017, Scottish Mortgage's 'Ongoing Charges Ratio' (OCR) fell to 0.44%, down from 0.45% the previous year. Ensuring that Scottish Mortgage has one of the lowest cost ratios in the sector remains an important competitive advantage for the Company, affording a clear and direct benefit to our shareholders. The Board and Baillie Gifford continually work together in this area and in March 2017 all parties were delighted to announce the introduction of a new tiered fee scale, with effect from 1 April 2017. The annual management charge (AMC) will continue to be 0.3% on the first £4 billion of assets under management, but will fall to 0.25% thereafter. As a result, provided the assets of the Company remain over £4 billion, this offers the prospect of further reductions in the OCR for the coming year and into the future.
Liquidity Policy
The Board believes that, just as lowering the ongoing charges for the Company is to the long term benefit of all shareholders, so too is lessening the market impact of trading in its shares. Such transactional friction is often an unseen cost to shareholders, which is mitigated by good levels of liquidity in the market. The Board has adopted a robust liquidity policy for some time now, to lessen the impact of large trading imbalances between buyers and sellers, by the issuance or repurchasing of the Company's shares, as appropriate. This helps to prevent Scottish Mortgage's shares from moving to a substantial premium or discount to the underlying NAV.
In furtherance of this policy, during the year the Company bought back into treasury just over 7 million shares, and sold more than 53 million shares from treasury at a premium to the net asset value. The net result of these operations was an increase in the Company's share capital of just under £155 million - a slightly lower number than last year, but large in comparison to most other investment companies in a period which in general saw a paucity of secondary issuance. The Directors will seek to renew the necessary authorities from Shareholders at the Company's Annual General Meeting (AGM) to facilitate the continuance of this policy. Full details of the Company's liquidity policy may be found on page 7 of the Annual Report and Financial Statements.
Gearing and Borrowing Policy
The Board of Scottish Mortgage remains committed to the strategic use of borrowings, in the belief that it is in the long term interests of Shareholders to be geared into prospective long run equity market returns. The Board views the capacity to use debt to enhance shareholder returns as one of the principal advantages of the investment trust structure. In line with the long term approach taken, no attempt is made to time short term market moves through tactical shifts in the level of gearing. As assets in the portfolio have risen on the back of strong performance, we have allowed the relative level of gearing to fall slightly, and it stood at a modest 9% at the financial year end.
For some months, we have been following developments in the market for fixed interest rate sterling debt, realising that we had the opportunity to lock in to long term borrowing arrangements which reflect the historically low interest rate environment which prevails. In early April 2017, the Company announced that it had raised a total of £125 million in long term, fixed rate, senior, unsecured private placement notes, denominated in sterling through the private placement debt market. These notes form part of the existing borrowing facilities for the Company and do not imply any change to the overall level of indebtedness of the Company; they are simply a switch from short term, variable interest rate debt, to instruments which offer us a fixed cost of financing over the next 25 or so years. The Board decided to undertake this transaction at what the Company believes to be attractive pricing levels, with a blended rate of just over 3% per annum, in the strong belief that this should enable us to enhance shareholder returns over the long term. Most funds have already been drawn down, but one tranche will be not be accessed until the maturity in 2020 of a £20 million debenture arranged in the 1980s, on which we pay interest at 14% per annum.
Corporate Broker
The Company conducted a review of its corporate broking arrangements as part of the continuing process of revisiting our relationships with all third party providers. Five firms, chosen by the Board, presented to the Company Secretaries to be evaluated against a framework set out by the Board. Two of these - one of which was our incumbent broker, Cenkos - were then selected to present to the Board. The result was a decision to extend the engagement of Cenkos and to broaden the mandate by appointing Jefferies Hoare Govett as joint broker to the Company.
Scottish Mortgage is now of a scale where the appointment of joint brokers is the norm and I hope that the new arrangement will build on the excellent work which Cenkos has done over the years to broaden the market for our shares and bring them to the attention of new buyers. We believe that the additional resources available to us from Cenkos and Jefferies working in tandem will bring significant benefit to the Company. The new arrangement took effect from 1 April 2017.
AGM and Shareholder Engagement
The AGM will be held in Edinburgh at the Merchants' Hall, at 4.30pm on 29 June 2017. The joint managers of the Company, 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.
The Board and Managers are keen to ensure that all shareholders have a clear understanding of the investment approach taken for the Company. One of the best ways to do this is through hearing directly from those involved. In recent years the proportion of the Company's share register represented by individual shareholders has grown, particularly as more savers have invested through platforms such as that of Baillie Gifford Savings Management Limited. Last year I highlighted that the Managers intended to hold an event in London specifically aiming to cater for shareholders who are unable to travel to Edinburgh for the AGM and who would otherwise find it difficult to have an opportunity to ask questions of their Managers. This event proved so popular and successful that the Managers have already held another such event in Birmingham in March of this year and have a further London based Investor Forum scheduled on 22 June.
There are plans to hold more of these Scottish Mortgage Investor Forums across the country over time. I would strongly encourage all shareholders to look at the further details given on page 70 of the Annual Report and Financial Statements, and on the Company's website: www.scottishmortgageit.com with a view to attending.
Investment Strategy
As has been the case for a number of years, the statement of the Managers' Core Investment Beliefs is included within the Annual Report and Financial Statements (on page 17). The Board continues to believe that one of the most valuable aspects of Scottish Mortgage is the consistency of its approach. Further, the long term investment perspective adopted by the Managers is a clear differentiator in a crowded field. Many claim to adopt a similar strategy, but few have consistently lived up to its challenges in the way that the Managers of Scottish Mortgage have done.
The Board strongly believes that investment risk is a function of the investment time horizon chosen. Over a period of years, investment risk is not defined by movements relative to an index composed of the aggregate performance of a broad and somewhat indiscriminate pool of possible investments, but by the prospect of permanent destruction of investment capital through poor investment decisions.
Unlisted Investments
Last year, we were given permission by our shareholders to hold up to 25% of our assets in unquoted companies, but I explained at the time that your Board sees this as a limit, not a target. The Managers' report deals in some detail with developments in this sector, and your Board continues to view this initiative with enthusiasm and a route to gaining access to promising companies well before they have any need to access public equity markets. The level of the Company's exposure to unlisted investments at the year end (13%) has not changed significantly over the 12 months (11.8% as at 31 March 2016).
Board Changes and Outlook
The world can and does change and sometimes this happens at a faster rate and is more significant than at others. It would be easy to focus on a number of political risks, from President Trump's unpredictable approach to policy making, to questions over North Korea's true intentions, to the escalation of the troubles in the Middle East, but the task of this Board is to consider the outlook in the context of the portfolio of Scottish Mortgage. In doing so it is important to focus on what will actually make a significant difference to the long run prospects of the companies in which the Managers invest, and to challenge the Managers as to the importance of these factors.
The flexibility of the investment policy of Scottish Mortgage is valuable in this regard, as it allows the Managers to go anywhere in the world to find opportunities and invest in any type of business. The Board views this flexibility as key to the longevity of the success of this investment strategy. Further, the stock picking approach of the Managers, focused on the long term fundamental characteristics of businesses, tends to favour the selection of those companies with a structural element to their growth, which are aiming to provide what their customers want or need. This should offer the potential for durable growth.
The pace of development and technological change not only represents a huge opportunity to some businesses, but is equally a significant threat to the existence of some of the index incumbents who have failed to invest to adapt to the transformations these technologies are bringing. If true investment risk is the permanent destruction of capital, the Board believes that not forcing the Managers to hold some of those companies which seem under greatest long term threat from such changes, in the name of diversification, is also beneficial for the long term value creation for shareholders of Scottish Mortgage.
Having started this statement by talking about my predecessor, I will conclude by saying a few words about succession. After some 16 years on this Board, I feel that it is time to move on and I have therefore decided not to stand for re-election to the Board at the AGM in June. Following a process led through the Nomination Committee by our Senior Independent Director, Professor John Kay, the Board was unanimous in supporting Fiona McBain as our new Chairman and it is proposed that she will take over from me following the AGM. Fiona has recently retired as Chief Executive of Scottish Friendly and in her eight years with Scottish Mortgage has proved to be a strong contributor to the Board.
In closing, I would like to say what a privilege it has been for me to have served on the Board of Scottish Mortgage since 2001 and in the Chair since the end of 2009. I joined in the immediate aftermath of 9/11, and we were immediately tested by the fallout from that atrocity, followed by the Iraq War and the Lehman crisis. But, for those who knew how to spot them, there were investment opportunities even in the most challenging times: sixteen years ago Facebook had not been invented but today is used by more than a quarter of the world's population, and Apple was struggling to survive, yet today it is by a large margin the world's most valuable company; all our Board papers are delivered via its ubiquitous iPad, a device which was launched in 2010! Throughout this period of extraordinary change I have been impressed by the capacity of the Managers to remain calm in stormy waters, to retain their faith in the long term value of equities, and to seek out and hold the ones that matter. They have shown repeatedly that they understand better than almost anyone else the long term changes being experienced in investment markets, with the creation of huge pools of wealth from sectors which did not even exist 20 years ago, and the concomitant destruction of value in many of our more traditional industries.
Thanks to the skills of the investment Managers, I leave Scottish Mortgage as the largest conventional investment trust, a constituent of the FTSE 100 index with a market capitalisation of over £5 billion, offering one of the lowest OCRs in the business and with an investment record which, while set out in sanitised detail elsewhere in this Report, I would simply describe as stellar.
John Scott
Chairman
12 May 2017
Past performance is not a guide to future performance.
See disclaimer at end of this document.
Managers' Review
Our Aims
Every year we describe our investment process and portfolio. But we have rarely addressed our underlying objectives and purpose. This is an attempt to rectify this omission.
It may seem self-evident that our objective is to provide an attractive total return after costs for our investors. But this is far less a strategy than a desirable outcome. We have an investment process (described on page 17 of the Annual Report and Financial Statements). Yet this is more about the method than the objective. Ultimately we endeavour to generate returns for savers and shareholders by helping to build and sustain excellent businesses over long periods. We prefer to focus on this task than on the daily gyrations of markets. We aim to support companies that contribute to productive innovation and that will eventually prove to possess deep competitive moats. Very often this means that the companies we back are addressing hard problems. We welcome this. It is in solving deep challenges that the greatest opportunities and rewards lie. Naturally this requires determination and unusual skills on the part of these companies. But over the course of time - often measured in decades - such unusual enterprises can generate abnormal profits and unusually high shareholder returns. So our objective is to help in the creation and improvement of such useful enterprises.
This may seem an oblique approach to generating shareholder returns. But so be it. Indeed the more that we can contribute to business stewardship, the better returns for shareholders are likely to be and the more we can play a constructive role in the economic system. If, in contrast, we merely see investment management as speculating - or rather guessing - which stock, sector or geography will give the best returns over the next year then we neither deserve high returns nor are likely to obtain them over anything other than carefully defined short periods. Capital allocation is too serious a matter to be hostage to the bonuses and impatience of fund managers.
Risk
In turn, our purpose translates into a quite different definition of and attitude to risk than that inculcated by modern finance theory. Its precepts have been taken up with alacrity by those who run the great majority of today's investment management companies as businesses in themselves.
We do not accept that risk resides in owning a portfolio that is different from the index or more volatile than the index. Risk is the permanent destruction of capital. The threat of such destruction is less predictable than formulas allow and is frequently unrelated to volatility. It may be that volatility is an essential safety valve. Certainly companies which are run to produce the regular pay-outs that tend to produce low share price volatility frequently endanger their long-term prospects. This means that volatility is not simply a bad synonym for risk but that low volatility frequently translates into high business risk. Or put simply that low volatility is a warning sign.
Yet a still more important issue lurks. We believe that we do nothing more important than taking and embracing risk even when we thereby expose ourselves to the possibility of permanent loss of capital. If we join the multitude and merely place our funds in assets that are already proven and currently solidly profitable, let alone in government bonds with minimal or negative yields, it is hard to see how our shareholders can expect to profit beyond the norm or - at the risk of pomposity - how our economy and society will move forward. The current obsession with pursuing safety, matching liabilities and targeting guaranteed returns is a profound systemic ill. It undermines entrepreneurial wealth creation.
Portfolio Concentration
We are often told that Scottish Mortgage is unduly concentrated. We disagree. We think that the shape of the portfolio is a rational response to the potential upside of a limited number of stocks, to an unhealthy preoccupation with individual stock performance and to an excessive preference for diversification in institutional portfolios.
It is the results of the overall portfolio that accrue to the owners. In this viewpoint we follow Jeff Bezos. Our long-standing ownership of Amazon has been good for investors but also comes with investing lessons that we need to assimilate. One of the best and bluntest pieces of advice comes from the 2015 Letter to Shareholders which stressed the virtues of risk-taking:
'Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you're still going to be wrong nine times out of ten.'
Naturally, we try to tilt the odds further in our favour (as with more prowess does Mr Bezos). But the central point remains that we quibble with the conventional wisdom that losing money in individual stocks is our prime foe. Instead we question the prevalence of truncated return assumptions and believe it makes sense to consider diversification at the strategic portfolio level. Losing money - failing as it is conventionally known - in individual stocks is a necessary and important part of educated risk-taking. This allows us to maximise our returns by owning stocks with the possibility of almost unlimited returns.
For sure we have a reasonably concentrated portfolio by most standards. This is driven by two additional but complementary perspectives. The first is that we are acutely aware that there are few if any investors who are solely exposed to Scottish Mortgage's fortunes. We hope that we bring certain attributes to the aggregate investment portfolios of individuals and their intermediaries but few have the concentrated exposure to Scottish Mortgage that the Managers themselves enjoy. What is often seen by commentators as heavy exposure to individual companies through the lens of Scottish Mortgage alone therefore looks more like the bare minimum to allow these same stocks to have an impact on the overall returns experienced by diversified investors. We think over-diversification is a far more prevalent and insidious threat than excessive concentration in today's investment world.
Secondly, we do not believe that there are many stocks that offer the possibility of truly superior long-term returns. Long-term equity performance has a much more skewed distribution than is commonly perceived. It is not normally distributed. Therefore our prime task lies in giving our shareholders the best possible opportunity to capture the extreme winners. For example 33% of the wealth created in the US equity markets between 1926-2015 came from just 30 companies out of a total of 26,000 quoted stocks. This return pattern is true for most successful investors too: however they invest, wherever they invest, whether they embrace it or not, results are highly asymmetric and top-heavy. Moreover we believe that this pattern of returns reflects company characteristics more than random chance (though the latter should not be dismissed). Currently exponential growth, huge addressable markets, frequently low capital requirements and, as ever, an enduring competitive moat are the decisive ingredients that give the opportunity for dramatic returns. Not many companies possess this combination.
Unquoted Companies
Given the relative paucity of outstanding companies, we have to do our best to widen the funnel of opportunity. We increasingly see unquoted companies as an essential part of this process. To put it bluntly: we fear that equity markets are failing in their primary responsibility of encouraging and enabling future entrepreneurial success. The reasons for this are many, well-known and hard to rank but all sad. What we can observe is that companies are finding it easier to build their businesses, raise capital and invest without excessive fear away from early exposure to capital markets. We are finding that the bulk of our emergent opportunities lie in unquoted companies and expect this to remain so for the foreseeable future.
Whilst the companies themselves enjoy a degree of isolation from the detrimental short term focused pressures of the public markets, as investors holding such assets as part of our portfolio, we are not so immune. We would caution that the accepted conventions for pricing unquoted equities frequently fail to capture underlying potential value creation. They tend to stress potentially misleading comparisons with their public competitors and emphasise the general financial market mood of the moment, over the specifics of corporate progress. Moreover any spot price underplays the uncertainties inherent in such investments. In combination, these characteristics can lead to either undue pessimism or excessive euphoria. We will try to indicate our perceptions of such emotions when they seem extreme. At present we would confine ourselves to saying that we do not regard unquoted valuations as generous in absolute terms or full, relative to quoted companies.
Supporting Companies and Entrepreneurs
But the problematic nature of quoted life requires us to do more than navigate around public markets. Although it is well-beyond our abilities and significance to reform the system, we sincerely believe that we can have an important role in supporting and strengthening the ability of companies in which we invest to withstand the pressures of capital markets. We should be plain that in many cases we are merely willing accomplices of founder owners who need little from us in the way of capital, advice or patience. But at times, particularly critical times, we can be of help. The usually large scale and long-term nature of our holdings matters in this context. These aren't postures. But we don't always succeed
Sadly the UK offers all too many occasions when constructive activism is required. We have worked closely but quietly with the new management at Rolls-Royce to support their determined efforts at corporate renewal. Progress is encouraging but will require many years. In contrast, we deeply regret that we had to sell our shares in ARM to SoftBank and only wish that ARM's Board, management and shareholders could have summoned the ambition, optimism and patience required to nurture Britain's best - perhaps only - chance of building a global technology giant.
We should be clear that be in the UK or internationally we see corporate stewardship as not just a rightful component of our task but as perhaps the essential reinforcing link in our investment philosophy. If we can prove in harsh times that we support teams trying to build great businesses and battling the forces of quarterly fund manager capitalism then these companies will hopefully be strengthened. They will almost certainly want us as shareholders and in turn help us with their time and insights. In turn other companies, quoted or unquoted, appear to want to talk to us rather more than is the norm. Reputation matters.
James Anderson
Portfolio Update
The Growing Power of the Platforms
In recent times we have observed the increasing power and dominance of a small number of companies from the west coast of the United States and the east coast of China. This success has important implications for the companies involved but also for the multitudes that compete with and rely upon the services they offer. We believe this is a foretaste of what is to come and our holdings in the companies involved continue to represent a significant proportion of our assets.
The importance of scale, mobile distribution and machine learning is increasing. There are five and a half billion people over the age of 14 alive today. There are five billion mobile handsets in circulation. This level of usage has created an addressable market far larger than anything that has gone before. The past few years have been about the build out of the mobile ecosystem but that phase is finishing. There is no longer much discussion of wars between the platforms, the technology is increasingly commoditised and the big winners are clear. The companies are now experimenting with what they can build. As they have refined their data gathering and machine learning capabilities through search, or social curation or cloud hosting or retail, they have been building the capability to redefine most other areas of economic endeavour. In last year's report we questioned whether the major and accelerating improvements in core technologies would lead to progress in healthcare, energy and transportation. A year on, the strongest prospects for delivering such an outcome are with the big network companies themselves rather than established incumbents developing or adopting the relevant skills.
In the automotive industry, the past twelve months have seen Tesla make encouraging progress in its bid to electrify passenger cars, but it is the technologies underlying vehicle autonomy that appear to have made the most dramatic gains. If Tesla, Google and Baidu use their data and machine learning capabilities to push the market into full autonomy, the ramifications for the traditional automotive companies are apparent. However, it is the second order implications that are truly enormous. Whither oil demand? What happens to ownership of the vehicle fleet? How would it be insured? What would happen to congestion? How would this affect the geography of our cities and the value of the real estate? What will happen to the logistics industry? These questions arise from just one application of Artificial Intelligence.
The big network companies are not restricting the deployment of their technology to the auto industry. Amazon and Netflix will provide 16% of professional US television production budgets this year. The 'Internet' is the third largest source of high budget television content. Online networks are taking over what we have historically conceived of as offline industries and they are providing the associated products in a way that is more personalised and convenient for the consumer. The conception of Amazon as a retailer is increasingly out-dated. Its devices wake us in the morning providing music and sharing news and weather information, its web services underpin many of the online systems we use at work and home, its delivery services provide our general goods and increasingly our groceries and its Kindle devices and streaming services provide our evening entertainment. Its reach is expanding rapidly and there remains a paucity of coherent competitive offerings.
Beyond the big networks and aspirants to similarly widespread dominance (Tesla or Illumina), it is those businesses that have understood the implications of the new order and refined their offer accordingly that seem most likely to thrive. Rather than competing directly for incremental e-commerce transactions or online advertisements, they offer customers and suppliers something different. Online retailer, Zalando offers brands the opportunity to tell their story in a way that isn't possible on other platforms. Inditex is using its supply chain expertise and store network to provide a degree of convenience and differentiation that is hard for others to replicate. Similarly Ctrip in travel and Spotify in music streaming. We think acknowledgement and adaptation is a far more promising path to value creation than incumbents labouring to minimise the impact of the changing competitive landscape.
As the network companies have become a larger part of the portfolio, we have continued to revisit their investment cases and ask whether future potential has been more fully reflected in share prices. Thus far, we have been able to answer this question with an emphatic 'no'. Our top ten holdings are largely unchanged but we are cognisant that corporate success will bring its own challenges. There have not been many instances where investors have made significant returns in companies with the market capitalisations that this group has now achieved. If we are to make money from here it will be on the basis of redefining what it means to be a 'large' company. Given their scale and influence, it is important that these companies are good corporate citizens. The technologies they are deploying may lead to significant dislocation in the labour market over the coming years and they must avoid being seen as the villains in a period of turbulence and change.
Particularly in China
Whilst the position of the American platform companies looks entrenched, the Chinese companies have a more fundamental role in the development of their domestic economy. Alibaba is the consumer economy in China and its fortunes are a proxy for the health of small and mid sized business. Singles Day is China's equivalent of Cyber Monday, the biggest online shopping event of the year. On that day in 2016, Alibaba took over $18bn of orders through its website. On Cyber Monday 2016, all US websites combined took a total of $3bn of orders. China rules the e-commerce world by a wide margin.
But there is something else going on here. Alibaba is one of the largest online media platforms in China. It owns Weibo, one of the largest social networking sites. It owns Youku Tudou which is one of the largest online video sites. It delivers 'top of the funnel' advertising and promotion. It can analyse consumer behaviour to predict demand.
It is also expanding rapidly beyond traditional e-commerce. Its finance platform has 450 million customers and processes 300 million daily transactions. It is using its reputation and reach to grow the business in areas such as wealth management and insurance. This is a real example of where a 'fintech' company might plausibly bypass an existing financial system by improving both the customer experience and the product.
Combining social, advertising, transaction, payment, delivery and banking data, Alibaba has a data set which is the envy of the online world. This allows it to study and train its machine learning algorithms on consumer behaviour right through from demand generation to completed transactions based on real identity. It operates in a regulatory regime which allows it to use this data to great effect. Credit scoring and therefore bank lending look to be far more accurate than can be achieved in the West.
Progress in Healthcare
Over the next decade, healthcare may turn out to be the most important example of the online platforms' participation in the broader economy. A local example of this comes from the NHS's partnership with Google's parent, Alphabet. This venture is applying machine learning to data from a million patients' eye scans with the aim of achieving earlier detection and treatment of common eye diseases.
Over the past ten years we have witnessed remarkable progress in the field of immuno-oncology (therapies that harness the body's immune system to fight cancer). New drugs have been developed, for example in the treatment of melanoma, which currently appear to be a functional cure for some of the patients that take them. That such treatments work for some patients and not others is driving a move away from a single 'standard of care' to a more tailored treatment approach based on an individual's genetic profile. This has been facilitated by the rapidly declining cost of gene sequencing, driven by the progress at Illumina.
Illumina's subsidiary, Grail, recently raised close to a billion dollars in a private round in which Scottish Mortgage participated. Grail is aiming to build a screening test for early stage cancer in asymptomatic individuals. To do this it will need to sequence the DNA of hundreds of thousands of people and learn from that information. This can only be done with access to data storage capability on a scale that few companies globally can provide. Human analysts cannot extract useful information from such datasets; advanced machine learning expertise is required. In this context, it is perhaps unsurprising that the CEO of Grail was formerly an engineer at Google. Nor was it a surprise to see that our co-investors included the likes of Amazon and Tencent.
Grail epitomises some of the themes mentioned earlier with regard to unlisted companies; it is building its business, accessing a large pool of capital and investing against a long-term opportunity away from the gaze of public market investors. Having its management and finances scrutinised every quarter by those trying to predict short-term share price movements would likely be a serious distraction and an impediment to underlying progress. Access to a large pool of patient long-term capital ought to provide the company with a competitive advantage.
Over the past few years we have allocated more of the Trust's assets to therapeutic healthcare companies. We continued this year. New holdings included Unity Biotechnology (diseases of ageing), Intarcia Therapeutics (diabetes) and Denali Therapeutics (neurodegeneration). We do not expect these companies to operate the capital light business models we've seen amongst the large online networks. Instead, they are attempting the difficult and expensive task of researching novel therapies for big disease categories. The traditional funding model for such companies is to offer only as much capital as is required to meet the next development milestone for a new drug. Whilst this approach encourages a disciplined and frugal approach to business development it has the significant drawback of orienting a company towards prioritising short-term landmarks ahead of long-term development. We are interested to find out whether more substantive funding for these companies at an earlier stage of their existence will extend time horizons and increase the chances of success.
Concluding Comments
The drive and vision of the founder-owners running many of our top holdings continually challenge us to reassess the scope of what they can achieve. As these network companies have grown large we have not become less demanding in our return expectations for them. We believe that they will have big new opportunities over the next decade. The enduring competitive moats that they have created seem to us to be under-appreciated in stock market and valuation terms.
The entrepreneurs running newer businesses in healthcare and beyond must navigate this competitive landscape. It is exciting that we continue to find new holdings with leaders that are prepared to invest and take on the challenges this presents.
The vagaries of stock markets will drive our returns over shorter time periods but it will be the success (or otherwise) of these individuals and the companies they are creating that determines the longer run outcome. For us, this is a source of great optimism.
Tom Slater
Thirty Largest Holdings and Twelve Month Performance
|
Name |
Business |
Fair value 31 March 2017 £'000 |
% of total assets |
Absolute Performance† % |
Contribution to absolute performance# % |
Fair Value 31 March 2016 £'000 |
|
Amazon.com |
Online retailing and cloud computing |
510,086 |
9.5 |
71.7 |
7.6 |
330,117 |
|
Tesla Inc |
Electric cars, autonomous driving and solar energy |
366,984 |
6.8 |
40.0 |
2.5 |
185,552 |
|
Illumina |
Biotechnology equipment |
318,103 |
5.9 |
21.0 |
1.9 |
291,722 |
|
Tencent Holdings |
Internet services |
308,730 |
5.7 |
61.8 |
3.6 |
190,964 |
|
Inditex |
Global clothing retailer |
297,098 |
5.5 |
22.8 |
1.7 |
231,567 |
|
Alibaba Group |
Online retail |
273,626 |
5.1 |
56.8 |
2.7 |
164,129 |
|
|
Social networking site |
257,167 |
4.8 |
43.1 |
2.3 |
179,697 |
|
Baidu |
Online search engine |
237,505 |
4.4 |
3.9 |
0.1 |
228,621 |
|
Alphabet |
Holding company for Google and associated ventures |
199,136 |
3.7 |
28.0 |
1.3 |
155,518 |
|
Ferrari |
Luxury automobiles |
148,851 |
2.8 |
109.4 |
1.9 |
27,788 |
|
Ctrip.com |
Travel agent |
131,093 |
2.4 |
28.0 |
0.5 |
35,752 |
|
BASF |
Chemicals |
118,852 |
2.2 |
56.6 |
1.3 |
78,624 |
|
ASML |
Lithography |
110,439 |
2.1 |
52.1 |
0.7 |
42,067 |
|
Zalando |
International online clothing retailer |
108,578 |
2.0 |
41.8 |
0.8 |
68,231 |
|
Atlas Copco |
Engineering |
107,723 |
2.0 |
65.8 |
1.4 |
87,657 |
|
Kering |
Luxury goods producer and retailer |
104,970 |
1.9 |
70.4 |
1.2 |
86,183 |
|
Netflix |
Subscription service for TV shows and movies |
98,605 |
1.8 |
66.2 |
1.0 |
36,264 |
|
Kinnevik |
Investment company |
90,981 |
1.7 |
21.8 |
0.4 |
68,867 |
|
Housing Development Finance Corporation |
Indian mortgage provider |
78,537 |
1.5 |
61.5 |
0.8 |
42,009 |
|
Intuitive Surgical |
Surgical robots |
75,393 |
1.4 |
45.8 |
0.7 |
67,644 |
|
Bluebird Bio Inc |
Provider of biotechnological products and services |
68,486 |
1.3 |
141.3 |
1.0 |
22,032 |
|
Rolls-Royce Group |
Aerospace equipment |
63,002 |
1.2 |
12.4 |
0.2 |
56,982 |
|
Workday |
Enterprise information technology |
60,431 |
1.1 |
24.6 |
0.2 |
26,714 |
|
Grail Inc Series B Pref. u |
Clinical stage biotechnology company |
59,978 |
1.1 |
(0.5)* |
-* |
- |
|
Nvidia |
Visual computing |
51,904 |
1.0 |
105.1* |
0.4* |
- |
|
Prudential |
International insurance |
51,845 |
1.0 |
33.1 |
0.5 |
76,256 |
|
Svenska Handelsbanken |
Banking |
48,280 |
0.9 |
23.9* |
0.2* |
- |
|
Novozymes |
Enzyme manufacturer |
47,104 |
0.9 |
2.7 |
0.2 |
54,045 |
|
Renishaw |
Electronic equipment |
45,076 |
0.8 |
72.7 |
0.6 |
26,571 |
|
You & Mr Jones Class A Units u |
Digital advertising |
45,064 |
0.8 |
29.5 |
0.3 |
34,787 |
|
|
|
4,483,627 |
83.3 |
|
|
|
† Absolute performance (in sterling terms) has been calculated on a total return basis over the period 1 April 2016 to 31 March 2017.
# 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.
See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Distribution of Assets
|
|
At 31 March 2017 % |
At 31 March 2016 % |
|
|
North America |
47.9 |
46.4 |
|
|
South America |
0.5 |
0.4 |
|
|
Europe |
30.3 |
33.7 |
|
|
|
United Kingdom |
4.4 |
8.6 |
|
|
Eurozone |
19.6 |
18.6 |
|
|
Developed Europe (non euro) |
5.9 |
5.8 |
|
|
Rest of Europe |
0.4 |
0.7 |
|
Africa and Middle East |
0.4 |
0.4 |
|
|
Asia |
20.9 |
19.1 |
|
|
|
China |
18.5 |
16.9 |
|
|
India |
2.1 |
1.7 |
|
|
Japan |
- |
0.2 |
|
|
Rest of Asia |
0.3 |
0.3 |
|
Total assets (before deduction of loans and debentures) |
100.0 |
100.0 |
|
Key Performance Indicators
The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:
- 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 24 of the Annual Report and Financial Statements.
In addition to the above, the Board considers performance against other companies within the AIC Global Sector.
Future Developments of the Company
The outlook for the Company is set out in the Chairman's Statement and the Managers' Report above.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors' Remuneration Report on Page 36 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
|
|
2017 Revenue £'000 |
2017 Capital £'000 |
2017 Total £'000 |
2016 Revenue £'000 |
2016 Capital £'000 |
2016 Total £'000 |
|
Investment management fee |
3,558 |
10,674 |
14,232 |
2,881 |
8,642 |
11,523 |
Details of the Investment Management Agreement are disclosed on page 27 of the Annual Report and Financial Statements. With effect from 1 April 2017 Baillie Gifford & Co Limited's annual management fee is 0.30% on the first £4 billion of total assets less current liabilities (excluding short term borrowings for investment purposes) and 0.25% thereafter. For the year to 31 March 2017 the management fee was 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes). The management fee is calculated quarterly and levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co; however the OEICs' share class held by the Company does not itself attract a management fee. The Company's holding in the Baillie Gifford Global Discovery OEIC was sold during the year.
The investment management fee is charged 25% to revenue and 75% to capital.
Principal Risks
As explained on page 31 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 56 to 61 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. The investment policy limits the amount which may be invested in unlisted companies to 25 per cent of the total assets of the Company, measured at time of purchase.
Investment Strategy Risk - pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or an ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their Net Asset Value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy, the investment portfolio and its performance, the level of discount/premium to Net Asset Value at which the shares trade and movements in the share register.
Discount Risk - the discount/premium at which the Company's shares trade relative to its Net Asset Value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.
Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.
Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including 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 held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.
Operational Risk - failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.
Leverage Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found on page 66 of the Annual Report and Financial Statements and the Glossary of Terms on page 71 of the Annual Report and Financial Statements.
Political Risk - 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 and the announcement by the Scottish Government that it will seek to hold a second referendum on Scottish independence. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.
Viability Statement
In accordance with provision C2.2 of the UK Corporate Governance Code that the Directors assess the prospects of the Company over a defined period, the Directors have elected to do so over a period of 10 years. The Directors continue to believe this period to be appropriate as the investment objective of the Company is aimed at investors with a 5 to 10 year investment horizon and, subject to the assumptions detailed below, the Directors do not expect there to be any significant change to the current principal risks facing Scottish Mortgage nor to the adequacy of the controls in place to effectively mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a 10 year period.
Assumption 1
There is no significant adverse change to the regulatory environment and tax treatment enjoyed by UK investment trusts.
Assumption 2
The Company does not suffer sustained inadequate relative investment performance with the current or any successor fund managers such that the Company fails to maintain a supportive shareholder base.
Using the long term expectations of shareholders as the main determinant of the chosen assessment period, the Directors have conducted a robust assessment of the principal risks and uncertainties facing the Company (as detailed 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, private placement loan notes 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 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 12 months from the date of approval of 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 21 to 23 of the Annual Report and Financial Statements.
Currency Risk
Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.
The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.
Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.
Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.
|
As at 31 March 2017 |
Investments £'000 |
Cash and cash equivalents £'000 |
Loans and debentures £'000 |
Other debtors and creditors* £'000 |
Net exposure £'000 |
|
US dollar |
3,311,569 |
67,547 |
(359,856) |
(890) |
3,018,370 |
|
Euro |
1,055,007 |
- |
- |
998 |
1,056,005 |
|
Hong Kong dollar |
308,730 |
- |
- |
- |
308,730 |
|
Swedish krona |
246,984 |
- |
- |
1,865 |
248,849 |
|
Brazilian real |
27,277 |
- |
- |
546 |
27,823 |
|
Danish krone |
47,104 |
- |
- |
- |
47,104 |
|
Indonesian rupiah |
17,659 |
- |
- |
- |
17,659 |
|
Indian rupee |
78,537 |
- |
- |
- |
78,537 |
|
Total exposure to currency risk |
5,092,867 |
67,547 |
(359,856) |
2,519 |
4,803,077 |
|
Sterling |
205,471 |
9,096 |
(149,710) |
5,657 |
70,514 |
|
|
5,298,338 |
76,643 |
(509,566) |
8,176 |
4,873,591 |
* Includes net non-monetary assets of £10,000.
|
As at 31 March 2016 |
Investments £'000 |
Cash and cash equivalents £'000 |
Loans and debentures £'000 |
Other debtors and creditors* £'000 |
Net exposure £'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 £34,000.
Currency Risk Sensitivity
At 31 March 2017, 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 2016.
|
|
2017 £'000 |
2016 £'000 |
|
US dollar |
150,919 |
102,621 |
|
Euro |
52,800 |
36,922 |
|
Hong Kong dollar |
15,437 |
9,548 |
|
Swedish krona |
12,442 |
7,826 |
|
Indian rupee |
3,927 |
2,106 |
|
Danish krone |
2,355 |
2,705 |
|
Brazilian real |
1,391 |
883 |
|
Polish zloty |
- |
264 |
|
Japanese yen |
- |
395 |
|
Indonesian rupiah |
883 |
647 |
|
|
240,154 |
163,917 |
Interest Rate Risk
Interest rate movements may affect directly:
¾ the fair value of the investments in fixed interest rate securities;
¾ the level of income receivable on cash deposits;
¾ the fair value of the Company's fixed-rate borrowings; and
¾ the interest payable on the Company's variable rate borrowings.
Interest rate movements may also impact upon the market value of the Company's investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.
The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.
The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value at fair value.
The interest rate risk profile of the Company's financial assets and liabilities at 31 March is shown below:
Financial Assets
|
|
2017 |
2016 |
||||
|
|
Fair value £'000 |
Weighted average interest rate |
Weighted average period until maturity* |
Fair value £'000 |
Weighted average interest rate |
Weighted average period until maturity* |
|
Floating rate: |
|
|
|
|
|
|
|
Brazilian bonds (index linked) |
27,277 |
9.7% |
28 years |
17,241 |
11.0% |
29 years |
|
Cash and short-term deposits: |
|
|
|
|
|
|
|
Other overseas currencies |
67,547 |
- |
n/a |
11,196 |
- |
n/a |
|
Sterling |
9,906 |
0.1% |
n/a |
32,777 |
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:
|
|
2017 £'000 |
2016 £'000 |
|
|
Floating rate |
- US$ denominated |
291,883 |
114,799 |
|
Fixed rate |
- Sterling denominated |
149,710 |
150,079 |
|
|
- US$ denominated |
67,973 |
233,076 |
|
|
509,566 |
497,594 |
|
Maturity Profile
The maturity profile of the Company's financial liabilities at 31 March was:
|
|
2017 |
2016 |
||||
|
|
Within 1 year £'000 |
Between 1 and 5 years £'000 |
More than 5 years £'000 |
Within 1 year £'000 |
Between 1 and 5 years £'000 |
More than 5 years £'000 |
|
Repayment of loans and debentures |
359,856 |
20,000 |
125,675 |
288,736 |
79,139 |
125,675* |
|
Accumulated interest on loans and debentures to maturity date |
18,060 |
52,487 |
33,022 |
18,094 |
55,125 |
44,209 |
|
|
377,916 |
72,487 |
158,697 |
306,830 |
134,264 |
169,884 |
* Includes £675,000 irredeemable debenture stock.
Interest Rate Risk Sensitivity
An increase of 100 basis points in bond yields as at 31 March 2017 would have decreased total net assets and total return on ordinary activities by £3,729,000 (2016 - £2,177,000) and would have increased the net asset value per share (with borrowings at fair value) by 0.55p (2016 - increased by 0.84p). A decrease of 100 basis points would have had an equal but opposite effect.
Other Price Risk
Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets.
The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the benchmark. The Board provides guidance to the Managers on the level of unlisted investments.
Other Price Risk Sensitivity
Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 21 to 23 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.
93.8% (2016 - 99.5%) of the Company's net assets are invested in quoted equities. A 3% increase in quoted companies equity valuations at 31 March 2017 would have increased total assets and total return on ordinary activities by £137,125,000 (2016 - £103,177,000). 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:
¾ where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;
¾ the Board regularly receives information from the Investment Managers on the credit ratings of those bonds and other securities in which the Company has invested;
¾ the Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. 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;
¾ investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations at the same time as any transfer of cash or securities away from the Company is completed;
¾ transactions involving derivatives, and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers of the creditworthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and
¾ cash is held only at banks that are regularly reviewed by the Managers.
Credit Risk Exposure
The maximum exposure to direct credit risk at 31 March was:
|
|
2017 £'000 |
2016 £'000 |
|
Fixed interest investments |
27,277 |
17,241 |
|
Cash and short term deposits |
76,643 |
43,973 |
|
Debtors and prepayments |
16,293 |
4,051 |
|
|
120,213 |
65,265 |
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:
|
|
2017 |
2016 |
||||
|
|
Par/nominal £'000 |
Book £'000 |
Fair £'000 |
Par/nominal £'000 |
Book £'000 |
Fair £'000 |
|
8-14% stepped interest debenture stock 2020 |
20,000 |
20,932 |
27,295 |
20,000 |
21,134 |
29,540 |
|
6.875% debenture stock 2023 |
75,000 |
74,784 |
95,250 |
75,000 |
74,747 |
89,044 |
|
6-12% stepped interest debenture stock 2026 |
50,000 |
53,319 |
83,028 |
50,000 |
53,523 |
85,927 |
|
4.5% irredeemable debenture stock |
675 |
675 |
712 |
675 |
675 |
649 |
|
Total debentures |
145,675 |
149,710 |
206,285 |
145,675 |
150,079 |
205,160 |
|
Fixed rate loans |
|
67,973 |
68,083 |
|
233,076 |
233,687 |
|
Floating rate loans |
|
291,883 |
291,883 |
|
114,799 |
114,799 |
|
Total borrowings |
|
509,566 |
566,251 |
|
497,954 |
553,646 |
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 358.7p to 354.6p. Taking the market price of the ordinary shares at 31 March 2017 of 366.1p, this would have given a premium to net asset value of 3.2% as against a premium of 2.1% on a debt at book basis. At 31 March 2016 the effect would have been to reduce the net asset value from 263.4p 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 0.3% on a debt at book basis.
Deducting long term borrowings at par value would have the effect of increasing the net asset value per share from 358.7p to 359.0p. Taking the market price of the ordinary shares at 31 March 2017 of 366.1p, this would have given a premium to net asset value of 2.0% as against a premium of 2.1% on a debt at book basis. At 31 March 2016 the effect would have been to increase the net asset value from 263.4p to 263.8p. Taking the market price of the ordinary shares at 31 March 2016 of 262.5p, this would have given a discount to net asset value of 0.5% as against a discount of 0.3% on a debt at book basis.
Capital Management
The capital of the Company is its share capital and reserves as set out in notes 13 and 14 of the Annual Report and Financial Statements together with its borrowings (see notes 11 and 12 of the Annual Report and Financial Statements). The objective of the Company is to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out above. The Company has the authority to issue and buy back its shares (see page 7 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in notes 13 and 14 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loans and debentures which are detailed in notes 11 and 12 of the Annual Report and Financial Statements.
Subsequent Events
Subsequent to the year end, on 6 April 2017, the Company issued the following private placement unsecured loan notes:
¾ £45 million at a coupon of 3.05% maturing on 7 April 2042.
¾ £30 million at a coupon of 3.30% maturing on 6 April 2044.
¾ £30 million at a coupon of 3.12% maturing on 6 April 2047.
A further unsecured loan note was agreed for funding on 30 September 2020 to refinance the £20 million 8-14% stepped interest debenture stock maturing on 30 September 2020:
¾ £20 million at a coupon of 3.65% maturing on 6 April 2044.
Alternative Investment Fund Managers (AIFM) Directive
In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors.
AIFM Remuneration
In accordance with the Directive, the AIFM remuneration policy is available at www.bailliegifford.com or on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's relevant reporting period are available at www.bailliegifford.com.
The Company's maximum and actual leverage levels (see Glossary of Terms on page 71 of the Annual Report and Financial Statements) at 31 March 2017 are shown below:
Leverage
|
|
|
|
Gross method |
Commitment method |
|
Maximum limit |
|
|
2.50:1 |
2.00:1 |
|
Actual |
|
|
1.10:1 |
1.10:1 |
Investments
|
As at 31 March 2017 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Listed equities/funds |
4,565,355 |
5,463 |
- |
4,570,818 |
|
Listed debt securities |
- |
27,277 |
- |
27,277 |
|
Unlisted equities |
- |
- |
700,243 |
700,243 |
|
Total financial asset investments |
4,565,355 |
32,740 |
700,243 |
5,298,338 |
|
As at 31 March 2016 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'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 |
Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 102, the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly
observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
The valuation techniques used by the Company are explained in the accounting policies on page 46 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 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 period. In preparing these Financial Statements, the Directors are required to:
¾ select suitable accounting policies and then apply them consistently;
¾ make judgements and 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 have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the 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.
Responsibility Statement of the Directors in Respect of the Annual Financial Report
We confirm that to the best of our knowledge:
¾ the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company;
¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that the issuer and business face; and
¾ we consider that 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.
By order of the Board
John Scott
12 May 2017
Income Statement
|
|
For the year ended 31 March 2017 |
For the year ended 31 March 2016 |
||||
|
|
Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
Gains/(losses) on investments |
- |
1,354,245 |
1,354,245 |
- |
(6,647) |
(6,647) |
|
Currency losses |
- |
(42,958) |
(42,958) |
- |
(7,212) |
(7,212) |
|
Income (note 2) |
27,796 |
- |
27,796 |
32,910 |
- |
32,910 |
|
Investment management fee |
(3,558) |
(10,674) |
(14,232) |
(2,881) |
(8,642) |
(11,523) |
|
Other administrative expenses |
(3,544) |
- |
(3,544) |
(3,176) |
- |
(3,176) |
|
Net return before finance costs and taxation |
20,694 |
1,300,613 |
1,321,307 |
26,853 |
(22,501) |
4,352 |
|
Finance costs of borrowings |
(4,837) |
(14,510) |
(19,347) |
(4,568) |
(13,704) |
(18,272) |
|
Net return on ordinary activities before taxation |
15,857 |
1,286,103 |
1,301,960 |
22,285 |
(36,205) |
(13,920) |
|
Tax on ordinary activities |
(1,721) |
- |
(1,721) |
(857) |
- |
(857) |
|
Net return on ordinary activities after taxation |
14,136 |
1,286,103 |
1,300,239 |
21,428 |
(36,205) |
(14,777) |
|
Net return per ordinary share (note 4) |
1.07p |
97.31p |
98.38p |
1.66p |
(2.81p) |
(1.15p) |
The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.
Balance Sheet
|
|
At 31 March 2017 £'000 |
At 31 March 2016 £'000 |
|
Fixed assets |
|
|
|
Investments held at fair value through profit or loss |
5,298,338 |
3,922,124 |
|
Current assets |
|
|
|
Debtors |
16,293 |
4,051 |
|
Cash and cash equivalents |
76,643 |
43,973 |
|
|
92,936 |
48,024 |
|
Creditors |
|
|
|
Amounts falling due within one year |
(367,973) |
(303,486) |
|
Net current liabilities |
(275,037) |
(255,462) |
|
Total assets less current liabilities |
5,023,301 |
3,666,662 |
|
Creditors |
|
|
|
Amounts falling due after more than one year |
(149,710) |
(209,218) |
|
|
4,873,591 |
3,457,444 |
|
Capital and reserves |
|
|
|
Called up share capital |
71,086 |
71,086 |
|
Capital redemption reserve |
19,094 |
19,094 |
|
Capital reserve |
4,754,597 |
3,313,502 |
|
Revenue reserve |
28,814 |
53,762 |
|
Shareholders' funds |
4,873,591 |
3,457,444 |
|
Net asset value per ordinary share (after deducting borrowings at book)* |
358.7p |
263.4p |
|
Net asset value per ordinary share (after deducting borrowings at fair value)* (note 7) |
354.6p |
259.2p |
|
Net asset value per ordinary share (after deducting borrowings at par)* |
359.0p |
263.8p |
|
Ordinary shares in issue† (note 8) |
1,358,569,485 |
1,312,524,485 |
* See Glossary of Terms on page 71 of the Annual Report and Financial Statements.
Statement of Changes in Equity
For the year ended 31 March 2017
|
|
Share £'000 |
Capital redemption reserve £'000 |
Capital reserve* £'000 |
Revenue reserve £'000 |
Shareholders' £'000 |
|
Shareholders' funds at 1 April 2016 |
71,086 |
19,094 |
3,313,502 |
53,762 |
3,457,444 |
|
Net return on ordinary activities after taxation |
- |
- |
1,286,103 |
14,136 |
1,300,239 |
|
Ordinary shares bought back into treasury (note 8) |
- |
- |
(19,558) |
- |
(19,558) |
|
Ordinary shares issued from treasury (note 8) |
- |
- |
174,550 |
- |
174,550 |
|
Dividends paid during the year (note 5) |
- |
- |
- |
(39,084) |
(39,084) |
|
Shareholders' funds at 31 March 2017 |
71,086 |
19,094 |
4,754,597 |
28,814 |
4,873,591 |
For the year ended 31 March 2016
|
|
Share £'000 |
Capital redemption reserve £'000 |
Capital reserve* £'000 |
Revenue reserve £'000 |
Shareholders' £'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 into treasury (note 8) |
- |
- |
(3,199) |
- |
(3,199) |
|
Ordinary shares issued from treasury (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 |
* The Capital Reserve balance at 31 March 2017 includes investment holding gains of £2,647,822,000 (31 March 2016 - gains of £1,533,836,000).
Cash Flow Statement
|
|
Year to 31 March 2017 £'000 £'000 |
Year to 31 March 2016 £'000 £'000 |
||
|
Cash flows from operating activities |
|
|
|
|
|
Net return on ordinary activities before taxation |
1,301,960 |
|
(13,920) |
|
|
Net (gains)/losses on investments |
(1,354,245) |
|
6,647 |
|
|
Currency losses |
42,958 |
|
7,212 |
|
|
Finance costs of borrowings |
19,347 |
|
18,272 |
|
|
Overseas withholding tax refunded |
124 |
|
935 |
|
|
Overseas withholding tax incurred |
(1,755) |
|
(1,792) |
|
|
Changes in debtors and creditors |
443 |
|
(216) |
|
|
Cash from operations |
|
8,832 |
|
17,138 |
|
Interest paid |
|
(19,484) |
|
(18,422) |
|
Net cash outflow from operating activities |
|
(10,652) |
|
(1,284) |
|
Cash flows from investing activities |
|
|
|
|
|
Acquisitions of investments |
(723,418) |
|
(619,851) |
|
|
Disposals of investments |
686,952 |
|
445,699 |
|
|
Realised currency gain |
6,927 |
|
3,848 |
|
|
Net cash outflow from investing activities |
|
(29,539) |
|
(170,304) |
|
Equity dividends paid |
(39,084) |
|
(37,671) |
|
|
Ordinary shares bought back into treasury |
(19,574) |
|
(3,184) |
|
|
Ordinary shares sold from treasury |
169,422 |
|
179,873 |
|
|
Bank loans repaid |
(37,903) |
|
(111,963) |
|
|
Bank loans drawn down |
- |
|
111,963 |
|
|
Net cash inflow from financing activities |
|
72,861 |
|
139,018 |
|
Increase/(decrease) in cash and cash equivalents |
|
32,670 |
|
(32,570) |
|
Cash and cash equivalents at start of period |
|
43,973 |
|
76,543 |
|
Cash and cash equivalents at end of period* |
|
76,643 |
|
43,973 |
* 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 2017 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out below which are unchanged from the prior year and have been applied consistently. The Company has early adopted the amendments to Section 34 of FRS 102 regarding fair value hierarchy disclosures. |
|||||||
|
2. |
Income |
Year to 31 March 2017 £'000 |
Year to 31 March 2016 £'000 |
|||||
|
|
Income from investments and interest receivable |
27,752 |
32,673 |
|||||
|
|
Other income |
44 |
237 |
|||||
|
|
|
27,796 |
32,910 |
|||||
|
3. |
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Investment Management Agreement is terminable on not less than six months' notice. The annual management fee for the year to 31 March 2017 was 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes), calculated quarterly. With effect from 1 April 2017 the annual management fee is 0.30% on the first £4 billion of total assets less current liabilities (excluding short term borrowings for investment purposes) and 0.25% thereafter, calculated quarterly. |
|||||||
|
4. |
Net Return per Ordinary Share |
|
Year to 31 March 2017 £'000 |
Year to 31 March 2016 £'000 |
||||
|
Revenue return on ordinary activities after taxation |
|
14,136 |
21,428 |
|||||
|
Capital return on ordinary activities after taxation |
|
1,286,103 |
(36,205) |
|||||
|
Total net return |
|
1,300,239 |
(14,777) |
|||||
|
Weighted average number of ordinary shares in issue |
1,321,667,362 |
1,290,467,928 |
||||||
|
Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares (excluding treasury shares) in issue during the year. There are no dilutive or potentially dilutive shares in issue. |
||||||||
|
5. |
Ordinary Dividends |
2017 |
2016
|
2017 £'000 |
2016 £'000 |
|||
| Amounts recognised as distributions in the year: |
|
|
|
|
||||
| Previous year's final (paid 4 July 2016) |
1.58p |
1.55p |
20,795 |
19,758 |
||||
| Interim (paid 2 December 2016) |
1.39p |
1.38p |
18,289 |
17,913 |
||||
|
2.97p |
2.93p |
39,084 |
37,671 |
|||||
| 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 £14,136,000 (2016 - £21,428,000). | ||||||||
|
|
|
2017 |
2016
|
2017 £'000 |
2016 £'000 |
|||
| Dividends paid and payable in respect of the year: |
|
|
|
|
||||
| Interim dividend per ordinary share (paid 2 December 2016) |
1.39p |
1.38p |
18,289 |
17,913 |
||||
| Proposed final dividend per ordinary share (payable 3 July 2017) |
1.61p |
1.58p |
21,873 |
20,738 |
||||
|
3.00p |
2.96p |
40,162 |
38,651 |
|||||
|
|
If approved the final dividend will be paid on 3 July 2017 to all shareholders on the register at the close of business on 9 June 2017. The ex-dividend date is 8 June 2017. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 12 June 2017. |
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|
6. |
Creditors falling due within one year include drawings under the following borrowing facilities: Borrowing facilities at 31 March 2017 A 1 year US$165 million revolving loan facility has been arranged with The Royal Bank of Scotland plc. A 2 year US$200 million revolving loan facility as been arranged with National Australia Bank Limited. A 3 year US$85 million loan facility has been arranged with The Royal Bank of Scotland plc. At 31 March 2017 drawings were as follows: The Royal Bank of Scotland plc US$165 million (revolving facility) at an interest rate (at 31 March 2017) of 1.525% per annum. US$85 million at an interest rate of 1.945% per annum. National Australia Bank US$200 million (revolving facility) at an interest rate (at 31 March 2017) of 1.792% per annum. At 31 March 2016 drawings were as follows: The Royal Bank of Scotland plc US$165 million (revolving facility) at an interest rate (at 31 March 2016) of 1.1169% per annum. US$85 million at an interest rate of 1.945% per annum (included in amounts due after more than one year). State Street Bank and Trust Company US$50 million at an interest rate of 1.70% per annum. National Australia Bank Limited US$200 million at an interest rate of 1.43% per annum. During the year the US$50 million 2 year loan with State Street was repaid. The US$165 million 1 year revolving loan with The Royal Bank of Scotland plc ('RBS') was refinanced with a US$165 million 1 year revolving loan from RBS. The US$200 million 2 year loan with National Australia Bank ('NAB') was repaid and refinanced with a revolving US$200 million 2 year loan from NAB. Subsequent to the year end, on 6 April 2017, the Company issued the following private placement unsecured loan notes: ¾ £45 million at a coupon of 3.05% maturing on 7 April 2042. ¾ £30 million at a coupon of 3.30% maturing on 6 April 2044. ¾ £30 million at a coupon of 3.12% maturing on 6 April 2047. A further unsecured loan note was agreed for funding on 30 September 2020 to refinance the £20 million 8-14% stepped interest debenture stock maturing on 30 September 2020: ¾ £20 million at a coupon of 3.65% maturing on 6 April 2044. Additionally, the US$165 million 1 year revolving loan with RBS was repaid on 11 April 2017 and replaced with a US$40 million 1 year revolving loan with RBS. |
|||||||
|
7. |
The fair value of borrowings at 31 March 2017 was £566,251,000 (2016 - £553,646,000). Net asset value per share (after deducting borrowings at fair value) was 354.6p (2016 - 259.2p). |
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|
8. |
|
|
2016 Number of shares |
2015 Number of shares |
||||
| Share capital: Ordinary shares of 5p each |
|
|
|
|||||
| Allotted, called up and fully paid |
|
1,358,569,485 |
1,312,524,485 |
|||||
| Treasury shares |
|
63,161,395 |
109,206,395 |
|||||
| 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 2017 a total of 7,005,000 (2016 - 1,250,000) ordinary shares with a nominal value of £350,000 (2016 - £63,000) were bought back at a total cost of £19,558,000 (2016 - £3,199,000) and held in treasury. At 31 March 2017 the Company had authority to buy back a further 193,072,120 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 2017, the Company sold 53,050,000 ordinary shares from treasury at a premium to net asset value, with a nominal value of £2,653,000 raising net proceeds of £174,550,000 (31 March 2016 - 68,100,000 ordinary shares raising net proceeds of £179,873,000). At 31 March 2017 the Company had authority to issue or sell from treasury a further 83,302,448 ordinary shares. |
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|
9. |
Transaction costs on purchases amounted to £261,000 (2016 - £275,000) and transaction costs on sales amounted to £312,000 (2016 - £325,000). |
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