Scot.Inv.Trust PLC

Final Results

RNS Number : 4548I
Scottish Investment Trust PLC
14 December 2020
 

The Scottish Investment Trust PLC

 

Annual Results for the year to 31 October 2020.

 

The Scottish Investment Trust PLC invests internationally and is independently managed.  Its objective is to provide investors, over the longer term, with above‑average returns through a diversified portfolio of international equities and to achieve dividend growth ahead of UK inflation.  Today it announces its results for the year to 31 October 2020.

 

Highlights

 

· 37th consecutive year of regular dividend increase

· Regular dividend increased by 1.8% to 23.2p

· Share price total return -12.0% and NAV total return -10.6%

 

Chairman's Statement

 

T h ere   h ave   b ee n   m a n y   m o m e n t o u s   p e r i o d s   f o r   m a r ke t s n   t he ong hstory of the Company and 2020 w no doubt be counted as among the most noteworthy.

 

S t o ckmarket movements have been neary as extraordnary as the events that swept the word. Fear and euphora made ther mark n equa measure, resutng n a perod of sgnficant voatty. The heath and economc costs are st beng counted, athough, for the year under revew, the sgnficant nterventons by governments and central banks have argey defined outcomes for equty nvestors.

 

D ur i n g   t h e   financa year, markets boomed even as the pandemc ntay raged, fe precptousy as the deveoped word 'ocked down' ther economes and then boomed agan as support measures were udged to have averted the worst of the economc catastrophe.

 

T h e Company's portfoo hed up we durng the market se-off but agged consderaby durng both perods of market strength as momentum and growth companes soared rrespectve of vauaton.

 

T a k e n   a s   a   wh o l e ,   i t   h a s   b ee n   a   chaengng year for our contraran approach. Sedom, f ever, has the dispersion of returns between growth and vaue names been so stark and, wthn ths context, performance has been dsappontng. he our performance reatve to global indces has agged n recent perods, we beeve that ths dsperson has created an opportunty to buy unoved, but robust, companes at attractve prces.

 

Performance

A m i d   t h i s   chaengng envronment, the share prce tota return was -12.0% and the net asset vaue per share (NAV) tota return (wth borrowngs at market vaue) was -10.6%. The Company does not have a forma benchmark but, by way of comparson, the sterng tota return of the nternatona MSCI Al Country Word Index (ACI) was 5.0% whe the UK based MSCI UK A Cap Index tota return was -20.6%. Ths eaves us strongy ahead of the UK comparator and we behnd the goba ndex.

 

Globa markets contnued ths year to be domnated by a momentum stye of nvestng whch seemngy pays scant regard to vauaton, and s an anathema to our vaue-focused stye of nvestng. To have kept pace wth goba markets ths year, our portfoo woud have requred a proportonatey arge exposure to a very sma number of companes that we beeve are greaty overvaued and a ot ess exposure to the names whch we consder offer the best potenta for ong-term gans.

 

T h i s   i n fluence, unfortunatey, has been a hamark of markets durng the five years snce we adopted our contraran approach and has become greater n more recent years. The resut s an extreme dvergence between the most and east expensve parts of the market. Such extremes have, hstorcay, proved unsustanabe and we beeve that a new phase for markets s overdue, one that may favour those who, ke us, do not foow the crowd.

 

N o t w i t h s t andng our ack of exposure to what we consder rratonay prced momentum drven nvestments, there were two partcuary advantageous decsons made durng the year. The first was our Manager's decson to take pre-emptve acton to preserve capta at the onset of the Covd-19 crss by selling out of some of the companies we beeved woud be most mpacted. The second was a arge exposure to god mners, whch partcpated strongy n the recovery. Unfortunatey, the benefits of these decsons were masked n the second haf of the year as markets rewarded stocks deemed mpervous to the chaenges facing the real economy, such as information technologystocks. In contrast we nvested n companes we beeved woud be ess mpacted by the travas of the rea economy, but were consdered du n the feversh monetary envronment created by centra bank support, whch has fuelled momentum nvestng.

 

O ur   contraran approach expcty ams to take a dfferent vew from other managers and nvest wthout regard to ndex composton n order to avod the herdng around popuar nvestments that s an nherent trat of actve management. We therefore expect our portfoo, and ts returns, to be unke any ndex.

 

Comparator index change

R eflectng our expectaton that our portfoo, and ts returns, w be unke any ndex, the Company has for many years had two comparator ndces, the MSCI Al Country Word Index (ACI) and the MSCI UK A Cap ndex. The Board has however now come to the vew that t woud be hepfu to the Manager, sharehoders and the Board tsef for the Company to move to a snge comparator ndex n order to better udge the Company's performance. The most recent financal year has shown how difficult it is to assess performance aganst two comparator ndces.

 

T h e B o ar d   c o n s i d ere d   a   nu m b e r   o f   d i ffere n t   in d i ces as a new snge comparator. As a hgh convcton contraran fund, wth a strong ncome ethos, there s no obvous single index to choose. The Board however concludedthat sharehoders are ookng for performance to be measured aganst goba markets. Accordngy, whe t mght appear counter-ntutve n vew of ths year's performance aganst the goba ndex, the Board decded that the Company w henceforth compare performance aganst the MSCI A Country Word Index as the soe comparator. he we aways note performance for the year, I woud remnd sharehoders that we assess progress over the onger term and we contnue to expect to dever above-average returns over an nvestment cyce.

 

Investing through the cycle

O ur   contraran nvestment approach s grounded n the observaton that stockmarket trends are frequenty pushed to extremes, eadng to ther eventua reversa. hat starts as an attractve opportunty s chased untl the potenta for further upsde s emnated and the potenta for a fa becomes hgh. Ths process can transform great companes nto bad nvestments. In a smar ven, companes can become so unoved that ther mprovement goes unnotced, creatng exceent nvestment opportuntes.

 

I t   i s   a l re a d y cear that ths perod marks an acute dsparty between the out of favour 'vaue' areas of the market and the well-loved 'growth' segments. Athough ths s one of the argest recorded dvergences, t s dfficut to know what the precse trgger w be for a reversa. However, n a nutshe, once a partcuar nvestment becomes overy consensua, and thus overcrowded, the rotation out of those nvestments nto other parts of the market can be swft and dramatc.

 

S t andng apart from consensua trends durng such tmes s dscomfortng, partcuary durng a cyce as long as ths one. For us however the aternatve s much more uncomfortabe - ownng stocks that are prced for perfecton. Consequenty, we contnue to advocate a vaue-drven approach.

 

Income and dividend

O ver the past year, earnngs per  s h are fe by 27.1% to 21.7p (2019: 29.8p). The decline was driven by reduced dvdend recepts as many busnesses, ncudng some n whch we nvest, opted to curta dvdend payments to safeguard ther financa heath.

 

A s   I have prevousy mentoned, our portfoo s not explicitly invested for income and the Board recognses that there will be occasons when the portfoo does not necessary fuy cover the requrements of the reguar dvdend.

 

T h e   p rec i s e   ca u s e s   o f   d i s ru p t i o n s   are   o f t e n   a surprse. The fact that they can and do occur s not. The Company prepares for these scenaros by budng a substanta revenue reserve durng more pentful perods, whch can be drawn down n ess frutfu tmes. Ths approach serves us we n the current envronment and the Company w utse a sma porton of ts reserve n ths financa year to cover the reguar dvdend. The revenue reserve remans substanta at 60.8p, equvaent to more than 2.5 times the targeted annua dvdend for the year to 31 October 2021.

 

T h e Board recognses the mportance of dvdend income to many shareholders and our intent with regardto dvdends remans unchanged. The Board ams to mantan the Company's ong track record of annual reguar dvdend ncreases and aso ts obectve to provde reguar dvdend growth ahead of UK nflaton over the onger term.

 

A ccordngy, the Board recommends a  fina dvdend of 6.1p whch, f approved, w mean that the tota reguar dvdend for the year w ncrease by 1.8% to 23.2p. If approved, ths will be the 37th year of annua reguar dvdend ncreases.

 

T h e Board's target s to decare three quartery nterm dvdends  o f   5 .8p for the year to 31 October 2021 and recommend a final dividend of at least 5.8p for approvalby shareholdersat the Annual Genera Meetng n 2022. The fina dvdend w be revewed n accordance wth the Board's desre to contnue the ong track record of annua dvdend ncreases and the am of the Company to provde dvdend growth ahead of UK nflaton over the onger term.

 

Discount, share buybacks and ongoing charges

T h e Company foows a pocy that ams, n normal marke condiions, to maintain the discount to NAV (with borrowngs at market vaue) at or beow 9%.

 

T h e dscount at whch the share prce traded to NAV over the year was more voate than norma, reflectng the perods of extreme market dsocaton, but finshed the year at 9.9%.

 

T h e average dscount over the year was 10.0%. Durng the period, 1.0m shares were purchased for canceaton at an average dscount of 10.6% and a cost of £7.3m. In the prevous year, 3.3m shares were purchased.

 

T h e ongong charges figure (OCF) for the year under revew of 0.52% (2019: 0.58%) remans favourabe compared wth other actvey-managed nvestment vehces. As a sef-managed nvestment trust, the OCF represents the ongong costs of runnng the Company as a proporton of net assets.

 

Gearing

A s   t h e   C o v i d - 19   p a n d e m i c   l oo ke d   cer t a i n   t o   s evere l y w eake n   t h e   economy, the Company reduced gearng from ts 31 October 2019 eve of 1% to a net cash poston of around 5%.  In other words, we hed a of our borrowngs and an addtona 5% of net assets n cash. Ths move was desgned to sheter funds from a market decne and to preserve firepower for a perod of sustaned recovery.

 

A s   funds were depoyed to take advantage of the recovery, gearing was increased and ended the year at 0%. It s our beef that there w be further compeng recovery opportuntes and we contnuay assess when to depoy gearng for the ong-term benefit of sharehoders.

 

Amendments to the Articles of Association

T h e goba pandemc hghghted chaenges n companes' abty to hod sharehoder meetngs whch comped wth ther Artces of Assocaton. Fortunatey, the government ntroduced temporary egsaton whch permtted companes to meet ther obgatons n ths regard by hodng vrtua meetngs and by restrctng the abty of sharehoders to attend. To avod any such dfficutes n the future, at the forthcomng Annua Genera Meetng (AGM), the Company w be seekng sharehoder approva to amend ts artces to aow for vrtua, hybrd and/or physca meetngs to be hed at the dscreton of the Drectors. A number of other non-substantve changes are also proposed. Further details can be found n the Corporate Governance Report within the Annual Report and Financial Statements.

 

Annual General Meeting (AGM) 

T h e Company's 133rd Annua Genera Meetng w be hed at the offices of Dckson Mnto W.S., 16 Charotte Square, Ednburgh EH2 4DF at 10.30am on Tuesday, 2 February 2021. Fu detas of the busness to be

conducted at the AGM are gven in the Notice of Meeting within the Annual Report and Financial Statements.

 

In ght of the restrctons on trave and socal gatherngs and as permtted by recent temporary egsaton the AGM w, for the first tme n ts hstory, be hed as a cosed meetng and sharehoders w not be abe to attend n person. Sharehoders' vews are mportant and the Board encourages sharehoders to vote on the resoutons wthn the Notce of AGM.

 

T h e Board aways wecomes questons from our sharehoders at the AGM. Ths year, to ensure that we are able to respond to any questions you may have for ether the Board or the Manager, pease send these va email to nfo@thescottsh.co.uk or n wrtng to the Company's regstered office.

 

Outlook

T h e course of the pandemc remans a matter of serous concern to markets and recent news about vaccnes has been we receved. Ceary there w be chaenges to come, not east managng the current wave of Covd, but we beeve the reacton to the vaccne newsflow demonstrates the potenta for recovery n beaten down and overooked areas shoud the good news be sustaned.

 

D ur i n g   t h e pandemc, the Company has successfuy operated wth roes performed at home. If requred, the Company can contnue to operate on ths bass for a further extended perod.

 

T h e drama around the US presdenta eecton was embematc of Donad Trump's tenure, but apparentPresdent-eect Joe Bden s key to brng a more dpomatc approach to the roe. That sad, Presdent Trump ceary gavansed a substanta porton of the popuaton and hs better than antcpated showng perhaps suggests that the popust tendences of recent years coud be a durabe trend.

 

At the time of writing, B rext negotatons remain ongoing and have proven fractous. Athough we contnuay revew the potental effects of Brext, we reman of the vew that t w not have a matera adverse mpact on the Company's busness mode or operatons.

 

W h il e t s certany premature to ook beyond the mpact of the vrus, eventuay attenton w turn to how we deal wth the ong-term effects of the 'whatever t takes' fisca and monetary response. he these measures were undoubtedy necessary to avod more astng damage to obs and busnesses, we have now entered a new era n economc pocymakng. It has become obvous, especay to those who wsh to contro the evers of power, that governments can borrow wthout regard to the tax-base as nterest rates reman very ow. Borrowng and spendng money s popuar.

 

Centra banks have drecty or ndrecty communcated a greater toerance for nflaton, whch may prove an unstoppabe deveopment once t becomes apparent. Ths, combned wth the eventua prospect of hgher rates of nterest, may favour our nvestment stye over others.

 

T h e dvergence of vauatons wthn markets has reached new extremes, a poston that we beeve s unsustanabe and key to reverse. Ths favours a contraran approach whch seeks out msprced nvestments that have been overooked. We beeve that the Company s we paced for the future.

 

James Will

Chairman

11 December 2020

 

Manager's Review

 

M a r k e t s   have continued to reward past winners, leaving the unloved parts of the market, where we prefer to invest, in their shadow.

 

B ef o re   we   c o n s i d er   t he   p o r t f o li o   o v er   t he last year, I want to refect on the position in which we find ourselves now.

 

O n one hand there is reason for us to be optimistic. The divergence in the performance and valuation of the most loved companies and those that are unloved, has seldom been more extreme. As contrarian stock pickers, that excites us and offers the potential to buy attractive companies at a good price. Certain areas of the market look especially cheap but, on the whole, there are companies in almost all sectors that go unrewarded despite their incumbent market positions, durability and cash generation. That is where our opportunity lies.

 

O n the other hand, we continue to worry about the overextended valuations accorded to previous 'winners'. These can appear to offer the prospect of perpetual growth. We understand why this fnds favour with some but, in contrast, we are wary of paying a fancy valuation for a company that is priced as if nothing will ever go wrong. In our view the margin of error is diminished and the potential for disappointment large.

 

S cott McNealy, then CEO of Sun Microsystems, one of the 'winners' in the dotcom boom, famously lambasted his own investors after the crash. He asked those who had paid a multiple of 10 times sales for his company's shares, "what were you thinking?". As he pointed out, at this valuation the payback period is likely to be unfathomably long. Having worked through that era, I never thought I would witness similar conditions, but here we are. Like then, the 'fear of missing out' has become one of the hottest investment themes. Indeed, the proportion of companies trading at 10 times sales or greater is near to that seen at the height of the dotcom boom.

 

T he root cause of such exuberance is, like then, too much cheap money creating a febrile atmosphere. In the period we have seen an electric truck maker, without a product in production, soar in valuation to becoe one of the biggest companies in the world. The share price quickly crashed when it was revealed that the promotional video purporting to show the vehicle in action was flmed using a mocked-up truck rolling down a slope.

 

O ur view is that a large proportion of market participants do not make discerning value judgements. This allows momentum to build for extended periods. There is tremendous pressure on many to perform in a similar manner to markets (or benchmarks), while passive investment products explicitly target such an outcome. Success breeds confdence which breeds infows which breeds momentum. All we can say is that, without valuation support, when markets turn, as they always d, the virtuous circle quickly becomes vicious.

 

I   remember from my formative investing experiences how easy it was to be wowed by a good story and a stock chart pointing to the sky. On occasion, I even found myself parroting some of these stock-hype narratives. This is what happens in a crowd - members tell each other what they think they are meant to say. Given the exceptional length of the current investment cycle, many professional investors have never experienced a period where growth and momentum investments are not the only game in town. As a result, sceptics (such as ourselves) are in short supply, so that the possibility of a change in trends is widely ignored.

 

F o r value-orientated investors the current market drivers can be viewed as a potential positive because of the opportunity they provide. The arithmetic of indices determines that they will struggle to increase if the speculative bubble in the most popular part of the market starts to defate, potentially allowing the unloved names to outperform. Wavering equity markets would also almost certainly push central banks to redouble efforts in order to prop them up and, as after the dotcom crash, the unintended consequence of this would be to provide substantial liquidity to the, currently unfashionable, areas of markets where we invest.

 

The portfolio

Gold typically offers shelter from the devaluing effects of unfettered money printing, so the period provided a favourable backdrop for our two largest gold mining investments Newmont (+£18.8m total return) and Barrick

G old   ( + £16.9m). Production challenges held back Newcrest Minin (-£1.2m), but we believe there are interesting growth opportunities that are being overlooked. Exposure to the sector was increased with the addition of two South African listed miners Gol Fiels (+£4.6m) and AnloGol Ashanti (+£1.3m) that are working to substantially improve operating performance.

 

U S   retailer Taret (+£4.6m) performed well as efforts to tilt its business model towards online sales and convenient store formats bolstered sales and proftability, an approach that served particularly well during the pandemic. Tesco

( - £1.8m) declined despite taking positive steps towards divesting its overseas operations and refocusing on growing proftability in its core UK market. Many traditional retailers have found their operations severely crimped, of course, and those that had not suffciently advanced their transformations were sold early in the year, including Gap(+£0.2m), Macy's (-£0.1m) and Marks & Sencer(-£1.0m). We added a holding in US fashion group Cari(-£0.1), which is undergoing a turnaround of its strong but underperforming brands.

 

P e p s iCo   ( £0.0m) continues to beneft from plans to enhance growth and proftability, while Japanese beverages group Kirin (-£2.1m) declined as the closure of the hospitality sector hampered sales. Brazilian brewing gian Ambev (-£0.4m) is a new holding and we expect it to participate in a recovery in consumption.

 

W e made a timely reduction in our energy holdings, leaving only oil majors with the greatest ability to withstand oil price volatility. Their comparative strength did not shield the fro the weak operating environment, however, and Royal Dutch Shell (-£10.8m), Exxon Mobil(-£5.7), Chevron (-£5.2m) and Total (-£5.1m) all declined in value. We took the opportunity to purchase oil services group Halliburton (-£0.5m) at a discounted valuation to take advantage of its strong position within the sector and recovery potential.

 

W e   a l s o   s c a le d   d o wn   o ur   investments in banks, in advance of the pandemic, in anticipation of a more challenging lending environment. We retained a small exposure to strong franchises that have scope to rebound as the economy improves including Natest (-£4.1m), ING(-£3.8m), Lloys Bankin (-£2.3m) and BNP Paribas(-£1.6m). Later in the period, we added JPMoran Chase(-£0.5m), Banco Santaner (+£0.1m) and First Horizon(+£0.1m). We also established a position in Dutch life insurer Aeon (-£0.1m) which is undergoing a transformation under new leadership. Meanwhile, we completely sold UK real estate trust British Lan (-£5.6m) as lockdowns looked set to place considerable strain on tenants.

 

E ast Jaan Railway   ( - £5.2m) declined as passenger volumes were severely curtailed by lockdown measures, though we see rebound potential as well as longer term value in the company's property assets.

 

Within the health care sector, Roche (+£1.9m) and GlaxoSmithKline (-£4.0m) continue to make progress in their transitions to a new generation of innovative medicines. New holdings were established in Bristol-Myers Suibb (-£0.3m), Sanofi (-£1.3m) and Gilead Sciences (-£3.5m) where we believe the market has misjudged the potential for these businesses to transform and grow. Gilead has become famous for its Covid-19 treatent redesivir, though we believe that value lies elsewhere in the business.

 

B T   ( - £13.8m) was a notable disappointment as tentative efforts to revive the business were overshadowed by the additional headwind of Covid-19. More broadly, telecoms were lacklustre despite increased reliance on communications infrastructure during lockdowns. KPN(-£0.6m), AT&T (-£2.1m), Telstra (-£2.1m), Orane(-£2.6m) and China Mobile (-£3.3m) all fell in value.

 

W e took new positions in several tobacco frms including Altria (-£1.2m), British American Tobacco (-£0.8m), Philip Morris International (-£0.4m) and KT&G (-£0.5m) where we believe that the durability of cash fows has been underappreciated by the market. Our longer- standing investment in Jaan Tobacco fell in value (-£2.5m).

Among utilities, Unite Utilities (+£0.7m) gained on the back of stabilising regulatory and political environment. We also added two US utilities, Duke Enery (-£1.2m) and Dominion Enery (-£0.2m), as we concluded that the potential for asset growth is not fully refected in their discounted valuations versus peers.

 

Outlook

Great uncertainty remains but it seems as if a return to some form of normality will occur next year, even if the

v a rious vaccines do not make their anticipated impact. That said, the recent rapid spread of Covid-19 in nuerous countries indicates that restrictions may remain part of life for some time.

 

Government and central bank support have been crucial to supporting economies and stockmarkets. We believe this will continue and expect its benefciaries to be more broadly spread if a sustainable recovery is evident in the real economy. The out of favour stocks that we prefer have lagged the stockmarket recovery to date but still offer excellent long term investment opportunities for patient investors. This is a positive environment for contrarian investors.

 

Alasdair McKinnon
Manager
11 December 2020

 

Our approach

To apply our approach, we divide the stocks in which we invest into three categories.

 

First, we have those that we describe as ugly ducklings - unloved shares that most investors shun. These companies have endured an extended period of poor operating performance and, for the majority, the near-term outlook continues to appear uninspiring. However, we see their out-of-favour status as an opportunity and can foresee the circumstances in which these investments will surprise on the upside.

 

The second category consists of companies where change is afoot. These companies have also endured a long period of poor operating performance but have recently demonstrated that their prospects have significantly improved. However, other investors continue to overlook this change for historical reasons.

 

In our third category, more to come, we have investments that are more generally recognised as good businesses with decent prospects. However, we see an opportunity as we believe there is scope for further improvement that is not yet fully recognised.

 

NAV Absolute Performance Attribution Year to 31 October 2020

Contribution

%

Equity portfolio (ungeared)

-8.8

Gearing

-0.7

Total equities

-9.5

Other income and currency

+0.1

Buybacks

+0.1

Expenses

-0.7

Interest charges

-0.5

Change in market value of borrowings

+0.1

Change in pension liability/surplus

-0.2

NAV with borrowings at market value total return

-10.6

 

Top Ten Gains and Losses

Year to 31 October 2020

 


Performance

Gains


Performance

Losses


%

£m


%

£m

Newmont

60.3

18.8

BT

-49.3

-13.8

Barrick Gold

55.7

16.9

Royal Dutch Shell

-60.5

-10.8

Target

57.9

4.6

Exxon Mobil

-44.8

-5.7

Gold Fields

54.9

4.6

British Land*

-54.9

-5.6

Roche

9.6

1.9

East Japan Railway

-43.4

-5.2

Anglogold Ashanti

9.4

1.3

Chevron

-37.4

-5.2

Heritable Property and subsidiary

58.3

0.9

Total

-38.2

-5.1

United Utilities

3.8

0.7

Natwest

-43.6

-4.1

Gap*

1.1

0.2

GlaxoSmithKline

-23.3

-4.0

Tourmaline Oil*

7.5

0.1

ING

-30.6

-3.8

* Sold during the year.

Total return on investment, taking into account both capital returns and entitlement to dividends declared, for the period the investment was held during the year.

 

Strategic Report

 

Business Model and Status

The Company is a self-managed global growth investment trust and is an investment company within the meaning of the Companies Act 2006. HM Revenue & Customs has approved the Company as an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010. The Company continues to satisfy the conditions for such approval. The Company is registered in Scotland and its registered office is 6 Albyn Place, Edinburgh EH2 4NL.

 

The Company has a premium listing on the London Stock Exchange, within the Financial Services sector, and is identified by the TIDM or ticker symbol 'SCIN'. The Company's ISIN is GB00007826091 and SEDOL is 0782609.

 

Investment objective and policy

The Company's objective is to provide investors, over the longer term, with above-average returns through a diversified portfolio of international equities and to achieve dividend growth ahead of UK inflation. In order to achieve this objective, the Company invests in an integrated global portfolio constructed through an investment process whereby assets are primarily allocated on the basis of the investment merits of individual stocks rather than those of regions, sectors or themes.

 

The Company's portfolio is actively managed and typically will contain 50 to 100 listed international equity investments. The portfolio is widely diversified both by industrial sector and geographic location of investments in order to spread investment risk.

 

Whilst performance is compared against major global and UK indices, the composition of indices has no influence on investment decisions or the construction of the portfolio. As a result, it is expected that the Company's investment portfolio and performance may deviate from the comparator indices.

 

Since the Company's assets are invested globally and without regard to the composition of any index, there are no restrictions on maximum or minimum exposures to specific geographic regions, industry sectors or unlisted investments. However, such exposures are reported in detail to, and monitored by, the Board at each Board meeting in order to ensure that adequate diversification is maintained.

 

Liquidity and long-term borrowings are managed with the aim of improving returns to shareholders. In pursuing its investment objective, from time to time the Company will hold certain financial instruments comprising equity and non-equity shares, fixed income securities, interests in limited partnerships, structured products and cash and liquid resources. The Company may use derivatives, other than in relation to the sale of index futures, for hedging or tactical investment purposes. The Company may only sell index futures for efficient portfolio management purposes. For the avoidance of doubt, any derivative instrument may only be used with the prior authorisation of the Board.

 

The Company has the ability to enter into contracts to hedge against currency risks on both capital and income.

 

The Company's investment activities are subject to the following limitations and restrictions:

 

-  under the Company's Articles of Association, up to 40% of the Company's total assets on the last audited balance sheet may be used to make investments of up to a maximum of 8% of the value of total assets in any one company, at the time the investment is made. Thereafter, individual investments may not exceed 3% of the value of total assets, at the time the investment is made;

the levels of gearing and gross gearing are monitored closely by the Board and the Manager. The Board currently limits gearing to 20%. While gearing will be employed in a typical range of 0% to 20%, the Company retains the ability to lower equity exposure to a net cash position if deemed appropriate;

the Company has a policy not to invest more than 15% of total assets in other listed closed-ended investment funds; and

the Company may not make investments in respect of which there is unlimited liability except that the Company may sell index futures for efficient portfolio management purposes.

Investment policy - implementation

During the year under review, the assets of the Company were invested in accordance with the Company's investment policy.

 

A full list of holdings and detailed analysis of the spread of investments by geographic region and industry sector is shown in the Annual Report and Financial Statements. A further analysis of changes in asset distribution by industry sector over the year, including the sources of gains/losses, is also shown therein. Attribution of NAV performance is shown above.

 

At the year end, the number of listed holdings was 59 (2019: 51). The top ten holdings comprised 39.5% of total assets (2019: 37.0%).

 

Details of the extent to which the Company's objective has been achieved and how the investment policy was implemented are provided in the Chairman's Statement and the Manager's Review.

 

Additional limitations on borrowings

Under the Company's Articles of Association, the Directors control the borrowings of the Company and its subsidiaries to ensure that the aggregate amount of borrowings does not, unless approved by an ordinary resolution of shareholders, exceed the aggregate of the reserves excluding unrealised capital profits of the Company and its subsidiaries, as published in the latest accounts. In addition, the Directors are authorised to incur temporary borrowings in the ordinary course of business of up to 10% of the Company's issued share capital. Such temporary borrowings are to be for no longer than six months.

 

Principal risks and uncertainties

The principal risks and uncertainties facing the Company are considered under the following categories:

-  Strategic - the level of investor appetite for the Company declines resulting in divestment or the Company's objective is challenged by significant external events such as regulatory change, global financial instability and the uncertainties around Brexit, Scottish independence and the global pandemic;

-  Investment portfolio and performance - the Company becomes unattractive due to level of relative performance, whether against peers or global market trends;

-  Financial - failure to set and monitor appropriate policies and controls in relation to market risk, credit risk and liquidity risk;

-  Operational - the potential failure of the Company's third party service providers' systems, including vulnerability to cyber attack or loss of key personnel; and

-  Tax, legal and regulatory - compliance with existing requirements and the ability to identify and respond to the continued volume of change in this area.

 

These and other risks facing the Company are reviewed regularly by the Audit Committee and the Board.

 

Performance

Management provides the Board with detailed information on the Company's performance at every Board meeting. Performance is assessed in comparison with the Company's peers and the comparator indices. During the financial year, the Board received regular updates from the management team, in response to and in order to more closely monitor market volatility and macro-economic uncertainty caused by the global pandemic.

 

Key Performance Indicators

The Directors use the following Key Performance Indicators (KPIs) and a number of Alternative Performance Measures (APMs) in order to assess the Company's success in achieving its objectives. These KPIs and APMs are viewed by the Board to be the most appropriate long term measures to enable investors to gain an understanding of the Company's business.

NAV total return;

NAV total return against comparators;

NAV and share price total return against peers;

discount with debt at market value;

dividend growth against UK inflation; and

ongoing charges figure.

Due to the contrarian nature of the Company's investment strategy, no formal targets are set for the KPIs and APMs referred to above.

 

Definitions of the APMs can be found in the Glossary in the Annual Report and Financial Statements.  

 

Future Developments

The main trends and factors likely to affect the future development, performance and position of the Company's business are set out in the Chairman's Statement and the Manager's Review.

 

Dividends

The Board may declare dividends, including interim dividends, but no dividend is payable in excess of the amount recommended by the Directors. The Company updated its Articles of Association in 2019 to allow distribution of its capital profits.

 

The Directors recommend a final dividend of 6.1p payable on 12 February 2021. With the interim dividends each of 5.7p already paid in May, August and November 2020, this makes a total of 23.2p for the year. Based on 72,896,247 shares in issue at 31 October 2020, the final dividend will cost £4.447m. The total dividend for the year will cost £17.026m.

 

Share capital

General

The Company had 72,896,247 shares of 25p each in issue on 31 October 2020 (2019: 73,893,508). Since the year end, the Company has bought back 545,747 shares for cancellation. The rights attaching to shares in the Company are set out in the Company's Articles of Association which may be amended by the passing of a special resolution of shareholders, that is, by the approval of a majority of not less than 75% of votes cast.

 

The Financial Conduct Authority rules in relation to non-mainstream investment products do not apply to the Company.

 

Rights to the capital of the Company on winding up

Shareholders would be entitled to the assets of the Company in the event of a winding up (after the Company's other liabilities had been satisfied).

 

Voting

On a show of hands, every shareholder present in person or by proxy has one vote and on a poll every member present in person or by proxy has one vote for each share.

 

Transfer

There are no restrictions concerning the holding or transfer of shares in the Company and there are no special rights attaching to any of the shares. The Company is not aware of any agreements between shareholders which might result in any restriction on the transfer of shares or their voting rights.

 

Deadlines for exercising voting rights

If a shareholder wishes to appoint a proxy to attend, speak and vote at a meeting on their behalf, a valid appointment is made when the form of proxy (together, where relevant, with a notarially certified copy of the power of attorney or other authority under which the form of proxy is signed) is received by the Company's registrar not less than 48 hours before the start of the meeting or the adjourned meeting at which the proxy is appointed to vote (or, in the case of a poll taken more than 48 hours after it is demanded, no later than 24 hours before the time appointed for taking the poll). In calculating these time periods, no account is taken of any day or part thereof that is not a working day.

 

Discount control policy

The Company's policy aims, in normal market conditions, to maintain the discount to cum-income NAV at or below 9%. In calculating the NAV for the purposes of this policy, the Company's borrowings are taken at their market value so as to ensure that future repurchases of shares will take into account changes in the value of the borrowings brought about by movements in long-term interest rates. During the year ended 31 October 2020, the Company bought back for cancellation a total of 997,261 shares of 25p each representing 1.3% of shares in issue at 31 October 2019, at a cost of £7,334,000.

 

At the AGM on 4 February 2020, authority was granted to repurchase up to 14.99% of shares in issue on that date. The number of shares authorised for repurchase was 11,067,642. Share buybacks from the date of the AGM to the Company's year end amounted to 937,261 shares or 1.27 percentage points of the 14.99% authority.

 

Holding in listed closed-ended investment funds

The Company has a policy not to invest more than 15% of total assets in other listed closed-ended investment funds.

 

Unlisted portfolio

The Company's unlisted holdings were valued at £2.4m (0.4% of shareholders' funds). These comprise the Company's office property and subsidiary company.

 

Viability statement

The Directors have assessed the prospects of the Company for a period of five years. The Board believes this time period continues to be most appropriate as it aligns with the Company's strategy to deliver above-average returns over the longer term, being at least five years.

 

In making this assessment, the Directors have considered detailed information provided at Board meetings which includes: the Company's balance sheet, gearing level, share price discount (or premium), asset allocation, income and operating expenses.

 

Consideration was also given to the principal risks and uncertainties faced by the Company, its portfolio of liquid listed international equity investments and cash balances, as well as its ability to achieve the stated dividend policy and to cover the interest payments on the Company's debt.

 

The Board has also considered the implications of the global pandemic in 2020 and resultant global macro-economic uncertainty, in relation to the Company's investment position, its future income streams, its gearing covenants and its ability to continue trading operationally.

 

The Company was in a resilient financial position as at 31 October 2020, with a strong asset-backed balance sheet and a flexible team capable of adapting to different working patterns. If necessary, the Company would be able to withstand continuing market volatility, reduced asset values and income streams and a depressed macro-economic outlook for a considerable period of time.

 

Based on the above, and notwithstanding a more uncertain macro-economic outlook this year, the Board confirms it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of this viability assessment.

 

Stakeholder relations (s.172 Statement)

I n   p e r f o r m i n g   i t s   d u t i e s ,   t h e B o ar d   a pp li e s   t h e   f o ll o w i n g key prncpes of secton 172 of the Companes Act 2006, beng those reevant to the Company as a sted nvestment company, to a ts decson makng:

 

( a) the key consequences of any decson n the ong term;

( b )   t h e nterests of the Company's empoyees;

( c) the need to foster the Company's busness reatonshps wth suppers, customers and others;

( d )   t h e mpact of the Company's operatons on the communty and the envronment;

( e) the desrabty of the Company mantanng a repuaion for high standards of business conduct;and

( f )   t h e need to act fary as between members of the Company.

 

A s   t h e Board consders that the Company n fact has reatvey few externa stakehoders, the key groups being its shareholders, its employees and its keyservice providers, the irectors have focused attenton on ensurng the foowng robust mechansms protect ther nterests:

 

Stakeholder

Engagement in year

Shareholders

T h e B o a rdrecognisestheimportanceofcommunicationswithshareholders. Theprimary modesofcommunicationaretheinterimandannualreportswhicharedesignedtoprovide shareholderswithafullunderstandingoftheCompany'sactivitiesandperformance.

The Company's Annual General Meeting in February 2020 was held in person. The Company also engages with shareholders and potential shareholders via its website, social media and a regular newsletter.

Undernormalcircumstances,the Boardwelcomestheopportunitytomeetwithshareholders atthennualGeneralMeetingandtorespondtoanyquestionsthatmayberaised.ueto theunprecedentedcircumstancesarisingfromtheglobalpandemic,theCompanywillbe holdingaclosedAGMin2021;however,shareholdersarewelcometosubmitquestionsahead oftheAGMor atanytimethroughouttheyearviaemailtoinfo@thescottish.co.uk or by writing to the Chairman at the Company's registered office.

Employees

T heCompanyisfortunatetobenefitfromagroupoflong-serving,experiencedstaff. Theteam workscloselywiththe BoardindefiningandimplementingstrategytomeettheCompany's objective. In light of the small number of employees, there is regular formal and informal interaction between the Board and staff. Inaddition,anEmployeeHandbookisprovided toallstaff. Thehandbook,whichisreviewedannually,setsoutkeypoliciesandproceduresto ensurethewell-beingofallemployees. TheCompanyhasalsoestablishedawhistleblowing policy  whichenablesconcernstoberaisedandinvestigatedinaconfidentialmanner.

A s a r e s u l t o f t h e g l o b a l p a n d e m i c,provisionhasbeenmadetoensurethatemployeesare abletoworksafelyandeffectivelyfromhome.ppropriateadaptationshavebeenmadetothe officespacetocreateaCovid-safeworkingenvironmentforemployees'returninduecourse.

Key Service Providers

A s a c o m p a n y w i t h a li s t i n g o n t h e P remiumSegmentoftheLondonStockExchange,the Boardismindfuloftheimportanceofensuringcompliancewith appropriate corporate legislation and therulesandregulationsof theFinancialConductuthorityinsofarastheyrelatetotheCompanyandits wholly owned subsidiary, S.I.T. Savings Limited.

T h e r e i s a r o b u s t o v e r s i g h t fr a m e w o r kinplacetoevaluatetheperformanceofkeyserviceproviders, including Maitland (who provide company secretarial and administration services) as well as our custodian and depositary. The Boardandmanagementmaintainregularcommunicationwithsenior personnel atkeyserviceproviderstoprovidefeedback,ensureopencommunicationsandto developandmaintainlong-termcollaborativepartnerships.

There was enhanced dialogue between the Company and its key service providers during the year to monitor their responses to the Covid-19 pandemic and to ensure that business continuity processes were operating effectively.

Community and Environment

A s s t a t e d i n t h e C h a i r m a n ' s S t a t e m e n t , i n p ur s u i n g t h e Company'sobjectives,variousfactors thatmayimpactontheperformanceareconsideredandthesemayincludeenvironmental, socialandgovernanceissues. TheconsiderationofESGfactorsisanimportantpartofthe investmentprocessastheCompanybelievesthatpoorpracticescanhaveanimpacton thevalueofinvestmentsandpotentialinvestments.Inabroadercontext,theCompany's operationscreateemployment,aideconomicgrowth,aswellasgeneratingtaxrevenuesand wealth,therebybenefittingthecommunity,economyandenvironmentmoregenerally.

 

Principal Decisions

We set out beow some exampes of how the Board has had regard to the matters set out n secton 172(1) (a)-(f) when dschargng ts secton 172 duty and the effect of that on decsons taken by us. We define prncpa decsons as both those that are matera to the Company, but aso those that are sgnficant to any of our key stakehoders. In makng the foowng prncpa decsons, the Board consdered the reevant mpact on stakehoders as we as the need to mantan a reputaton for hgh standards of busness conduct.

 

Principal decision 1 - Dividend declarations

Each year, in conjunction with advice from the Manager, the Board makes an assessment of the strength of the Company's income, forecast revenue, revenue reserve and future prospects relative to uncertainties in the external environment and makes decisions about the payment of dividends. Despite the uncertainties arising from the global pandemic and having reviewed a range of metrics, the Board approved and declared dividends totalling £17.026m to shareholders during the year to 31 October 2020.

 

Principal decision 2 - Comparator index change

A s   p a rt of the Board's annual review of the Company's strategy, it considered the ongoing appropriateness of the two comparator indices which it had been using to assess performance. Taking into account feedback from some shareholders and the views of the current irectors, it was concluded that it would be better to move to a single comparator index, the MSCI ll Country World Index. The Board believes that this will provide shareholders with a clear comparison of the Company's performance against global markets, as well as providing direction to the Manager on how we will be assessing performance in the future.

 

Principal decision 2 - Elimination of the actuarial deficit in the Company's defined benefit pension scheme

Following completion of the latest triennial valuation of the Company's defined benefit pension scheme, the Board gave consideration to the options around the future funding of the scheme. As a result of its deliberations, the Board approved a one-off contribution of £3,220,000 to the Company's Retirement Benefits Scheme to eliminate the remaining actuarial deficit after deduction of regular payments in the year. In reaching this decision, the Board considered the effects on key stakeholders including employees, shareholders and the Company as a whole. Further information is provided in note 4 to the financial statements.

 

Investment risk

The investment portfolio is diversified over a range of industries and regions in order to spread risk. The Company has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns but, should stockmarkets fall, such borrowings would magnify losses. The Company can buy back and cancel its own shares. All other things being equal, this would have the effect of increasing gearing.

 

Performance comparators

The Company does not have a formal benchmark.

 

Performance is reviewed in the context of returns achieved by a broad basket of UK equities through the MSCI UK All Cap Index and of international equities through the MSCI All Country World Index (ACWI). The portfolio is not modelled on any index.

 

As explained in the Chairman's Statement, with effect from 1 November 2020 the Company will henceforth compare performance against the MSCI All Country World Index as the sole comparator.

 

Management

The Board has appointed the Company's wholly-owned subsidiary, S.I.T. Savings Limited, as its Alternative Investment Fund Manager (AIFM).

 

Day-to-day management of the Company is delegated to the Company's executive management which reports directly to the Board.

 

The Board has appointed Maitland Administration Services Limited to provide company secretarial, administration and accounting services to the Company. Northern Trust acts as custodian and depositary.

 

Substantial shareholdings

At 31 October 2020, the Company had been informed of the following notifiable interest in its voting rights:

 


 

Shares

%

held

Wells Capital Management Inc.

4,924,836

6.8

 

On 4 November 2020, Wells Capital Management Inc. informed the Company that it no longer held a notifiable interest in its voting rights. On the same date, 1607 Capital Partners, LLC informed the Company of its interest in 3,785,706 shares, being 5.2% of the share capital as at 31 October 2020.

 

Analysis of share register at 31 October 2020

 

Category of holder

Share capital

%

Individuals

82.6

Investment companies

5.2

Pension funds

5.7

Other

6.5

Total

100.0

 

Company's directors and employees

The table below shows the breakdown of Directors and employees.

 


31 October 2020

31 October 2019


Male

Female

Male

Female

Directors

3

2

4

2

Senior Manager

1

0

1

0

Employees

5

5

4

5

 

Purpose, Culture and Stakeholders

Reflecting the time the Board has spent considering these areas during the year, our stakeholder responsibilities and approach to purpose, culture and values are reviewed in more detail within the Annual Report and Financial Statements.

 

Environmental, Social and Governance Policy

When investments are made, the primary objective is to achieve the best investment return while allowing for an acceptable degree of risk. In pursuing this objective, various factors that may impact on the performance are considered and these may include environmental, social and governance issues.

 

The consideration of ESG factors is an important part of the investment process as the Board and Manager believe that poor practices can have an impact on the value of the Company's investments and/or potential investments. Prescriptive criteria are not applied; however, the Manager considers the circumstances of each situation.

 

If an ESG concern pertaining to an existing investment is identified the Manager would initially consider if engagement with the investee company would give rise to a satisfactory resolution. Depending on the conclusion, the Manager will either engage with the company to encourage resolution of the issue or sell the investment.

 

As an investment trust, the Company does not provide goods or services in the normal course of business, nor does it have customers. Accordingly, the Directors consider that the Company does not fall within the scope of the Modern Slavery Act 2015 and that there are no disclosures to be made in respect of human rights or community issues.

 

Bribery Act 2010

The Company has a zero tolerance policy towards bribery and a commitment to carry out business fairly, honestly and openly.

 

Criminal Finances Act 2017

The Company has a zero tolerance policy to tax evasion and the facilitation of tax evasion.

 

The Strategic Report was approved by the Board and signed on its behalf by:

 

James Will

Chairman

11 December 2020

 

Financial Summary

 





 

2020

 

2019

 

Change

%

Total

Return

%

NAV with borrowings at market value

755.5p

878.5p

-10.6§

NAV with borrowings at amortised cost

793.6p

915.9p

-13.4

-10.1§

Ex-income NAV with borrowings at market value§

750.9p

864.2p

-13.1


Ex-income NAV with borrowings at amortised cost

789.0p

901.6p

-12.5


Share price

681.0p

807.0p

-15.6

-12.0

Discount to NAV with borrowings at market value§

9.9%

8.1%



MSCI ACWI



+3.2

+5.0

MSCI UK All Cap Index



-23.0

-20.6






£'000

£'000



Equity investments

581,235

687,820



Pension surplus

1,161

-



Net current assets

80,542

74,173



Total assets

662,938

761,993



Long-term borrowings at amortised cost

(84,013)

(83,921)



Pension scheme deferred tax on surplus

(406)

-



Pension liability

-

(1,279)



Shareholders' funds

578,519

676,793



Earnings per share

21.70p

29.75p

-27.1


Regular dividend per share (2020: proposed final 6.10p)

23.20p

22.80p

+1.8


Special dividend per share

-

7.45p



Total dividend per share

23.20p

30.25p

-23.3


UK Consumer Prices Index - annual inflation



+0.7


 

§ Alternative Performance Measures (please refer to Glossary in Annual Report and Financial Statements)

 

Year's High & Low

Year to

31 October 2020

Year to

31 October 2019


High

Low

High

Low

NAV with borrowings at market value

924.0p

705.2p

930.6p

812.9p

Closing share price

841.0p

557.0p

843.0p

748.0p

Discount to NAV with borrowings at market value

25.8%

5.9%

10.1%

7.0%

 

List of Investments

As at 31 October 2020

 

Listed Equities


 

Market value

Cumulative

weight

Holding

Country

£'000

%

Newmont

US

49,475


Barrick Gold

Canada

47,034


Newcrest Mining

Australia

35,884


Pfizer

US

22,254


Japan Tobacco

Japan

21,209


Roche

Switzerland

21,041


United Utilities

UK

17,515


Severn Trent

UK

16,031


Duke Energy

US

16,029


Gilead Sciences

US

15,201

45.0

BT

UK

14,135


Kirin

Japan

13,939


KT&G

South Korea

13,830


Tesco

UK

13,365


Sanofi

France

13,278


GlaxoSmithKline

UK

13,176


Verizon Communications

US

12,584


China Mobile

China

12,037


PepsiCo

US

11,443


Gold Fields

South Africa

11,176

67.2

Bristol-Myers Squibb

US

10,849


Deutsche Telekom

Germany

9,961


Target

US

9,948


Telstra

Australia

9,803


Carrefour

France

9,316


Altria

US

9,206


Chevron

US

8,600


Anglogold Ashanti

South Africa

8,163


Total

France

7,862


Orange

France

6,630

82.8

National Grid

UK

6,548


JPMorgan Chase

US

6,063


British American Tobacco

UK

5,996


KPN

Netherlands

5,974


AT&T

US

5,956


BP

UK

5,603


KDDI

Japan

5,301


East Japan Railway

Japan

5,046


Royal Dutch Shell

UK

4,829


Aegon

Netherlands

4,267

92.3

Tele2

Sweden

3,907


Exxon Mobil

US

3,431


Dominion Energy

US

3,169


First Horizon

US

3,059


Banco Santander

Spain

3,005


Philip Morris International

US

2,856


Capri

US

2,805


Bank of Kyoto

Japan

2,581


Ambev

Brazil

2,539


Sumitomo Mitsui Financial

Japan

2,461

97.4

Halliburton

US

2,425


NatWest

UK

1,925


Mitsubishi UFJ Financial

Japan

1,602


ING

Netherlands

1,557


Lloyds Banking

UK

1,303


BNP Paribas

France

1,286


Adecco

Switzerland

928


Intesa Sanpaolo

Italy

869


Standard Chartered

UK

595


Total listed equities


578,860

99.6


 

 

 

Unlisted


Market value

Cumulative

weight

Holding

Country

£'000

%

Heritable property and subsidiary

UK

2,375


Total unlisted


2,375

0.4

Total equities


581,235

100.0

The 10 largest holdings have an aggregate market value of £261,673,000.

 

Distribution of Total Assets

by Sector

31 October

2020

%

31 October

2019

%


by Region

31 October

2020

%

31 October

2019

%

Energy

4.9

11.1


UK

15.6

22.6

Materials

22.9

14.2


Europe (ex UK)

13.5

19.1

Industrials

0.9

4.0


North America

36.6

29.5

Consumer Discretionary

1.9

9.5


Latin America

0.4

-

Consumer Staples

15.7

12.8


Japan

7.9

10.4

Health Care

14.5

8.1


Asia Pacific (ex Japan)

10.8

8.7

Financials

5.0

11.2


Middle East & Africa

2.9

-

Information Technology

-

-


Pension surplus

0.2

-

Communication Services

13.0

15.4


Net current assets

12.1

9.7

Utilities

8.9

2.3


Total assets

100.0

100.0

Real Estate

-

1.7





Pension surplus

0.2

-





Net current assets

12.1

9.7





Total assets

100.0

100.0





 

Allocation of Shareholders' Funds


%

Total equities

100.5

Pension surplus

0.2

Net current assets

13.9

Borrowings at amortised cost

-14.5

Provisions for liabilities

-0.1

Shareholders' funds

100.0

 

Changes in Asset Distribution

by Sector



 

31 October

2019

£m

Net purchases

(sales)

£m

 

Appreciation

(depreciation)

£m

 

31 October

2020

£m

Energy



84.5

(19.7)

(32.1)

32.7

Materials



108.1

5.7

37.9

151.7

Industrials



30.3

(18.4)

(5.9)

6.0

Consumer Discretionary



72.9

(62.6)

2.5

12.8

Consumer Staples



97.3

20.7

(14.3)

103.7

Health Care



61.8

45.7

(11.7)

95.8

Financials



85.1

(37.4)

(14.8)

32.9

Information Technology



-

-

-

-

Communication Services



117.1

-

(30.8)

86.3

Utilities



17.6

45.4

(3.7)

59.3

Real Estate



13.1

(7.3)

(5.8)

-

Total equities



687.8

(27.9)

(78.7)

581.2

 

Changes in Shareholders' Funds


 

31 October

2019

£m

Net purchases

(sales)

£m

 

31 October

2020

£m

 

Gains

(losses)

£m

 

Dividend

income

£m

 

Total

return

£m

Total equities

687.8

(27.9)

581.2

(78.7)

19.9

(58.8)

Pension surplus

-

-

1.2




Net current assets

74.2

6.0

80.5




Total assets

762.0

(21.9)

662.9




Borrowings at amortised cost

(83.9)

(0.1)

(84.0)




Provision for liabilities

(1.3)

-

(0.4)




Shareholders' funds

676.8

(22.0)

578.5




 

Income Statement

For the year to 31 October 2020


 

 

Revenue

£'000

 

2020

Capital

£'000

 

 

Total

£'000

 

 

Revenue

£'000

 

2019

Capital

£'000

 

 

Total

£'000

Net losses on investments held

at fair value through profit and loss

-

(78,698)

-

(8,651)

(8,651)








Net gains/(losses) on currencies

-

818

818

-

(1,175)

(1,175)








Income

21,737

-

21,737

28,859

-

28,859








Expenses

(2,346)

(1,069)

(3,415)

(2,625)

(1,508)

(4,133)








Net Return before

Finance Costs and Taxation

19,391

(78,949)

(59,558)

26,234

(11,334)

14,900








Interest payable

(1,732)

(3,217)

(4,949)

(1,732)

(3,217)

(4,949)








Return on Ordinary

Activities before Tax

17,659

(82,166)

(64,507)

24,502

(14,551)

9,951








Tax on ordinary activities

(1,673)

-

(1,673)

(1,929)

-

(1,929)








Return attributable to Shareholders

15,986

(82,166)

(66,180)

22,573

(14,551)

8,022








Return per share

(basic and fully diluted)

21.70p

(111.52)p

(89.82)p

29.75p

(19.18)p

10.57p








Weighted average number of

shares in issue during the year


 

73,677,432



 

75,862,506

















2020

£'000



2019

£'000



Dividends paid and proposed














First interim 2020: 5.70p (2019: 5.30p)

4,207



4,055



Second interim 2020: 5.70p (2019: 5.30p)

4,204



3,996



Third interim 2020: 5.70p (2019: 5.30p)

4,168



3,918



Final 2020: 6.10p (2019: 6.90p)

4,447



5,098



Special 2020: Nil (2019: 7.45p)

-



5,501



Total 2020: 23.20p (2019: 30.25p)

17,026



22,568










All revenue and capital items in the above statement derive from continuing operations


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

 

The accompanying notes are an integral part of this statement.

 

Balance Sheet

As at 31 October 2020



 

£'000

2020

£'000

£'000

2019

£'000

Fixed Assets






Investments



581,235


687,820

Non-current Assets






Pension surplus



1,161


-




582,396


687,820

Current Assets






Debtors


7,188


2,459


Cash and cash equivalents


75,981


72,378




83,169


74,837


Creditors: liabilities falling due within one year

(2,627)


(664)


Net Current Assets



80,542


74,173

Total Assets less Current Liabilities


662,938


761,993

Creditors: liabilities falling due after more than one year





Long‑term borrowings at amortised cost



(84,013)


(83,921)

Provisions for Liabilities






Pension scheme deferred tax on surplus



(406)



Pension liability



-


(1,279)

Net Assets



578,519


676,793

Capital and Reserves






Called‑up share capital



18,224


18,474

Share premium account



39,922


39,922

Other reserves:






Capital redemption reserve



52,637


52,387

Capital reserve



423,402


513,930

Revenue reserve



44,334


52,080

Shareholders' Funds



578,519


676,793







Net Asset Value per share with borrowings at amortised cost (basic and fully diluted)

 

793.6p


 

915.9p







Number of shares in issue at year end


72,896,247


73,893,508













Statement of Comprehensive Income

For the year to 31 October 2020


2020

2019


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Return attributable to shareholders

15,986

(82,166)

(66,180)

22,573

(14,551)








Actuarial (losses)/gains relating to pension scheme

 

(412)

 

(764)

 

(1,176)

 

82

 

151

 

233

Pension scheme deferred tax on surplus

(142)

(264)

(406)

-

-

-

Total comprehensive income for the year

15,432

(83,194)

(67,762)

22,655

(14,400)

8,255








Total comprehensive income per share

20.95p

(112.92)p

(91.97)p

29.86p

(18.98)p

10.88p

 

Statement of Changes in Equity

For the year to 31 October 2020





2020

£'000


2019

£'000








Opening balance



676,793


715,312







Total comprehensive income



(67,762)


8,255








Dividends




(23,178)


(19,796)







Share buybacks



(7,334)


(26,978)







Closing balance



578,519


676,793








 

Cash Flow Statement

For the year to 31 October 2020



 

 

2020

£'000


2019

£'000

Operating activities






Net revenue before finance costs and taxation


19,391


26,234

Expenses charged to capital


(1,069)


(1,508)

Decrease/(increase) in accrued income


278


(91)

(Decrease)/increase in other payables


(60)


(135)

Decrease/(increase) in other receivables


158


(80)

Adjustment for pension funding


(3,616)


175

Tax on investment income


(1,637)


(1,929)

Cash flows from operating activities


13,445


22,666






Investing activities





Purchases of investments


(178,725)


(176,213)

Disposals of investments


203,970


196,088

Cash flows from investing activities


25,245


19,875






Cash flows before financing activities


38,690


42,541






Financing activities





Dividends paid


(23,178)


(19,800)

Share buybacks


(7,052)


(28,742)

Interest paid


(4,857)


(4,857)

Cash flows used in financing activities


(35,087)


(53,399)






Net movement in cash and cash equivalents


3,603


(10,858)






Cash and cash equivalents at the beginning of year

72,378


83,236






Cash and cash equivalents at the end of year *


75,981


72,378

 

* Cash and cash equivalents represent cash at bank and short‑term money market deposits repayable on demand.

 

The accompanying notes are an integral part of this statement.

 

Responsibility Statement

 

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law the Directors must not approve the accounts 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:

 

-  select suitable accounting policies and then apply them consistently;

-  make judgments and accounting estimates that are reasonable and prudent;

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

-  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 comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

 

The Board of Directors confirms that to the best of its knowledge:

 

a)  the Financial Statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and return of the Company;

b)  the Strategic Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties the Company faces; and

c)  the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

 

The Responsibility Statement was approved by the Board and signed on its behalf by:


James Will
Chairman
11 December 2020

 

Notes

 

1.  Basis of accounting

The Financial Statements have been prepared in accordance with Financial Reporting Standard 102 and with the AIC's Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (SORP) and in accordance with the Companies Act 2006. They are also prepared on a going concern basis under the historical cost convention, modified to include the revaluation of investments at fair value. It is the opinion of the Directors that, as most of the Company's assets are readily realisable and exceed its liabilities, it is expected that the Company will continue in operational existence for the foreseeable future and for at least the next 12 months from the date of signing these financial statements. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates. The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments.

 

2.  Return per ordinary share

The revenue return per share is calculated on net revenue on ordinary activities after taxation for the year of £15,986,000 (2019: £22,573,000) and on 73,677,432 (2019: 75,862,506) shares, being the weighted average number of shares in issue during the year.

 

The capital return per share is calculated on net capital loss for the year of £82,166,000 (2019: net capital loss of £14,551,000) and on 73,677,432 (2019: 75,862,506) shares, being the weighted average number of shares in issue during the year.

 

The total return per share is calculated on total loss for the year of £66,180,000 (2019: profit of £8,022,000) and on 73,677,432 shares (2019: 75,862,506), being the weighted average number of shares in issue during the year.

 

3.  Net asset value per share

The net asset value per share with borrowings at amortised cost is based on net assets of £578,519,000 (2019: £676,793,000) and on 72,896,247 (2019: 73,893,508) shares, being the number of shares in issue at the year end.

 

4.  Dividends

A final dividend in respect of the year ended 31 October 2020 of 6.10p (2019 - 6.90p) per share will be paid on 12 February 2021 to shareholders on the register on 15 January 2021 (ex-dividend 14 January 2021).

 

5.  Related parties

Directors' fees are detailed in the Directors' Remuneration Report. There were no matters requiring disclosure under section 412 of the Companies Act 2006. S.I.T. Savings Limited is a wholly owned subsidiary of the Company. During the year to 31 October 2020 the net amount paid to S.I.T. Savings Limited was £1,667 (2019: nil) in relation to expenses. At 31 October 2020 the net amount due to S.I.T. Savings Limited was £10,501 (2019: £14,011). The net amount receivable from S.I.T. Savings Limited was £13,860 (2019: £14,812).

 

The financial information set out above does not constitute the Company's statutory Financial Statements for the year ended 31 October 2020 but is derived from those Financial Statements. Statutory Financial Statements for the year ended 31 October 2020 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those Financial Statements; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' Report will be found in the Company's full Annual Report and Financial Statements on the Company's website: www.thescottish.co.uk Copies may also be obtained from the Company Secretary: Maitland Administration Services Limited, Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY.

 

Risk management policies and procedures

 

As an investment trust, the Company invests in equities and other investments for the long term so as to secure its investment objective. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in a reduction in the Company's net assets and a reduction in the profits available for dividend.

 

The main risks include investment and market price risk (comprising foreign currency risk and interest rate risk), liquidity risk and credit risk. The Directors' approach to the management of these risks is set out below. The Directors of the Company and of S.I.T. Savings Limited coordinate the Company's risk management.

 

The Company's policies and processes for managing the risks, and the methods used to measure the risks, which are set out below, have not changed from those applied in the previous year.

 

Please refer to the Corporate Governance Report in the Annual Report and Financial Statements regarding the Company's risk as a result of Covid-19.

 

a.  Investment and market price risk

The holding of securities and investing activities involve certain inherent risks, principally in relation to market risk. A contrarian investment approach is a distinctive style that may deviate from comparator indices and peer group performance over discrete periods. Whilst performance is compared against major global and UK indices, the composition of indices has no influence on investment decisions or the construction of the portfolio. As a result, it is expected that the Company's investment portfolio and performance may deviate from the comparator indices. Events may occur which affect the value of investments. From time to time, the Company may wish to use derivatives in order to protect against a specific risk or to facilitate a change in investment strategy such as the movement of funds from one area to another. No such transaction may take place without the prior authorisation of the Board.

 

Management of the risk

Company performance is monitored at each Board meeting, including investment performance. The Company holds a portfolio which is well diversified across industrial and geographical areas to help minimise these risks. The contrarian investment approach is explained in our shareholder communications and through meetings with media and the investor community. The levels of gearing and gross gearing are monitored closely by the Board and the Manager. The Board currently limits gearing to 20%. While gearing will be employed in a typical range of 0% to 20%, the Company retains the ability to lower equity exposure to a net cash position if deemed appropriate.

 

b.  Foreign currency risk

Approximately 82% of the Company's assets are invested overseas which gives rise to a currency risk. From time to time, specific hedging transactions may be undertaken. The Company's overseas income is subject to currency movements. The currency profile of the Company's monetary assets and liabilities is set out below.

 

Management of the risk

Management monitors the Company's exposure to foreign currencies on a daily basis, and reports to the Board at regular intervals. Management measures 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.

 

Foreign currency borrowings and forward currency contracts may be used to limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments or the income received from them. These borrowings and contracts are limited to currencies and amounts commensurate with the asset exposure to those currencies.

 

Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is receivable and its receipt.

 

c.   Interest rate risk

The Company finances its operations through a combination of investment realisations, retained revenue reserves, debenture stocks and secured bonds. All debenture stocks and secured bonds are at fixed rates.

 

Management of the risk

The Company finances part of its activities through borrowings at levels which have been approved and are monitored by the Board.

 

d.  Liquidity risk

Almost all of the Company's assets comprise listed securities which represent a ready source of funds.

 

Management of the risk

Liquidity risk is not as significant as the other risks as most of the Company's assets are investments in quoted equities and are readily realisable. Management reviews the liquidity of the portfolio when making investment decisions.

 

e.  Credit risk

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

 

Management of the risk

This risk is managed as follows:

 

-  by dealing only with brokers and banks which have been approved by the Audit Committee and which have credit ratings assigned by international credit rating agencies; and

-  by setting limits on the maximum exposure to any one counterparty at any time, which are reviewed semi-annually at meetings of the Audit Committee.

 

f.   Capital management policies and procedures

The Company carries on its business as a global growth investment trust. Its objective is to provide investors, over the longer term, with above-average returns through a diversified portfolio of international equities and to achieve dividend growth ahead of UK inflation.

 

The levels of gearing and gross gearing are monitored closely by the Board and management. The Board currently limits gearing to 20%. While gearing will be employed in a typical range of 0% to 20%, the Company retains the ability to lower equity exposure to a net cash position if deemed appropriate.

 

The Board, with the assistance of management, monitors and reviews the structure of the Company's capital on an ongoing basis. This review includes the planned level of gearing which will take into account management's view on the market, the need to buy back shares for cancellation and the level of dividends.

 

The Company's policies and processes for managing capital are unchanged from the previous year.

 

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