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What is the risk?
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How
is it managed?
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Current assessment of risk
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Financial risk
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The Company's assets consist mainly
of listed securities and its principal risks are therefore market
related and include market risk (comprising currency risk, interest
rate risk and other price risk), liquidity risk and credit risk. An
explanation of those risks and how they are managed is contained in
note 19 to the Financial Statements on pages 96 to 105 of the
Annual Report and Financial Statements.
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The Board has, in particular,
considered the impact of heightened macroeconomic and geopolitical
concerns, including continued high interest rates, the ongoing
Russia-Ukraine war, heightened tensions between China and both the
US and Taiwan, and the conflict in the Middle East. The Board also
considers the commercial impact of changes in regulatory posture in
local market jurisdictions. The Board Considers at each meeting
various metrics including portfolio concentration, regional and
industrial sector weightings, top and bottom stock contributors to
performance and contribution to performance by industrial sector.
The Managers provide the rationale for stock selection decisions
and both the investment strategy and portfolio risks are formally
considered in detail at least annually.
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This risk is considered to have
increased. Although macroeconomic risks such as rising interest
rates have reduced, the prospect of market volatility remains from
deteriorating geopolitical stability such as the ongoing
Russia-Ukraine war, increasing trade tensions between the West and
China and escalating hostilities in the Middle East.
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Private company investments
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The Company's risk could be
increased by its investment in private company securities. These
investments may be more difficult to buy or sell, assessment of
their value is more subjective than for investments listed on a
recognised stock exchange and their valuations may be perceived to
be more volatile or out of date.
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The Board considers the private
company investments in the context of the overall investment
strategy and provides guidance to the Managers on the maximum
exposure to private company investments. The investment policy
limits the amount which may be invested in private companies to 30
per cent. of the total assets of the Company, measured at time of
purchase (see page 42 of the Annual Report and Financial
Statements). The Managers have a robust valuation methodology,
which is applied consistently. The Managers' valuation process
involves a revaluation of each of the private company investments
every 3 months and additional valuations are carried out in
response to trigger events to ensure the investments are carried at
fair value. The valuation process is overseen by the Private
Companies Valuations Group at Baillie Gifford which is independent
from the portfolio managers and which takes advice from an
independent third party (S&P Global). The valuations are
subject to review and challenge by the Board every 6 months and are
subject to scrutiny annually by the external Auditor. The Managers
have endeavoured to improve market understanding of the valuation
process.
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This risk is seen as stable. In
periods of market volatility the Private Company Valuations Group
will perform trigger analyses and, if appropriate, revalue the
relevant investments, as described in the report on page 82 of the
Annual Report and Financial Statements. The Managers consider
market understanding of the valuations process to have
improved.
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Investment strategy risk
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Pursuing an investment strategy to
fulfil the Company's objective which the market perceives to be
unattractive or inappropriate, or the ineffective implementation of
an attractive or appropriate strategy, may lead to reduced returns
for shareholders and, as a result, a decreased demand for the
Company's shares. This may lead to the Company's shares trading at
a widening discount to their net asset value.
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The Board regularly reviews and
monitors the Company's objective and investment policy and
strategy, the investment portfolio and its performance, the level
of discount/premium to net asset value at which the shares trade
and movements in the share register.
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The market appetite for growth
investing is considered to have improved over the year and the
discount of the Company's shares to the net asset value has
narrowed.
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Climate and governance risk
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As investors place increased
emphasis on Environmental, Social and Governance ('ESG') issues,
perceived problems on ESG matters in an investee company could lead
to that company's shares being less attractive to investors,
adversely affecting its share price, in addition to potential
valuation issues arising from any direct impact of the failure to
address the ESG weakness on the operations or management of the
investee company (for example in the event of an industrial
accident or spillage). Repeated failure by the Managers to identify
ESG weaknesses in investee companies could lead to the Company's
own shares being less attractive to investors, adversely affecting
its own share price. In addition, the valuation of investments
could be impacted by climate change due to climate-related
operational challenges, changes in end demand or failure to
identify a pathway to Net Zero.
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This is mitigated by the Managers'
strong ESG stewardship and engagement policies which are available
to view on the Managers' website bailliegifford.com and have been
reviewed and endorsed by the Company and fully integrated into the
investment process, as well as the extensive up-front and ongoing
due diligence which the Managers' undertake on each investee
company. This due diligence includes assessment of the risks
inherent in climate change (see page 52 of the Annual Report and
Financial Statements). An explanation of how these policies are
applied in the context of Scottish Mortgage's long term investment
approach is available at scottishmortgage.com.
The Managers utilise data sourced
from a third-party provider to map the carbon footprint of the
portfolio. This analysis estimates that the carbon intensity of
Scottish Mortgage is 95.7% less than the index albeit that is based
on only 67.9% of the value of the Company's equity portfolio which
reports on carbon emissions and other carbon related
characteristics (see page 52 of the Annual Report and Financial
Statements).
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The Managers continue to employ
strong ESG stewardship and engagement policies.
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Discount risk
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The discount/premium at which the
Company's shares trade relative to its net asset value can change.
The risk of a widening discount is that it may undermine investor
confidence in the Company.
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The Board monitors the level of
discount/premium at which the shares trade and the Company has
authority to buyback its existing shares when deemed by the Board
to be in the best interests of the Company and its shareholders.
The Company announced on 15 March 2024 that it would allocate at
least £1 billion for share buybacks over a two year
period.
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This risk is seen as
stable notwithstanding
that the discount has narrowed
following the announcement on 15 March 2024 that the Company would
make available at least £1 billion for share buybacks over a two
year period, and subsequent increased buyback activity.
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Regulatory risk
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Changes to the regulatory
environment could negatively impact the Company. Failure to comply
with applicable legal and regulatory requirements such as the tax
rules for investment trust companies, the FCA Listing Rules and the
Companies Act could lead to suspension of the Company's Stock
Exchange listing, financial penalties, a qualified audit report or
the Company being subject to tax on capital gains.
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Baillie Gifford's Business Risk,
Internal Audit and Compliance Departments provide regular reports
to the Audit Committee on Baillie Gifford's monitoring programmes.
Major regulatory change could impose disproportionate compliance
burdens on the Company. In such circumstances representation is
made to ensure that the special circumstances of investment trusts
are recognised. Shareholder documents and announcements, including
the Company's published Interim and Annual Report and Financial
Statements, are subject to stringent review processes and
procedures are in place to ensure adherence to the Transparency
Directive and the Market Abuse Directive with reference to inside
information.
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All control procedures are working
effectively. There have been no material regulatory changes in the
year.
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Custody and depositary risk
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Safe custody of the Company's assets
may be compromised through control failures by the Depositary,
including cyber security incidents.
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The Board receives six monthly
reports from the Depositary confirming safe custody of the
Company's assets held by the Custodian. Cash and portfolio holdings
are independently reconciled to the Custodian's records by the
Managers who also agree uncertificated unlisted portfolio holdings
to confirmations from investee companies. The Custodian's internal
controls assurance reports are reviewed by Baillie Gifford's
Business Risk Department and a summary of the key points is
reported to the Audit Committee and any concerns
investigated.
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All control procedures are working
effectively.
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Operational risk
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Failure of Baillie Gifford's systems
or those of other third party service providers could lead to an
inability to provide accurate reporting and monitoring or a
misappropriation of assets.
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Baillie Gifford has a comprehensive
business continuity plan which facilitates continued operation of
the business in the event of a service disruption or major
disaster. The Audit Committee reviews Baillie Gifford's Report on
Internal Controls and the reports by other key third party
providers are reviewed by Baillie Gifford on behalf of the Board
and a summary of the key points is reported to the Audit Committee
and any concerns investigated. The other key third party service
providers have not experienced significant operational difficulties
affecting their respective services to the Company.
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All control procedures are working
effectively.
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Cyber security risk
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A cyber attack on Baillie Gifford's
network or that of a third party service provider could impact the
confidentiality, integrity or availability of data and
systems.
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The Audit Committee reviews Reports
on Internal Controls published by Baillie Gifford and other third
party service providers. Baillie Gifford's Business Risk Department
report to the Audit Committee on the effectiveness of information
security controls in place at Baillie Gifford and its business
continuity framework. Cyber security due diligence is performed by
Baillie Gifford on third party service providers which includes a
review of crisis management and business continuity
frameworks.
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This risk is seen as increasing due
to recent indications that the continuation of geopolitical
tensions could lead to more cyber attacks. Emerging technologies,
including AI, could potentially increase information security
risks. In addition, service providers operate a hybrid approach of
remote and office working, thereby increasing the potential of a
cyber security threat.
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Leverage risk
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The Company borrows money for
investment purposes, sometimes known as 'gearing' or 'leverage'. If
the investments fall in value, borrowings will magnify the impact
of this loss. If borrowing facilities are not renewed, the Company
may have to sell investments to repay borrowings.
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All borrowings require the prior
approval of the Board and leverage levels are discussed by the
Board and Managers at every meeting. Covenant levels are monitored
regularly. Details of the Company's borrowings can be found in
Notes 11 and 12 on pages 92 to 93 of the Annual Report and
Financial Statements. The majority of the Company's investments are
in quoted securities that are readily realisable. Further
information on leverage can be found on page 111 of the Annual
Report and Financial Statements and the Glossary of terms and
Alternative Performance Measures on pages 115 to 117 of the Annual
Report and Financial Statements.
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During the year to 31 March £153
million of bank loans have been repaid. The Company has undrawn
revolving credit facilities of US$495 million.
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Political risk
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Political change in areas in which
the company invests or may invest may have practical consequences
for the company.
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Political developments are closely
monitored and considered by the Board. The Board continues to
assess the potential consequences for the Company's future
activities including those that may arise from geopolitical
tensions and constitutional change. The Board believes that the
Company's global portfolio partially helps to mitigate such
political risks.
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This risk is seen as increasing as
deteriorating geopolitical stability increases the prospect of
trade conflict and sanctions.
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Emerging risks
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As explained on page 62 of the
Annual Report and Financial Statements, the Board has regular
discussions on principal risks and uncertainties, including any
risks which are not an immediate threat but could arise in the
longer term. The Board considers that the key emerging risks arise
from the interconnectedness of the global economy (including
factors such as supply chain constraints and economic sanctions)
and the related exposure of the investment portfolio to societal
and financial implications of an escalation of geopolitical
tensions, cyber risk and coronavirus variants or similar public
health threats. These are mitigated by the Managers' close links to
the investee companies and their ability to ask questions on
contingency plans. The Managers believe the impact of such events
may be to impact the pace of growth rather than to invalidate the
investment rationale over the long term.
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