TIDMSCIN
RNS Number : 8928Y
Scottish Investment Trust PLC
11 December 2017
The Scottish Investment Trust PLC
Annual Results for the year ended 31 October 2017.
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 2017.
Highlights
-- Step change 48.1% increase in regular dividend to 20p.
-- Additional special dividend of 5p.
-- Total dividend increase of 11.1%.
-- Share price total return +12.8% and NAV total return +11.0%.
Enquiries:
Alasdair McKinnon, Manager
0131 225 7781
Chairman's Statement
Performance
I am pleased to report that during the 12 months to 31 October
2017 a combination of capital appreciation and strong dividend
income meant that the Company delivered another year of robust
total returns. Over that period, the share price total return was
12.8% and the net asset value per share (NAV) total return (with
borrowings at market value) was 11.0%.
The Company does not have a formal benchmark but, by way of
comparison, the sterling total return of the international MSCI All
Country World Index (ACWI) was 13.3% while the UK based MSCI UK All
Cap Index total return was 13.5%. As noted in previous
communications, elsewhere in this statement and in the Manager's
review, we do not expect the Company's portfolio return to match
any particular index return over any defined period due to the
contrarian nature of the portfolio's composition. Our contrarian
approach aims to achieve above average long-term performance. Given
this focus and the fact that we expect to make more of our gains in
particular market conditions, we believe that a period of at least
five years is required to evaluate the Company's returns.
With the Company's portfolio rebalanced towards the high
conviction, global contrarian approach described below, the Board
now believes that the Company will generate a higher level of
dividend income through an investment cycle than has previously
been the case. The Board wishes to ensure that shareholders have
greater clarity about their future dividend expectations and
therefore recommends a positive step change increase in the regular
dividend. I explain this later in this statement.
Low cost active management
Over the last three years, the Company has undertaken a
significant process of change with our goal to continue to provide
an attractive, low cost investment vehicle for our shareholders,
who are mainly, and increasingly, individuals.
In the last year, we have reinvigorated our approach to
marketing and communications, within our longstanding marketing
budget. It is important that we raise the Company's profile, as we
believe that our investment approach should appeal to a broad range
of investors.
The ongoing charges figure for the year under review was 0.49%,
which compares favourably with other actively-managed investment
vehicles. As a self-managed investment trust, this figure
represents the ongoing costs of running the Company as a proportion
of net assets. We have reduced our costs in recent years, most
notably by restructuring the investment team and by outsourcing a
number of functions.
The ongoing charges figure has remained the same as last year,
despite the reduction in net assets following the repurchase of
Aviva's shareholding.
High conviction, global contrarians
The high conviction, global contrarian investment approach
adopted by Alasdair McKinnon and his team clearly differentiates
the Company from our global investment trust peers and from the
vast array of passive investment products through which investors
can 'track' stockmarket indices.
The approach reflects the investment team's natural style as
independent thinkers and active, long-term investors who seldom
follow the herd. The Manager believes that opportunities are
created by the natural human tendency to focus on past performance
as a predictor of future performance. Our approach aims to profit
by investing in carefully selected, but unfashionable, companies
which are undervalued as they are overlooked by other investors who
prefer the comfort of investing with the crowd.
The portfolio reflects this contrarian philosophy and is
constructed without reference to any benchmark or stockmarket
index. Accordingly, we do not expect the portfolio return to be
similar to a particular index return in any given year and we
expect that the contrarian style will work differently depending on
market conditions. For example, the Manager expects that the
Company might not fully participate in more speculative market
conditions as the investment team seeks to avoid investments that
are sustained by overly enthusiastic positive sentiment. Likewise,
we might expect better than average performance when market spirits
are more tempered, as our holdings typically have less positive
sentiment priced in.
During the year, the number of portfolio holdings was further
reduced as the Manager believes that the best long-term returns
will be generated by having the conviction to back the team's best
investment ideas. The portfolio currently contains 54 listed equity
holdings, which compares with 70 at the previous year end. The
number of holdings will vary as the investment team unearths new
opportunities.
Contrarian style boosts income generation
Over the past year earnings per share rose by 6.7% to 23.1p
(2016: 21.6p).
In previous reports, I have noted that the Board wishes to
maintain both the long track record of dividend increases and the
aim of the Company to provide dividend growth ahead of UK inflation
over the longer term. In recent years, this has been achieved by
appropriate increases to the regular dividend, with any excess
being distributed as a special dividend.
Since the adoption of the contrarian investment approach, income
generated has been considerably more than that required to pay the
regular dividend. The Board has discussed this extensively with the
Manager and, despite the approach not explicitly targeting high
yielding investments, we expect the contrarian investment style to
generate a higher level of investment income through an investment
cycle than was previously the case. A higher than average level of
dividend income is often, but not always, a consequence of an
investment in an unfashionable company.
Step change increase in the regular dividend
Given the above, the Board considers it is appropriate to make a
significant step change increase in the regular dividend to make it
clear to shareholders and prospective investors that the Company
expects to generate a higher level of income through an investment
cycle. A consequence of such a change will be that the Company is
less likely to pay discretionary special dividends in future years
and will not necessarily distribute income generated in excess of
the requirements of the regular dividend.
One particular advantage of such a significant step change
increase in the regular dividend is that it will give shareholders
and potential investors a clearer indication of the income that
they can expect to receive. This is because, when calculating the
yield on ordinary shares, many investors ignore special dividends
as they consider them non-recurring. The proposed step change
increase in the regular dividend will, going forward, materially
increase the stated yield of the Company's shares, which the Board
believes will enhance their attraction to investors. Following the
change, the Company will have one of the highest stated dividend
yields among its global investment trust peers.
The Board recommends a final dividend of 14.5p per share which,
if approved, will mean that the total regular dividend for the year
will increase by 48.1% to 20.0p and will represent the 34(th)
consecutive year of regular dividend increase.
The Board also recommends a special dividend of 5.0p per share
in order to distribute the income generated in the year to 31
October 2017 in excess of the requirements of the proposed regular
dividend. This recommendation reflects past indications made as to
how the Board would likely deal with such balance of income
generated in respect of the financial year. As mentioned
previously, the Company is less likely to pay discretionary special
dividends in future years. If approved, the total dividend for the
year will increase by 11.1%.
It is worth clarifying that the Board has not changed its future
intentions for regular dividend increases. The Board wishes, from
this higher level, to continue the Company's long track record of
dividend increases and its aim to provide dividend growth ahead of
UK inflation over the longer term.
Importantly, the Board remains of the view that the composition
of the portfolio should not be dictated by this change to dividend
policy and recognises that there may be occasions when the
portfolio will generate a lower level of income that does not
necessarily cover the requirements of the regular dividend. This
dividend policy is supported by the Company's healthy revenue
reserves of 70.6p per share, which would currently cover more than
three years of the proposed new higher regular dividend. The Board
considers that it would be appropriate to utilise such revenue
reserves as required to support such a policy, drawing from revenue
reserves in some years to supplement earnings for that year and
adding to revenue reserves in other years.
Move to quarterly dividend payments
I announced in the interim report that the Company intended to
adopt a quarterly schedule of dividend payments starting in the
2017/18 financial year. The Board recognises that predictable,
regular distribution of income is desirable for the majority of our
shareholders.
The proposed final and special dividends, which, if approved,
will be paid to shareholders in February 2018 will mark the last
dividends of the current distribution schedule before we move to
quarterly payments. The Board's target is to declare three
quarterly interim dividends of 5.0p, in the year to 31 October 2018
and recommend a final dividend of at least 5.0p for approval by
Shareholders at the Annual General Meeting in 2019. It is intended
that the first quarterly dividend will be paid in May 2018. The
second and third quarterly dividends are expected to be paid no
later than August and November 2018. The final dividend will be
reviewed in accordance with the Board's desire to continue the long
track record of annual dividend increases and the aim of the
Company to provide dividend growth ahead of UK inflation over the
longer term.
Aviva share repurchase
As I noted in the interim report, in March the Company completed
the repurchase and cancellation of the shareholding of Aviva,
representing 11.9% of the Company's issued share capital at that
time. Aviva had gained control of this substantial shareholding in
November 2015 through its purchase of Friends Life. Aviva had not
previously been a long-term investor in the Company, did not have a
history of holding investment trusts and had indicated that it did
not plan to retain this shareholding.
At a specially convened General Meeting, shareholders approved
the repurchase for cancellation of 11.4m shares from Aviva at a
10.75% discount to the cum-income NAV (with borrowings at market
value). The Board considered this transaction to be in the best
interests of the Company and shareholders as it removed a known
seller of a large block of shares and enhanced this NAV for the
ongoing shareholders by 1.4%.
Gearing
Gearing ended the year largely unchanged at 5%. During the year,
the Company briefly moved to a net cash position to facilitate the
transaction with Aviva.
Buybacks and updated policy
During the year, 16.9m shares were purchased for cancellation
(2016: 9.2m) at an average discount of 10.5% to the cum-income NAV
with borrowings at market value (9.5% to the ex-income NAV) and a
cost of GBP135.2m. Excluding the repurchase of the Aviva shares,
5.5m shares were repurchased for cancellation at an average
discount of 9.7% to the cum-income NAV with borrowings at market
value (8.1% to the ex-income NAV) and a cost of GBP44.9m.
As announced in the interim results, the Company's buyback
policy has been adjusted to aim, in normal market conditions, to
maintain the discount to the cum-income NAV (with borrowings at
market value) at or below 9%. This is a change from the previous
policy which aimed to control the discount to the ex-income NAV
(with borrowings at market value). The Company was an early adopter
of a buyback policy in 2006 and, since then, it has become more
normal industry practice to use the cum-income NAV rather than the
ex-income NAV.
Successful migration of savings schemes
The savings schemes previously offered by the Company have now
been closed but scheme holders were offered an attractive
alternative arrangement for their shareholding. I would like to
thank those shareholders affected for their understanding
throughout the transition.
The schemes were set up in an era when it was expensive and
complicated, particularly for a smaller shareholder, to buy shares
directly in a single company. However, in recent years, a number of
ways to buy the Company's shares in a simple and cost effective
manner have been developed and very few providers offer the
infrastructure to support single company savings schemes.
Accordingly, when the savings schemes' administrator informed us
that they intended to withdraw from this business area, we were,
despite an extensive search, unable to identify a viable
alternative scheme administrator.
The majority of scheme holders have now transferred to AJ Bell
Youinvest. We look forward to working with AJ Bell Youinvest in
continuing to communicate with our shareholders.
Board composition
I would like to welcome Karyn Lamont to the Board. Karyn was
appointed as a non-executive director and Chair of the Audit
Committee in October 2017. Karyn brings a wealth of specialist
audit experience from her long career in the field and will stand
for election at the Annual General Meeting.
Karyn replaced Ian Hunter who retired after three years of
valuable service to the Company. The Board and I would like to
extend our gratitude to Ian for his considerable contribution,
particularly over the last eighteen months as the Company
reorganised a number of its key administrative functions.
Hamish Buchan will retire at the AGM. The Company has benefited
greatly from Hamish's knowledge and experience over the last
fourteen years. On behalf of the Board, I should like to thank
Hamish for his outstanding contribution. There is no current
intention to replace Hamish as the Board considers that its
membership will continue to ensure that the appropriate balance of
skills, experience, independence and knowledge will be
achieved.
Outlook
I have previously discussed the anti-establishment mood that
seems to have characterised recent voting on both sides of the
Atlantic. The most obvious examples are the Brexit vote, the
election of Donald Trump and the unexpected result in the UK 'snap'
election.
President Clinton's victory in the 1992 US Presidential election
has often been attributed to the slogan "It's the economy, stupid"
and this catchphrase remains highly relevant today. Large sections
of the population, in a number of countries, feel disadvantaged in
the current economic environment. Government policies have favoured
asset prices with unintended consequences for the cost of
living.
Markets do not operate in a vacuum and, to date, have generally
interpreted this shift in the political climate as a positive
development. This is justified, to some extent, as stimulatory
measures to boost the 'real economy' may well improve the prospects
of sections of the corporate sector. On the other hand, some of the
more radical measures occasionally mooted, no doubt with the best
of intentions, have potential to harm sections of the corporate
sector and will not necessarily achieve their end purpose.
The US Federal Reserve, which sets the tone for global monetary
policy, has continued to increase interest rates from a very low
base and has started tentatively to reduce the stockpile of bonds
purchased to lower long-term interest rates. Other central banks
have taken this cue and have started either to reduce, or at least
slow, the rate of increase in stimulatory measures. This is
evidenced by the recent interest rate increase by the Bank of
England and the planned reduction in European Central Bank bond
purchases. Markets have undoubtedly benefited from low long-term
interest rates and it remains to be seen how dependent these low
rates are on central bank largesse.
As ever, there are a number of events which could potentially
destabilise markets if the worst fears come to pass, or potentially
boost markets if they are successfully resolved. Of the prominent
events, tension in the Korean peninsula remains confined to
sabre-rattling while some modest progress seems to have been made
in the Brexit negotiations.
The Board is pleased with the progress made to transform the
investment approach, to increase the regular dividend, to reduce
the cost base and to improve the profile of the Company. It now
believes that the Company is differentiated, competitive in costs
and an attractive investment vehicle focused on delivering
above-average returns and dividend growth over the longer term.
James Will
Chairman
8 December 2017
Manager's Review
Our Contrarian Approach
Shareholders who have read my previous Manager's Reviews will be
aware that a simple philosophy underpins our approach to
investment. At the core of this philosophy is a recognition that
investors, in aggregate, are not dispassionate calculating machines
but, in fact, retain human emotions.
While this may not seem a particularly radical observation, it
nonetheless flies in the face of a large body of scholarly research
into finance and economics. Theory would argue that, while any
individual can behave irrationally this is averaged out within a
group so that a rational decision is reached. In contrast, we do
not think that groups always make rational investment decisions
and, to evidence this, would merely point to the numerous bubbles
which have bedevilled markets over the years. Over the last 20
years, we have witnessed bubbles in emerging markets, euro
convergence beneficiaries, dotcom stocks, house builders, property
stocks, oil stocks, miners and emerging markets (again).
The reason for this difference of opinion perhaps arises
because, in many human endeavours, the group does indeed reach a
rational solution. In more arduous times, our very survival
depended on working as a group and the crucial skill to develop as
an individual was cooperation as part of this group. An isolated
individual was vulnerable and, even if the group was pursuing an
endeavour in a suboptimal manner, it was safer to remain part of
the group.
Society as we know it today, which has built a great
civilisation, continues to depend on this cohesive group approach.
Most individuals subconsciously understand that they need to
recognise the written and unwritten rules of society and therefore
feel uncomfortable outwith the mainstream.
However, we believe that this crowding instinct does not
usefully translate into financial markets. This is because the view
of the crowd naturally gravitates towards what has recently been
successful and shuns what has recently been unsuccessful. The
challenge posed by financial markets is that, by the time an
investment has performed sufficiently well (or badly) for it to
become an accepted wisdom, conditions are ripe for the trend to
change.
Business and investment cycles have operated throughout recorded
human history. The specifics are always different but the
principles remain the same. Initially, a conducive environment and
opportunity attracts investment to a 'good thing' and initial and
subsequent success attracts further and further investment, with
later investors increasingly willing to suspend disbelief about the
durability of future prospects. The 'upcycle' is hypnotic but it
always ends. Excess investment destroys the scarcity of the 'good
thing' while those propagating it become heady on their success and
throw caution to the winds. The downcycle occurs when the bubble
bursts and this process goes into reverse, eventually creating an
opportunity again.
We think that to profit, an investor has to take a different
stance and that the biggest challenge for an investor is to
recognise when the voice of the crowd no longer suggests a sensible
balance between risk and reward. We seek to avoid speculation,
which we define as investing largely on the basis that somebody
else will pay more for an already fully priced, popular asset.
We are, of course, stock market investors and even if we are
very skilful with our stock picking, we are likely to be affected
by wider market movements. However, we think that one of the most
prudent ways to make money in the stock market is to invest when
others are reluctant to do so. We actively seek unpopular areas
because this is where the balance between risk and reward can be
most favourable. We believe in cycles rather than perpetual trends
and wish to purchase at depressed prices to improve our margin of
safety.
Our style is distinct and we would expect other investors to ebb
and flow in their support for the types of stocks we favour. We aim
to achieve above-average long-term performance, although we do not
expect this to be achieved in a linear manner. We are less likely
to participate in the exhilarating latter stages of a bull market
because we think it is vitally important to survive the down leg of
an investment cycle.
NAV Absolute Performance Attribution
Year to 31 October 2017
Contribution
%
-------------------------------------- -------------
Equity portfolio (ungeared) +9.5
Gearing +0.8
-------------------------------------- -------------
Total equities +10.3
Other income and currency -0.2
Buybacks +1.7
Expenses -0.5
Interest charges -0.6
Change in market value of borrowings +0.0
Change in pension liability +0.3
-------------------------------------- -------------
NAV with borrowings at market value
total return +11.0
-------------------------------------- -------------
Gains and Losses
Year to 31 October 2017
Performance Gains Performance Losses
% GBPm % GBPm
------------------- ------------ ------ ----------------- ------------ -------
Treasury Wine
Estates 39.6 15.4 General Electric -34.3 -4.6
Rentokil Initial 49.1 14.7 Tesco -13.5 -3.7
Nintendo 51.5 8.3 GlaxoSmithKline -12.1 -3.1
ING 34.4 7.8 BT -27.3 -2.9
Royal Dutch Shell 22.7 4.6 KDDI -17.2 -2.7
BNP Paribas 29.4 4.4 Baker Hughes -26.1 -2.5
Citigroup 38.8 4.1 Macy's -22.3 -2.2
Microsoft* 25.6 3.6 Cemex -13.6 -2.1
SAP 20.6 3.6 Kingfisher* -13.2 -2.0
Comcast* 20.4 3.5 Tourmaline Oil -35.8 -1.7
------------------- ------------ ------ ----------------- ------------ -------
* Sold during the year.
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.
The Financial Year
Investment returns were again strong during the year. In
contrast with last year, markets showed less favour towards a
margin of safety based investment approach such as our own.
The election of President Trump represented a blow to the
establishment but investors interpreted this positively, as it
provided the theoretical basis for a new round of stimulatory
policies. The slight conundrum is that Donald Trump was elected to
improve the living standards of the mass of population, rather than
boost asset prices. There is a risk that investors may discover
that populist policies do not necessarily coincide with their
interests.
Investors in general seem enthusiastic about the prospects for
asset markets and exhibit a low level of scepticism about some of
the most popular investment themes. Confidence has returned and
there is now a lot of money seeking a return driven by low cash
interest rates and the commensurate low cost of debt.
Central banks, led by the US Federal Reserve, have taken the
first steps to unwind this era of ultra cheap money. Central banks
clearly do not wish to unduly upset investors but this assumes that
they have perfect control and, as suggested above, the political
backdrop is shifting.
The most obvious sign of overly confident cheap money is the
current boom in cryptocurrencies such as Bitcoin. We have concerns
because, although the core technology has potential, there appears
an unlimited supply of these currencies and governance appears very
poor. Likewise, it is noteworthy that some of the largest US stocks
have gained the moniker 'FANG' (an acronym of Facebook,
Amazon/Apple, Netflix, Google). It is probably fair to say that by
the time an investment theme gains an acronym it is so well
established that a reasonable opportunity for a risk-adjusted
return may no longer exist. The last 'acronym investment theme' you
may recall was the 'BRICs' (Brazil, Russia, India, China), which
did very well for the early entrants but less so for later
participants who probably lost money.
The Portfolio
Portfolio turnover was elevated by the need to raise funds for
the buyback transaction with Aviva. Rather than apply a pro-rata
reduction across the portfolio, we took the opportunity to
selectively reduce the number of holdings.
Given our focus on individual stock ideas, I thought it most
useful to discuss the notable gains and losses, in total return
terms, over the year.
Treasury Wine Estates (+GBP15.4m), the Australian wine producer
continued to refocus on premium brands to drive higher profit
margins. Having delivered outstanding performance since it was
bought as an 'ugly duckling' in 2015, the company has now graduated
through each of our three categories. We now see Treasury Wine
Estates as one with 'more to come'.
Rentokil Initial (+GBP14.7m) also moved into the 'more to come'
category after another year of excellent performance. Its
transformation from an unloved and underperforming conglomerate to
a business focused chiefly on the attractive market for pest
control helped the group to deliver strong results.
We added to our holding in Nintendo (+GBP8.3m), as we were
surprised by the muted investor reaction towards the new 'Switch'
games console. The Switch is an excellent product but, later in the
year, as other investors became more enthusiastic and as
expectations of future success increased, we reduced our holding.
We have also moved this company into the 'more to come'
category.
Our bank holdings performed strongly, as they had previously
been inexpensively valued and stood to benefit from the prospect of
higher interest rates and stimulus policies designed to help the
mainstream economy. Our biggest gain was from Dutch lender ING
(+GBP7.8m), while we also saw strong gains from BNP Paribas
(+GBP4.4m), Citigroup (+GBP4.1m), Intesa Sanpaolo (+GBP2.6m), Bank
of Kyoto (+GBP2.1m), Citizens Financial (+GBP2.1m), Sumitomo Mitsui
Financial Group (+GBP1.7m) and Standard Chartered (+GBP1.2m).
The continued rebound in commodities prices helped a number of
our investments, with energy holdings a notable beneficiary later
in the period. Royal Dutch Shell (+GBP4.6m), produced the biggest
gain, as well as BHP Billiton (+GBP2.6m), BASF (+GBP1.8m), Total
(+GBP1.7m), Suncor Energy (+GBP1.5m) and Diamond Offshore Drilling
(+GBP1.4m). However, we lost money in Hess (-GBP1.1m) and
Tourmaline Oil (-GBP1.7m).
German software provider SAP (+GBP3.6m) gained credit for an
encouraging transition to a recurring subscription-based model.
Vinci (+GBP2.7m) did well on an improved outlook for the European
construction market. RSA Insurance (+GBP2.3m), was buoyed by the
continued progress of a turnaround strategy. Good results from
Johnson & Johnson's (+GBP2.2m) pharmaceuticals business helped
the business to deliver a solid performance, while Adecco
(+GBP2.0m) gained on the prospect of better conditions in the
temporary staffing market.
We consider Tesco (-GBP3.7m), one of our 'ugly ducklings', an
excellent turnaround opportunity but this was obscured by the
proposed acquisition of wholesaler Booker. However, we think that
other investors will pay more attention now that this transaction
has been approved. Our holding in Marks & Spencer (+GBP1.2m)
endured fluctuating fortunes but showed some signs of progress and
has a senior management team committed to change. We sold our
entire holding in Kingfisher (-GBP2.0m), prompted by a need to
raise funds for the Aviva transaction but also because we preferred
the outlook for Marks & Spencer.
General Electric (-GBP4.6m) performed poorly in anticipation of
a strategy review update at which new leadership reset profit and
dividend expectations. GlaxoSmithKline (-GBP3.1m), also delivered a
negative return as the new CEO unnerved investors as to where the
dividend lay on her list of priorities.
Our telecom holdings in BT (-GBP2.9m), KDDI (-GBP2.7m) and China
Mobile (-GBP1.1m) did not prove fruitful over the year. BT
depressed investors with a disappointing trading update but, in
general, we think that these telecom stocks have suffered from a
rotation away from the more defensive areas of the market.
We sold our entire holding in Microsoft (+GBP3.6m) as we thought
that the turnaround in the company's fortunes was adequately
reflected in the share price. We also completely sold Comcast
(+GBP3.5m) as, although the company is likely to continue to
benefit from greater demand for high-speed internet we judged that
the valuation already reflected this.
Outlook
The late Andy Grove, founder and former CEO of Intel, distilled
his thoughts about management into a book called "Only the Paranoid
Survive". However, I've always thought this would make a good title
for a book about investing.
The reason for this is that a successful investor has to
continually question their every assumption because things can, and
do, change. The political environment is never static, new
competition can emerge, advances in technology can drive structural
change, management can remove their focus on the core business and
apparently successful business models can mask hidden flaws while
apparently unsuccessful business models can evolve positively.
The views of the crowd are a particularly poor predictor of
future investment performance because the crowd extrapolates recent
history and assumes it is a constant.
We could debate whether particular asset classes are overly
elevated but perhaps less in question is that there have been a
number of years of good returns and there are now signs of
complacency in investors' attitude to risk. To some extent this is
understandable as the world is awash with cheap money and the
curators of this capital are desperate for a return. Symptoms of
this excess are the appearance of get-rich-quick schemes such as
cryptocurrency investments and the fact that an acronym (FANG) has
been attributed to a narrow group of stocks which are all viewed as
sure-fire winners.
This is not to say that the wider market will fall but more to
observe that the risks currently being taken in some areas may not
be justified by the future returns. The spread of valuations across
the market is wide and, accordingly, we continue to identify
opportunities which we believe will generate good long-term returns
for shareholders.
We are contrarian investors and, as such, we seek unfashionable
and unpopular investments that we think can recover. We invest, but
with our guard up, as hot money has less tendency to inhabit the
areas we favour. As I have noted in previous Manager's Reviews, our
investment approach is designed to anticipate and benefit from
change and we will continue to seek out opportunities with
potential to profit the long-term investor.
Alasdair McKinnon
Manager
8 December 2017
Financial Summary
Total
Change Return
2017 2016 % %
NAV with borrowings at market value 924.4p 854.9p +8.1 +11.0
NAV with borrowings at amortised cost 956.8p 881.2p +8.6 +11.4
Ex-income NAV with borrowings at market
value 904.8p 837. 5p +8.0
Ex-income NAV with borrowings at amortised
cost 937.2p 863.9p +8.5
Share price 843.0p 769.5p +9.6 +12.8
Discount to cum-income NAV with borrowings
at market value 8.8% 10.0%
Discount to ex-income NAV with borrowings
at market value 6.8% 8.1%
MSCI ACWI +11.1 +13.3
MSCI UK All Cap Index +9.2 +13.5
------------------------------------------------ ---------- --------- --------- --------
GBP'000 GBP'000
Equity investments 801,302 893,432
Net current assets 43,897 42,502
------------------------------------------------ ---------- --------- --------- --------
Total assets 845,199 935,934
Long-term borrowings at amortised cost (83,737) (83,645)
Pension liability (1,091) (3,272)
------------------------------------------------ ---------- --------- --------- --------
Shareholders' funds 760,371 849,017
------------------------------------------------ ---------- --------- --------- --------
Earnings per share 23.06p 21.62p +6.7
Regular dividend per share (2017: proposed
final 14.50p) 20.00p 13.50p +48.1
Special dividend per share (proposed) 5.00p 9.00p
Total dividend per share 25.00p 22.50p +11.1
UK Consumer Prices Index - annual inflation +3.0
Year's High & Low Year to Year to
31 October 2017 31 October 2016
High Low High Low
------------------------------------------------ ---------- --------- --------- --------
NAV with borrowings at market value 938.2p 817.1p 867.8p 606.3p
Closing share price 850.0p 739.0p 774.0p 544.5p
Discount to cum-income NAV with borrowings
at market value 12.2% 7.1% 15.8% 9.3%
Discount to ex-income NAV with borrowings
at market value 10.6% 6.6% 14.4% 8.1%
------------------------------------------------ ---------- --------- --------- --------
List of Investments
As at 31 October 2017
Market Cumulative Market Cumulative
Listed equities value weight Unlisted value weight
Holding Country GBP'000 % Holding Country GBP'000 %
---------------------- ------------- -------- ----------- ------------------- -------- -------- -----------
Treasury Wine Heritable property
Estates Australia 48,511 & subsidiary UK 1,400
Rentokil Initial UK 44,389 Apax Europe V-B UK 35
------------------- -------- -------- -----------
ING Netherlands 29,626 Total unlisted 1,435 0.2
------------------- -------- -------- -----------
Standard Chartered UK 27,787 Total equities 801,302 100.0
------------------- -------- -------- -----------
Marks & Spencer UK 25,508
Newcrest Mining Australia 25,301
Royal Dutch Shell UK 24,452
Tesco UK 23,945
Suncor Energy Canada 23,517
GlaxoSmithKline UK 23,218 37.0
---------------------- ------------- -------- -----------
Sumitomo Mitsui
Financial Japan 21,867
SAP Germany 20,919
Gap US 20,627
BNP Paribas France 18,891
Johnson & Johnson US 18,674
BHP Billiton UK 18,537
Citigroup US 16,574
Pepsico US 16,352
United Utilities UK 15,869
Exxon Mobil US 15,691 59.9
---------------------- ------------- -------- -----------
Hong
China Mobile Kong 15,554
Pfizer US 15,466
RSA Insurance UK 15,223
Cemex Mexico 14,894
Roche Switzerland 14,744
Total France 14,187
British Land UK 12,677
Vinci France 12,302
BASF Germany 12,191
Macy's US 10,860 77.3
---------------------- ------------- -------- -----------
National Oilwell
Varco US 11,609
KDDI Japan 10,918
Ambev Brazil 10,589
Verizon
Communications US 10,291
Chevron US 9,991
East Japan Railway Japan 9,447
Adecco Switzerland 9,403
Sony Japan 9,298
Nintendo Japan 9,114
General Electric US 8,694 89.7
---------------------- ------------- -------- -----------
Bank of Kyoto Japan 8,592
Intesa Sanpaolo Italy 8,450
Citizens Financial US 7,986
International
Business Machines US 7,657
BT UK 7,500
Hess US 6,649
Bank of Ireland Ireland 6,056
Baker Hughes US 6,008
Diamond Offshore
Drilling US 5,414
TGS-NOPEC Geophysical Norway 4,916 98.3
---------------------- ------------- -------- -----------
BorgWarner US 4,645
Tourmaline Oil Canada 3,074
Freehold Royalties Canada 2,990
Greggs UK 1,223
---------------------- ------------- -------- -----------
Total listed equities 799,867 99.8
------------------------------------- -------- -----------
Distribution of Total Assets
By Sector 31 October 31 October By Region 31 October 31 October
2017 2016 2017 2016
% % % %
Energy 15.2 12.4 UK 28.6 32.2
Materials 8.4 7.1 Europe (ex UK) 17.9 14.9
Industrials 10.0 10.5 North America 26.5 24.9
Consumer Discretionary 8.6 12.4 Latin America 3.0 3.0
Consumer Staples 11.8 10.4 Japan 8.2 10.0
Asia Pacific (ex
Health Care 8.5 8.3 Japan) 10.6 10.5
Financials 19.2 15.1 Net current assets 5.2 4.5
------------------- ----------- -----------
Information Technology 4.5 8.0 Total assets 100.0 100.0
------------------- ----------- -----------
Telecommunication
Services 5.2 5.1
Utilities 1.9 5.1
Real Estate 1.5 1.1
Net current assets 5.2 4.5
------------------------ ----------- -----------
Total assets 100.0 100.0
------------------------ ----------- -----------
Allocation of Shareholders' Funds
31 October
2017
%
------------------------- ---- -----------
Total equities 105.4
Net current assets 5.8
Borrowings at amortised
cost (11.0)
Pension liability (0.2)
Shareholders' funds 100.0
------------------------------- -----------
Changes in Asset Distribution
Net purchases
31 October (sales) Appreciation 31 October
2016 GBPm (depreciation) 2017
GBPm GBPm GBPm
------------------- ------------- ---------------------------- ---------------- ---------------- ---------------
Energy 115.9 25.2 (12.6) 128.5
Materials 66.3 2.8 1.8 70.9
Industrials 98.6 (27.6) 13.2 84.2
Consumer
Discretionary 116.4 (60.0) 16.7 73.1
Consumer Staples 97.1 (6.4) 8.7 99.4
Health Care 77.7 (2.0) (3.6) 72.1
Financials 141.1 (1.5) 22.9 162.5
Information
Technology 75.2 (50.9) 13.4 37.7
Telecommunication
Services 48.1 5.6 (9.4) 44.3
Utilities 47.2 (28.1) (3.2) 15.9
Real Estate 9.8 - 2.9 12.7
------------------- ------------- ---------------------------- ---------------- ---------------- ---------------
Total equities 893.4 (142.9) 50.8 801.3
------------------- ------------- ---------------------------- ---------------- ---------------- ---------------
Changes in Shareholders' Funds
Net
31 October purchases 31 October Appreciation Dividend Total
2016 (sales) 2017 (depreciation) income return
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------- ------------- ------------- ----------------
Total equities 893.4 (142.9) 801.3 50.8 25.7 76.5
------------------- ------------- ------------- ------------- ----------------
Net current assets 42.5 2.6 43.9
------------------- ------------- ------------- -------------
Total assets 935.9 (140.3) 845.2
------------------- ------------- ------------- -------------
Long-term
borrowings
at amortised cost (83.6) (0.1) (83.7)
Pension liability (3.3) - (1.1)
------------------- ------------- ------------- -------------
Shareholders'
funds 849.0 (140.4) 760.4
------------------- ------------- ------------- -------------
Income Statement
For the year to 31 October 2017
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net gains on
investments
held
at fair value
through
profit and loss - 50,816 50,816 - 177,326 177,326
Net (losses)/gains on
currencies - (1,185) (1,185) - 6,024 6,024
Income 25,898 - 25,898 28,440 - 28,440
Expenses (2,075) (1,442) (3,517) (2,407) (1,673) (4,080)
Net Return before
Finance Costs and
Taxation 23,823 48,189 72,012 26,033 181,677 207,710
Premium on repayment
of
secured bonds - - - - (7,393) (7,393)
Interest payable (2,474) (2,475) (4,949) (2,529) (2,529) (5,058)
Return on Ordinary
Activities before
Tax 21,349 45,714 67,063 23,504 171,755 195,259
Tax on ordinary
activities (1,252) - (1,252) (1,534) - (1,534)
Return attributable
to
Shareholders 20,097 45,714 65,811 21,970 171,755 193,725
Return per share
(basic
and fully diluted) 23.06p 52.46p 75.52p 21.62p 169.04p 190.66p
Weighted average
number
of
shares in issue
during
the year 87,144,760 101,606,378
2017 2016
GBP'000 GBP'000
---------------------- -------------- ------------------ ---------- ---------- -------------- ----------
Dividends paid and
proposed
Interim 2017 - 5.50p
(2016:
5.25p) 4,543 5,276
Final 2017 - 14.50p
(2016:
8.25p) 11,523 7,916
Special 2017 - 5.00p
(2016:
9.00p) 3,973 8,636
---------------------- -------------- ------------------ ---------- ---------- -------------- ----------
Total 2017 - 25.00p
(2016:
22.50p) 20,039 21,828
---------------------- -------------- ------------------ ---------- ---------- -------------- ----------
The total column of this statement is the profit and loss account of the
Company.
Balance Sheet
As at 31 October 2017
2017 2016
GBP'000 GBP'000 GBP'000 GBP'000
Fixed Assets
Investments 801,302 893,432
Current Assets
Debtors 2,113 2,260
Cash 5,240 11,694
Cash equivalents 37,696 29,210
------------------------------------ ------------- -------------------- ----------- --------- -----------
45,049 43,164
Creditors: liabilities falling due
within one year (1,152) (662)
Net Current Assets 43,897 42,502
Total Assets less Current Liabilities 845,199 935,934
Creditors: liabilities falling due
after more than one year
Long-term borrowings at
amortised cost (83,737) (83,645)
Provisions for Liabilities
Pension liability (1,091) (3,272)
Net Assets 760,371 849,017
Capital and Reserves
Called-up share capital 19,867 24,086
Share premium account 39,922 39,922
Other reserves
Capital redemption reserve 50,994 46,775
Capital reserve 593,484 682,209
Revenue reserve 56,104 56,025
Shareholders' Funds 760,371 849,017
------------------------------------ ------------- -------------------- ----------- --------- -----------
Net Asset Value per share with borrowings
at amortised cost 956.8p 881.2p
------------------------------------------------------------------------- ----------- --------- -----------
Number of shares in issue at year
end 79,468,458 96,342,683
--------------------------------------------------- -------------------- ----------- --------- -----------
Statement of Comprehensive Income
For the year to 31 October 2017
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ------------- --------- --------- ----------- --------- -----------
Return attributable to shareholders 20,097 45,714 65,811 21,970 171,755 193,725
Actuarial gains/(losses)
relating to pension scheme 1,077 749 1,826 (596) (414) (1,010)
------------------------------------ ------------- --------- --------- ----------- --------- -----------
Total comprehensive income
for the year 21,174 46,463 67,637 21,374 171,341 192,715
------------------------------------ ------------- --------- --------- ----------- --------- -----------
Total comprehensive income
per share 24.30p 53.31p 77.61p 21.04p 168.63p 189.67p
------------------------------------ ------------- --------- --------- ----------- --------- -----------
Statement of Changes in Equity
For the year to 31 October 2017
2017 2016
GBP'000 GBP'000
------------------------ --------- ---------
Opening balance 849,017 733,056
Total comprehensive
income 67,637 192,715
Dividend payments (21,095) (16,810)
Aviva share buyback (90,255) -
Regular share buybacks (44,933) (59,944)
Closing balance 760,371 849,017
------------------------- --------- ---------
Cash Flow Statement
For the year to 31 October 2017
2017 2016
GBP'000 GBP'000
-------------------------------------------- ---------- ----------
Operating activities
Net revenue before finance costs
and taxation 23,823 26,033
Expenses charged to capital (1,442) (1,673)
Decrease/(increase) in accrued
income 226 (287)
Increase/(decrease) in other payables 47 (403)
(Increase)/decrease in other receivables (3) 81
Adjustment for pension funding (355) (288)
Tax on investment income (1,327) (1,919)
Cash flows from operating activities 20,969 21,544
--------------------------------------------- ---------- ----------
Investing activities
Purchases of investments (131,714) (162,884)
Disposals of investments 273,474 218,530
--------------------------------------------- ---------- ----------
Cash flows from investing activities 141,760 55,646
Cash flows before financing activities 162,729 77,190
--------------------------------------------- ---------- ----------
Financing activities
Dividends paid (21,095) (16,810)
Repayment of secured bond - (28,241)
Aviva share buyback (90,255) -
Regular share buybacks (44,490) (60,158)
Interest paid (4,857) (5,030)
Cash flows from financing activities (160,697) (110,239)
--------------------------------------------- ---------- ----------
Net movement in cash and cash
equivalents 2,032 (33,049)
--------------------------------------------- ---------- ----------
Cash and cash equivalents at the beginning
of year 40,904 73,953
---------------------------------------------- ---------- ----------
Cash and cash equivalents at the
end of year 42,936 40,904
--------------------------------------------- ---------- ----------
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 performance, business model and
strategy.
The responsibility statement was approved by the Board of Directors and
signed on its behalf by:
James Will
Chairman
8 December 2017
Notes
1. 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', issued in 2014 and updated in January 2017. The financial statements
are prepared in sterling which is the functional currency of the Company
and are rounded to the nearest GBP'000. They have also been prepared on
the assumption that approval as an investment trust will continue to be
granted. The financial statements have been prepared on a going concern
basis.
2. Return per ordinary share
The revenue return per share is calculated on net revenue on ordinary
activities after taxation for the year of GBP20,097,000 (2016 - GBP21,970,000)
and on 87,144,760 (2016 - 101,606,378) shares, being the weighted average
number of shares in issue during the year.
The capital return per share is calculated on net capital return for the
year of GBP45,714,000 (2016 -GBP171,755,000) and on 87,144,760 (2016 -
101,606,378) shares, being the weighted average number of shares in issue
during the year.
The total return per share is calculated on total return for the year
of GBP65,811,000 (2016 -GBP193,725,000) and on 87,144,760 (2016 - 101,606,378)
shares, being the weighted average number of shares in issue during the
year.
3. Net asset value per share
The net asset value per share is based on net assets of GBP760,371,000
(2016: GBP849,017,000) and on 79,468,458 (2016: 96,342,683) 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 2017 of 14.50p
(2016 - 8.25p) per share will be paid on 9 February 2018 to shareholders
on the register on 12 January 2018.
A special dividend in respect of the year ended 31 October 2017 of 5.00p
(2016 - 9.00p) per share will be paid on 9 February 2018 to shareholders
on the register on 12 January 2018.
5. Related parties
The Directors of the Company receive fees for their services.
6. The financial information set out above does not constitute the Company's
statutory Financial Statements for the year ended 31 October 2017 but
is derived from those Financial Statements. Statutory Financial Statements
for the year ended 31 October 2017 will be delivered to the Registrar
of Companies in due course. The Auditor has reported on those Financial
Statements; its report was (i) unqualified, (ii) did not include a reference
to any matters to which the Auditor 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 Auditor's
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
(Scotland) Limited, 20 Forth Street, Edinburgh EH1 3LH.
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 stated above.
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.
a. Investment and market price risk
The holding of securities and investing activities involve certain inherent
risks. Events may occur which affect the value of investments. The Company
holds a portfolio which is well diversified across industrial and geographical
areas to help minimise these risks. 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.
b. Foreign currency risk
Approximately 70% of the Company's assets are invested overseas which
gives rise to a currency risk. From time to time, specific hedging transactions
are undertaken. The Company's overseas income is subject to currency movements.
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.
d. Liquidity risk
Almost all of the Company's assets comprise listed securities which represent
a ready source of funds.
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.
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 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 Board, with the assistance of the 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 the
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.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR URSWRBRAUAAA
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