TIDMSMT
RNS Number : 3941G
Scottish Mortgage Inv Tst PLC
26 May 2017
Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Annual Financial Report
A copy of the Annual Report and Financial Statements for the
year ended 31 March 2017 of Scottish Mortgage Investment Trust PLC
has been submitted electronically to the National Storage Mechanism
and will shortly be available for inspection at
http://www.morningstar.co.uk/uk/NSM
The Annual Report and Financial Statements for the year ended 31
March 2017 including the Notice of Annual General Meeting is also
available on Scottish Mortgage's page of the Baillie Gifford
website at: www.scottishmortgageit.com
The unedited full text of those parts of the Annual Report and
Financial Statements for the year ended 31 March 2017 which require
to be published by DTR 4.1 is set out on the following pages.
Neither the contents of the Managers' website nor the contents
of any website accessible from hyperlinks on the Managers' website
(or any other website) is incorporated into, or forms part of, this
announcement.
Baillie Gifford & Co Limited
Company Secretaries
26 May 2017
Chairman's Statement
Somewhat breaking with convention for statements of this kind, I
would like to open by saying some words about my predecessor as
Chairman of Scottish Mortgage, Sir Donald MacKay, who died last
November at the age of 79. Sir Donald was a remarkable man, whose
intelligence and acumen were appreciated by governments and
businesses alike. His contribution to the development of this
Company was profound, for it was largely under his watch that the
Managers were encouraged to pay less attention to benchmarks and
what their competitors were up to, and spend more time following
their investment beliefs, with greater freedom to back businesses
anywhere in the world likely to benefit from the transformational
changes we are experiencing, and thus with the potential to deliver
exceptional returns for our shareholders.
As I hope is clear to all, the results have been excellent: we
have for some time been the UK's largest conventional investment
trust, in March we were admitted to the FTSE 100 index, and our
investment performance bears comparison with the very best.
Although Sir Donald stepped down at the end of 2009, much of what
has since been achieved at Scottish Mortgage can trace its roots to
decisions taken under his stewardship. I am therefore delighted to
report that the strong record of performance continues, especially
when measured over five and ten year periods, both in terms of the
share price and net asset value (NAV) returns. The table below
shows the five and ten year total returns for the Company to 31
March 2017, alongside the Association of Investment Companies (AIC)
Global Sector average for comparison.
Total Return %
Five Years Ten Years
========================== =========== ==========
NAV 146.6 236.3
Share Price 177.3 302.2
FTSE All-World Index 97.3 148.7
Global Sector Av - NAV 95.3 127.9
Global Sector Av - share
price 109.6 141.9
Source: AIC/Morningstar and relevant underlying index
providers.
As it happens, the performance over the last financial year has
also been very healthy, with a rise in the NAV per share of over
38% (on a total return basis). Whilst this is obviously pleasing to
shareholders, I wish to highlight the importance of judging
Scottish Mortgage on the basis of its long term approach.
However good the 12 month figures, I would urge shareholders to
focus on the five and ten year performance record, as this is the
test which your Board feels best represents the Managers' success
or otherwise in following the stated investment policy of the
Company. Over any given twelve month period performance may be at
least as much due to the fluctuating obsessions of broader markets
or geopolitics as any change in the businesses underlying the
investments; in the past year, to take one example, performance was
flattered by the devaluation of sterling. It is only over the
longer term that the impact of investing in individual companies
can be said to come to the fore.
Earnings and Dividends
As we experienced in the previous financial year, our income for
the period has fallen as the companies in the portfolio have found
more productive uses for their capital than returning it to
shareholders. This year's earnings per share were 1.07p, down 36%
on 2015/16.
The Company's investment objective is to maximise total return
from a portfolio of long term investments chosen on a global basis,
enabling the Company to provide capital and dividend growth. The
Managers of Scottish Mortgage have been relentless in pursuing this
growth focused investment mandate. The Board believes this clarity
of proposition and purpose is valued by shareholders. The Board
therefore has no desire to deflect the Managers from their focus on
finding the best growth companies of the future, and encourages
them not to dilute their approach by investing in companies which
do not fit this objective, in order to pursue a secondary goal of
income production.
Whilst the stated investment objective explicitly provides for
both capital and income growth, shareholders will be aware from
earlier Annual Reports and other statements that the clear
expectation should be that this balance will be heavily in favour
of capital appreciation over the long term, in line with this
growth focused approach. Yet the Board also acknowledges that many
of our shareholders appreciate even the modest income component of
the total return from their Scottish Mortgage holding.
We are recommending an increased final dividend, providing a
total distribution for the year of 3.00 pence per share (2015/16 -
2.96p), an increase of just over 1%. In order to achieve this,
given the low level of income in the portfolio, it will be
necessary to utilise most of the remaining revenue reserve which,
once the final dividend is approved and paid, will stand at just
over 0.5 pence per share.
The Board takes this opportunity to repeat the guidance given
earlier as to its intentions regarding the future payment of
dividends by the Company. Shareholders have already granted the
Company the power to pay dividends from capital profits but, thanks
to the revenue reserve, to date these have not been needed. Absent
a significant (and unexpected) uplift in income from the portfolio,
next year the Board will be obliged either to cut the dividend, or
to make use of its power to continue to pay a comparable dividend,
supplemented from capital profits as well as the remainder of the
revenue reserve. In view of the explicit dividend growth component
of the Company's investment objective, the Board wishes to make
clear to shareholders that it would be willing to make such
distributions from capital profits, in order to sustain or modestly
increase our dividend, provided that the Board is of the view that
the total returns being earned by the Company over the long run
justify this. This policy was set out in some detail in my
Statement last year.
Low Cost
For the year to 31 March 2017, Scottish Mortgage's 'Ongoing
Charges Ratio' (OCR) fell to 0.44%, down from 0.45% the previous
year. Ensuring that Scottish Mortgage has one of the lowest cost
ratios in the sector remains an important competitive advantage for
the Company, affording a clear and direct benefit to our
shareholders. The Board and Baillie Gifford continually work
together in this area and in March 2017 all parties were delighted
to announce the introduction of a new tiered fee scale, with effect
from 1 April 2017. The annual management charge (AMC) will continue
to be 0.3% on the first GBP4 billion of assets under management,
but will fall to 0.25% thereafter. As a result, provided the assets
of the Company remain over GBP4 billion, this offers the prospect
of further reductions in the OCR for the coming year and into the
future.
Liquidity Policy
The Board believes that, just as lowering the ongoing charges
for the Company is to the long term benefit of all shareholders, so
too is lessening the market impact of trading in its shares. Such
transactional friction is often an unseen cost to shareholders,
which is mitigated by good levels of liquidity in the market. The
Board has adopted a robust liquidity policy for some time now, to
lessen the impact of large trading imbalances between buyers and
sellers, by the issuance or repurchasing of the Company's shares,
as appropriate. This helps to prevent Scottish Mortgage's shares
from moving to a substantial premium or discount to the underlying
NAV.
In furtherance of this policy, during the year the Company
bought back into treasury just over 7 million shares, and sold more
than 53 million shares from treasury at a premium to the net asset
value. The net result of these operations was an increase in the
Company's share capital of just under GBP155 million - a slightly
lower number than last year, but large in comparison to most other
investment companies in a period which in general saw a paucity of
secondary issuance. The Directors will seek to renew the necessary
authorities from Shareholders at the Company's Annual General
Meeting (AGM) to facilitate the continuance of this policy. Full
details of the Company's liquidity policy may be found on page 7 of
the Annual Report and Financial Statements.
Gearing and Borrowing Policy
The Board of Scottish Mortgage remains committed to the
strategic use of borrowings, in the belief that it is in the long
term interests of Shareholders to be geared into prospective long
run equity market returns. The Board views the capacity to use debt
to enhance shareholder returns as one of the principal advantages
of the investment trust structure. In line with the long term
approach taken, no attempt is made to time short term market moves
through tactical shifts in the level of gearing. As assets in the
portfolio have risen on the back of strong performance, we have
allowed the relative level of gearing to fall slightly, and it
stood at a modest 9% at the financial year end.
For some months, we have been following developments in the
market for fixed interest rate sterling debt, realising that we had
the opportunity to lock in to long term borrowing arrangements
which reflect the historically low interest rate environment which
prevails. In early April 2017, the Company announced that it had
raised a total of GBP125 million in long term, fixed rate, senior,
unsecured private placement notes, denominated in sterling through
the private placement debt market. These notes form part of the
existing borrowing facilities for the Company and do not imply any
change to the overall level of indebtedness of the Company; they
are simply a switch from short term, variable interest rate debt,
to instruments which offer us a fixed cost of financing over the
next 25 or so years. The Board decided to undertake this
transaction at what the Company believes to be attractive pricing
levels, with a blended rate of just over 3% per annum, in the
strong belief that this should enable us to enhance shareholder
returns over the long term. Most funds have already been drawn
down, but one tranche will be not be accessed until the maturity in
2020 of a GBP20 million debenture arranged in the 1980s, on which
we pay interest at 14% per annum.
Corporate Broker
The Company conducted a review of its corporate broking
arrangements as part of the continuing process of revisiting our
relationships with all third party providers. Five firms, chosen by
the Board, presented to the Company Secretaries to be evaluated
against a framework set out by the Board. Two of these - one of
which was our incumbent broker, Cenkos - were then selected to
present to the Board. The result was a decision to extend the
engagement of Cenkos and to broaden the mandate by appointing
Jefferies Hoare Govett as joint broker to the Company.
Scottish Mortgage is now of a scale where the appointment of
joint brokers is the norm and I hope that the new arrangement will
build on the excellent work which Cenkos has done over the years to
broaden the market for our shares and bring them to the attention
of new buyers. We believe that the additional resources available
to us from Cenkos and Jefferies working in tandem will bring
significant benefit to the Company. The new arrangement took effect
from 1 April 2017.
AGM and Shareholder Engagement
The AGM will be held in Edinburgh at the Merchants' Hall, at
4.30pm on 29 June 2017. The joint managers of the Company, James
Anderson and Tom Slater, will make a presentation to shareholders
on the investments, and take questions. I do hope you will be able
to attend.
The Board and Managers are keen to ensure that all shareholders
have a clear understanding of the investment approach taken for the
Company. One of the best ways to do this is through hearing
directly from those involved. In recent years the proportion of the
Company's share register represented by individual shareholders has
grown, particularly as more savers have invested through platforms
such as that of Baillie Gifford Savings Management Limited. Last
year I highlighted that the Managers intended to hold an event in
London specifically aiming to cater for shareholders who are unable
to travel to Edinburgh for the AGM and who would otherwise find it
difficult to have an opportunity to ask questions of their
Managers. This event proved so popular and successful that the
Managers have already held another such event in Birmingham in
March of this year and have a further London based Investor Forum
scheduled on 22 June.
There are plans to hold more of these Scottish Mortgage Investor
Forums across the country over time. I would strongly encourage all
shareholders to look at the further details given on page 70 of the
Annual Report and Financial Statements, and on the Company's
website: www.scottishmortgageit.com with a view to attending.
Investment Strategy
As has been the case for a number of years, the statement of the
Managers' Core Investment Beliefs is included within the Annual
Report and Financial Statements (on page 17). The Board continues
to believe that one of the most valuable aspects of Scottish
Mortgage is the consistency of its approach. Further, the long term
investment perspective adopted by the Managers is a clear
differentiator in a crowded field. Many claim to adopt a similar
strategy, but few have consistently lived up to its challenges in
the way that the Managers of Scottish Mortgage have done.
The Board strongly believes that investment risk is a function
of the investment time horizon chosen. Over a period of years,
investment risk is not defined by movements relative to an index
composed of the aggregate performance of a broad and somewhat
indiscriminate pool of possible investments, but by the prospect of
permanent destruction of investment capital through poor investment
decisions.
Unlisted Investments
Last year, we were given permission by our shareholders to hold
up to 25% of our assets in unquoted companies, but I explained at
the time that your Board sees this as a limit, not a target. The
Managers' report deals in some detail with developments in this
sector, and your Board continues to view this initiative with
enthusiasm and a route to gaining access to promising companies
well before they have any need to access public equity markets. The
level of the Company's exposure to unlisted investments at the year
end (13%) has not changed significantly over the 12 months (11.8%
as at 31 March 2016).
Board Changes and Outlook
The world can and does change and sometimes this happens at a
faster rate and is more significant than at others. It would be
easy to focus on a number of political risks, from President
Trump's unpredictable approach to policy making, to questions over
North Korea's true intentions, to the escalation of the troubles in
the Middle East, but the task of this Board is to consider the
outlook in the context of the portfolio of Scottish Mortgage. In
doing so it is important to focus on what will actually make a
significant difference to the long run prospects of the companies
in which the Managers invest, and to challenge the Managers as to
the importance of these factors.
The flexibility of the investment policy of Scottish Mortgage is
valuable in this regard, as it allows the Managers to go anywhere
in the world to find opportunities and invest in any type of
business. The Board views this flexibility as key to the longevity
of the success of this investment strategy. Further, the stock
picking approach of the Managers, focused on the long term
fundamental characteristics of businesses, tends to favour the
selection of those companies with a structural element to their
growth, which are aiming to provide what their customers want or
need. This should offer the potential for durable growth.
The pace of development and technological change not only
represents a huge opportunity to some businesses, but is equally a
significant threat to the existence of some of the index incumbents
who have failed to invest to adapt to the transformations these
technologies are bringing. If true investment risk is the permanent
destruction of capital, the Board believes that not forcing the
Managers to hold some of those companies which seem under greatest
long term threat from such changes, in the name of diversification,
is also beneficial for the long term value creation for
shareholders of Scottish Mortgage.
Having started this statement by talking about my predecessor, I
will conclude by saying a few words about succession. After some 16
years on this Board, I feel that it is time to move on and I have
therefore decided not to stand for re-election to the Board at the
AGM in June. Following a process led through the Nomination
Committee by our Senior Independent Director, Professor John Kay,
the Board was unanimous in supporting Fiona McBain as our new
Chairman and it is proposed that she will take over from me
following the AGM. Fiona has recently retired as Chief Executive of
Scottish Friendly and in her eight years with Scottish Mortgage has
proved to be a strong contributor to the Board.
In closing, I would like to say what a privilege it has been for
me to have served on the Board of Scottish Mortgage since 2001 and
in the Chair since the end of 2009. I joined in the immediate
aftermath of 9/11, and we were immediately tested by the fallout
from that atrocity, followed by the Iraq War and the Lehman crisis.
But, for those who knew how to spot them, there were investment
opportunities even in the most challenging times: sixteen years ago
Facebook had not been invented but today is used by more than a
quarter of the world's population, and Apple was struggling to
survive, yet today it is by a large margin the world's most
valuable company; all our Board papers are delivered via its
ubiquitous iPad, a device which was launched in 2010! Throughout
this period of extraordinary change I have been impressed by the
capacity of the Managers to remain calm in stormy waters, to retain
their faith in the long term value of equities, and to seek out and
hold the ones that matter. They have shown repeatedly that they
understand better than almost anyone else the long term changes
being experienced in investment markets, with the creation of huge
pools of wealth from sectors which did not even exist 20 years ago,
and the concomitant destruction of value in many of our more
traditional industries.
Thanks to the skills of the investment Managers, I leave
Scottish Mortgage as the largest conventional investment trust, a
constituent of the FTSE 100 index with a market capitalisation of
over GBP5 billion, offering one of the lowest OCRs in the business
and with an investment record which, while set out in sanitised
detail elsewhere in this Report, I would simply describe as
stellar.
John Scott
Chairman
12 May 2017
Past performance is not a guide to future performance.
See disclaimer at end of this document.
Managers' Review
Our Aims
Every year we describe our investment process and portfolio. But
we have rarely addressed our underlying objectives and purpose.
This is an attempt to rectify this omission.
It may seem self-evident that our objective is to provide an
attractive total return after costs for our investors. But this is
far less a strategy than a desirable outcome. We have an investment
process (described on page 17 of the Annual Report and Financial
Statements). Yet this is more about the method than the objective.
Ultimately we endeavour to generate returns for savers and
shareholders by helping to build and sustain excellent businesses
over long periods. We prefer to focus on this task than on the
daily gyrations of markets. We aim to support companies that
contribute to productive innovation and that will eventually prove
to possess deep competitive moats. Very often this means that the
companies we back are addressing hard problems. We welcome this. It
is in solving deep challenges that the greatest opportunities and
rewards lie. Naturally this requires determination and unusual
skills on the part of these companies. But over the course of time
- often measured in decades - such unusual enterprises can generate
abnormal profits and unusually high shareholder returns. So our
objective is to help in the creation and improvement of such useful
enterprises.
This may seem an oblique approach to generating shareholder
returns. But so be it. Indeed the more that we can contribute to
business stewardship, the better returns for shareholders are
likely to be and the more we can play a constructive role in the
economic system. If, in contrast, we merely see investment
management as speculating - or rather guessing - which stock,
sector or geography will give the best returns over the next year
then we neither deserve high returns nor are likely to obtain them
over anything other than carefully defined short periods. Capital
allocation is too serious a matter to be hostage to the bonuses and
impatience of fund managers.
Risk
In turn, our purpose translates into a quite different
definition of and attitude to risk than that inculcated by modern
finance theory. Its precepts have been taken up with alacrity by
those who run the great majority of today's investment management
companies as businesses in themselves.
We do not accept that risk resides in owning a portfolio that is
different from the index or more volatile than the index. Risk is
the permanent destruction of capital. The threat of such
destruction is less predictable than formulas allow and is
frequently unrelated to volatility. It may be that volatility is an
essential safety valve. Certainly companies which are run to
produce the regular pay-outs that tend to produce low share price
volatility frequently endanger their long-term prospects. This
means that volatility is not simply a bad synonym for risk but that
low volatility frequently translates into high business risk. Or
put simply that low volatility is a warning sign.
Yet a still more important issue lurks. We believe that we do
nothing more important than taking and embracing risk even when we
thereby expose ourselves to the possibility of permanent loss of
capital. If we join the multitude and merely place our funds in
assets that are already proven and currently solidly profitable,
let alone in government bonds with minimal or negative yields, it
is hard to see how our shareholders can expect to profit beyond the
norm or - at the risk of pomposity - how our economy and society
will move forward. The current obsession with pursuing safety,
matching liabilities and targeting guaranteed returns is a profound
systemic ill. It undermines entrepreneurial wealth creation.
Portfolio Concentration
We are often told that Scottish Mortgage is unduly concentrated.
We disagree. We think that the shape of the portfolio is a rational
response to the potential upside of a limited number of stocks, to
an unhealthy preoccupation with individual stock performance and to
an excessive preference for diversification in institutional
portfolios.
It is the results of the overall portfolio that accrue to the
owners. In this viewpoint we follow Jeff Bezos. Our long-standing
ownership of Amazon has been good for investors but also comes with
investing lessons that we need to assimilate. One of the best and
bluntest pieces of advice comes from the 2015 Letter to
Shareholders which stressed the virtues of risk-taking:
'Given a ten percent chance of a 100 times payoff, you should
take that bet every time. But you're still going to be wrong nine
times out of ten.'
Naturally, we try to tilt the odds further in our favour (as
with more prowess does Mr Bezos). But the central point remains
that we quibble with the conventional wisdom that losing money in
individual stocks is our prime foe. Instead we question the
prevalence of truncated return assumptions and believe it makes
sense to consider diversification at the strategic portfolio level.
Losing money - failing as it is conventionally known - in
individual stocks is a necessary and important part of educated
risk-taking. This allows us to maximise our returns by owning
stocks with the possibility of almost unlimited returns.
For sure we have a reasonably concentrated portfolio by most
standards. This is driven by two additional but complementary
perspectives. The first is that we are acutely aware that there are
few if any investors who are solely exposed to Scottish Mortgage's
fortunes. We hope that we bring certain attributes to the aggregate
investment portfolios of individuals and their intermediaries but
few have the concentrated exposure to Scottish Mortgage that the
Managers themselves enjoy. What is often seen by commentators as
heavy exposure to individual companies through the lens of Scottish
Mortgage alone therefore looks more like the bare minimum to allow
these same stocks to have an impact on the overall returns
experienced by diversified investors. We think over-diversification
is a far more prevalent and insidious threat than excessive
concentration in today's investment world.
Secondly, we do not believe that there are many stocks that
offer the possibility of truly superior long-term returns.
Long-term equity performance has a much more skewed distribution
than is commonly perceived. It is not normally distributed.
Therefore our prime task lies in giving our shareholders the best
possible opportunity to capture the extreme winners. For example
33% of the wealth created in the US equity markets between
1926-2015 came from just 30 companies out of a total of 26,000
quoted stocks. This return pattern is true for most successful
investors too: however they invest, wherever they invest, whether
they embrace it or not, results are highly asymmetric and
top-heavy. Moreover we believe that this pattern of returns
reflects company characteristics more than random chance (though
the latter should not be dismissed). Currently exponential growth,
huge addressable markets, frequently low capital requirements and,
as ever, an enduring competitive moat are the decisive ingredients
that give the opportunity for dramatic returns. Not many companies
possess this combination.
Unquoted Companies
Given the relative paucity of outstanding companies, we have to
do our best to widen the funnel of opportunity. We increasingly see
unquoted companies as an essential part of this process. To put it
bluntly: we fear that equity markets are failing in their primary
responsibility of encouraging and enabling future entrepreneurial
success. The reasons for this are many, well-known and hard to rank
but all sad. What we can observe is that companies are finding it
easier to build their businesses, raise capital and invest without
excessive fear away from early exposure to capital markets. We are
finding that the bulk of our emergent opportunities lie in unquoted
companies and expect this to remain so for the foreseeable
future.
Whilst the companies themselves enjoy a degree of isolation from
the detrimental short term focused pressures of the public markets,
as investors holding such assets as part of our portfolio, we are
not so immune. We would caution that the accepted conventions for
pricing unquoted equities frequently fail to capture underlying
potential value creation. They tend to stress potentially
misleading comparisons with their public competitors and emphasise
the general financial market mood of the moment, over the specifics
of corporate progress. Moreover any spot price underplays the
uncertainties inherent in such investments. In combination, these
characteristics can lead to either undue pessimism or excessive
euphoria. We will try to indicate our perceptions of such emotions
when they seem extreme. At present we would confine ourselves to
saying that we do not regard unquoted valuations as generous in
absolute terms or full, relative to quoted companies.
Supporting Companies and Entrepreneurs
But the problematic nature of quoted life requires us to do more
than navigate around public markets. Although it is well-beyond our
abilities and significance to reform the system, we sincerely
believe that we can have an important role in supporting and
strengthening the ability of companies in which we invest to
withstand the pressures of capital markets. We should be plain that
in many cases we are merely willing accomplices of founder owners
who need little from us in the way of capital, advice or patience.
But at times, particularly critical times, we can be of help. The
usually large scale and long-term nature of our holdings matters in
this context. These aren't postures. But we don't always
succeed
Sadly the UK offers all too many occasions when constructive
activism is required. We have worked closely but quietly with the
new management at Rolls-Royce to support their determined efforts
at corporate renewal. Progress is encouraging but will require many
years. In contrast, we deeply regret that we had to sell our shares
in ARM to SoftBank and only wish that ARM's Board, management and
shareholders could have summoned the ambition, optimism and
patience required to nurture Britain's best - perhaps only - chance
of building a global technology giant.
We should be clear that be in the UK or internationally we see
corporate stewardship as not just a rightful component of our task
but as perhaps the essential reinforcing link in our investment
philosophy. If we can prove in harsh times that we support teams
trying to build great businesses and battling the forces of
quarterly fund manager capitalism then these companies will
hopefully be strengthened. They will almost certainly want us as
shareholders and in turn help us with their time and insights. In
turn other companies, quoted or unquoted, appear to want to talk to
us rather more than is the norm. Reputation matters.
James Anderson
Portfolio Update
The Growing Power of the Platforms
In recent times we have observed the increasing power and
dominance of a small number of companies from the west coast of the
United States and the east coast of China. This success has
important implications for the companies involved but also for the
multitudes that compete with and rely upon the services they offer.
We believe this is a foretaste of what is to come and our holdings
in the companies involved continue to represent a significant
proportion of our assets.
The importance of scale, mobile distribution and machine
learning is increasing. There are five and a half billion people
over the age of 14 alive today. There are five billion mobile
handsets in circulation. This level of usage has created an
addressable market far larger than anything that has gone before.
The past few years have been about the build out of the mobile
ecosystem but that phase is finishing. There is no longer much
discussion of wars between the platforms, the technology is
increasingly commoditised and the big winners are clear. The
companies are now experimenting with what they can build. As they
have refined their data gathering and machine learning capabilities
through search, or social curation or cloud hosting or retail, they
have been building the capability to redefine most other areas of
economic endeavour. In last year's report we questioned whether the
major and accelerating improvements in core technologies would lead
to progress in healthcare, energy and transportation. A year on,
the strongest prospects for delivering such an outcome are with the
big network companies themselves rather than established incumbents
developing or adopting the relevant skills.
In the automotive industry, the past twelve months have seen
Tesla make encouraging progress in its bid to electrify passenger
cars, but it is the technologies underlying vehicle autonomy that
appear to have made the most dramatic gains. If Tesla, Google and
Baidu use their data and machine learning capabilities to push the
market into full autonomy, the ramifications for the traditional
automotive companies are apparent. However, it is the second order
implications that are truly enormous. Whither oil demand? What
happens to ownership of the vehicle fleet? How would it be insured?
What would happen to congestion? How would this affect the
geography of our cities and the value of the real estate? What will
happen to the logistics industry? These questions arise from just
one application of Artificial Intelligence.
The big network companies are not restricting the deployment of
their technology to the auto industry. Amazon and Netflix will
provide 16% of professional US television production budgets this
year. The 'Internet' is the third largest source of high budget
television content. Online networks are taking over what we have
historically conceived of as offline industries and they are
providing the associated products in a way that is more
personalised and convenient for the consumer. The conception of
Amazon as a retailer is increasingly out-dated. Its devices wake us
in the morning providing music and sharing news and weather
information, its web services underpin many of the online systems
we use at work and home, its delivery services provide our general
goods and increasingly our groceries and its Kindle devices and
streaming services provide our evening entertainment. Its reach is
expanding rapidly and there remains a paucity of coherent
competitive offerings.
Beyond the big networks and aspirants to similarly widespread
dominance (Tesla or Illumina), it is those businesses that have
understood the implications of the new order and refined their
offer accordingly that seem most likely to thrive. Rather than
competing directly for incremental e-commerce transactions or
online advertisements, they offer customers and suppliers something
different. Online retailer, Zalando offers brands the opportunity
to tell their story in a way that isn't possible on other
platforms. Inditex is using its supply chain expertise and store
network to provide a degree of convenience and differentiation that
is hard for others to replicate. Similarly Ctrip in travel and
Spotify in music streaming. We think acknowledgement and adaptation
is a far more promising path to value creation than incumbents
labouring to minimise the impact of the changing competitive
landscape.
As the network companies have become a larger part of the
portfolio, we have continued to revisit their investment cases and
ask whether future potential has been more fully reflected in share
prices. Thus far, we have been able to answer this question with an
emphatic 'no'. Our top ten holdings are largely unchanged but we
are cognisant that corporate success will bring its own challenges.
There have not been many instances where investors have made
significant returns in companies with the market capitalisations
that this group has now achieved. If we are to make money from here
it will be on the basis of redefining what it means to be a 'large'
company. Given their scale and influence, it is important that
these companies are good corporate citizens. The technologies they
are deploying may lead to significant dislocation in the labour
market over the coming years and they must avoid being seen as the
villains in a period of turbulence and change.
Particularly in China
Whilst the position of the American platform companies looks
entrenched, the Chinese companies have a more fundamental role in
the development of their domestic economy. Alibaba is the consumer
economy in China and its fortunes are a proxy for the health of
small and mid sized business. Singles Day is China's equivalent of
Cyber Monday, the biggest online shopping event of the year. On
that day in 2016, Alibaba took over $18bn of orders through its
website. On Cyber Monday 2016, all US websites combined took a
total of $3bn of orders. China rules the e-commerce world by a wide
margin.
But there is something else going on here. Alibaba is one of the
largest online media platforms in China. It owns Weibo, one of the
largest social networking sites. It owns Youku Tudou which is one
of the largest online video sites. It delivers 'top of the funnel'
advertising and promotion. It can analyse consumer behaviour to
predict demand.
It is also expanding rapidly beyond traditional e-commerce. Its
finance platform has 450 million customers and processes 300
million daily transactions. It is using its reputation and reach to
grow the business in areas such as wealth management and insurance.
This is a real example of where a 'fintech' company might plausibly
bypass an existing financial system by improving both the customer
experience and the product.
Combining social, advertising, transaction, payment, delivery
and banking data, Alibaba has a data set which is the envy of the
online world. This allows it to study and train its machine
learning algorithms on consumer behaviour right through from demand
generation to completed transactions based on real identity. It
operates in a regulatory regime which allows it to use this data to
great effect. Credit scoring and therefore bank lending look to be
far more accurate than can be achieved in the West.
Progress in Healthcare
Over the next decade, healthcare may turn out to be the most
important example of the online platforms' participation in the
broader economy. A local example of this comes from the NHS's
partnership with Google's parent, Alphabet. This venture is
applying machine learning to data from a million patients' eye
scans with the aim of achieving earlier detection and treatment of
common eye diseases.
Over the past ten years we have witnessed remarkable progress in
the field of immuno-oncology (therapies that harness the body's
immune system to fight cancer). New drugs have been developed, for
example in the treatment of melanoma, which currently appear to be
a functional cure for some of the patients that take them. That
such treatments work for some patients and not others is driving a
move away from a single 'standard of care' to a more tailored
treatment approach based on an individual's genetic profile. This
has been facilitated by the rapidly declining cost of gene
sequencing, driven by the progress at Illumina.
Illumina's subsidiary, Grail, recently raised close to a billion
dollars in a private round in which Scottish Mortgage participated.
Grail is aiming to build a screening test for early stage cancer in
asymptomatic individuals. To do this it will need to sequence the
DNA of hundreds of thousands of people and learn from that
information. This can only be done with access to data storage
capability on a scale that few companies globally can provide.
Human analysts cannot extract useful information from such
datasets; advanced machine learning expertise is required. In this
context, it is perhaps unsurprising that the CEO of Grail was
formerly an engineer at Google. Nor was it a surprise to see that
our co-investors included the likes of Amazon and Tencent.
Grail epitomises some of the themes mentioned earlier with
regard to unlisted companies; it is building its business,
accessing a large pool of capital and investing against a long-term
opportunity away from the gaze of public market investors. Having
its management and finances scrutinised every quarter by those
trying to predict short-term share price movements would likely be
a serious distraction and an impediment to underlying progress.
Access to a large pool of patient long-term capital ought to
provide the company with a competitive advantage.
Over the past few years we have allocated more of the Trust's
assets to therapeutic healthcare companies. We continued this year.
New holdings included Unity Biotechnology (diseases of ageing),
Intarcia Therapeutics (diabetes) and Denali Therapeutics
(neurodegeneration). We do not expect these companies to operate
the capital light business models we've seen amongst the large
online networks. Instead, they are attempting the difficult and
expensive task of researching novel therapies for big disease
categories. The traditional funding model for such companies is to
offer only as much capital as is required to meet the next
development milestone for a new drug. Whilst this approach
encourages a disciplined and frugal approach to business
development it has the significant drawback of orienting a company
towards prioritising short-term landmarks ahead of long-term
development. We are interested to find out whether more substantive
funding for these companies at an earlier stage of their existence
will extend time horizons and increase the chances of success.
Concluding Comments
The drive and vision of the founder-owners running many of our
top holdings continually challenge us to reassess the scope of what
they can achieve. As these network companies have grown large we
have not become less demanding in our return expectations for them.
We believe that they will have big new opportunities over the next
decade. The enduring competitive moats that they have created seem
to us to be under-appreciated in stock market and valuation
terms.
The entrepreneurs running newer businesses in healthcare and
beyond must navigate this competitive landscape. It is exciting
that we continue to find new holdings with leaders that are
prepared to invest and take on the challenges this presents.
The vagaries of stock markets will drive our returns over
shorter time periods but it will be the success (or otherwise) of
these individuals and the companies they are creating that
determines the longer run outcome. For us, this is a source of
great optimism.
Tom Slater
Thirty Largest Holdings and Twelve Month Performance
Fair
Fair
value Value
Contribution
31 March % of Absolute to absolute 31 March
2017 total Performance performance(#) 2016
Name Business GBP'000 assets % % GBP'000
====================== ======================== ========== ========= ============= ================= ===========
Online retailing and
Amazon.com cloud computing 510,086 9.5 71.7 7.6 330,117
Electric cars,
autonomous
driving
Tesla Inc and solar energy 366,984 6.8 40.0 2.5 185,552
Illumina Biotechnology equipment 318,103 5.9 21.0 1.9 291,722
Tencent Holdings Internet services 308,730 5.7 61.8 3.6 190,964
Inditex Global clothing retailer 297,098 5.5 22.8 1.7 231,567
Alibaba Group Online retail 273,626 5.1 56.8 2.7 164,129
Social networking
Facebook site 257,167 4.8 43.1 2.3 179,697
Baidu Online search engine 237,505 4.4 3.9 0.1 228,621
Holding company for
Google and
Alphabet associated ventures 199,136 3.7 28.0 1.3 155,518
Ferrari Luxury automobiles 148,851 2.8 109.4 1.9 27,788
Ctrip.com Travel agent 131,093 2.4 28.0 0.5 35,752
BASF Chemicals 118,852 2.2 56.6 1.3 78,624
ASML Lithography 110,439 2.1 52.1 0.7 42,067
International online
Zalando clothing retailer 108,578 2.0 41.8 0.8 68,231
Atlas Copco Engineering 107,723 2.0 65.8 1.4 87,657
Luxury goods producer
Kering and retailer 104,970 1.9 70.4 1.2 86,183
Subscription service
for TV shows
Netflix and movies 98,605 1.8 66.2 1.0 36,264
Kinnevik Investment company 90,981 1.7 21.8 0.4 68,867
Housing Development
Finance
Corporation Indian mortgage provider 78,537 1.5 61.5 0.8 42,009
Intuitive Surgical Surgical robots 75,393 1.4 45.8 0.7 67,644
Provider of
biotechnological
products
Bluebird Bio Inc and services 68,486 1.3 141.3 1.0 22,032
Rolls-Royce Group Aerospace equipment 63,002 1.2 12.4 0.2 56,982
Enterprise information
Workday technology 60,431 1.1 24.6 0.2 26,714
Clinical stage
Grail Inc Series biotechnology
B Pref. (u) company 59,978 1.1 (0.5)* -* -
Nvidia Visual computing 51,904 1.0 105.1* 0.4* -
Prudential International insurance 51,845 1.0 33.1 0.5 76,256
Svenska Handelsbanken Banking 48,280 0.9 23.9* 0.2* -
Novozymes Enzyme manufacturer 47,104 0.9 2.7 0.2 54,045
Renishaw Electronic equipment 45,076 0.8 72.7 0.6 26,571
You & Mr Jones
Class A Units (u) Digital advertising 45,064 0.8 29.5 0.3 34,787
====================== ======================== ========== ========= ============= ================= ===========
4,483,627 83.3
=============================================== ========== ========= ============= ================= ===========
Absolute performance (in sterling terms) has been calculated on
a total return basis over the period 1 April 2016 to 31 March
2017.
(#) Contribution to absolute performance (in sterling terms) has
been calculated to illustrate how an individual stock has
contributed to the overall return. It is influenced by both share
price performance and the weighting of the stock in the portfolio,
taking account of any purchases or sales in the period.
(*) Figures relate to part-period returns where the equity has
been purchased during the period.
(u) Denotes unlisted investment
Source: Baillie Gifford/StatPro.
See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Distribution of Assets
At At
31 March 31 March
2017 2016
% %
==================================== ========== ==========
North America 47.9 46.4
South America 0.5 0.4
Europe 30.3 33.7
United Kingdom 4.4 8.6
Eurozone 19.6 18.6
Developed Europe (non euro) 5.9 5.8
Rest of Europe 0.4 0.7
Africa and Middle East 0.4 0.4
Asia 20.9 19.1
China 18.5 16.9
India 2.1 1.7
Japan - 0.2
Rest of Asia 0.3 0.3
Total assets (before deduction of
loans and debentures) 100.0 100.0
==================================== ========== ==========
Key Performance Indicators
The key performance indicators (KPIs) used to measure the
progress and performance of the Company over time are established
industry measures and are as follows:
- the movement in net asset value per ordinary share (after
deducting borrowings at fair value);
- the movement in the share price;
- the movement of net asset value and share price performance
compared to the Benchmark;
- the premium/discount (after deducting borrowings at fair
value);
- ongoing charges ratio;
- revenue return; and
- dividend per share.
The one, five and ten year records of the KPIs are shown on
pages 5, 6 and 24 of the Annual Report and Financial
Statements.
In addition to the above, the Board considers performance
against other companies within the AIC Global Sector.
Future Developments of the Company
The outlook for the Company is set out in the Chairman's
Statement and the Managers' Report above.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors'
Remuneration Report on Page 36 of the Annual Report and Financial
Statements.
No Director has a contract of service with the Company. During
the year no Director was interested in any contract or other matter
requiring disclosure under section 412 of the Companies Act
2006.
Management Fee Arrangements
2017 2017 2017 2016 2016 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========= ========= ========= =========
Investment management
fee 3,558 10,674 14,232 2,881 8,642 11,523
======================= ========= ========= ========= ========= ========= =========
Details of the Investment Management Agreement are disclosed on
page 27 of the Annual Report and Financial Statements. With effect
from 1 April 2017 Baillie Gifford & Co Limited's annual
management fee is 0.30% on the first GBP4 billion of total assets
less current liabilities (excluding short term borrowings for
investment purposes) and 0.25% thereafter. For the year to 31 March
2017 the management fee was 0.30% of total assets less current
liabilities (excluding short term borrowings for investment
purposes). The management fee is calculated quarterly and levied on
all assets, including holdings in collective investment schemes
(OEICs) managed by Baillie Gifford & Co; however the OEICs'
share class held by the Company does not itself attract a
management fee. The Company's holding in the Baillie Gifford Global
Discovery OEIC was sold during the year.
The investment management fee is charged 25% to revenue and 75%
to capital.
Principal Risks
As explained on page 31 of the Annual Report and Financial
Statements there is a process for identifying, evaluating and
managing the risks faced by the Company on a regular basis. The
Directors have carried out a robust assessment of the principal
risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. A
description of these risks and how they are being managed or
mitigated is set out below:
Financial Risk - the Company's assets consist mainly of listed
securities and its principal financial risks are therefore market
related and include market risk (comprising currency risk, interest
rate risk and other price risk), liquidity risk and credit risk. An
explanation of those risks and how they are managed is contained in
note 19 to the Financial Statements on pages 56 to 61 of the Annual
Report and Financial Statements. To mitigate this risk, the Board
considers at each meeting various metrics including portfolio
concentration, regional and industrial sector weightings, top and
bottom stock contributors to performance and contribution to
performance by industrial sector. The Managers provide the
rationale for stock selection decisions and both the investment
strategy and portfolio risk are formally considered in detail
annually.
Unlisted Investments - the Company's risk could be increased by
its investment in unlisted investments. These assets may be more
difficult to buy or sell, so changes in their prices may
be greater.
To mitigate this risk, the Board considers the unlisted
investments in the context of the overall investment strategy and
provides guidance to the Managers on the maximum exposure to
unlisted investments. The investment policy limits the amount which
may be invested in unlisted companies to 25 per cent of the total
assets of the Company, measured at time of purchase.
Investment Strategy Risk - pursuing an investment strategy to
fulfil the Company's objective which the market perceives to be
unattractive or inappropriate, or an ineffective implementation of
an attractive or appropriate strategy, may lead to reduced returns
for shareholders and, as a result, a decreased demand for the
Company's shares. This may lead to the Company's shares trading at
a widening discount to their Net Asset Value. To mitigate this
risk, the Board regularly reviews and monitors the Company's
objective and investment policy and strategy, the investment
portfolio and its performance, the level of discount/premium to Net
Asset Value at which the shares trade and movements in the share
register.
Discount Risk - the discount/premium at which the Company's
shares trade relative to its Net Asset Value can change. The risk
of a widening discount is that it may undermine investor confidence
in the Company. To manage this risk, the Board monitors the level
of discount/premium at which the shares trade and the Company has
authority to buy back its existing shares when deemed by the Board
to be in the best interests of the Company and its
shareholders.
Regulatory Risk - failure to comply with applicable legal and
regulatory requirements such as the tax rules for investment trust
companies, the UKLA Listing Rules and the Companies Act could lead
to suspension of the Company's Stock Exchange listing, financial
penalties, a qualified audit report or the Company being subject to
tax on capital gains. To mitigate this risk, Baillie Gifford's
Business Risk, Internal Audit and Compliance Departments provide
regular reports to the Audit Committee on Baillie Gifford's
monitoring programmes. Major regulatory change could impose
disproportionate compliance burdens on the Company. In such
circumstances representation is made to ensure that the special
circumstances of investment trusts are recognised. Shareholder
documents and announcements, including the Company's published
Interim and Annual Report and Financial Statements, are subject to
stringent review processes, and procedures are in place to ensure
adherence to the Transparency Directive and the Market Abuse
Directive with reference to inside information.
Custody and Depositary Risk - safe custody of the Company's
assets may be compromised through control failures by the
Depositary, including breaches of cyber security. To mitigate this
risk, the Board receives six monthly reports from the Depositary
confirming safe custody of the Company's assets held by the
Custodian. Cash and portfolio holdings are independently reconciled
to the Custodian's records by the Managers. The Custodian's audited
internal controls reports are reviewed by Baillie Gifford's
Internal Audit Department and a summary of the key points is
reported to the Audit Committee and any concerns investigated. In
addition, the existence of assets is subject to annual external
audit.
Operational Risk - failure of Baillie Gifford's systems or those
of other third party service providers could lead to an inability
to provide accurate reporting and monitoring or a misappropriation
of assets. To mitigate this risk, Baillie Gifford has a
comprehensive business continuity plan which facilitates continued
operation of the business in the event of a service disruption or
major disaster. The Board reviews Baillie Gifford's Report on
Internal Controls and the reports by other key third party
providers are reviewed by Baillie Gifford on behalf of the
Board.
Leverage Risk - the Company may borrow money for investment
purposes. If the investments fall in value, any borrowings will
magnify the impact of this loss. If borrowing facilities are not
renewed, the Company may have to sell investments to repay
borrowings. To mitigate this risk, all borrowings require the prior
approval of the Board and leverage levels are discussed by the
Board and Managers at every meeting. Covenant levels are monitored
regularly. The majority of the Company's investments are in quoted
securities that are readily realisable. Further information on
leverage can be found on page 66 of the Annual Report and Financial
Statements and the Glossary of Terms on page 71 of the Annual
Report and Financial Statements.
Political Risk - Political developments are closely monitored
and considered by the Board. The Board has noted the results of the
UK referendum on continuing membership of the European Union and
the announcement by the Scottish Government that it will seek to
hold a second referendum on Scottish independence. Whilst there is
considerable uncertainty at present, the Board will continue to
monitor developments as they occur and assess the potential
consequences for the Company's future activities.
Viability Statement
In accordance with provision C2.2 of the UK Corporate Governance
Code that the Directors assess the prospects of the Company over a
defined period, the Directors have elected to do so over a period
of 10 years. The Directors continue to believe this period to be
appropriate as the investment objective of the Company is aimed at
investors with a 5 to 10 year investment horizon and, subject to
the assumptions detailed below, the Directors do not expect there
to be any significant change to the current principal risks facing
Scottish Mortgage nor to the adequacy of the controls in place to
effectively mitigate those risks. Furthermore, the Directors do not
reasonably envisage any change in strategy or any events which
would prevent the Company from operating over a 10 year period.
Assumption 1
There is no significant adverse change to the regulatory
environment and tax treatment enjoyed by UK investment trusts.
Assumption 2
The Company does not suffer sustained inadequate relative
investment performance with the current or any successor fund
managers such that the Company fails to maintain a supportive
shareholder base.
Using the long term expectations of shareholders as the main
determinant of the chosen assessment period, the Directors have
conducted a robust assessment of the principal risks and
uncertainties facing the Company (as detailed on pages 8 and 9 of
the Annual Report and Financial Statements) and in particular the
impact of market risk where a significant fall in global equity
markets would adversely impact the value of the investment
portfolio. In reviewing the viability of the Company, the Directors
have considered the key characteristics of the Company which
include an investment portfolio that takes account of different
degrees of liquidity, with moderate levels of debt and a business
model where substantially all of the essential services required
are outsourced to third party providers; this outsourcing structure
allows key service providers to be replaced at relatively short
notice where necessary.
The Directors have also considered the Company's leverage and
liquidity in the context of fixed term debentures, private
placement loan notes and short term bank loans, the revenue
projections, the readily realisable nature of the portfolio which
could be sold to provide funding if necessary and its stable closed
end structure. The Directors have concluded that these sustainable
long term characteristics provide a high degree of flexibility to
the Company and afford an ability to react so as to mitigate both
controllable and most external uncontrollable risks and events in
order to ensure the long term prosperity of the business.
Based upon the Company's processes for monitoring operating
costs, share price premium/discount, the Managers' compliance with
the investment objective, the portfolio risk profile, leverage,
counterparty exposure, liquidity risk and financial controls, the
Board believes that the prospects of the Company are sound and the
Directors are able to confirm that they have a reasonable
expectation that it will continue in operation and meet its
liabilities as they fall due over a period of at least 10
years.
Going Concern
In accordance with The Financial Reporting Council's guidance on
going concern and liquidity risk, the Directors have undertaken a
rigorous review of the Company's ability to continue as a going
concern.
The Company's principal risks are market related and include
market risk, liquidity risk and credit risk. An explanation of
these risks and how they are managed is contained in note 19 to the
Financial Statements. The Company's assets, the majority of which
are investments in quoted securities which are readily realisable,
exceed its liabilities significantly. All borrowings require the
prior approval of the Board. Gearing levels and compliance with
borrowing covenants are reviewed by the Board on a regular
basis.
Accordingly, the Financial Statements have been prepared on the
going concern basis as it is the Directors' opinion, having
assessed the principal risks and other matters set out in the
Viability Statement above, that the Company will continue in
operational existence for a period of at least 12 months from the
date of approval of the Financial Statements.
Financial Instruments
As an Investment Trust, the Company invests in listed and
unlisted equities and makes other investments so as to achieve its
investment objective of maximising total return, whilst also
generating dividend growth, from a focused and actively managed
global portfolio. In pursuing its investment objective, the Company
is exposed to various types of risk that are associated with the
financial instruments and markets in which it invests.
These risks are categorised here as market risk (comprising
currency risk, interest rate risk and other price risk), liquidity
risk and credit risk. The Board monitors closely the Company's
exposures to these risks but does so in order to reduce the
likelihood of a permanent loss of capital rather than to minimise
the short term volatility. Risk provides the potential for both
losses and gains and in assessing risk, the Board encourages the
Managers to exploit the opportunities that risk affords.
The risk management policies and procedures outlined in this
note have not changed substantially from the previous accounting
period.
Market Risk
The fair value of future cash flows of a financial instrument or
other investment held by the Company may fluctuate because of
changes in market prices. This market risk comprises three elements
- currency risk, interest rate risk and other price risk. The Board
reviews and agrees policies for managing these risks and the
Company's Investment Managers both assess the exposure to market
risk when making individual investment decisions and monitor the
overall level of market risk across the investment portfolio on an
ongoing basis. Details of the Company's investment portfolio are
shown in note 9 and on pages 21 to 23 of the Annual Report and
Financial Statements.
Currency Risk
Certain of the Company's assets, liabilities and income are
denominated in currencies other than sterling (the Company's
functional currency and that in which it reports its results).
Consequently, movements in exchange rates may affect the sterling
value of those items.
The Investment Managers monitor the Company's exposure to
foreign currencies and report to the Board on a regular basis. The
Investment Managers assess the risk to the Company of the foreign
currency exposure by considering the effect on the Company's net
asset value and income of a movement in the rates of exchange to
which the Company's assets, liabilities, income and expenses are
exposed. However, the country in which a company is listed is not
necessarily where it earns its profits. The movement in exchange
rates on earnings may have a more significant impact upon a
company's valuation than a simple translation of the currency in
which the company is quoted.
Foreign currency borrowings can limit the Company's exposure to
anticipated future changes in exchange rates which might otherwise
adversely affect the value of the portfolio of investments.
Exposure to currency risk through asset allocation, which is
calculated by reference to the currency in which the asset or
liability is quoted, is shown below.
Loans
Cash and and debentures Other debtors
As at 31 March Investments cash equivalents GBP'000 and creditors* Net exposure
2017 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== =================== ================ ================= ===============
US dollar 3,311,569 67,547 (359,856) (890) 3,018,370
Euro 1,055,007 - - 998 1,056,005
Hong Kong dollar 308,730 - - - 308,730
Swedish krona 246,984 - - 1,865 248,849
Brazilian real 27,277 - - 546 27,823
Danish krone 47,104 - - - 47,104
Indonesian rupiah 17,659 - - - 17,659
Indian rupee 78,537 - - - 78,537
Total exposure
to
currency risk 5,092,867 67,547 (359,856) 2,519 4,803,077
Sterling 205,471 9,096 (149,710) 5,657 70,514
=================== ============== =================== ================ ================= ===============
5,298,338 76,643 (509,566) 8,176 4,873,591
=================== ============== =================== ================ ================= ===============
* Includes net non-monetary assets of GBP10,000.
Loans
Cash and and debentures Other debtors
As at 31 March Investments cash equivalents GBP'000 and creditors* Net exposure
2016 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== =================== ================ ================= ===============
US dollar 2,389,758 11,196 (347,874) (656) 2,052,424
Euro 745,466 - - (7,018) 738,448
Hong Kong dollar 190,964 - - - 190,964
Swedish krona 156,525 - - - 156,525
Brazilian real 17,241 - - 408 17,649
Danish krone 54,045 - - 61 54,106
Polish zloty 5,270 - - - 5,270
Japanese yen 7,826 - - 68 7,894
Indonesian rupiah 12,933 - - - 12,933
Indian rupee 42,009 - - 114 42,123
=================== ============== =================== ================ ================= ===============
Total exposure
to
currency risk 3,622,037 11,196 (347,874) (7,023) 3,278,336
Sterling 300,087 32,777 (150,080) (3,676) 179,108
=================== ============== =================== ================ ================= ===============
3,922,124 43,973 (497,954) (10,699) 3,457,444
=================== ============== =================== ================ ================= ===============
* Includes net non-monetary assets of GBP34,000.
Currency Risk Sensitivity
At 31 March 2017, if sterling had strengthened by 5% in relation
to all currencies, with all other variables held constant, total
net assets and total return on ordinary activities would have
decreased by the amounts shown below. A 5% weakening of sterling
against all currencies, with all other variables held constant,
would have had an equal but opposite effect on the financial
statement amounts.
The analysis is performed on the same basis for 2016.
2017 2016
GBP'000 GBP'000
=================== ========= =========
US dollar 150,919 102,621
Euro 52,800 36,922
Hong Kong dollar 15,437 9,548
Swedish krona 12,442 7,826
Indian rupee 3,927 2,106
Danish krone 2,355 2,705
Brazilian real 1,391 883
Polish zloty - 264
Japanese yen - 395
Indonesian rupiah 883 647
240,154 163,917
=================== ========= =========
Interest Rate Risk
Interest rate movements may affect directly:
3/4 the fair value of the investments in fixed interest rate securities;
3/4 the level of income receivable on cash deposits;
3/4 the fair value of the Company's fixed-rate borrowings; and
3/4 the interest payable on the Company's variable rate borrowings.
Interest rate movements may also impact upon the market value of
the Company's investments outwith fixed income securities. The
effect of interest rate movements upon the earnings of a company
may have a significant impact upon the valuation of that company's
equity.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions and when entering
borrowing agreements.
The Board reviews on a regular basis the amount of investments
in cash and fixed income securities and the income receivable on
cash deposits, floating rate notes and other similar
investments.
The Company finances part of its activities through borrowings
at approved levels. The amount of such borrowings and the approved
levels are monitored and reviewed regularly by the Board. Movements
in interest rates, to the extent that they affect the market value
of the Company's fixed rate borrowings, may also affect the amount
by which the Company's share price is at a discount or a premium to
the net asset value at fair value.
The interest rate risk profile of the Company's financial assets
and liabilities at 31 March is shown below:
Financial Assets
2017 2016
Weighted Weighted Weighted Weighted
average average Fair average average
Fair interest period value interest period
value rate until GBP'000 rate until maturity*
GBP'000 maturity*
=========================== ========== ========== =========== ========== ========== =================
Floating rate:
Brazilian bonds (index
linked) 27,277 9.7% 28 years 17,241 11.0% 29 years
=========================== ========== ========== =========== ========== ========== =================
Cash and short-term
deposits:
Other overseas currencies 67,547 - n/a 11,196 - n/a
Sterling 9,906 0.1% n/a 32,777 0.3% n/a
=========================== ========== ========== ----------- ========== ========== =================
* Based on expected maturity date.
The cash deposits generally comprise call or short term money
market deposits of less than one month which are repayable on
demand. The benchmark rate which determines the interest payments
received on cash balances is the Interbank market rates.
Financial Liabilities
The interest rate risk profile of the Company's bank loans and
debentures (at amortised cost) and the maturity profile of the
undiscounted future cash flows in respect of the Company's
contractual financial liabilities at 31 March are shown below.
Interest Rate Risk Profile
The interest rate risk profile of the Company's financial
liabilities at 31 March was:
2017 2016
GBP'000 GBP'000
====================================== ========= =========
Floating
rate - US$ denominated 291,883 114,799
Fixed rate - Sterling denominated 149,710 150,079
- US$ denominated 67,973 233,076
===================================== ========= =========
509,566 497,594
====================================== ========= =========
Maturity Profile
The maturity profile of the Company's financial liabilities at
31 March was:
2017 2016
Between Between
Within 1 and More than Within 1 and More than
1 year 5 years 5 years 1 year 5 years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================== ========= ========= ========== ========= ========= ==========
Repayment of loans
and debentures 359,856 20,000 125,675 288,736 79,139 125,675*
Accumulated interest
on loans and debentures
to maturity date 18,060 52,487 33,022 18,094 55,125 44,209
========================== ========= ========= ========== ========= ========= ==========
377,916 72,487 158,697 306,830 134,264 169,884
-------------------------- ========= ========= ========== ========= ========= ==========
* Includes GBP675,000 irredeemable debenture stock.
Interest Rate Risk Sensitivity
An increase of 100 basis points in bond yields as at 31 March
2017 would have decreased total net assets and total return on
ordinary activities by GBP3,729,000 (2016 - GBP2,177,000) and would
have increased the net asset value per share (with borrowings at
fair value) by 0.55p (2016 - increased by 0.84p). A decrease of 100
basis points would have had an equal but opposite effect.
Other Price Risk
Changes in market prices other than those arising from interest
rate risk or currency risk may also affect the value of the
Company's net assets.
The Board manages the market price risks inherent in the
investment portfolio by ensuring full and timely access to relevant
information from the Investment Managers. The Board meets regularly
and at each meeting reviews investment performance, the investment
portfolio and the rationale for the current investment positioning
to ensure consistency with the Company's objectives and investment
policies. The portfolio does not seek to reproduce the index,
investments are selected based upon the merit of individual
companies and therefore performance may well diverge from the short
term fluctuations of the benchmark. The Board provides guidance to
the Managers on the level of unlisted investments.
Other Price Risk Sensitivity
Fixed asset investments are valued at bid prices which equate to
their fair value. A full list of the Company's investments is given
on pages 21 to 23 in the Annual Report and Financial Statements. In
addition, a geographical analysis of the portfolio, an analysis of
the investment portfolio by broad industrial or commercial sector
and a list of the 30 largest investments by their aggregate market
value are contained in the Strategic Report.
93.8% (2016 - 99.5%) of the Company's net assets are invested in
quoted equities. A 3% increase in quoted companies equity
valuations at 31 March 2017 would have increased total assets and
total return on ordinary activities by GBP137,125,000 (2016 -
GBP103,177,000). A decrease of 3% would have had an equal but
opposite effect.
Liquidity Risk
This is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities.
Liquidity risk is potentially significant but the majority of
the Company's assets are investments in quoted securities that are
believed to be readily realisable. The Board provides guidance to
the Investment Managers as to the maximum exposure to any one
holding and to the maximum aggregate exposure to substantial
holdings.
The Company has the power to take out borrowings, which give it
access to additional funding when required.
Credit Risk
This is the risk that a failure of a counterparty to a
transaction to discharge its obligations under that transaction
could result in the Company suffering a loss.
This risk is managed as follows:
3/4 where the Investment Managers make an investment in a bond
or other security with credit risk, that credit risk is assessed
and then compared to the prospective investment return of the
security in question;
3/4 the Board regularly receives information from the Investment
Managers on the credit ratings of those bonds and other securities
in which the Company has invested;
3/4 the Depositary is liable for the loss of financial
instruments held in custody. The Depositary will ensure that any
delegate segregates the assets of the Company. The Depositary has
delegated the custody function to Bank of New York Mellon SA/NV
London Branch. Bankruptcy or insolvency of the custodian may cause
the Company's rights with respect to securities held by the
custodian to be delayed. The Investment Manager monitors the
Company's risk by reviewing the custodian's internal control
reports and reporting its findings to the Board;
3/4 investment transactions are carried out with a large number
of brokers whose creditworthiness is reviewed by the Investment
Managers. Transactions are ordinarily undertaken on a delivery
versus payment basis whereby the Company's custodian bank ensures
that the counterparty to any transaction entered into by the
Company has delivered on its obligations at the same time as any
transfer of cash or securities away from the Company is
completed;
3/4 transactions involving derivatives, and other arrangements
wherein the creditworthiness of the entity acting as broker or
counterparty to the transaction is likely to be of sustained
interest, are subject to rigorous assessment by the Investment
Managers of the creditworthiness of that counterparty. The
Company's aggregate exposure to each such counterparty is monitored
regularly by the Board; and
3/4 cash is held only at banks that are regularly reviewed by the Managers.
Credit Risk Exposure
The maximum exposure to direct credit risk at 31 March was:
2017 2016
GBP'000 GBP'000
============================== ========= =========
Fixed interest investments 27,277 17,241
Cash and short term deposits 76,643 43,973
Debtors and prepayments 16,293 4,051
============================== ========= =========
120,213 65,265
============================== ========= =========
None of the Company's financial assets is past due or
impaired.
Fair Value of Financial Assets and Financial Liabilities
The Directors are of the opinion that the financial assets and
liabilities of the Company are stated at fair value in the Balance
Sheet with the exception of long term borrowing. Long term
borrowings in relation to debentures are included in the accounts
at the amortised amount of net proceeds after issue, plus accrued
finance costs in accordance with FRS102. The fair value of bank
loans is calculated with reference to government bonds of
comparable maturity and yield. A comparison with the fair value
(closing offer value) is as follows:
2017 2016
Par/nominal Book Fair Par/nominal Book Fair
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================= ============ ========= ========= ============ ========= =========
8-14% stepped interest
debenture stock 2020 20,000 20,932 27,295 20,000 21,134 29,540
6.875% debenture stock
2023 75,000 74,784 95,250 75,000 74,747 89,044
6-12% stepped interest
debenture stock 2026 50,000 53,319 83,028 50,000 53,523 85,927
4.5% irredeemable debenture
stock 675 675 712 675 675 649
============================= ============ --------- ========= ============ ========= =========
Total debentures 145,675 149,710 206,285 145,675 150,079 205,160
============================= ============ ========= ========= ============ ========= =========
Fixed rate loans 67,973 68,083 233,076 233,687
============================= ============ ========= ========= ============ ========= =========
Floating rate loans 291,883 291,883 114,799 114,799
============================= ============ ========= --------- ============ ========= =========
Total borrowings 509,566 566,251 497,954 553,646
============================= ============ ========= ========= ============ ========= =========
All short term floating rate borrowings are stated at fair
value, which is considered to be equal to their par value.
Deducting long term borrowings at fair value would have the
effect of reducing the net asset value per share from 358.7p to
354.6p. Taking the market price of the ordinary shares at 31 March
2017 of 366.1p, this would have given a premium to net asset value
of 3.2% as against a premium of 2.1% on a debt at book basis. At 31
March 2016 the effect would have been to reduce the net asset value
from 263.4p to 259.2p. Taking the market price of the ordinary
shares at 31 March 2016 of 262.5p, this would have given a premium
to net asset value of 1.3% as against a discount of 0.3% on a debt
at book basis.
Deducting long term borrowings at par value would have the
effect of increasing the net asset value per share from 358.7p to
359.0p. Taking the market price of the ordinary shares at 31 March
2017 of 366.1p, this would have given a premium to net asset value
of 2.0% as against a premium of 2.1% on a debt at book basis. At 31
March 2016 the effect would have been to increase the net asset
value from 263.4p to 263.8p. Taking the market price of the
ordinary shares at 31 March 2016 of 262.5p, this would have given a
discount to net asset value of 0.5% as against a discount of 0.3%
on a debt at book basis.
Capital Management
The capital of the Company is its share capital and reserves as
set out in notes 13 and 14 of the Annual Report and Financial
Statements together with its borrowings (see notes 11 and 12 of the
Annual Report and Financial Statements). The objective of the
Company is to maximise total return from a portfolio of long term
investments chosen on a global basis, enabling the Company to
provide capital and dividend growth. The Company's investment
policy is set out on page 7 of the Annual Report and Financial
Statements. In pursuit of the Company's objective, the Board has a
responsibility for ensuring the Company's ability to continue as a
going concern and details of the related risks and how they are
managed are set out above. The Company has the authority to issue
and buy back its shares (see page 7 of the Annual Report and
Financial Statements) and changes to the share capital during the
year are set out in notes 13 and 14 of the Annual Report and
Financial Statements. The Company does not have any externally
imposed capital requirements other than the covenants on its loans
and debentures which are detailed in notes 11 and 12 of the Annual
Report and Financial Statements.
Subsequent Events
Subsequent to the year end, on 6 April 2017, the Company issued
the following private placement unsecured loan notes:
3/4 GBP45 million at a coupon of 3.05% maturing on 7 April 2042.
3/4 GBP30 million at a coupon of 3.30% maturing on 6 April 2044.
3/4 GBP30 million at a coupon of 3.12% maturing on 6 April 2047.
A further unsecured loan note was agreed for funding on 30
September 2020 to refinance the GBP20 million 8-14% stepped
interest debenture stock maturing on 30 September 2020:
3/4 GBP20 million at a coupon of 3.65% maturing on 6 April 2044.
Alternative Investment Fund Managers (AIFM) Directive
In accordance with the AIFM Directive, information in relation
to the Company's leverage and the remuneration of the Company's
AIFM, Baillie Gifford & Co Limited, is required to be made
available to investors.
AIFM Remuneration
In accordance with the Directive, the AIFM remuneration policy
is available at www.bailliegifford.com or on request (see contact
details on the back cover of the Annual Report and Financial
Statements) and the numerical remuneration disclosures in respect
of the AIFM's relevant reporting period are available at
www.bailliegifford.com.
The Company's maximum and actual leverage levels (see Glossary
of Terms on page 71 of the Annual Report and Financial Statements)
at 31 March 2017 are shown below:
Leverage
Gross Commitment
method method
=============== ======== ===========
Maximum limit 2.50:1 2.00:1
Actual 1.10:1 1.10:1
================= ======== ===========
Investments
As at Level 1 Level 2 Level 3 Total
31 March 2017 GBP'000 GBP'000 GBP'000 GBP'000
======================== ========== ========= ========= ==========
Listed equities/funds 4,565,355 5,463 - 4,570,818
Listed debt securities - 27,277 - 27,277
Unlisted equities - - 700,243 700,243
======================== ========== ========= ========= ==========
Total financial asset
investments 4,565,355 32,740 700,243 5,298,338
======================== ========== ========= ========= ==========
As at Level 1 Level 2 Level 3 Total
31 March 2016 GBP'000 GBP'000 GBP'000 GBP'000
======================== ========== ========= ========= ==========
Listed equities/funds 3,415,656 23,580 - 3,439,236
Listed debt securities - 17,241 - 17,241
Unlisted equities - - 465,647 465,647
======================== ========== ========= ========= ==========
Total financial asset
investments 3,415,656 40,821 465,647 3,922,124
======================== ========== ========= ========= ==========
Investments in securities are financial assets designated at
fair value through profit or loss on initial recognition. In
accordance with Financial Reporting Standard 102, the preceding
tables provide an analysis of these investments based on the fair
value hierarchy described below, which reflects the reliability and
significance of the information used to measure their fair
value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of
financial assets is described below. The levels are determined by
the lowest (that is the least reliable or least independently
observable) level of input that is significant to the fair value
measurement for the individual investment in its entirety as
follows:
Level 1 - using unadjusted quoted prices for identical
instruments in an active market;
Level 2 - using inputs, other than quoted prices included within
Level 1, that are directly or indirectly
observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market
data is unavailable).
The valuation techniques used by the Company are explained in
the accounting policies on page 46 of the Annual Report and
Financial Statements.
Statement of Directors' Responsibilities in respect of the
Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report,
the Directors' Remuneration Report and the Financial Statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial
Statements for each financial year. Under that law they have
elected to prepare the Financial Statements in accordance with
applicable law and UK Accounting Standards including FRS 102 'The
Financial Reporting Standard applicable in the UK and Republic of
Ireland'. Under company law the Directors must not approve the
Financial Statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period. In preparing
these Financial Statements, the Directors are required to:
3/4 select suitable accounting policies and then apply them consistently;
3/4 make judgements and accounting estimates that are reasonable and prudent;
3/4 state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
3/4 prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the Financial Statements and the Directors' Remuneration Report
comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Company and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the Company's pages on the Managers' website. Legislation in the
United Kingdom governing the preparation and dissemination of
Financial Statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in Respect of the
Annual Financial Report
We confirm that to the best of our knowledge:
3/4 the Financial Statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and net return of
the Company;
3/4 the Strategic Report includes a fair review of the
development and performance of the business and the position of the
issuer, together with a description of the principal risks and
uncertainties that the issuer and business face; and
3/4 we consider that the Annual Report and Financial Statements
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
By order of the Board
John Scott
12 May 2017
Income Statement
For the year ended For the year ended
31 March 2017 31 March 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================ ============= =============== ===================== ============= ============== ==============
Gains/(losses)
on investments - 1,354,245 1,354,245 - (6,647) (6,647)
Currency losses - (42,958) (42,958) - (7,212) (7,212)
Income (note 2) 27,796 - 27,796 32,910 - 32,910
Investment
management fee (3,558) (10,674) (14,232) (2,881) (8,642) (11,523)
Other
administrative
expenses (3,544) - (3,544) (3,176) - (3,176)
================ ============= =============== ===================== ============= ============== ==============
Net return
before finance
costs and
taxation 20,694 1,300,613 1,321,307 26,853 (22,501) 4,352
Finance costs of
borrowings (4,837) (14,510) (19,347) (4,568) (13,704) (18,272)
================ ============= =============== ===================== ============= ============== ==============
Net return on
ordinary
activities
before taxation 15,857 1,286,103 1,301,960 22,285 (36,205) (13,920)
Tax on ordinary
activities (1,721) - (1,721) (857) - (857)
================ ============= =============== ===================== ============= ============== ==============
Net return on
ordinary
activities
after taxation 14,136 1,286,103 1,300,239 21,428 (36,205) (14,777)
================ ============= =============== ===================== ============= ============== ==============
Net return per
ordinary share
(note 4) 1.07p 97.31p 98.38p 1.66p (2.81p) (1.15p)
================ ============= =============== ===================== ============= ============== ==============
The total column of this statement is the profit and loss
account of the Company. The supplementary revenue and capital
return columns are prepared under guidance published by the
Association of Investment Companies.
All revenue and capital items in this statement derive from
continuing operations.
A Statement of Comprehensive Income is not required as all gains
and losses of the Company have been reflected in the above
statement.
Balance Sheet
At 31 March 2017 At 31 March 2016
GBP'000 GBP'000
====================================================== ================ ================
Fixed assets
Investments held at fair value through profit or loss 5,298,338 3,922,124
Current assets
Debtors 16,293 4,051
Cash and cash equivalents 76,643 43,973
====================================================== ================ ================
92,936 48,024
====================================================== ================ ================
Creditors
Amounts falling due within one year (367,973) (303,486)
====================================================== ================ ================
Net current liabilities (275,037) (255,462)
------------------------------------------------------ ---------------- ----------------
Total assets less current liabilities 5,023,301 3,666,662
Creditors
Amounts falling due after more than one year (149,710) (209,218)
====================================================== ================ ================
4,873,591 3,457,444
====================================================== ================ ================
Capital and reserves
Called up share capital 71,086 71,086
Capital redemption reserve 19,094 19,094
Capital reserve 4,754,597 3,313,502
Revenue reserve 28,814 53,762
====================================================== ================ ================
Shareholders' funds 4,873,591 3,457,444
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at book)* 358.7p 263.4p
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at fair value)* (note 7) 354.6p 259.2p
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at par)* 359.0p 263.8p
====================================================== ================ ================
Ordinary shares in issue (note 8) 1,358,569,485 1,312,524,485
====================================================== ================ ================
* See Glossary of Terms on page 71 of the Annual Report and Financial Statements.
Statement of Changes in Equity
For the year ended 31 March 2017
Share Capital Shareholders'
capital Capital redemption reserve reserve* Revenue reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 1 April 2016 71,086 19,094 3,313,502 53,762 3,457,444
Net return on ordinary activities
after taxation - - 1,286,103 14,136 1,300,239
Ordinary shares bought back into
treasury (note 8) - - (19,558) - (19,558)
Ordinary shares issued from treasury
(note 8) - - 174,550 - 174,550
Dividends paid during the year (note
5) - - - (39,084) (39,084)
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 31 March 2017 71,086 19,094 4,754,597 28,814 4,873,591
===================================== ======== ========================== ========= =============== =============
For the year ended 31 March 2016
Share Capital Shareholders'
capital Capital redemption reserve reserve* Revenue reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 1 April 2015 71,086 19,094 3,173,033 70,005 3,333,218
Net return on ordinary activities
after taxation - - (36,205) 21,428 (14,777)
Ordinary shares bought back into
treasury (note 8) - - (3,199) - (3,199)
Ordinary shares issued from treasury
(note 8) - - 179,873 - 179,873
Dividends paid during the year (note
5) - - - (37,671) (37,671)
===================================== ======== ========================== ========= =============== =============
Shareholders' funds at 31 March 2016 71,086 19,094 3,313,502 53,762 3,457,444
===================================== ======== ========================== ========= =============== =============
* The Capital Reserve balance at 31 March 2017 includes
investment holding gains of GBP2,647,822,000 (31 March 2016 - gains
of GBP1,533,836,000).
Cash Flow Statement
Year to Year to
31 March 2017 31 March 2016
GBP'000 GBP'000 GBP'000 GBP'000
================================================== ===================== ====================
Cash flows from operating activities
================================================== =========== ======== ========= =========
Net return on ordinary activities before taxation 1,301,960 (13,920)
Net (gains)/losses on investments (1,354,245) 6,647
Currency losses 42,958 7,212
Finance costs of borrowings 19,347 18,272
Overseas withholding tax refunded 124 935
Overseas withholding tax incurred (1,755) (1,792)
Changes in debtors and creditors 443 (216)
================================================== =========== ======== ========= =========
Cash from operations 8,832 17,138
Interest paid (19,484) (18,422)
================================================== =========== ======== ========= =========
Net cash outflow from operating activities (10,652) (1,284)
================================================== =========== ======== ========= =========
Cash flows from investing activities
Acquisitions of investments (723,418) (619,851)
Disposals of investments 686,952 445,699
Realised currency gain 6,927 3,848
================================================== =========== ======== ========= =========
Net cash outflow from investing activities (29,539) (170,304)
================================================== =========== ======== ========= =========
Equity dividends paid (39,084) (37,671)
Ordinary shares bought back into treasury (19,574) (3,184)
Ordinary shares sold from treasury 169,422 179,873
Bank loans repaid (37,903) (111,963)
Bank loans drawn down - 111,963
================================================== =========== ======== ========= =========
Net cash inflow from financing activities 72,861 139,018
================================================== =========== ======== ========= =========
Increase/(decrease) in cash and cash equivalents 32,670 (32,570)
Cash and cash equivalents at start of period 43,973 76,543
================================================== =========== ======== ========= =========
Cash and cash equivalents at end of period* 76,643 43,973
================================================== =========== ======== ========= =========
* Cash and cash equivalents represent cash at bank and short
term money market deposits repayable on demand.
Notes to the Financial Statements
1. The Financial Statements for the year to 31 March 2017 have been prepared in accordance with
FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on
the basis of the accounting policies set out below which are unchanged from the prior year
and have been applied consistently. The Company has early adopted the amendments to Section
34 of FRS 102 regarding fair value hierarchy disclosures.
===========================================================================================================
2. Income Year to Year to
31 March 31 March
2017 2016
GBP'000 GBP'000
================================================================== ================= ====================
Income from investments and interest receivable 27,752 32,673
Other income 44 237
====================================================================== ================= ====================
27,796 32,910
====================================================================== ================= ====================
3. Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been
appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries.
Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford
& Co. The Investment Management Agreement sets out the matters over which the Managers have
authority in accordance with the policies and directions of, and subject to restrictions imposed
by, the Board. The Investment Management Agreement is terminable on not less than six months'
notice. The annual management fee for the year to 31 March 2017 was 0.30% of total assets
less current liabilities (excluding short term borrowings for investment purposes), calculated
quarterly. With effect from 1 April 2017 the annual management fee is 0.30% on the first GBP4
billion of total assets less current liabilities (excluding short term borrowings for investment
purposes) and 0.25% thereafter, calculated quarterly.
===========================================================================================================
4. Net Return per Ordinary Share Year to Year to
31 March 31 March
2017 2016
GBP'000 GBP'000
========================================================== ====== ================= ====================
Revenue return on ordinary activities after taxation 14,136 21,428
Capital return on ordinary activities after taxation 1,286,103 (36,205)
============================================================== ====== ================= ====================
Total net return 1,300,239 (14,777)
============================================================== ====== ================= ====================
Weighted average number of ordinary shares in issue 1,321,667,362 1,290,467,928
====================================================================== ================= ====================
Net return per ordinary share figures are based on the above totals of revenue and capital
and the weighted average number of ordinary shares (excluding treasury shares) in issue during
the year. There are no dilutive or potentially dilutive shares in issue.
5. Ordinary Dividends 2017 2016 2017 2016
GBP'000 GBP'000
========================================================== ====== ================= ======== ==========
Amounts recognised as distributions in the year:
Previous year's final (paid 4 July 2016) 1.58p 1.55p 20,795 19,758
Interim (paid 2 December 2016) 1.39p 1.38p 18,289 17,913
============================================================== ====== ================= ======== ==========
2.97p 2.93p 39,084 37,671
============================================================== ====== ================= ======== ==========
Also set out below are the total dividends paid and proposed in respect of the financial year,
which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010
are considered. The revenue available for distribution by way of dividend for the year is
GBP14,136,000 (2016 - GBP21,428,000).
2017 2016 2017 2016
GBP'000 GBP'000
========================================================== ====== ================= ======== ==========
Dividends paid and payable in respect of the year:
Interim dividend per ordinary share (paid 2 December 2016) 1.39p 1.38p 18,289 17,913
Proposed final dividend per ordinary share (payable 3 July
2017) 1.61p 1.58p 21,873 20,738
============================================================== ====== ================= ======== ==========
3.00p 2.96p 40,162 38,651
============================================================== ====== ================= ======== ==========
If approved the final dividend will be paid on 3 July 2017 to all shareholders on the register
at the close of business on 9 June 2017. The ex-dividend date is 8 June 2017. The Company's
Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend
is 12 June 2017.
===========================================================================================================
6. Creditors falling due within one year include drawings under the following borrowing facilities:
Borrowing facilities at 31 March 2017
A 1 year US$165 million revolving loan facility has been arranged with The Royal Bank of Scotland
plc.
A 2 year US$200 million revolving loan facility as been arranged with National Australia Bank
Limited.
A 3 year US$85 million loan facility has been arranged with The Royal Bank of Scotland plc.
At 31 March 2017 drawings were as follows:
The Royal Bank of Scotland plc US$165 million (revolving facility) at an interest rate (at
31 March
2017) of 1.525% per annum.
US$85 million at an interest rate of 1.945% per annum.
National Australia Bank US$200 million (revolving facility) at an interest rate (at 31 March
2017) of 1.792% per annum.
At 31 March 2016 drawings were as follows:
The Royal Bank of Scotland plc US$165 million (revolving facility) at an interest rate (at
31 March
2016) of 1.1169% per annum.
US$85 million at an interest rate of 1.945% per annum (included in
amounts due after more than one year).
State Street Bank and Trust Company US$50 million at an interest rate of 1.70% per annum.
National Australia Bank Limited US$200 million at an interest rate of 1.43% per annum.
During the year the US$50 million 2 year loan with State Street was repaid. The US$165 million
1 year revolving loan with The Royal Bank of Scotland plc ('RBS') was refinanced with a US$165
million 1 year revolving loan from RBS.
The US$200 million 2 year loan with National Australia Bank ('NAB') was repaid and refinanced
with a revolving US$200 million 2 year loan from NAB.
Subsequent to the year end, on 6 April 2017, the Company issued the following private placement
unsecured loan notes:
3/4 GBP45 million at a coupon of 3.05% maturing on 7 April 2042.
3/4 GBP30 million at a coupon of 3.30% maturing on 6 April 2044.
3/4 GBP30 million at a coupon of 3.12% maturing on 6 April 2047.
A further unsecured loan note was agreed for funding on 30 September 2020 to refinance the
GBP20 million 8-14% stepped interest debenture stock maturing on 30 September 2020:
3/4 GBP20 million at a coupon of 3.65% maturing on 6 April 2044.
Additionally, the US$165 million 1 year revolving loan with RBS was repaid on 11 April 2017
and replaced with a US$40 million 1 year revolving loan with RBS.
-----------------------------------------------------------------------------------------------------------
7. The fair value of borrowings at 31 March 2017 was GBP566,251,000 (2016 - GBP553,646,000).
Net asset value per share (after deducting borrowings at fair value) was 354.6p (2016 - 259.2p).
-----------------------------------------------------------------------------------------------------------
8. 2016 2015
Number of shares Number of shares
========================================================== ====== ================= ====================
Share capital: Ordinary shares of 5p each
Allotted, called up and fully paid 1,358,569,485 1,312,524,485
Treasury shares 63,161,395 109,206,395
============================================================== ====== ================= ====================
Total 1,421,730,880 1,421,730,880
============================================================== ====== ================= ====================
The Company's authority permits it to hold shares bought back 'in treasury'. Such treasury
shares may be subsequently either sold for cash (at, or at a premium to, net asset value per
ordinary share) or cancelled. In the year to 31 March 2017 a total of 7,005,000 (2016 - 1,250,000)
ordinary shares with a nominal value of GBP350,000 (2016 - GBP63,000) were bought back at
a total cost of GBP19,558,000 (2016 - GBP3,199,000) and held in treasury. At 31 March 2017
the Company had authority to buy back a further 193,072,120 ordinary shares.
Under the provisions of the Company's Articles the share buy-backs were funded from the capital
reserve.
In the year to 31 March 2017, the Company sold 53,050,000 ordinary shares from treasury at
a premium to net asset value, with a nominal value of GBP2,653,000 raising net proceeds of
GBP174,550,000 (31 March 2016 - 68,100,000 ordinary shares raising net proceeds of GBP179,873,000).
At 31 March 2017 the Company had authority to issue or sell from treasury a further 83,302,448
ordinary shares.
===============================================================================================================
9. Transaction costs on purchases amounted to GBP261,000 (2016 - GBP275,000) and transaction
costs on sales amounted to GBP312,000 (2016 - GBP325,000).
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