Half Yearly Results

RNS Number : 8122R

Scottish Mortgage Inv Tst PLC

31 October 2013

 



RNS Announcement

Scottish Mortgage Investment Trust PLC

Results for the half-year to 30 September 2013

The following is the unaudited preliminary statement for the six months to 30 September 2013 which was approved by the Board on 30 October 2013.

Half-yearly management report

Results and Approach

Over the six month period performance has been very strong; net asset value (NAV) per share increased by 12.1% and the share price by 13.1%, while the FTSE All-World Index fell by 0.4%.

Performance is assessed by the Board over longer periods (five to ten years) in keeping with the investment approach.  Long term results are outstanding: over 5 years the NAV per share total return (capital and dividends) was 104%; the share price, 126% and the FTSE All-World Index, 65%.  Over 10 years the returns were: NAV, 240%; share price, 316% and the Index, 135%. 

Past performance is an unreliable guide to future performance; the precise repetition of old patterns is unlikely. That said, the approach adopted over the past ten years has been consistent and the intention is to maintain it. The portfolio consists of around 70 investments chosen on a global basis with a long term horizon (five years or longer).  Criteria examined when considering investment focus on competitive advantage, financial strength, management attitudes and valuation.

The resulting portfolio bears little resemblance to the benchmark, the FTSE All-World Index. This is adopted only with a view to providing a base against which long term performance can be measured.  Research suggests that sustained outperformance is only achieved with high "active share" (a low overlap with the index). Scottish Mortgage has an active share of 94 (100 means there is no commonality with the index while a figure of zero represents a replication of the Index).

The scale of the Company has increased considerably over the five year period.  Scottish Mortgage's share price has risen recently over £10 and the Company is now one of the largest UK listed investment trusts by market capitalisation.  This has been driven by both asset growth and by a narrowing of the discount at which the share price stands to net asset value.  Scale is important for a number of reasons including the sharing of costs across a broad base, the advantages of greater prominence and the provision of liquidity to existing and potential shareholders.  As the share price has moved closer to net asset value, it is worth bearing in mind that there are 36 million shares held in Treasury which are available for re-issue at a premium. 

Earnings and Dividend

It was pointed out in the 2012/13 Annual Report that earnings in the current year were likely to fall; this has been the case and earnings were 9.19p per share compared to 12.53p in the corresponding period.  A dividend of 6.90p will be paid, a 3% increase over last year's interim payment.  It is the Board's intention to maintain its progressive dividend policy, although the main focus is on capital growth.

The Portfolio

The portfolio has changed little over the past six months.  Holdings were taken in Dropbox (secure and easy to use data storage), Genomic Health (a molecular diagnostics company that sells tests that help to predict how patients will respond to cancer treatment) and Tesla Motors (an ambitious and rapidly growing Californian  electric car designer and manufacturer).  A new name in the top ten holdings is Kering, reflecting a name change from PPR (French owner of luxury brands including Gucci, Bottega Veneta, Saint Laurent and Alexander McQueen).  There were complete sales of three holdings where on re-examination the investment case was considered less promising: Serco (government outsourcing), FLIR Systems (infrared sensors) and Dangdang (on line book seller). 

Markets and Outlook

Market preoccupations over the six months have included: the consequences of the withdrawal of stimulus measures and the tapering of quantitative easing, the short term weakness of emerging markets indices and some currencies, the increasingly delicate and pivotal state of Middle Eastern politics and the inability of the US Government to agree its debt ceiling and budget.  Offsetting these unsettling preoccupations has been the  positive news that larger economies are recovering well and enjoying accelerating growth rates (including the US, Germany and the UK) or still growing at a relatively fast pace (notably China).  This is probably the strand that has most impact on confidence and also on individual companies' operational plans and future returns. 

However, the investment managers' main concern continues to be the longer term strategic and operational performance of individual companies rather than short term macro-economic conditions. 

The principal risks and uncertainties facing the Company are set out in note 11.

Past performance is not a guide to future performance.

30 October 2013

Responsibility statement

We confirm that to the best of our knowledge:

a)  the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

b)  the Half-Yearly Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, their impact on the financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)  the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

John Scott

Chairman

30 October 2013

Income statement (unaudited)

	For the six months ended  30 September 2013			For the six months ended 30 September 2012			For the year ended 31 March 2013
								(audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	17,339	17,339	-	64,428	64,428	-	105,854	105,854
Changes in investment  holding gains and losses	-	214,981	214,981	-	(94,544)	(94,544)	-	139,134	139,134
Currency gains/(losses)	-	13,092	13,092	-	2,099	2,099	-	(10,396)	(10,396)
Income from investments and interest receivable	33,433	-	33,433	42,608	-	42,608	58,950	-	58,950
Investment management fee (note 3)	(2,166)	(2,166)	(4,332)	(1,831)	(1,831)	(3,662)	(3,836)	(3,836)	(7,672)
Other administrative expenses	(1,271)	-	(1,271)	(1,151)	-	(1,151)	(2,379)	-	(2,379)
Net return before finance costs and taxation	29,996	243,246	273,242	39,626	(29,848)	9,778	52,735	230,756	283,491
Finance costs of borrowings	(4,627)	(4,627)	(9,254)	(4,663)	(4,663)	(9,326)	(9,215)	(9,215)	(18,430)
Net return on ordinary activities before taxation	25,369	238,619	263,988	34,963	(34,511)	452	43,520	221,541	265,061
Tax on ordinary activities	(2,402)	-	(2,402)	(3,194)	-	(3,194)	(4,010)	-	(4,010)
Net return on ordinary activities after taxation	22,967	238,619	261,586	31,769	(34,511)	(2,742)	39,510	221,541	261,051
Net return per ordinary share (note 4)	9.19p	95.52p	104.71p	12.53p	(13.61p)	(1.08p)	15.59p	87.42p	103.01p
Dividends paid and proposed per ordinary share (note 5)	6.90p			6.70p			14.00p

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

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

Balance sheet (unaudited)

	At 30 September 2013 £'000	At 30 September 2012 £'000	At 31 March 2013 (audited) £'000
Fixed assets
Investments held at fair value through profit or loss	2,815,734	2,340,750	2,581,849
Current assets
Debtors	25,625	10,328	5,401
Cash and short term deposits	13,688	7,556	13,867
	39,313	17,884	19,268
Creditors
Amounts falling due within one year:
Bank loans (note 6)	(244,273)	(61,308)	(65,196)
Other creditors	(19,985)	(4,385)	(7,671)
	(264,258)	(65,693)	(72,867)
Net current liabilities	(224,945)	(47,809)	(53,599)
Total assets less current liabilities	2,590,789	2,292,941	2,528,250
Creditors
Amounts falling due after more than one year:
Bank loans (note 6)	-	(149,539)	(158,929)
Debenture stocks	(150,825)	(151,067)	(150,953)
	(150,825)	(300,606)	(309,882)
	2,439,964	1,992,335	2,218,368
Capital and reserves
Called up share capital	71,086	71,086	71,086
Capital redemption reserve	19,094	19,094	19,094
Capital reserve	2,261,893	1,809,718	2,045,003
Revenue reserve	87,891	92,437	83,185
Shareholders' funds	2,439,964	1,992,335	2,218,368
Net asset value per ordinary share (after deducting borrowings at fair value) (note 7)	961.0p	757.4p	857.6p
Net asset value per ordinary share (after deducting borrowings at par)	983.3p	787.7p	885.4p
Ordinary shares in issue (note 8)	248,664,897	253,619,897	251,144,897

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 30 September 2013

	Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2013	71,086	19,094	2,045,003	83,185	2,218,368
Net return on ordinary activities after taxation	-	-	238,619	22,967	261,586
Shares bought back (note 8)	-	-	(21,729)	-	(21,729)
Dividends paid during the period (note 5)	-	-	-	(18,261)	(18,261)
Shareholders' funds at 30 September 2013	71,086	19,094	2,261,893	87,891	2,439,964

For the six months ended 30 September 2012

	Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2012	71,086	19,094	1,844,229	77,914	2,012,323
Net return on ordinary activities after taxation	-	-	(34,511)	31,769	(2,742)
Shares bought back (note 8)	-	-	-	-	-
Dividends paid during the period (note 5)	-	-	-	(17,246)	(17,246)
Shareholders' funds at 30 September 2012	71,086	19,094	1,809,718	92,437	1,992,335

For the year ended 31 March 2013 (audited)

	Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2012	71,086	19,094	1,844,229	77,914	2,012,323
Net return on ordinary activities after taxation	-	-	221,541	39,510	261,051
Shares bought back (note 8)	-	-	(20,767)	-	(20,767)
Dividends paid during the year (note 5)	-	-	-	(34,239)	(34,239)
Shareholders' funds at  31 March 2013	71,086	19,094	2,045,003	83,185	2,218,368

*      The Capital Reserve balance at 30 September 2013 includes investment holding gains on fixed asset investments of £1,109,365,000 (30 September 2012 - gains of £660,706,000 and 31 March 2013 - gains of £894,384,000).

Condensed cash flow statement (unaudited)

	Six months to  30 September 2013 £'000	Six months to  30 September 2012 £'000	Year to  31 March 2013 (audited) £'000
Net cash inflow from operating activities	24,216	29,315	48,335
Net cash outflow from servicing of finance	(9,277)	(9,499)	(18,693)
Total tax suffered	(2,162)	(2,534)	(4,042)
Net cash (outflow)/inflow from financial investment	(6,096)	(13,335)	22,418
Equity dividends paid (note 5)	(18,261)	(17,246)	(34,239)
Net cash (outflow)/inflow before use of liquid resources and financing	(11,580)	(13,299)	13,779
Shares bought back (note 8)	(21,729)	-	(20,767)
Net cash inflow from bank loans (note 6)	33,130	-	-
Decrease in cash	(179)	(13,299)	(6,988)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the period	(179)	(13,299)	(6,988)
Increase in bank loans (note 6)	(33,130)	-	-
Exchange movement on bank loans	12,982	3,970	(9,308)
Other non-cash changes	128	112	226
Movement in net debt in the period	(20,199)	(9,217)	(16,070)
Net debt at start of the period	(361,211)	(345,141)	(345,141)
Net debt at end of the period	(381,410)	(354,358)	(361,211)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return on ordinary activities before finance costs and taxation	273,242	9,778	283,491
Net (gains)/losses on investments	(232,320)	30,116	(244,988)
Currency (gains)/losses	(13,092)	(2,099)	10,396
Changes in debtors and creditors	(3,614)	(8,480)	(564)
Net cash inflow from operating activities	24,216	29,315	48,335

Thirty largest holdings and performance (unaudited)

Name	Business	Fair Value at 30 Sept 2013 £'000	% of total assets	Contribution to absolute performance† %
Amazon.com	Online retailer	225,582	7.96	1.1
Baidu	Online search engine	213,388	7.53	3.7
Tencent Holdings	Internet services	146,501	5.17	2.4
Inditex	International clothing retailer	146,499	5.17	0.6
Atlas Copco	Engineering	129,864	4.58	(0.2)
Kering	Luxury goods producer and retailer	124,056	4.38	(0.1)
Illumina	Biotechnology equipment	107,379	3.79	1.6
Google	Online search engine	95,259	3.36	0.3
Salesforce	Cloud computing and hosting	88,362	3.12	0.3
Apple	Computer technology	71,009	2.50	0.0
Prudential	International insurance	67,464	2.38	0.3
Banco Santander	Banking	60,710	2.14	0.5
KGHM	Copper mining	57,806	2.04	(0.5)
Vale (CVRD)	Iron ore and nickel mining	54,833	1.93	(0.4)
Facebook	Social networking site	54,317	1.92	1.1
Novozymes	Enzyme manufacturer	53,498	1.89	0.1
Whole Foods Market	Food retailer	51,011	1.80	0.6
Reckitt Benckiser	Consumer goods company	50,051	1.76	(0.1)
Fiat	Automobiles	48,540	1.71	0.7
Brazil CPI Linked 2045	Brazilian government inflation linked bond	47,548	1.68	(0.9)
Intuitive Surgical	Surgical robots	44,787	1.58	(0.8)
Rolls-Royce Group	Aerospace equipment	44,480	1.57	0.0
BASF	Chemicals	44,273	1.56	0.1
Alibaba Group#	Online retail	44,067	1.55	0.3
Linkedin Corp	Business-related social networking site	36,063	1.27	0.4
New Oriental Education & Technology	Education and training	35,744	1.26	0.5
Rackspace Hosting	Cloud computing and hosting	35,151	1.24	0.0
Aggreko	Power equipment rental	31,526	1.11	(0.1)
Arm Holdings	Semiconductor and software design   company	31,307	1.10	0.1
Deere	Farm machinery	30,574	1.08	(0.2)
		2,271,649	80.13

†    Contribution to absolute performance has been calculated on a total return basis over the period 1 April 2013 to 30 September 2013.

^#     Denotes holding in unlisted convertible preference shares.

Source: Baillie Gifford & Co/StatPro.

Past performance is not a guide to future performance.

Distribution of assets (unaudited)

			At 30 September 2013 %	At 30 September 2012 %	At 31 March 2013 %
North America			32.2	31.0	32.4
South America			4.2	7.6	5.2
Europe			42.7	41.9	44.7
	United Kingdom		13.1	13.2	14.1
	Eurozone		18.3	15.1	17.8
	Developed Europe (non euro)		7.4	7.7	8.9
	Rest of Europe		3.9	5.9	3.9
Africa and Middle East			0.3	0.4	0.4
Asia			20.6	19.1	17.3
	China		16.8	14.3	12.6
	India		1.4	2.0	1.8
	Japan		0.5	0.4	0.4
	Rest of Asia		1.9	2.4	2.5
Total assets (before deduction of loans and debentures)			100.0	100.0	100.0

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 30 September 2013 comprise the statements set out in the previous pages together with the related notes below. They have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 March 2013 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. The Board approves borrowing limits and reviews regularly the amount of any borrowings and compliance with banking covenants. Accordingly, the Half-Yearly Financial Report has been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 March 2013 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain statements under sections 498 (2) or (3) of the Companies Act 2006.
3.	Baillie Gifford & Co is employed by the Company as investment managers and secretaries under a management agreement which can be terminated on not less than six months' notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.08% of total assets less current liabilities (excluding short term borrowings for investment purposes).
4.	Net Return per ordinary share	Six months to  30 September 2013 £'000	Six months to 30 September  2012 £'000	Year to 31 March 2013 (audited) £'000
	Revenue return on ordinary activities after taxation	22,967	31,769	39,510
	Capital return on ordinary activities after taxation	238,619	(34,511)	221,541
	Total net return	261,586	(2,742)	261,051
	Weighted average number of ordinary shares in issue	249,808,285	253,619,897	253,421,883
	Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.
5.	Dividends	Six months to  30 September 2013 £'000	Six months to 30 September  2012 £'000	Year to 31 March 2013 (audited) £'000
	Amounts recognised as distributions in the period:
	Previous year's final dividend of 7.30p (2012 - 6.80p), paid 1 July 2013	18,261	17,246	17,246
	Interim dividend for the year ended 31 March 2013 of 6.70p, paid 23 November 2012	-	-	16,993
		18,261	17,246	34,239

Notes to the condensed financial statements (unaudited) (ctd)

5.	Dividends (ctd)	Six months to  30 September 2013 £'000	Six months to 30 September  2012 £'000	Year to 31 March 2013 (audited) £'000
	Dividends paid and proposed in the period:
	Interim dividend for the year ending 31 March 2014 of 6.90p (2013 - 6.70p)	17,158	16,993	16,993
	Final dividend for the year ended 31 March 2013 of 7.30p	-	-	18,334
	Adjustment to provision for previous year's final dividend re shares bought back	(73)	-	-
		17,085	16,993	35,327
	The interim dividend was declared after the period end date and has therefore not been included as a liability in the balance sheet. It is payable on 29 November 2013 to shareholders on the register at the close of business on 15 November 2013.  The ex dividend date is 13 November 2013. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 18 November 2013.
6.	The bank loans falling due within one year comprise US$150 million, US$163 million and €61 million (30 September 2012 - US$99 million; 31 March 2013 - US$99 million). There were no bank loans falling due in more than one year at 30 September 2013 (30 September 2012 - US$163 million and €61 million; 31 March 2013 - US$163 million and €61 million). During the period the bank loan of US$99 million with The Bank of New York Mellon was repaid and replaced with a £100 million mult-currency facility with State Street Bank and Trust Company.
7.	The fair value of the borrowings at 30 September 2013 was £445,425,000 (30 September 2012- £433,441,000; 31 March 2013 - £439,557,000).
8.		At  30 September 2013 Number of shares	At 30 September  2012 Number of shares	At 31 March 2013 (audited) Number of shares
	Share capital: Ordinary shares of 25p each
	Allotted, called up and fully paid	248,664,897	253,619,897	251,144,897
	Treasury shares	35,681,279	30,726,279	33,201,279
	Total	284,346,176	284,346,176	284,346,176
	In the six months to 30 September 2013 a total of 2,480,000 ordinary shares were bought back at a total cost of £21,729,000 (30 September 2012 no ordinary shares were bought back; in the year to 31 March 2013 a total of 2,475,000 ordinary shares were bought back at a total cost of £20,767,000). At 30 September 2013 the Company had authority to buy back a further 36,633,042 ordinary shares.
9.	Transaction costs on purchases amounted to £153,000 (30 September 2012 - £180,000; 31 March 2013 - £238,000) and transaction costs on sales amounted to £59,000 (30 September 2012 - £80,000; 31 March 2013 - £188,000).

Notes to the condensed financial statements (unaudited) (ctd)

10.

Shareholders will be notified on or around 11 November 2013 that the Half-Yearly Financial Report has been published and will be available on the Scottish Mortgage page of the Managers' website www.scottishmortgageit.com. ‡

11.

Principal Risks and Uncertainties The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 22 of the Company's Annual Report and Financial Statements for the year to 31 March 2013. The principal risks and uncertainties have not changed since the publication of the Annual Report and Financial Statements which can be obtained free of charge from Baillie Gifford & Co and is available on the Scottish Mortgage page of the Managers' website: www.scottishmortgageit.com.‡ Other risks facing the Company include the following: gearing risk (the use of borrowings can magnify the impact of falling markets); regulatory risk (that the loss of investment trust status or a breach of applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage); operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss); and the risk to shareholders that the discount can widen. Further information can be found on page 22 of the Annual Report and Financial Statements.

‡    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.

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

Scottish Mortgage is a low cost investment trust that aims to maximise total return over the long term from a focused and actively managed portfolio. It invests globally, looking for strong businesses with above-average returns.

You can find up to date performance information about Scottish Mortgage on the Scottish Mortgage page of the Managers' website at www.scottishmortgageit.com^‡

‡    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.

Scottish Mortgage is managed by Baillie Gifford & Co, the Edinburgh based fund management group with over £100 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 30 October 2013).

Investment Trusts are UK public limited companies and are not authorised or regulated by the Financial Conduct Authority.

Past performance is not a guide to future performance.  The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares.

31 October 2013

For further information please contact:

James Budden, Baillie Gifford & Co  

Tel: [phone] or 07507 201208

Roland Cross, Director, Broadgate Mainland

Tel:  [phone]

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