TIDMSMT
RNS Number : 1463A
Scottish Mortgage Inv Tst PLC
24 May 2019
Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Regulated Information Classification: Annual Financial and Audit
Reports
Annual Financial Report
This is the Annual Financial Report of Scottish Mortgage
Investment Trust PLC as required to be published under DTR 4 of the
UKLA Listing Rules.
The financial information set out in this Annual Financial
Report does not constitute the Company's statutory accounts for the
years ended 31 March 2018 or 31 March 2019 but is derived from
those accounts. Statutory accounts for 2018 have been delivered to
the Registrar of Companies, and those for 2019 will be delivered in
due course. The auditor has reported on those accounts; the reports
were (i) unqualified, (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying their report other than the emphasis of matter -
revision of disclosure note, included within the unqualified audit
opinion for the year ended 31 March 2018, and (iii) did not contain
a statement under section 498 (2) or (3) of the Companies Act
2006.
The Annual Report and Financial Statements for the year ended 31
March 2019, including the Notice of Annual General Meeting, has
been submitted electronically to the National Storage Mechanism and
will shortly be available for inspection at
http://www.morningstar.co.uk/uk/NSM and is also available on
Scottish Mortgage's page of the Baillie Gifford website at:
www.scottishmortgageit.com
Neither the contents of the Managers' website nor the contents
of any website accessible from hyperlinks on the Managers' website
(or any other website) is incorporated into, or forms part of, this
announcement.
Baillie Gifford & Co Limited
Company Secretaries
24 May 2019
Chairman's Statement
Corporate Strategy
The Board and Managers focus on pursuing a truly distinctive
global investment proposition, working to maximise the Company's
competitive advantages. In a frantic world, obsessed with
predicting the next 'thing' which might go wrong, Scottish
Mortgage's consistent long term approach of patiently investing in
outstanding growth businesses across the globe, whether those
businesses are public or private, continues to set it apart.
Performance
The Managers and the Board believe strongly in the advantages of
being very clear as to the investment proposition that Scottish
Mortgage offers shareholders, to ensure everyone's time horizons
are aligned. Scottish Mortgage is not intended to be all things for
all people and is most suited to those who share its patient, long
term approach to investment. We aim to report on Scottish
Mortgage's results in a manner consistent with this approach,
drawing on the lessons from the Managers themselves on the
challenges of being long term shareholders and the dangers of short
term distractions. I am delighted to say that the Company's long
term progress remains impressive.
Long Term Returns
This table shows the five and ten year total returns for the
Company to 31 March 2019, alongside the Association of Investment
Companies (AIC) Global Sector average for comparison.
========================================================================
Total Return(*) (%) Five Years Ten Years
========================================= ============== =============
NAV 152.7 647.4
========================================= ============== =============
Share Price 157.1 737.3
========================================= ============== =============
FTSE All-World Index 79.8 260.8
========================================= ============== =============
Global Sector Average - NAV 94.7 361.0
========================================= ============== =============
Global Sector Average - share
price 110.8 442.5
========================================= ============== =============
Source: AIC/Refinitiv/Baillie Gifford. NAV after deducting
borrowings at fair value(*) .
* Alternative Performance Measure - see Glossary of Terms and
Alternative Performance Measures at the end of this
announcement.
We report performance figures over the 12 month period within
the Annual Report because of the nature of the document and, as it
happens, once again these look attractive. However, granting these
figures undue prominence is not particularly helpful for
shareholders of this Company and I urge readers to pay little heed
to them, whether they be good, bad or indifferent. They reveal
little about the success or otherwise of the Company in pursuing
its aims.
12 Months
Total Return(*) (%) 12 Months
=============================== ==========
NAV 14.6
=============================== ==========
Share Price 16.5
=============================== ==========
FTSE All-World Index 10.7
=============================== ==========
Global Sector Average - NAV 9.9
=============================== ==========
Global Sector Average - share
price 11.7
=============================== ==========
Source: AIC/Refinitiv/Baillie Gifford. NAV after deducting
borrowings at fair value(*) .
* Alternative Performance Measure - see Glossary of Terms and
Alternative Performance Measures at the end of this
announcement.
Progress this year
The considerable growth in the Company's assets over the last
five years was predominantly a result of long-term investment
performance, also augmented by the net new capital raised under the
Company's long-standing liquidity policy'. I am pleased to say
that, during this financial year, over GBP400 million in new
capital has been generated in this way and there were no share
buy-backs undertaken. The Board views this as indicative of the
degree to which Scottish Mortgage's unique investment proposition
continues to resonate with investors. The Board does not anticipate
making any changes to the liquidity policy over the coming
year.
Due to the growth in the assets over time, the Company has also
raised additional long term borrowings; the Board authorised these
in order to maintain what it views as the strategically appropriate
level of gearing in the portfolio. The impact of growth on the
level of gearing is clearly illustrated in the table of the ten
year record of Capital on page 25. In June 2018, Scottish Mortgage
raised a further GBP170 million through additional private
placement agreements at very competitive rates of under 3% per
annum. The Board believes this offers a potential source of
additional value for shareholders over time. The Board will
continue to keep the level of gearing under review.
Earnings and Dividend
Over the year, earnings per share for Scottish Mortgage rose to
1.64 pence, a significant increase of nearly 37% over last year
(1.20 pence). However, this was due to the impact of the change in
accounting treatment to allocate management and finance costs
entirely to capital, highlighted in the previous Annual Report as
well as this year's Interim Report. Previously 75% of the costs had
been allocated against capital, with the remainder set against
income. The basis was revised from the start of this financial year
to reflect better the split of returns in the portfolio between
capital and income. While the overall position for the Company is
not affected, the new allocation policy does mean that more of the
modest income from the portfolio becomes distributable
earnings.
By now there can be few investors who seek a significant
dividend yield from their shares in Scottish Mortgage. The Board
has repeatedly highlighted that, while the formal investment
objective is "to maximise total return ... enabling the Company to
provide capital and dividend growth" shareholders should anticipate
that returns will primarily come through long term capital
appreciation. One common characteristic of many of the businesses
in the portfolio is the retention and investment of most if not all
of their earnings to support future growth. This tends to result in
a relatively low level of dividend income for Scottish
Mortgage.
However the Board acknowledges that a significant number of
shareholders value the modest level of income they do receive and
has therefore maintained the policy of paying a small and growing
dividend. The consistent application of this policy allows those
shareholders to plan their own portfolio income. The Board has
therefore decided not to change the current dividend policy. Those
who do not require the income may elect to reinvest their cash
dividend.
The Board proposes paying a final dividend of 1.74 pence which,
together with the interim dividend, would give a total of 3.13
pence per share for the year. This is an increase of 2% over last
year (3.07 pence). As the Company's revenue earnings for the year
are insufficient to cover the entire dividend, the balance is paid
from realised capital reserves. The Board believes this to be
appropriate, given the relatively immaterial size of the element
paid from capital, compared with the scale of the distributable
capital gains over the long term.
The Board will continue to keep the dividend policy and use of
realised capital reserves under review.
Low Cost
Scottish Mortgage has led the way in providing investors with
access to great growth businesses at a highly competitive cost
level. Through the twin advantages of the Company's own increasing
scale and its enduring relationship with Baillie Gifford, we have
brought the management and administrative costs down over time to
one of the lowest levels available for an actively managed
portfolio. This means that, as a shareholder, you keep more of the
returns generated with your capital. Very unusually, Scottish
Mortgage has also extended this low cost mantra to the unlisted
area of the capital markets. This year I am pleased to report that
the total 'Ongoing Charges Ratio' for Scottish Mortgage remains at
a market leading rate of 0.37%. I am sure you will agree with the
Board that this provides excellent long term value for
shareholders.
Accessibility
Access to most of the private companies held by Scottish
Mortgage came about as a result of the Managers' hard-won global
reputation as genuine long term custodians of businesses and long
established relationships with those at other companies in the
portfolio, built over many years of supportive investment by the
Managers. The Board believes that it would be very hard for others
to replicate this distinguishing feature of Scottish Mortgage and
that the importance of this competitive advantage is often
underestimated. This year, the Managers made their largest single
investment in a private company to date: Chinese financial services
giant, Ant Financial. The opportunity came about as direct result
of the long-standing investment in its parent company, Alibaba. Ant
Financial has the potential to disrupt our own industry and it
reminds us that all companies, including this one, must be prepared
to adapt to the changes taking place.
Diversity and Board Independence
Ensuring that there is real diversity of thought informing the
decisions taken for Company, both at a Board and operational level,
remains just as vital for Scottish Mortgage as for any other
business. Maintaining this will help Scottish Mortgage to continue
to adapt to change so that it can progress through its second
century.
Achieving diversity of thought cannot be reduced to ticking a
selection of predefined boxes. However, the Board and Managers do
consider it more likely to arise within discussions between a group
of individuals who can bring together a mix of experiences, whether
those arise through their variety of professional disciplines,
cultural backgrounds, gender or other factors.
There are currently five Non-Executive Directors on the Board,
three men and two women, none of whom has ever worked for Baillie
Gifford. The Board believes each of the Directors to be independent
of the Managers and considers this to be essential for the delivery
of their individual responsibility to act in the best interests of
shareholders.
Each Director brings a fresh perspective to the Board's central
tasks. Current members include two economists, two chartered
accountants and a professor of clinical medicine. The Board
believes that this broad range of experience is particularly
valuable. When considering any future recruitment requirements, the
Board will seek to draw upon as diverse a pool of candidates as
possible, including men and women from across all ethnic
backgrounds, working in the fields of science and industry as well
as finance, to ensure this remains the case.
Baillie Gifford has always carried out all of the executive
functions of the Company and so Scottish Mortgage itself has no
employees. Baillie Gifford similarly strives for diversity in its
own business and reports on its progress in this area to the Board
every year. The Board also encourages all major third-party
suppliers to the Company to consider such issues and to report
progress on this topic to the Board.
Just as with diversity, the Board does not believe the simple
imposition of a hard limit on the tenure of individual members to
be the best way to ensure ongoing diversity and Board refreshment.
In determining the appropriate length of service for each Director,
including the Chairman, the Board must judge the appropriate
overall balance between the retention of the corporate memory and a
suitable rate of refreshment at any given point in time. The Board
also wishes to retain the flexibility to be able to recruit
outstanding candidates when they become available, rather than
simply adding new Directors based upon a predetermined
timetable.
As the new Corporate Governance Code comes into effect over the
course of this year, the Board will continue to monitor the
development of best practice and align its policies in these
related areas as appropriate, to include a formal statement of
these policies.
This year we will be asking shareholders at the Annual General
Meeting to approve an increase in the total permitted level of
Board remuneration. The Board is not seeking to raise the current
level of remuneration for existing Directors this year; the
increase is to allow sufficient flexibility to recruit new
Non-Executive Directors as and when the Board finds suitable
candidates. It will also provide the necessary headroom to
accommodate modest increases in the Directors' remuneration levels
where appropriate in years to come to enable the Company to
continue to recruit the best candidates.
Shareholders should be reassured that the Board remains mindful
of Scottish Mortgage's low-cost focus and, in common with the
Managers, the members of the Board remain committed to playing
their part in ensuring the maintenance of this key competitive
advantage for shareholders' benefit.
Just as the Managers do with the investee companies, so as a
Board we aim to offer support and a discussion forum for ideas to
help the Managers to maximise their competitive advantages within
the strategic framework set by the Board and to resist the
inevitable countervailing short term pressures of the public
markets. As an independent Board, this is one of the most valuable
tasks we can undertake for shareholders.
Future Prospects
The strengths of Scottish Mortgage's investment strategy tend to
be recognised most clearly when markets focus their attentions on
company fundamentals. However there will almost inevitably also be
periods of broad-based swings in sentiment when that is not the
case and short term views prevail in markets. The Board does not
view such oscillations as a true investment risk for the patient
investor who is prepared to hold steady; it is why we continually
emphasise that this a long term investment.
The ability to cope with uncertainty is key to all investment.
The best long-run risk mitigation strategy remains flexibility.
Scottish Mortgage can invest in companies in any industry or
geography. The overall approach remains consistent, although the
reflection of this within the portfolio evolves through time as
countries, industries and companies themselves change.
Today, Scottish Mortgage has perhaps become best known for its
holdings in the tech giants but investors are cautioned that
defining the portfolio in such terms gives too narrow a perspective
on this Company's future prospects. The portfolio not only includes
retail, advertising and media businesses but also a wide variety of
companies in healthcare, manufacturing, transportation, financial
services, food production and consumption. There will inevitably be
some portfolio companies whose future progress does not match their
ambitions. Yet while this is a clear investment risk, it is
mitigated by the asymmetry of the capital exposure compared with
the potential scale of returns from those which do succeed. As a
Board a key task of ours is therefore to ensure the portfolio is
sufficiently, but not overly, diversified.
The Board and Managers acknowledge the potential risk of changes
to the regulatory environment for some of the larger portfolio
holdings, but believe such risks are manageable as the likelihood,
scope and impact of any such changes may be anticipated to a
reasonable degree. There is also a range of macro level risks
facing Scottish Mortgage, such as issues around global security and
rising geopolitical tensions as a result of the Eastward shift of
economic power and influence. Macro factors such as these have far
reaching, interconnected consequences but are more properly
considered general risks which all investors must acknowledge and
accept. The Board predominantly focuses its efforts on analysing
risk to the extent to which it is possible to predict the potential
impact on individual companies and thereby the Scottish Mortgage
portfolio.
Over time, the Board believes that it is likely that the winners
and losers from the deep structural shifts taking place will become
more apparent but that the transition period will likely be
challenging and more volatile. Once again, shareholders are
cautioned not to expect any attempt by the Board or Managers to
mitigate short term market swings. Scottish Mortgage's advantages
lie elsewhere. The Board will continue to stand resolutely behind
the long term strategy.
Brexit
This year the Company is required to comment on the potential
impact of 'Brexit' on its future prospects. I will refrain from
general speculation or comment as to the political process itself,
simply observing that there are very few UK companies in the
portfolio (5 holdings representing around 3% of assets), most of
which are global, rather than purely domestically focused
businesses.
The greatest exposure of Scottish Mortgage to potential negative
impacts from Brexit is through fluctuations in foreign currency
exchange rates, which impact the sterling value of the Company's
overseas assets. The following observations may therefore be
helpful. The pound has already fallen considerably in recent years
against a range of currencies, most notably the US dollar. A
certain degree of pessimism is therefore already priced in. However
if concerns over Brexit were to weigh further on sterling, this
would actually benefit the portfolio due to its global nature.
Conversely, if Brexit were to be resolved in a more constructive
manner than is currently feared and sterling was to appreciate,
this would be a headwind for our overseas assets; however, this
would likely be offset to a degree by a corresponding improvement
in sentiment and perhaps even in the actual business
environment.
The Managers will not be turning their investment skills to
attempting to predict the byzantine path of Brexit or to express
any views on potential resulting currency market moves. The Board
fully supports them in this and, as always, will encourage them to
remain focused on the area where they have a deep competitive
advantage: finding great businesses with long term growth
prospects.
Shareholders may also wish to note that Scottish Mortgage
already has a long term structural hedge in place for its largest
foreign currency exposure, as it has both US dollar denominated
assets and liabilities. Movements in the dollar/sterling exchange
rate have opposing impacts on these, thereby helping to reduce the
net impact of oscillations in this exchange rate. More broadly, the
long-run impact of currency fluctuations is diversified by the
nature of this portfolio, including as it does many global
companies, listed in a wide range of countries.
Shareholder Engagement
In addition to urging all shareholders to read the Annual
Report, I would also encourage all interested investors to take up
the various opportunities to hear directly from the Managers. This
can be done through the various digital sources which the Managers
provide, as well as through attendance at one of the Scottish
Mortgage Investor Forums which take place throughout the year. The
details of these are available at the back of the Annual Report and
at www.scottishmortgageit.com.
We hope to see as many shareholders as possible at the Scottish
Mortgage AGM on 27 June. Please note that this year the meeting
will be held at a new venue: The Royal College of Physicians of
Edinburgh, 9 Queen Street, Edinburgh, EH2 1JQ.
Finally, I want to thank shareholders for their ongoing support
of Scottish Mortgage and the Managers for all their efforts on
shareholders' behalf. Scottish Mortgage's success very much depends
on the patience of both. I would also like to thank my colleagues
on the Board, our professional advisers and the teams at Baillie
Gifford that provide the support necessary to best look after your
interests as shareholders.
Fiona McBain
Chairman
15 May 2019
Past performance is not a guide to future performance.
See disclaimer at end of this document.
Managers' Review
It's been a year ruled by sound and fury. From trade wars to
Brexit political arguments were rife and unedifying. By October it
was thought that the US economy was overheating and that interest
rates would therefore have to rise substantially. But by our March
year end bond yields had reversed course and fallen sufficiently to
provoke forecasts of imminent recession. Global stock markets have
been equally emotional. We've moved from the worst December falls
in American equity markets since 1931 to their best quarterly
performance for a decade. Not to be outdone Chinese stocks have
risen by almost a quarter in 2019, yet this leaves the Shanghai
market below its level of twelve months ago.
It's far from evident that these levels of volatility signify
much of significance. It may be that the last few months have
provided a useful reminder that it's become hard for the western
world to generate high and sustained nominal growth, let alone
substantial inflation, in an era of technology driven deflation,
economic inequality and demographic decay. It may be that signs of
a revival in animal spirits in China hints that American antagonism
will not reverse the return to Asian leadership that so preoccupies
Washington. But these are but reminders of what has long appeared
probable.
The Evolution of the Scottish Mortgage Portfolio
On the surface there has been little change in Scottish
Mortgage's portfolio in the last twelve months. Of the top thirty
holdings last year we still own 28. The two that we have sold, BASF
and Svenska Handelsbanken, have been replaced because the
opportunities opening up to us in the unquoted realm seem to offer
more compelling growth potential rather than out of disappointment
at their conduct of affairs. Amongst our top ten quoted stocks,
which exert a crucial influence given that they sum to just over
half of the assets, the sole change has been the rise of Netflix at
the cost of Baidu. The former has been driven by stock
outperformance whilst we have reduced Baidu as, for once, we share
the market concern that the group is squandering broader
opportunities in the Chinese internet in the desire for
unduly tight managerial controls.
But beneath the apparent stability there has been a step change
in our commitment to venture capital which we believe matters
considerably for our future prospects, deeply differentiates
Scottish Mortgage from its peers and requires nuanced explanation.
Given that the percentage of assets in our unquoted equities has
only increased from 15% to 17% and the attention we paid to
reporting on these assets at the half-year stage it may appear that
we are becoming excessively focussed on this segment but this
underestimates its structural importance. Currently 34% of the
assets started out as investments in private companies, even if
some of those are now public. Up until now we have been reluctant
to stress this area too heavily because our own education in
venture capital was incomplete. We have now become more convinced
in our abilities and advantages in this comparatively new and
different area. In fact we're thrilled with what we have learnt.
Our opportunity is greater than we initially perceived. It's our
responsibility to take advantage of this favourable combination of
circumstances.
The starting point is that we have outstanding access to
unquoted companies across the world. This may be illustrated by
some of our new purchases in the last twelve months. The only
unquoted holding amongst our top ten overall is Ant Financial,
which amongst other attributes runs both Alipay, the largest global
mobile payments platform and Yu'e Bao, the world's largest money
market fund. Our access came about through our faithful ownership
of Ant's parent Alibaba from the days it too was a private company.
Similarly our recent purchase of a holding in Space X would have
been unimaginable without our patient, controversial and unashamed
backing of Tesla. Perhaps we need to move on from pride in being a
rare truly global fund to embarrassment at being so limited in our
ambitions.
But lest it be thought that our unquoted portfolio is solely a
reflection of our committed ownership of public companies it may be
worth citing another area where we have substantially increased our
exposure in the past year. This is the crossover between genomics
and large scale, but individual, data observation in healthcare.
Although Flatiron, one of our initial forays in this direction, was
purchased by Roche in early 2018 its continued progress illustrates
the reality of clinical utility in this area. We've added holdings
in Tempus and Recursion that are emblematic of accelerated efforts
and medical hope through such techniques.
Our purpose in unquoted equities goes further than obtaining
access to a new universe of opportunity for our shareholders. We
are doing so at a cost that is structurally lower than that
available elsewhere. We ask no higher fee for incorporating
unquoted equities. The overall ongoing charges of 0.37% compares
with a still normal level of 2% and 20% carried interest for
venture capital funds. This matters to us and we hope to our
shareholders.
Our appeal to companies is equally distinctive. Most venture
capitalists demand an exit as their funds near the end of their ten
year life. In turn many companies seek to go public to satisfy this
need for liquidity. We feel no need to encourage companies to move
to an Initial Public Offering prematurely. But if an IPO is the
eventual outcome then our preference, subject to business progress,
is to buy more shares at that stage both for Scottish Mortgage and
frequently for other portfolios managed by Baillie Gifford that are
unable to make investments until a company is public.
This willingness to own companies regardless of their status as
private for the long term, on the verge of an IPO, or as fully
fledged public companies is a cornerstone of our policy. We believe
it is a damaging narrowing of the necessarily limited opportunity
set of potentially great growth stocks to confine ourselves to
public companies at a time when the necessity to be quoted is
unclear and the pressures of being so all too evident. As owners we
are structurally neutral as to the best status whilst listening to
the arguments for each unique company in which we invest. Whatever
the conclusion we try to bring attitudes more typical of venture
capitalism to all our investments. We believe that patient support
- especially at the inevitable moments of struggle - is better than
hurried exit. We believe that our success in quoted as well as
unquoted stocks will continue to be dependent on a small number of
extreme winners rather than a parade of the slightly above
average.
Growth Investing
Whilst we aspire to special, potentially unique, advantages in
unquoted equities our approach to all our investing is consistent
and in line with our Core Beliefs as set out once again on page 15
of the Annual Report and Financial Statements. Plainly these
contentions are based on our convictions around extreme outcomes
and the attractions of high growth investing.
It has been an investment commonplace for long decades that
growth investing is a chimera. Value investing, especially as
articulated by Warren Buffett, has risen to the status of the one
true faith. Yet over the last decade growth indices have
substantially outperformed their value counterparts. Moreover this
trend has principally been driven by the shares of a cohort of
major internet platforms that have defied all predictions of doom
based on the strains of growth from an already large base or
assumptions of a short competitive advantage period.
What is critical now is to analyse whether this pattern of the
last decade is just a chance occurrence, defying eternal verities,
or whether it is the outcome of structural changes in corporate
affairs and economic structures that find their natural echo in
stock markets. We contend that it is the latter. There were two
central reasons why the broad genre of value investing outperformed
growth in the past. The first was that for all the vicissitudes of
cycles and products over time average companies survived and
endured. Now they die. Their demise is usually at the hands of
technologically driven business models.
Secondly, growing companies did not scale satisfactorily.
Returns tended to decline as complexity and asset bases grew in
search of increasingly marginal customers. Compounding growth was
therefore both hard and dragged down profitability. But in
increasing portions of the modern economy this is no longer true.
Instead the pattern of increasing returns to scale is more and more
evident. Ultimately this isn't hard to understand: for a software
or internet company the initial product introduction is expensive
and success uncertain but at scale each new customer is often close
to costless after adoption and profitability surges. Gaining new
customers frequently becomes easier as network effects prevail. In
retrospect investors ought to have grasped the dawning of a new age
as long as thirty years ago. This model was pioneered at ever
increasing scale by Microsoft. It's yet to be destroyed there
despite substantial managerial missteps or the extraordinary size
of the company.
Far from increasing returns to scale being a temporary and
limited facet of the economic conditions of today we suspect that
such characteristics will persist and subsume ever increasing areas
of the global economy. Healthcare and transportation may be the
next sectors to be transformed in this manner as their own forms of
data and software emerge. Traditional models will find it hard to
cope with such revolutions. More and more of the traditional giants
of the world economy and the value universe will therefore fail.
They will not revert to the mean as has been the assumption.
Future Prospects
It's traditional to end reports such as this with a list of
events and conundrums that preoccupy headline writers and then to
move on to a prediction as to the market response over the next
year.
We shouldn't be tempted by either habit. There will always be
difficulties and uncertainties. Mostly they pass. They are then
succeeded by others that appear equally worthy of fascinated minute
by minute attention. But it is the underlying rhythm of scientific
advance, of increased knowledge on a global scale and the
associated development of great business models that ultimately
powers sustainable increases in the prices of special equities.
This process requires decades. In any twelve month period news flow
and emotions will contribute to unknowable outcomes. If we are to
be of use to our shareholders then we need to concentrate on the
beneficial trends of decades not the specifics of the current
preoccupations of the moment.
James Anderson
A Complexified World
There was a media frenzy earlier this year when Amazon CEO Jeff
Bezos published details of an attempt to blackmail him with stolen
photographs. In a blog post, Bezos suggested that his ownership
of the Washington Post was a 'complexifier' leading one critic
to suggest he should have engaged an editor and that the word
'complicating' would have done. It is dangerous to criticise a
genius and it seems to me that Bezos' quixotic use of language
was justified. The situation was not complicated. It was complex. I
would like to explain the distinction and why it matters.
Complex systems are transforming our world and driving a process
of accelerating change with big implications for investors.
Companies that have relied on established market structures to
extract high prices from their customers (for example broadcasters,
consumer goods or oil companies) are likely to face great
challenges. Those that earn their revenues by facilitating
connections and taking a share of the value they create for their
customers are in a much stronger position.
Complicated problems are hard to solve but often can be
addressed with formulae, rules and processes. Many of today's
hierarchical institutions were created to solve complicated
problems. However, approaches that work for complicated problems
don't work well with complex problems. Complex problems arise when
a system has many connected parts which interact with one another.
Our climate is a complex system, as is the human brain or our
transportation network. Such systems involve too many unknowns and
too many interrelated factors to be reduced to rules and processes.
They behave in ways that are hard to predict even when you know a
great deal about the individual components. Connections
dramatically change the way the individual components of a network
behave.
The explosion in the number of connected devices is leading to
fundamental change in our society and our economy. This deeper
level of connection makes us all part of a complex network. It is
changing the way we behave as citizens, as consumers and as
workers. Connection creates big new opportunities and we have seen
phenomenal growth in social networks, ride-sharing companies and
cloud computing. At the same time, it creates threats that our
society is ill-equipped to counter from hacking and information
theft through to terrorist infrastructure. The shape of our global
network is evolving rapidly and there is still much that is unknown
but those that understand and can influence this development are
likely to possess significant advantage.
The networks we interact with on a daily basis accelerate the
pace of our lives. In a networked world, having the closest and
fastest connections is valuable. This creates a self-reinforcing
drive towards ever greater speed. Our machines are always on. Ideas
spread almost instantly and new movements grow and evolve in
unexpected ways. The friction that has historically slowed our
access to information is being removed and we are increasingly
intolerant of barriers to speed.
Consequently, our political and military institutions are
creaking. They are failing to address the implications of vast
connected networks for nationalism and geopolitics, inequality of
every kind, terrorism or climate change. Many of the large
corporate institutions in which billions of pounds of savings are
invested face similar threats as they fail to comprehend the
rapidly changing expectations of their users and partners.
It is not just humans who are being connected. Billions of
sensors are giving our computer networks an innate awareness of
what is going on in the world around them. The power of connected
computers has ushered in a new era of Artificial Intelligence,
allowing machines to turn awareness into actionable insights. The
applications of such collective intelligence will have profound
effects on our society and we must absorb these changes at ever
faster speeds. The next ten years will bring self-driving cars.
Drones will take on many roles now carried out by human workers.
Computational biology will transform our understanding of disease.
We will synthesise biology and use it in our manufacturing
processes. More work must be done to understand the consequences of
this progress and also to limit the less appealing aspects.
An inherent feature of a complex system is that there is no
permanent equilibrium. The state of the system is constantly
changing. We can no longer expect that market structures will
endure indefinitely, that corporate advantages will persist or that
consumers will behave in a predictable way. Instead a position of
advantage within the network becomes a more important source of
competitive edge, as does the institutional ability to adapt
quickly to a changing environment. We are often asked about
Scottish Mortgage's exposure to Technology or to Emerging Markets
(both unhelpful groupings advanced by the manufacturers of stock
market indices). When 1.4bn Chinese consumers and entrepreneurs are
milliseconds away it surely makes little sense to segregate the
world by geography? Similarly, networks affect every company, not
just the subset that are deemed to be 'Technology Companies'. It is
far more relevant to distinguish between those that have understood
network power and those that have not.
It is obvious that a small handful of internet companies have
understood the power of networks. Microsoft, Alphabet and Facebook
between them have bought and built twelve products with more than a
billion users. Tencent and Alibaba are not far behind. These
products become more appealing to each user as the total number of
users grows. This makes rival services unlikely. The companies have
become more profitable and often grown faster as they have got
bigger. They are gatekeepers to networks which allows them to build
any number of profitable and useful services. We think the
potential of several such companies is still only dimly perceived
and a long way from being reflected in valuations. Regulators
across the globe are scrambling to understand but until they grasp
the network-centric nature of these companies' market position they
will find it hard to exert influence.
There are many other implications of a networked society and we
spend much of our time trying to understand the entrepreneurs and
businesses that are shaping its development. Our holdings in Airbnb
and Lyft are demonstrating the power of this model in
reconstructing the accommodation and transportation markets. So too
are Delivery Hero, Grubhub and Meituan in the food industry.
Transferwise matches buyers and sellers of currency through its
network avoiding the need for money to cross borders and incur the
associated fees. Most of the new successful businesses we look at
are harnessing network effects to create new markets or disrupt
existing industries.
It isn't necessary to be a young company to encounter and
exploit the opportunities presented by a connected world. When
established businesses have leadership and vision the results they
can achieve are remarkable. Kering is a fine example. Its Gucci
subsidiary has doubled sales in the past two years through careful
attention to its brand and the way it uses technology to build deep
connections with its customers. Conversely, for those that get it
wrong, the consequences are immediate and can be hugely
damaging.
The impact of greater complexity and the power of networks is
all around us. Mr Bezos understood this long before most people. As
investors, we must simultaneously absorb and understand the
implications of accelerating connectedness whilst stepping back
from it to seek space for reflection. We can see the malign
consequences of ever-faster networks in our stock markets and the
shortening time-horizons this inflicts on corporate management
teams. Our aim remains patiently to support the companies we think
can navigate this complex world over the long term.
Tom Slater
Thirty largest holdings and twelve month performance at 31 March
2019
Fair value 31 March Fair value
2019 % of Absolute performance Contribution to absolute performance(#) 31 March 2018
Name Business GBP'000 total assets % % GBP'000
============== ================= =================== ============== ==================== ======================================= ==============
Online retailer
and cloud
Amazon.com computing 778,843 9.6 32.4 3.0 661,339
Biotechnology
Illumina equipment 613,045 7.5 41.5 2.3 433,312
Online retailing
Alibaba Group and financial
(P) services 532,441 6.5 7.0 1.0 497,643
Tencent
Holdings Internet services 531,946 6.5 (4.9) (0.1) 500,986
Electric cars,
autonomous
driving and
Tesla Inc solar energy 428,304 5.3 13.2 0.9 324,503
Luxury goods
producer and
Kering retailer 299,236 3.7 41.4 1.7 231,740
Subscription
service for TV
Netflix shows and movies 254,115 3.1 30.0 1.0 195,159
Luxury
Ferrari automobiles 246,825 3.0 21.2 0.7 195,553
ASML Lithography 233,003 2.9 3.5 0.1 207,437
Ant Online financial
International services
Limited(u) platform 191,858 2.4 3.0(++) 0.1 -
Global clothing
Inditex retailer 178,783 2.2 4.0 0.3 239,840
Spotify Online music
Technology streaming
SA(P) service 176,293 2.2 24.4 0.1 62,505
Online search
Baidu engine 141,665 1.7 (20.5) (0.5) 265,268
Ctrip.com Travel agent 138,253 1.7 0.9 0.1 137,095
Holding company
for Google and
associated
Alphabet ventures 132,109 1.6 22.6 0.4 128,777
Online food
Delivery Hero delivery service 124,960 1.5 (19.1) (0.6) 67,124
Enterprise
information
Workday technology 124,657 1.5 63.4 0.8 93,244
Provider of
biotechnological
Bluebird Bio products and
Inc services 123,604 1.5 (0.8) 0.1 124,535
Nvidia Visual computing 119,284 1.5 (16.3) (0.5) 143,346
International
online clothing
Zalando retailer 116,867 1.4 (22.9) (0.4) 151,205
Intuitive
Surgical Surgical robots 106,974 1.3 48.9 0.6 89,464
Social networking
Facebook site 105,764 1.3 11.8 0.2 130,886
Online money
Transferwise transfer
Ltd (u) * services 93,173 1.1 124.0 0.6 41,601
Housing
Development
Finance Indian mortgage
Corporation provider 92,568 1.1 10.4 0.2 84,710
Ridesharing
Lyft Inc(P) services 92,448 1.1 116.1 0.6 35,708
Designs and
manufacturers
electric and
autonomous
NIO Inc(P) vehicles 87,726 1.1 22.0 (0.2) 17,822
Investment
Kinnevik company 84,359 1.1 (15.9) (0.2) 108,283
Analyses plant
Indigo microbiomes to
Agriculture increase crop
Inc (u) * yields 77,425 1.0 124.3 0.4 24,950
Atlas Copco Engineering 71,839 1.0 (5.9) (0.1) 106,975
Meituin Local services
Dianping(P) aggregator 67,254 0.9 27.1 - 26,774
============== ================= =================== ============== ==================== ======================================= ==============
6,365,621 78.3
================================ =================== ============== ==================== ======================================= ==============
Absolute performance (in sterling terms) has been calculated on
a total return basis over the period 1 April 2018 to 31 March 2019.
For a definition of the total return see Glossary of Terms and
Alternative Performance Measures at the end of this
announcement.
(#) 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 over the period.
(++) Figures relate to part period returns where the investment
has been purchased in the period.
* Multiple lines of stock held. Holding information represents
the aggregate of all lines of stock.
(u) Denotes unlisted investment.
(P) Denotes listed security previously held in the portfolio as an unlisted security.
Source: Baillie Gifford/StatPro and underlying data providers.
See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Long Term Investment
Portfolio Holding Periods as at 31 March 2019
=============================================
More Than 5 Years 2-5 Years Less Than 2 Years
Name % of Name % of Name % of
total total total
assets assets assets
========================= ======== ======================== ======== ========================== ========
Ant International
Amazon.com(10) 9.6 Netflix 3.1 (u) 2.4
Spotify Technology
Illumina 7.5 SA(P) 2.2 Delivery Hero 1.5
Alibaba Group(P) 6.5 Bluebird Bio Inc 1.5 Lyft Inc(P) 1.1
Tencent Holdings(10) 6.5 Nvidia 1.5 NIO(P) 1.1
Indigo Agriculture
Tesla Inc 5.3 Zalando 1.4 (u) 1.0
Kering(10) 3.7 Transferwise (u) 1.1 Carbon (u) 0.7
Ferrari 3.0 Meituan Dianping*(P) 0.9 Zipline (u) 0.7
ASML 2.9 Tableau Software 0.8 Rubius Therapeutics(P) 0.6
Uptake Technologies
Inditex 2.2 Grail (u) 0.8 (u) 0.6
Baidu(10) 1.7 Orchard Therapeutics(P) 0.8 Tanium (u) 0.6
Vir Biotechnology
Ctrip.com 1.7 Anaplan(P) 0.7 (u) 0.6
Space Exploration
Alphabet(10) 1.6 Rocket Internet 0.7 Technologies (u) 0.6
Workday 1.5 Denali Therapeutics(P) 0.7 Shopify 0.5
You & Mr Jones Tempus Labs Inc
Intuitive Surgical 1.3 (u) 0.6 (u) 0.5
Essence Healthcare
Facebook 1.3 (u) 0.6 Heartflow (u) 0.5
Housing Development
Finance Ginkgo Bioworks
Corporation(10) (u) 0.5 Pinduoduo 0.5
Recursion Pharmaceuticals
1.1 Funding Circle(P) 0.5 (u) 0.4
The Production Board
Kinnevik 1.1 HelloFresh(P) 0.4 (u) 0.4
JAND Inc (Warby
Atlas Copco(10) 1.0 Parker) (u) 0.4 Bolt Threads (u) 0.4
Renishaw 0.7 Auto1 (u) 0.4 Eventbrite(P) 0.3
Full Truck Alliance
Alnylam Pharmaceuticals 0.3 Thumbtack (u) 0.3 (u) 0.3
Innovation Works
Development
Fund (u) SurveyMonkey(P) 0.3 Affirm (u) 0.3
Palantir Technologies
0.3 (u) 0.3 Grubhub 0.3
WI Harper Fund
VII (u) 0.1 CureVac (u) 0.3 Clover Health (u) 0.2
KSQ Therapeutics
Level E Maya Fund 0.1 Airbnb (u) 0.3 (u) 0.2
Slack Technologies
Unity Biotechnology(P) 0.2 (u) 0.1
Intarcia Therapeutics Sana Biotechnology
(u) 0.2 (u) 0.1
ZocDoc (u) 0.1 ARCH Ventures Fund <0.1
X (u)
Udacity (u) 0.1 ARCH Ventures Fund <0.1
X Overage (u)
Sinovation Fund
III (u) 0.1
ARCH Ventures
Fund IX (u) 0.1
WI Harper Fund
VIII (u) 0.1
Home24(P) 0.1
========================= ======== ======================== ======== ========================== ========
Total 61.0 Total 22.1 Total 16.5
========================= ======== ======================== ======== ========================== ========
(u) Denotes unlisted security.
(P) Denotes listed security previously held in the portfolio as an unlisted security.
(10) Denotes security held for more than 10 years.
* Previously known as Internet Plus Holdings.
Net liquid assets represent 0.4% of total assets. See Glossary
of Terms and Alternative Performance Measures on pages at the end
of this announcement.
List of investments at 31 March 2019
====================================
Fair Value at 31 March
2019 % of Contribution to absolute performance(*) Fair value 31 March 2018
Name Business GBP'000 total assets % Notes GBP'000
================= ==================== ====================== ============== ======================================= ============== ========================
Online retailer and
Amazon.com cloud computing 778,843 9.6 3.0 661,339
Biotechnology
Illumina equipment 613,045 7.5 2.3 433,312
Online retailing and
Alibaba Group (P) financial services 532,441 6.5 1.0 497,643
Tencent Holdings Internet services 531,946 6.5 (0.1) 500,986
Electric cars,
autonomous driving Significant
Tesla Inc and solar energy 428,304 5.3 0.9 addition 324,503
Luxury goods
producer and
Kering retailer 299,236 3.7 1.7 231,740
Subscription service
for TV shows and
Netflix movies 254,115 3.1 1.0 195,159
Ferrari Luxury automobiles 246,825 3.0 0.7 195,552
ASML Lithography 233,003 2.9 0.1 207,437
Ant International
Limited Class C Online financial New
Ord.(u) services platform 191,858 2.4 0.1 purchase -
Global clothing Significant
Inditex retailer 178,783 2.2 0.3 reduction 239,840
Significant
Spotify addition
Technology Online music following
SA(P) streaming service 176,293 2.2 0.1 IPO 62,505
Significant
Baidu Online search engine 141,665 1.7 (0.5) reduction 265,268
Ctrip.com Travel agent 138,253 1.7 0.1 137,095
Google search engine
and associated
Alphabet ventures 132,109 1.6 0.4 128,777
Online food delivery Significant
Delivery Hero service 124,960 1.5 (0.6) addition 67,124
Enterprise
information Significant
Workday technology 124,657 1.5 0.8 reduction 93,244
Provider of
biotechnological
products and
Bluebird Bio Inc services 123,604 1.5 0.1 124,535
Nvidia Visual computing 119,284 1.5 (0.5) 143,346
International online
Zalando clothing retailer 116,867 1.4 (0.4) 151,205
Intuitive Significant
Surgical Surgical robots 106,974 1.3 0.6 reduction 89,464
Social networking Significant
Facebook site 105,764 1.3 0.2 reduction 130,886
Transferwise Ltd
Series D Pref. Online money
(u) transfer service 45,327 0.6 0.3 20,238
Transferwise Ltd Online money
Series Ord. (u) transfer service 19,266 0.2 0.1 8,602
Transferwise Ltd
Series A Pref. Online money
(u) transfer service 10,542 0.1 0.1 4,707
Transferwise Ltd
Series B Pref. Online money
(u) transfer service 9,588 0.1 0.1 4,281
Transferwise Ltd
Series E Pref. Online money
(u) transfer service 5,482 0.1 - 2,448
Transferwise Ltd
Series Seed Online money
Pref. (u) transfer service 2,565 <0.1 - 1,145
Transferwise Ltd
Series C Pref. Online money
(u) transfer service 403 <0.1 - 180
====================== ============== ======================================= ============== ========================
93,173 1.1 0.6 41,601
Housing
Development
Finance Indian mortgage
Corporation provider 92,568 1.1 0.2 84,710
Significant
addition
following
Lyft Inc(P) Ridesharing services 92,448 1.1 0.6 IPO 35,708
Designs and Significant
manufactures addition
electric and following
NIO Inc(P) autonomous vehicles 87,726 1.1 (0.2) IPO 17,822
Kinnevik Investment company 84,359 1.1 (0.2) 108,283
Participated
Indigo Analyses plant in
Agriculture Inc microbiomes to additional
Series D Pref. increase crop funding
(u) yields 55,273 0.7 0.4 round 24,950
Indigo Analyses plant
Agriculture Inc microbiomes to
Series E Pref. increase crop
(u) yields 22,152 0.3 - -
====================== ============== ======================================= ============== ========================
77,425 1.0 0.4 24,950
Sold shares
in Epiroc
received
following
Atlas Copco Engineering 71,839 1.0 (0.1) spin-off 106,975
Significant
addition
Meituin Local services following
Dianping(P) aggregator 67,254 0.9 - IPO 26,774
Significant
Tableau Software Analytics software 67,133 0.8 0.4 addition 33,609
Grail Inc Series Clinical stage
B biotechnology
Pref. (u) company 66,768 0.8 0.2 53,485
Participated
in
additional
funding
round and
increased
holding
Orchard Gene therapy for following
Therapeutics(P) rare diseases 64,778 0.8 0.5 IPO 16,076
Carbon Inc Series Manufactures and
D develops 3D
Pref.(u) printers 36,796 0.4 0.1 28,514
Participated
in
Carbon Inc Series Manufactures and additional
E develops 3D funding
Pref. (u) printers 23,023 0.3 - round -
====================== ============== ======================================= ============== ========================
59,819 0.7 0.1 28,514
Logistics company
that designs,
Zipline manufactures and
International operates drones
Inc Series D to deliver medical
Pref. (u) supplies 30,697 0.4 - -
Logistics company
that designs,
Zipline manufactures and
International operates drones
Inc Series C to deliver medical
Pref. (u) supplies 26,209 0.3 0.2 -
====================== ============== ======================================= ============== ========================
56,906 0.7 0.2 New purchase -
Anaplan Inc Enterprise planning
Common(P) software 56,535 0.7 0.6 14,677
Internet start-up
Rocket Internet factory 54,691 0.7 (0.1) 61,456
Renishaw Electronic equipment 53,663 0.7 (0.1) 65,218
Denali
Therapeutics(P) Biotechnology 51,851 0.7 0.1 40,800
You & Mr Jones
Class A Units
(u) Digital advertising 50,650 0.6 0.2 34,538
Space Exploration Designs,
Technologies manufactures and
Corp launches
Series J Pref. rockets and New
(u) spacecraft 50,502 0.6 - purchase -
Rubius
Therapeutics
Inc(P) Biotechnology 47,558 0.6 0.2 28,863
Uptake
Technologies Designs and develops
Inc Series D enterprise
Pref. (u) software 47,427 0.6 (0.2) 60,814
Provides security
Tanium Inc Class and systems
B management New
Common (u) solutions 46,813 0.6 - purchase -
Essence
Healthcare
Series 3 Pref. Cloud-based health
(u) provider 46,105 0.6 0.2 27,837
Vir Biotechnology Biotechnology
Inc company developing
Series A Pref. anti-infective
(u) therapies 30,697 0.4 0.3 7,200
Participated
Vir Biotechnology Biotechnology in
Inc company developing additional
Series B Pref. anti-infective funding
(u) therapies 15,349 0.2 - round -
====================== ============== ======================================= ============== ========================
46,046 0.6 0.3 7,200
Ginko Bioworks
Inc
Series D Pref. Bio-engineering
(u) company 22,796 0.3 - 20,853
Ginko Bioworks
Inc
Series C Pref. Bio-engineering
(u) company 21,867 0.2 - 21,444
====================== ============== ======================================= ============== ========================
44,663 0.5 - 42,297
Significant
Facilitates loans to addition
small and medium following
Funding Circle(P) enterprises 42,748 0.5 - IPO 25,218
Cloud-based commerce
Shopify platform provider 41,338 0.5 0.2 New purchase -
Offers molecular
diagnostics tests
for cancer
Tempus Labs Inc and aggregates
Series E Pref. clinical oncology New
(u) records 40,849 0.5 0.1 purchase -
Develops software
for cardiovascular
Heartflow Inc disease
Series E diagnosis and
Pref. (u) treatment 40,065 0.5 - 37,423
Pinduoduo Inc Chinese e-commerce 39,711 0.5 0.1 New purchase -
Uses image
Recursion recognition/machine
Pharmaceuticals learning and
Inc automation to
Series C Pref. improve drug
(u) discovery 38,372 0.4 - New purchase -
Significant
HelloFresh(P) Grocery retailer 33,661 0.4 (0.3) addition 44,416
JAND Inc (Warby
Parker)
Series D Pref. Online and physical
(u) glasses retailer 17,087 0.2 - 16,844
JAND Inc (Warby
Parker)
Series A Common Online and physical
(u) glasses retailer 11,019 0.1 - 10,862
JAND Inc (Warby
Parker)
Series E Pref. Online and physical
(u) glasses retailer 4,220 0.1 - 4,094
====================== ============== ======================================= ============== ========================
32,326 0.4 - 31,800
The Production
Board Holding company for
Series A-2 Pref. food technology New
(u) companies 31,925 0.4 - purchase -
Auto1 Group GmbH
Series E Pref. Online retailer of
(u) used cars 31,269 0.4 0.1 21,918
Bolt Threads Inc Natural fibres and
Series fabrics
D Pref. (u) manufacturer 31,182 0.4 0.1 24,950
Thumbtack Inc Online directory
Series G service for local
Pref. (u) businesses 25,791 0.3 - 24,963
Significant
addition
following
SurveyMonkey(P) Online surveys 24,732 0.3 0.2 IPO 10,920
Online ticketing
Eventbrite Inc(P) service 23,924 0.3 - 17,822
Alnylam
Pharmaceuticals Biotechnology 23,459 0.3 (0.1) 27,763
Palantir
Technologies Data integration
Inc Series J software and
Pref.(u) service provider 23,394 0.3 - 22,573
Full Truck
Alliance Ltd
Series A-15 Freight-truck New
Pref.(u) matching platform 23,023 0.3 - purchase -
Innovation Works
Development Fund
(u) Venture capital fund 22,300 0.3 0.1 19,784
Online platform
which provides
Affirm Inc Series lending and
F consumer credit
Pref. (u) services 21,872 0.3 - New purchase -
CureVac AG Series
B
Pref. (u) Biotechnology 21,542 0.3 - 21,918
US online food New
Grubhub services 20,797 0.3 (0.2) purchase -
Online market place
Airbnb Inc Series for travel
E Pref. (u) accommodation 20,648 0.3 - 20,750
Significant
Clinical stage addition
Unity biotechnology following
Biotechnology(P) company 20,003 0.2 (0.3) IPO 25,836
Intarcia
Therapeutics
Inc Convertible Implantable drug Additional
Bond (u) delivery system 11,511 0.1 - investment -
Intarcia
Therapeutics
Inc Series EE Implantable drug
Pref.(u) delivery system 8,039 0.1 (0.1) 16,705
====================== ============== ======================================= ============== ========================
19,550 0.2 (0.1) 16,705
Clover Health
Investments
Series Healthcare insurance
D Pref.(u) provider 19,190 0.2 (0.1) 20,714
KSQ therapeutics
Inc
Series C Pref Biotechnology New
(u) company 19,186 0.2 - purchase -
Online platform for
searching for
doctors and
ZocDoc Inc Series booking
D-2 Pref.(u) appointments 17,492 0.1 - 16,900
Slack
Technologies
Inc Series H Enterprise messaging New
Pref.(u) platform 10,338 0.1 - purchase -
WI Harper Fund
VII(u) Venture capital fund 9,885 0.1 - 7,806
Udacity Inc
Series D
Pref.(u) Online education 9,606 0.1 - 10,155
Sinovation Fund Additional
III(u) Venture capital fund 8,256 0.1 - investment 5,320
Venture capital fund
to invest in
ARCH Ventures biotech Additional
Fund IX(u) start-ups 8,242 0.1 - investment 2,575
WI Harper Fund Additional
VIII (u) Venture capital fund 6,970 0.1 - investment 5,171
Biotechnology
company creating
Sana and
Biotechnology delivering
Inc Series A-2 engineered cells as
Pref.(u) medicine 6,395 0.1 - New purchase -
Online furniture
Home24 AG(P) retailer 5,593 0.1 (0.3) 29,936
Artificial
intelligence based
Level E Maya Fund algorithmic trading 4,846 0.1 - 5,174
Venture capital fund
ARCH Ventures to invest in
Fund biotech
X(u) start-ups 413 <0.1 - New purchase -
Venture capital fund
ARCH Ventures to invest in
Fund biotech
X Overage(u) start-ups 397 <0.1 - New purchase -
================= ==================== ====================== ============== ======================================= ============== ========================
Total Investments 8,098,819 99.6
======================================= ====================== ============== ======================================= ============== ========================
Net Liquid Assets 34,572 0.4
======================================= ====================== ============== ======================================= ============== ========================
Total Assets 8,133,391 100.0
======================================= ====================== ============== ======================================= ============== ========================
Listed Unlisted Unlisted Net liquid
equities Securities Bonds Assets Total
% # % % %
%
31 March
2019 82.2 17.3 0.1 0.4 100.0
---------- ------------ --------- ----------- --------
31 March
2018 84.6 15.0 - 0.4 100.0
---------- ------------ --------- ----------- --------
Figures represent percentage of total assets.
* Contribution to absolute performance has been calculated on a
total return basis over the period 1 April 2018 to 31 March 2019.
For the definition of total return see Glossary of Terms and
Alternative Performance Measures at the end of this
announcement.
Significant additions and reductions to investments have been
noted where the transaction value is at least a 20% movement from
the value of the holding at 31 March 2018. The change in value over
the year also reflects the share price performance and the movement
in exchange rates.
(u) Denotes unlisted security.
(P) Denotes listed security previously held in the portfolio as an unlisted security.
# Includes holdings in preference shares and ordinary shares.
The following investments were completely sold during the
period: BASF, Dropbox, Marketaxess Holdings, Prudential,
Rolls-Royce Group, Svenska Handelsbanken and Under Armour. The
following investments were taken over during the period: Flatiron
Health, Flipkart and Mobike.
Source: Baillie Gifford/StatPro.
Distribution of Assets
At At
31 March 31 March
2019
% 2018
%
=================================== =============== ===============
North America 52.8 48.1
Europe 24.2 27.7
United Kingdom 3.5 2.9
Eurozone 16.6 19.9
Developed Europe (non euro) 4.1 4.9
Asia 23.0 24.2
China 21.9 22.5
India 1.1 1.7
================================== =============== ===============
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:
3/4 the movement in net asset value per ordinary share (after
deducting borrowings at fair value);
3/4 the movement in the share price;
3/4 the movement of net asset value and share price performance compared to the Benchmark;
3/4 the premium/discount (after deducting borrowings at fair value);
3/4 the ongoing charges ratio;
3/4 revenue return; and
3/4 dividend per share.
An explanation of these measures can be found in the Glossary of
Terms and Alternative Performance Measures (APM) at the end of this
announcement.
The one, five and ten year records of the KPIs are shown on
pages 5, 6 and 25 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 and Directors' interests are
detailed in the Directors' Remuneration Report on pages 38 and 39
in 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
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. Dealing
activity and transaction reporting has been further sub-delegated
to Baillie Gifford Overseas Limited.
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 2019 was 0.30% on the first GBP4 billion of total
assets less current liabilities (excluding short term borrowings
for investment purposes) and 0.25% on the remaining assets.
2019 2019 2019 2018 2018 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========== ========= ========= ========= ========= =========
Investment management
fee - 21,879 21,879 4,495 13,484 17,979
======================= ========== ========= ========= ========= ========= =========
During the year to 31 March 2019, as reported in the 2018
Chairman's Statement, the Board determined it more appropriate to
revise the allocation of management and borrowing costs to reflect
better the split of returns between capital and income.
The investment management fee for the year to 31 March 2019 was
charged 100% to capital (year to 31 March 2018 - 25% to revenue and
75% to capital).
Principal Risks
As explained on page 34 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 18 to the Financial Statements on pages 61to 67 of the Annual
Report and Financial Statements. To mitigate these risks, 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 at
least 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
than for listed investments.
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 the ineffective implementation of
an attractive or appropriate strategy, may lead to reduced returns
for shareholders and, as a result, a decreased demand for the
Company's shares. This may lead to the Company's shares trading at
a widening discount to their net asset value. 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.
The Liquidity Policy is set out on page 7 of the Annual Report and
Financial Statements.
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 cyber security incidents. 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
Business Risk Department and a summary of the key points is
reported to the Audit Committee and any concerns investigated.
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 73 of the Annual Report and Financial
Statements and the Glossary of Terms and Alternative Performance
Measures at the end of this announcement.
Political Risk - Political developments are closely monitored
and considered by the Board. The Board continues to monitor
developments as they occur regarding the Government's intention
that the UK should leave the European Union and to assess the
potential consequences for the Company's future activities. Whilst
there remains considerable uncertainty, the Board believes that the
Company's global portfolio, with no significant exposure to the
United Kingdom, positions the Company to be suitably insulated from
Brexit-related risk (see Chairman's Statement above).
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
the Company 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. The Board has considered the
uncertainty arising from the UK's ongoing negotiations to leave the
EU and does not envisage any outcome that would significantly
affect the viability or going concern status of the Company.
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 (above) 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, the existing and
additional private placement loan notes issued during the year and
short term bank loans, the revenue projections, the readily
realisable nature of the listed portfolio which could be sold to
provide funding if necessary and its stable closed ended structure.
Specific leverage and liquidity stress testing was conducted during
the year. The leverage stress testing identified the impact on
leverage in scenarios where gross assets fall by 25% and 50%,
reflecting a range of market conditions that may adversely impact
the portfolio. The liquidity stress testing identified the
reduction in the value of assets that can be liquidated within one
month that would result in the value of those assets falling below
the value of the borrowings. The stress testing did not indicate
any matters of concern.
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 18 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.
The Company has continued to comply with the investment trust
status requirements of section 1158 of the Corporation Tax Act 2010
and the Investment Trust (Approved Company) Regulations 2011.
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 below which assesses the prospects of the
Company over a period of 10 years, that the Company will continue
in operational existence for a period of at least 12 months from
the date of approval of these Financial Statements.
Financial Instruments
As an investment trust, the Company invests in listed and
unlisted securities and makes other investments so as to achieve
its investment objective to maximise total return from a portfolio
of long term investments chosen on a global basis enabling it to
provide capital and dividend growth. 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 24 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.
Cash and Loans, Other debtors
As at 31 March Investments cash equivalents loan notes and creditors Net exposure
2019 GBP'000 GBP'000 and debentures GBP'000 GBP'000
GBP'000
================== ============== =================== ================= ================ ===============
US dollar 5,761,829 28,147 (280,112) (16,854) 5,493,010
Euro 1,346,429 - - 159 1,346,588
Hong Kong dollar 599,200 - - - 599,200
Swedish krona 156,199 - - - 156,199
Indian rupee 92,568 - - - 92,568
Canadian dollar 41,338 - - - 41,338
Total exposure
to
currency risk 7,997,563 28,147 (280,112) (16,695) 7,728,903
Sterling 101,256 7,440 (423,349) (16,680) (298,973)
================== ============== =================== ================= ================ ===============
8,098,819 35,587 (703,461) (1,015) 7,429,930
================== ============== =================== ================= ================ ===============
Cash and Loans, Other debtors
As at 31 March Investments cash equivalents loan notes and creditors Net exposure
2018 GBP'000 GBP'000 and debentures GBP'000 GBP'000
GBP'000
================== ============== =================== ================= ================ ===============
US dollar 4,235,597 25,986 (231,679) (690) 4,029,214
Euro 1,335,236 - - 159 1,335,395
Hong Kong dollar 500,986 - - - 500,986
Swedish krona 333,306 3,798 - - 337,104
Indian rupee 84,710 - - 162 84,872
Total exposure
to
currency risk 6,489,835 29,784 (231,679) (369) 6,287,571
Sterling 156,180 5,190 (254,036) (7,149) (99,815)
================== ============== =================== ================= ================ ===============
6,646,015 34,974 (485,715) (7,518) 6,187,756
================== ============== =================== ================= ================ ===============
Currency Risk Sensitivity
At 31 March 2019, 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
2018.
2019 2018
GBP'000 GBP'000
================== ========= =========
US dollar 274,651 201,461
Euro 67,329 66,770
Hong Kong dollar 29,960 25,049
Swedish krona 7,810 16,855
Indian rupee 4,628 4,244
Canadian dollar 2,067 -
386,445 314,379
================== ========= =========
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
2019 2018
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*
=========================== ========== ========== =========== ========== ========== =================
Cash and short-term
deposits:
Other overseas currencies 28,147 - n/a 29,784 - n/a
Sterling 7,440 0.3% n/a 5,190 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:
2019 2018
GBP'000 GBP'000
====================================== ========= =========
Floating
rate - US$ denominated 280,112 231,679
Fixed rate - Sterling denominated 423,349 254,036
703,461 485,715
====================================== ========= =========
The interest rates of the financial liabilities are disclosed in
notes 11 and 12 on pages 58 and 59 of the Annual Report and
Financial Statements.
Maturity Profile
The maturity profile of the Company's financial liabilities at
31 March was:
2019 2018
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,
debentures and loan
notes 280,112 95,000 325,675* 231,679 95,000 155,675*
Accumulated interest
on loans, debentures
and loan notes to
maturity date 24,680 79,369 184,090 18,799 62,141 91,284
======================= ========= ========= ========== ========= ========= ==========
304,792 174,369 509,765 250,478 157,141 246,959
----------------------- ========= ========= ========== ========= ========= ==========
* Includes GBP675,000 irredeemable debenture stock.
Interest Rate Risk Sensitivity
An increase of 100 basis points in bond yields as at 31 March
2019 would have had no significant impact on the net assets or net
return after taxation (2018 - GBPnil) and would have increased the
net asset value per share (with borrowings at fair value) by 7.68p
(2018 - increased by 2.69p). 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 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 24 of the Annual Report and Financial Statements. In
addition, a geographical analysis of the portfolio, an analysis of
the investment portfolio by broad industrial sector and a list of
the 30 largest investments by their aggregate market value are
contained above.
89.9% (2018 - 91.2%) of the Company's net assets are invested in
quoted investments. A 3% increase in quoted companies equity
valuations at 31 March 2019 would have increased net assets and net
return after taxation by GBP200,405,000 (2018 - GBP169,276,000). A
decrease of 3% would have had an equal but opposite effect.
19.1% (2018 - 16.2%) of the Company's net assets are invested in
unlisted investments. The fair valuation of the unlisted
investments is influenced by the estimates, assumptions and
judgements made in the fair valuation process (see 1(b) on page 51
of the Annual Report and Financial Statements). A sensitivity
analysis is provided below which recognises that the valuation
methodologies employed involve different levels of subjectivity in
their inputs. The sensitivity analysis below applies a wider range
of input variable sensitivity to the multiples methodology as it
involves more significant subjective estimation than the recent
transaction method (the risk of over or under estimation is higher
due to the greater subjectivity involved, for example, in selecting
the most relevant measure of sustainable revenues and identifying
appropriate comparable companies).
As at 31 March 2019
Impact
Valuation Fair Value Key variable input* Variable GBP'000 %
Technique of Investments Input of net
GBP'000 Sensitivity assets
(%)
===================== ================ =============================== ============= ============= =========
Selection of appropriate
benchmark
Selection of comparable
companies
Probability estimation
Recent transaction/ of liquidation event++
Adjusted Application of valuation
recent transaction 1,047,125 basis +/-10 +/-104,713 +/-1.4
Estimated sustainable earnings
Selection of comparable
companies
Application of illiquidity
discount
Probability estimation
of liquidation event++
Application of valuation
Multiples 315,048 basis +/-20 +/-63,010 +/-0.8
Net Asset Application of valuation
Value# 56,463 basis +/-10 +/-5,646 +/-0.1
===================== ================ =============================== ============= ============= =========
Total 1,418,636 +/-173,369 +/-2.3
===================== ================ =============================== ============= ============= =========
As at 31 March 2018
Impact
Valuation Fair Value Key variable input* Variable GBP'000 %
Technique of Investments Input of net
GBP'000 Sensitivity assets
(%)
===================== ================ =============================== ============= ============ =========
Selection of appropriate
benchmark
Selection of comparable
companies
Probability estimation
Recent transaction/ of liquidation event++
Adjusted Application of valuation
recent transaction 748,271 basis +/-10 +/-74,827 +/-1.2
Estimated sustainable earnings
Selection of comparable
companies
Application of illiquidity
discount
Probability estimation
of liquidation event++
Application of valuation
Multiples 214,568 basis +/-20 +/-42,914 +/-0.7
Net Asset Application of valuation
Value# 40,656 basis +/-10 +/-4,066 +/-0.1
===================== ================ =============================== ============= ============ =========
Total 1,003,495 +/-121,807 +/-2.0
===================== ================ =============================== ============= ============ =========
Impact on net assets and net return after taxation.
(#) Unlisted fund investments held at net asset values produced
by the relevant fund administrators using appropriate fair
valuation principles.
++ A liquidation event is typically a company sale or an initial public offering ('IPO')
* Key Variable Inputs
The variable inputs applicable to each broad category of
valuation basis will vary dependent on the particular circumstances
of each unlisted company valuation. An explanation of each of the
key variable inputs is provided below and includes an indication of
the range in value for each input, where relevant. The assumptions
made in the production of the inputs are described in note 1(b) on
page 51 of the Annual Report and Financial Statements.
Selection of appropriate benchmarks
The selection of appropriate benchmarks is assessed individually
for each investment. The industry and geography of each company are
key inputs to the benchmark selection, with either one or two key
indices or benchmarks being used for comparison.
Selection of comparable companies
The selection of comparable companies is assessed individually
for each investment at the point of investment, and the relevance
of the comparable companies is continually evaluated at each
valuation. The key criteria used in selecting appropriate
comparable companies are the industry sector in which they operate,
the geography of the company's operations, the respective revenue
and earnings growth rates and the operating margins. Typically,
between 4 and 10 comparable companies will be selected for each
investment, depending on how many relevant comparable companies are
identified. The resultant revenue or earnings multiples derived
will vary depending on the companies selected and the industries
they operate in and can vary in the range of 1x to 10x.
Probability estimation of liquidation events
The probability of a liquidation event such as a company sale,
or alternatively an initial public offering ('IPO'), is a key
variable input in the transaction-based and multiples-based
valuation techniques. The probability of an IPO versus a company
sale is typically estimated from the outset to be 50:50 if there
has been no indication by the company of pursuing either of these
routes. If the company has indicated an intention to IPO, the
probability is increased accordingly to 75% and if an IPO has
become a certainty the probability is increased to 100%. Likewise,
in a scenario where a company is pursuing a trade sale the
weightings will be adjusted accordingly in favour of a sale
scenario, or in a situation where a company is underperforming
expectations significantly and therefore deemed very unlikely to
pursue an IPO.
Application of valuation basis
Each investment is assessed independently, and the valuation
basis applied will vary depending on the circumstances of each
investment. When an investment is pre-revenue, the focus of the
valuation will be on assessing the recent transaction and the
achievement of key milestones since investment. Adjustments may
also be made depending on the performance of comparable benchmarks
and companies. For those investments where a trading multiples
approach can be taken, the methodology will factor in revenue,
earnings or net assets as appropriate for the investment, and where
a suitable correlation can be identified with the comparable
companies then a regression analysis will be performed. Discounted
cash flows will also be considered where appropriate forecasts are
available.
Estimated sustainable earnings
The selection of sustainable revenue or earnings will depend on
whether the company is sustainably profitable or not, and where it
is not then revenues will be used in the valuation. The valuation
approach will typically assess companies based on the last twelve
months of revenue or earnings, as they are the most recent
available and therefore viewed as the most reliable. Where a
company has reliably forecasted earnings previously or there is a
change in circumstance at the business which will impact earnings
going forward, then forward estimated revenue or earnings may be
used instead.
Application of illiquidity discount
The application of an illiquidity discount will be applied
either through the calibration of a valuation against the most
recent transaction, or by application of a specific discount. The
discount applied where a calibration is not appropriate is
typically 10%, reflecting that the majority of the investments held
are substantial companies with some secondary market activity.
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 incur 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 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 (if any);
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 Depository
delegated the custody function to The Bank of New York Mellon SA/NV
for the period to 3 April 2018 and, following the internal
reorganisation at The Bank of New York, the custody function was
also undertaken by The Bank of New York Mellon (International)
Limited. 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 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 continuing
interest, are subject to rigorous assessment by the 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.
The Company owns a number of unquoted preference share
securities. Some of these may have been classified as debt by the
issuer. There are no material amounts past due in relation to these
securities. As these instruments (alongside the ordinary share
securities) have been recognised at fair value through profit and
loss, the fair value takes into account credit, market and other
price risk.
Credit Risk Exposure
The maximum exposure to direct credit risk at 31 March was:
2019 2018
GBP'000 GBP'000
============================== ========= =========
Fixed interest investments 11,511 -
Cash and short term deposits 35,587 34,974
Debtors and prepayments 27,892 2,764
============================== ========= =========
74,990 37,738
============================== ========= =========
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 FRS 102. 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:
2019 2018
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 20,448 23,335 20,000 20,704 25,339
6.875% debenture stock
2023 75,000 74,858 86,400 75,000 74,821 85,629
6-12% stepped interest
debenture stock 2026 50,000 52,842 79,944 50,000 53,093 81,177
4.5% irredeemable debenture
stock 675 675 736 675 675 713
============================= ============ --------- ========= ============ ========= =========
Total debentures 145,675 148,823 190,415 145,675 149,293 192,858
============================= ============ ========= ========= ============ ========= =========
GBP30 million 2.91%
2038 30,000 29,960 30,339 - - -
GBP50 million 2.94%
2041 50,000 49,933 50,422 - - -
GBP45 million 3.05%
2042 45,000 44,896 46,082 45,000 44,890 47,762
GBP30 million 3.30%
2044 30,000 29,929 31,882 30,000 29,927 31,696
GBP30 million 3.12%
2047 30,000 29,929 31,003 30,000 29,926 31,819
GBP90 million 2.96%
2048 90,000 89,879 90,490 - - -
============================= ============ ========= ========= ============ ========= =========
Total unsecured loan
notes 275,000 274,526 280,218 105,000 104,743 111,277
============================= ============ ========= ========= ============ ========= =========
Floating rate loans 280,112 280,112 231,679 231,679
============================= ============ ========= ========= ============ ========= =========
Total borrowings 703,461 750,745 485,715 535,814
============================= ============ ========= ========= ============ ========= =========
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 504.0p to
500.8p. Taking the market price of the ordinary shares at 31 March
2019 of 512.0p, this would have given a premium to net asset value
of 2.2% as against a premium of 1.6% on a debt at book basis. At 31
March 2018 the effect would have been to reduce the net asset value
from 443.5p to 439.9p. Taking the market price of the ordinary
shares at 31 March 2018 of 442.2p, this would have given a premium
to net asset value of 0.5% 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 504.0p to
504.2p. Taking the market price of the ordinary shares at 31 March
2019 of 512.0p, this would have given a premium to net asset value
of 1.5% as against a premium of 1.6% on a debt at book basis. At 31
March 2018 the effect would have been to increase the net asset
value from 443.5p to 443.7p. Taking the market price of the
ordinary shares at 31 March 2018 of 442.2p, this would have given a
discount to net asset value of 0.3% 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,
loan notes and debentures which are detailed in notes 11 and 12 of
the Annual Report and Financial Statements.
Subsequent Events
Unlisted investments:
Further to the commitment to invest a further US$41.67m in
Series A-2 preference shares of Sana Biotechnology Inc (see note 17
on page 61 of the Annual Report and Financial Statements), the
Company purchased a further US$1.6m of Series A-2 preference shares
on 3 May 2019.
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.
Leverage
The Company's maximum and actual leverage levels (see Glossary
of Terms and Alternative Performance Measures at the end of this
announcement) at 31 March 2019 are shown below:
Gross Commitment
method method
=============== ======== ===========
Maximum limit 2.50:1 2.00:1
Actual 1.09:1 1.10:1
================= ======== ===========
Investments
As at Level 1 Level 2 Level 3 Total
31 March 2019 GBP'000 GBP'000 GBP'000 GBP'000
========================== ========== ========= ========== ==========
Equities/funds 6,680,183 - - 6,680,183
Unlisted ordinary shares - - 268,956 268,956
Unlisted preference
shares - - 1,138,169 1,138,169
Unlisted convertible
note - - 11,511 11,511
========================== ========== ========= ========== ==========
Total financial asset
investments 6,680,183 - 1,418,636 8,098,819
========================== ========== ========= ========== ==========
As at Level 1 Level 2 Level 3 Total
31 March 2018 GBP'000 GBP'000 GBP'000 GBP'000
========================== ========== ========= ========== ==========
Equities/funds 5,604,854 37,666 - 5,642,520
Unlisted ordinary shares - - 168,083 168,083
Unlisted preference
shares - - 835,412 835,412
========================== ========== ========= ========== ==========
Total financial asset
investments 5,604,854 37,666 1,003,495 6,646,015
========================== ========== ========= ========== ==========
The investments in preference shares are not classified as
equity holdings as they include liquidation preference rights that
determine the repayment (or multiple thereof) of the original
investment in the event of a liquidation event such as a
take-over.
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 52 of the Annual Report and
Financial Statements.
During the year investments with a book cost of GBP284,681,000
(2018 - GBP72,494,000) were transferred from Level 3 to Level 1 on
becoming listed and investments with a book cost of GBPnil (2018 -
GBP16,292,000) were transferred from Level 3 to Level 2 on becoming
listed. Investments with a book cost of GBP16,292,000 were
transferred from Level 2 to Level 1 following conversion to a
different share class (2018 - GBPnil).
Statement of Directors' Responsibilities in respect of the
Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report
and 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 are
required to prepare the Financial Statements in accordance with 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 its profit or
loss 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 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;
3/4 assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
3/4 use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
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
its Financial Statements comply with the Companies Act 2006. They
are responsible for such internal control as they determine is
necessary to enable the preparation of Financial Statements that
are free from material misstatement, whether due to fraud or error,
and 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 have delegated responsibility to the Managers for
the maintenance and integrity of the corporate and financial
information included on the Company's website. Legislation in the
UK 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 profit or loss
of the Company; and
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 they face.
We consider the Annual Report and Accounts, 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.
On behalf of the Board
Fiona McBain
15 May 2019
Income Statement
For the year ended For the year ended
31 March 2019 31 March 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================= ======== ======== ====================== ============= =============== ===============
Gains on investments - 923,535 923,535 - 1,203,348 1,203,348
Currency (losses)/gains - (12,180) (12,180) - 21,129 21,129
Income (note 2) 28,187 - 28,187 30,663 - 30,663
Investment management fee - (21,879) (21,879) (4,495) (13,484) (17,979)
Other administrative
expenses (4,342) - (4,342) (3,929) - (3,929)
========================= ======== ======== ====================== ============= =============== ===============
Net return before finance
costs and taxation 23,845 889,476 913,321 22,239 1,210,993 1,233,232
Finance costs of
borrowings - (29,866) (29,866) (5,490) (16,471) (21,961)
========================= ======== ======== ====================== ============= =============== ===============
Net return before
taxation 23,845 859,610 883,455 16,749 1,194,522 1,211,271
Tax (176) - (176) (48) - (48)
========================= ======== ======== ====================== ============= =============== ===============
Net return after taxation 23,669 859,610 883,279 16,701 1,194,522 1,211,223
========================= ======== ======== ====================== ============= =============== ===============
Net return per ordinary
share (note 4) 1.64p 59.58p 61.22p 1.20p 85.80p 87.00p
========================= ======== ======== ====================== ============= =============== ===============
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 2019 At 31 March 2018
GBP'000 GBP'000
====================================================== ================ ================
Fixed assets
Investments held at fair value through profit or loss 8,098,819 6,646,015
Current assets
Debtors 27,892 2,764
Cash and cash equivalents 35,587 34,974
====================================================== ================ ================
63,479 37,738
====================================================== ================ ================
Creditors
Amounts falling due within one year (note 6) (309,019) (241,961)
====================================================== ================ ================
Net current liabilities (245,540) (204,223)
------------------------------------------------------ ---------------- ----------------
Total assets less current liabilities 7,853,279 6,441,792
Creditors
Amounts falling due after more than one year (note 6) (423,349) (254,036)
====================================================== ================ ================
7,429,930 6,187,756
====================================================== ================ ================
Capital and reserves
Share capital 73,713 71,086
Share premium account 710,569 352,375
Capital redemption reserve 19,094 19,094
Capital reserve 6,602,885 5,741,352
Revenue reserve 23,669 3,849
====================================================== ================ ================
Shareholders' funds 7,429,930 6,187,756
====================================================== ================ ================
Net asset value per ordinary share
(after deducting borrowings at book)* 504.0p 443.5p
====================================================== ================ ================
Ordinary shares in issue (note 8) 1,474,255,880 1,395,363,209
====================================================== ================ ================
Excluding treasury shares.
* See Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Statement of Changes in Equity
For the year ended 31 March 2019
Share premium Capital
Share account redemption Capital Shareholders'
capital GBP'000 reserve Reserve(#) Revenue reserve(#) funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ================= ================= =========== ================== =================
Shareholders'
funds at 1 April
2018 71,086 352,375 19,094 5,741,352 3,849 6,187,756
Net return after
taxation - - - 859,610 23,669 883,279
Ordinary shares
sold from
treasury (note 8) - 91,044 - 42,069 - 133,113
Ordinary shares
issued (note 8) 2,627 267,150 - - - 269,777
Dividends paid
during the year
(note 5) - - - (40,146) (3,849) (43,995)
================== ======== ================= ================= =========== ================== =================
Shareholders'
funds at 31 March
2019 73,713 710,569 19,094 6,602,885 23,669 7,429,930
================== ======== ================= ================= =========== ================== =================
For the year ended 31 March 2018
Share premium Capital
Share account redemption Capital Revenue Shareholders'
capital GBP'000 reserve Reserve (#) reserve(#) funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ================= ================= ============ ================= =================
Shareholders'
funds at 1 April
2017 71,086 216,808 19,094 4,537,789 28,814 4,873,591
Net return after
taxation - - - 1,194,522 16,701 1,211,223
Ordinary shares
bought back into
treasury (note 8) - - - (62,951) - (62,951)
Ordinary shares
sold from
treasury (note 8) - 135,567 - 71,992 - 207,559
Dividends paid
during the year
(note 5) - - - - (41,666) (41,666)
================== ======== ================= ================= ============ ================= =================
Shareholders'
funds at 31 March
2018 71,086 352,375 19,094 5,741,352 3,849 6,187,756
================== ======== ================= ================= ============ ================= =================
The Capital Reserve balance at 31 March 2019 includes investment
holding gains of GBP3,964,387,000 (31 March 2018 - gains of
GBP3,392,070,000).
# The Revenue Reserve and the Capital Reserve (to the extent it
constitutes realised profits) are distributable.
Cash Flow Statement
Year to Year to
31 March 2019 31 March 2018
GBP'000 GBP'000 GBP'000 GBP'000
================================================================= ====================== ======================
Cash flows from operating activities
Net return before taxation 883,455 1,211,271
Gains on investments (923,535) (1,203,348)
Currency losses/(gains) 12,180 (21,129)
Finance costs of borrowings 29,866 21,961
Overseas withholding tax refunded 2,978 316
Overseas withholding tax incurred (1,488) (2,128)
Changes in debtors and creditors 1,448 4,295
================================================================= =========== ========= =========== =========
Cash from operations 4,904 11,238
Interest paid (28,162) (20,972)
================================================================= =========== ========= =========== =========
Net cash outflow from operating activities (23,258) (9,734)
================================================================= =========== ========= =========== =========
Cash flows from investing activities
================================================================= =========== ========= =========== =========
Acquisitions of investments (1,248,097) (938,385)
Disposals of investments 707,123 800,627
Net cash outflow from investing activities (540,974) (137,758)
================================================================= =========== ========= =========== =========
Equity dividends paid (note 5) (43,995) (41,666)
Ordinary shares bought back into treasury and stamp duty thereon (67) (62,884)
Ordinary shares sold from treasury 133,113 212,687
Ordinary shares issued 269,776 -
Bank loans repaid (28,221) (132,775)
Bank loans drawn down and loan notes issued 226,207 136,921
================================================================= =========== ========= =========== =========
Net cash inflow from financing activities 556,813 112,283
================================================================= =========== ========= =========== =========
Decrease in cash and cash equivalents (7,419) (35,209)
Exchange movements 8,032 (6,460)
Cash and cash equivalents at start of period* 34,974 76,643
================================================================= =========== ========= =========== =========
35,587 34,974
================================================================= =========== ========= =========== =========
* 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 2019 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 in the Annual Report and Financial Statements
which are unchanged from the prior year and have been applied consistently.
=============================================================================================================
2. Income Year to Year to
31 March 31 March
2019 2018
GBP'000 GBP'000
===================================================================== =============== =====================
Income from investments 27,252 30,283
Other income 935 380
========================================================================= =============== =====================
28,187 30,663
========================================================================= =============== =====================
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. Dealing activity and transaction reporting has been further sub-delegated to Baillie
Gifford Overseas Limited. 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 2019
was 0.30% on the first GBP4 billion of total assets less current liabilities (excluding short
term borrowings for investment purposes) and 0.25% on the remaining assets.
With effect from 1 April 2018 the investment management fee is charged 100% to capital.
=============================================================================================================
4. Net Return per Ordinary Share Year to Year to
31 March 31 March
2019 2018
GBP'000 GBP'000
===================================================================== =============== =====================
Revenue return on ordinary activities after taxation 23,669 16,701
Capital return on ordinary activities after taxation 859,610 1,194,522
========================================================================= =============== =====================
883,279 1,211,223
========================================================================= =============== =====================
Weighted average number of ordinary shares in issue 1,442,733,808 1,392,180,470
========================================================================= =============== =====================
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 2019 2018 2019 2018
GBP'000 GBP'000
=== ===================================================================== ===== ======== ======== ===========
Previous year's final (paid 2 July 2018) 1.68p 1.61p 23,766 22,264
Interim (paid 30 November 2018) 1.39p 1.39p 20,229 19,402
3.07p 3.00p 43,995 41,666
========================================================================= ===== ======== ======== ===========
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
GBP23,669,000 (2018 - GBP16,701,000).
=================================================================================================================
5. Ordinary Dividends (Ctd)
===========================================================================================================
2019 2018 2019 2018
GBP'000 GBP'000
=============================================================== ========= ========= ======== ==========
Dividends paid and payable in respect of the year:
Interim dividend per ordinary share (paid 30 November 2018) 1.39p 1.39p 20,229 19,402
Proposed final dividend per ordinary share (payable 2 July
2019) 1.74p 1.68p 25,652 23,766
=============================================================== ========= ========= ======== ==========
3.13p 3.07p 45,881 43,168
=============================================================== ========= ========= ======== ==========
If approved the final dividend will be paid on 2 July 2019 to all shareholders on the register
at the close of business on 7 June 2019. The ex-dividend date is 6 June 2019. The Company's
Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend
is 11 June 2019.
===========================================================================================================
6. Creditors falling due within one year include drawings under the following borrowing facilities:
Borrowing facilities at 31 March 2019
A 2 year US$85 million revolving loan facility has been arranged with The Royal Bank of Scotland
plc.
A 2 year US$200 million revolving loan facility has been arranged with National Australia
Bank Limited.
A 3 year US$80 million revolving loan facility has been arranged with The Royal Bank of Scotland
plc.
At 31 March 2019 drawings were as follows:
The Royal Bank of Scotland plc US$80 million (revolving facility) at an interest rate (at
31 March 2019) of 3.629% per annum.
US$85 million (revolving facility) at an interest rate (at 31 March 2019) of
3.410% per annum.
National Australia Bank US$200 million (revolving facility) at an interest rate (at 31 March
2019)
of 3.324% per annum.
At 31 March 2018 drawings were as follows:
The Royal Bank of Scotland plc US$40 million (revolving facility) at an interest rate (at
31 March 2018) of
2.255% per annum.
US$85 million (revolving facility) at an interest rate (at 31 March 2018) of
2.764% per annum.
National Australia Bank US$200 million (revolving facility) at an interest rate (at 31 March
2018)
of 2.623% per annum.
During the year the US$40 million 1 year revolving loan with The Royal Bank of Scotland plc
('RBS') was replaced with a US$80 million 3 year revolving loan with RBS. Additionally, the
US$200 million 2 year revolving loan with National Australia Bank Limited ('NAB') was refinanced
with a US$200 million 2 year revolving loan with NAB.
The main covenants which are tested monthly are:
3/4 The total borrowings shall not exceed 35% of the Company's adjusted net asset value.
3/4 Total borrowings shall not exceed 35% of the Company's adjusted total assets.
3/4 The Company's minimum net asset value shall be GBP1,000 million.
3/4 The Company shall not change the investment manager without prior written consent of
the lenders.
===========================================================================================================
7. The fair value of borrowings at 31 March 2019 was GBP750,745,000 (2018 - GBP535,814,000).
Net asset value per share (after deducting borrowings at fair value) was 500.8p (2018 - 439.9p).
===========================================================================================================
8. 2019 2018
Number of Shares Number of shares
============================================================== =================== ====================
Share capital: Ordinary shares of 5p each
Allotted, called up and fully paid 1,474,255,880 1,395,363,209
Treasury shares - 26,367,671
=============================================================== ==== =================== ====================
Total 1,474,255,880 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 2019 no shares were bought back (2018
- 14,006,276 ordinary shares with a nominal value of GBP700,000 were bought back at a total
cost of GBP62,951,000 and held in treasury). At 31 March 2019 the Company had authority to
buy back 210,484,065 ordinary shares.
Under the provisions of the Company's Articles the share buy-backs are funded from the capital
reserve.
In the year to 31 March 2019, the Company sold 26,367,671 ordinary shares from treasury at
a premium to net asset value, with a nominal value of GBP1,318,000 raising net proceeds of
GBP133,113,000 (31 March 2018 - 50,800,000 ordinary shares sold from treasury with a nominal
value of GBP2,540,000 raising net proceeds of GBP207,559,000) and issued 52,525,000 ordinary
shares, with a nominal value of GBP2,627,000, at a premium to net asset value raising proceeds
of GBP269,777,000 (2018 - GBPnil). At 31 March 2019 the Company had authority to issue or
sell from treasury a further 90,241,320 ordinary shares (no shares were held in treasury at
31 March 2019).
================================================================================================================
9. Transaction costs on purchases amounted to GBP531,000 (2018 - GBP332,000) and transaction
costs on sales amounted to GBP100,000 (2018 - GBP383,000).
===========================================================================================================
10. The financial information set out above does not constitute the Company's statutory accounts
for the years ended 31 March 2019 or 2018 but is derived from those accounts. Statutory accounts
for 2018 have been delivered to the Registrar of Companies, and those for 2019 will be delivered
in due course. The auditor has reported on those accounts; the reports were (i) unqualified,
(ii) did not include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report other than the emphasis of matter - revision of
disclosure note, included within the unqualified audit opinion for the year ended 31 March
2018, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies
Act 2006.
===========================================================================================================
Glossary of Terms and Alternative Performance Measures (APM)
Total Assets
Total assets less current liabilities, before deduction of all borrowings.
Net Asset Value
Also described as shareholders' funds. Net Asset Value (NAV) is the value of total assets
less liabilities (including borrowings). The NAV per share is calculated by dividing this
amount by the number of ordinary shares in issue (excluding treasury shares).
Net Asset Value (Borrowings at Book)/Shareholders' Funds
Borrowings are valued at adjusted net issue proceeds.
Net Asset Value (Borrowings at Fair Value) (APM)
Borrowings are valued at an estimate of their market worth. A reconciliation to Net Asset
Value with borrowings at book value is provided below.
31 March 31 March 2018
2019
============================================== =============== ===============
Net Asset Value per ordinary share
(borrowings at book value) 504.0p 443.5p
Shareholders' funds (borrowings at GBP7,429,930k GBP6,187,756k
book value)
Add: Book value of borrowings GBP703,461k GBP485,715k
Less: fair value of borrowings (GBP750,745k) (GBP535,814k)
============================================== =============== ===============
Net Asset Value (borrowings at fair GBP7,382,646k GBP6,137,657k
value)
Shares in issue at year end (excluding
treasury shares) 1,474,255,880 1,395,363,209
Net Asset Value per ordinary share
(borrowings at fair value) 500.8p 439.9p
============================================== =============== ===============
Net Asset Value (Borrowings at Par) (APM)
Borrowings are valued at their nominal par value. A reconciliation
to Net Asset Value with borrowings at book value is provided
below.
================================================================================
31 March 31 March 2018
2019
============================================== =============== ===============
Net Asset Value per ordinary share
(borrowings at book value) 504.0p 443.5p
Shareholders' funds (borrowings at GBP7,429,930k GBP6,187,756k
book value)
Add: allocation of interest on borrowings GBP3,805k GBP4,098k
Less: expenses of debenture issue (GBP1,131k) (GBP1,198k)
============================================== =============== ===============
Net asset Value (borrowings at par GBP7,432,604k GBP6,190,656k
value)
Shares in issue at year end (excluding
treasury shares) 1,474,255,880 1,395,363,209
Net Asset Value per ordinary share
(borrowings at par value) 504.2p 443.7p
============================================== =============== ===============
Net Liquid Assets
Net liquid assets comprise current assets less current liabilities,
excluding borrowings.
Discount/Premium (APM)
As stockmarkets and share prices vary, an investment trust's
share price is rarely the same as its NAV. When the share
price is lower than the NAV per share it is said to be trading
at a discount. The size of the discount is calculated by
subtracting the share price from the NAV per share and is
usually expressed as a percentage of the NAV per share. If
the share price is higher than the NAV per share, this situation
is called a premium.
Ongoing Charges Ratio (APM)
The total expenses (excluding borrowing costs) incurred by
the Company as a percentage of the average net asset value
(with debt at fair value). The ongoing charges have been
calculated on the basis prescribed by the Association of
Investment Companies. A reconciliation from the expenses
detailed in the Income Statement is provided below.
=====================================================================================
2019 2018
=================================================== =============== ===============
Investment management fee GBP21,879k GBP17,979k
Other administrative expenses GBP4,342k GBP3,929k
=========================================== ====== =============== ===============
Total expenses (a) GBP26,221k GBP21,908k
Average net asset value (with (b) GBP7,051,629k GBP5,849,630k
borrowings deducted at fair
value)
=========================================== ====== =============== ===============
Ongoing charges ((a) ÷(b)
expressed as a percentage) 0.37% 0.37%
=========================================== ====== =============== ===============
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an investment trust
can borrow money to invest in additional investments for its portfolio. The effect of the
borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the
shareholders' assets grow proportionately more because the debt remains the same. But if the
value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance
performance in rising markets but can adversely impact performance in falling markets.
Gearing represents borrowings at book value less cash and cash equivalents (including any
outstanding trade settlements) expressed as a percentage of shareholders' funds.
==============================================================================================================
31 March 2019 31 March 2018
====================================================== ======= ================ ===========================
Borrowings (at book value) GBP703,461k GBP485,715k
Less: cash and cash equivalents (GBP35,587k) (GBP34,974k)
Less: sales for subsequent settlement (GBP27,388k) -
Add: purchases for subsequent settlement GBP15,683k -
====================================================== ======= ================ ===========================
Adjusted borrowings (a) GBP656,169k GBP450,741k
====================================================== ======= ================ ===========================
Shareholders' funds (b) GBP7,429,930k GBP6,187,756k
====================================================== ======= ================ ===========================
Gearing: (a) as a percentage of (b) 9% 7%
====================================================== ======= ================ ===========================
Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds.
31 March 2019 31 March 2018
====================================================== ======= ================ ===========================
Borrowings (at book value) (a) GBP703,461k GBP485,715k
Shareholders' funds (b) GBP7,429,930k GBP6,187,756k
====================================================== ======= ================ ===========================
Potential gearing: (a) as a percentage of (b) 9% 8%
====================================================== ======= ================ ===========================
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is
any method which increases the Company's exposure, including the borrowing of cash and the
use of derivatives. It is expressed as a ratio between the Company's exposure and its net
asset value and can be calculated on a gross and a commitment method. Under the gross method,
exposure represents the sum of the Company's positions after the deduction of sterling cash
balances, without taking into account any hedging and netting arrangements. Under the commitment
method, exposure is calculated without the deduction of sterling cash balances and after certain
hedging and netting positions are offset against each other.
Active Share (APM)
Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio
that differs from its comparative index. It is calculated by deducting from 100 the percentage
of the portfolio that overlaps with the comparative index. An active share of 100 indicates
no overlap with the index and an active share of zero indicates a portfolio that tracks the
index.
Total Return (APM)
The total return is the return to shareholders after reinvesting the net dividend on the date
that the share price goes ex-dividend.
==============================================================================================================
2019 2019 2019 2018 2018 2018
NAV NAV Share NAV NAV Share
(book) (fair) Price (book) (fair) Price
========================== ====================== ======= ======= ======= ======= ========= =======
Closing NAV per
share/share price (a) 504.0p 500.8p 512.0p 443.5p 439.9p 442.2p
Dividend adjustment
factor* (b) 1.0067 1.0066 1.0063 1.0070 1.0077 1.0068
Adjusted closing NAV per
share/share price (c = a x b) 507.4p 504.1p 515.2p 446.6p 443.3p 445.2p
Opening NAV per
share/share price (d) 443.5p 439.9p 442.2p 358.7p 354.6p 366.1p
========================== ====================== ======= ======= ======= ======= ========= =======
Total return (c ÷ d) - 1 14.4% 14.6% 16.5% 24.5% 25.0% 21.6%
========================== ====================== ======= ======= ======= ======= ========= =======
* The dividend adjustment factor is calculated on the assumption
that the dividends of 3.07p (2018 - 3.00p) paid by the Company
during the year were reinvested into shares of the Company at the
cum income NAV/share price, as appropriate, at the ex-dividend
date.
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