Annual Financial Report
Baillie Gifford US Growth Trust plc
Legal Entity Identifier: 213800UMIOUWXZPKE539
Regulated Information Classification: Annual Financial and Audit Reports
Annual Financial Report
This is the Annual Financial Report of Baillie Gifford US Growth 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 period 7 February 2018 to 31 May 2019 but is derived from those accounts. The Company's Auditors have reported on the Annual Report and Financial Statements for the period to 31 May 2019, their report was unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under sections 498(2) or 498(3) of the Companies Act 2006. Statutory accounts for the period to 31 May 2019 will be delivered to the Registrar in due course.
The Annual Report and Financial Statements for the period ended 31 May 2019, including the Notice of Annual General Meeting, has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection http://www.morningstar.co.uk/uk/NSM and is also available on Baillie Gifford US Growth Trust's page of the Baillie Gifford website at: www.bgusgrowthtrust.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
5 August 2019
Chairman's Statement
It is with pleasure that I present the Board's first Annual Report for Baillie Gifford US Growth Trust plc ('the Company') for the period from incorporation on 7 February 2018 to 31 May 2019. The Company raised gross proceeds of £173 million at launch on 23 March 2018 and, as at 31 May 2019, had net assets of £289.9 million.
Performance
During the period from 23 March 2018 to 31 May 2019, the Company's share price and net asset value returned 28.4% and 28.8% respectively. This compares with a total return of 22.2% for the S&P 500 Index* (in sterling terms). The Board is encouraged by the net asset value total return that the Managers have been able to deliver over the period since launch, however, we would ask shareholders to judge performance over periods of five years or more. Further information about the Company's portfolio performance is covered by our portfolio managers, Gary Robinson and Helen Xiong, in their Managers' Review.
Share Issuance and Buy-backs
The Company's shares have consistently traded at a premium to their net asset value since launch and the Company has issued a further 56.8 million shares since the launch date to 31 May 2019 at an average premium to net asset value of approximately 2.7%, raising further proceeds of £70 million.
At 31 May 2019 we had authority, which was granted at the initial launch, to issue a further 770.2 million shares. This authority expires at the end of the period of five years from passing the resolution which was 5 March 2018.
The Company also has authority to buy back shares. The buy-back facility was sought to allow the Company to buy-back its own shares when the discount is substantial in absolute terms and relative to its peers. The Company will be seeking to renew the buy-back authority at the forthcoming Annual General Meeting.
Gearing
On 1 August 2018, the Company entered into a five year US$25 million revolving credit facility with ING Bank N.V., London Branch. The facility is available to be used to fund purchases of unlisted securities as and when suitable opportunities arise. As at 31 May 2019 US$15 million had been drawn down under the facility.
Earnings and Dividend
The Company's priority is to generate capital growth over the long term. The Company therefore has no dividend target and will not seek to provide shareholders with a level of dividend. The net revenue return per share for the period to 31 May 2019 was a negative 1.09p. As the revenue account is running at a deficit, the Board is recommending that no final dividend be paid. Should the level of underlying income increase in future years, the Board will seek to distribute the minimum permissible to maintain investment trust status by way of a final dividend.
Unlisted Investments
As at the Company's period end, the portfolio weighting in unlisted investments stood at 10.8% of total assets, invested in eleven holdings. There is commentary on these in the Managers' Review below and Review of Invesments below. Lyft, which was bought in August 2018, listed on Nasdaq in March this year.
Since the period end further investment has been made to JRSK (Away) and Slack Technologies listed on the New York Stock Exchange.
Your portfolio managers remain alert to further special and high potential opportunities not widely accessible through public markets.
Annual General Meeting
The Annual General Meeting of the Company will be held at Baillie Gifford's offices in Edinburgh at 9.30am on Tuesday, 27 August 2019. Further information on this and all the resolutions can be found on page 50 of the Annual Report and Financial Statements. The Directors consider that all resolutions to be put to shareholders are in their and the Company's best interests as a whole and recommend that shareholders vote in their favour.
Helen Xiong, one of the joint portfolio managers, will give a presentation and take questions. The Board will also be available to respond to any questions that you may have. I hope that you will be able to attend.
Brexit
This year the Company is required to comment on the potential impact of 'Brexit' on its future prospects. The Board has considered the uncertainties surrounding Brexit and can see no scenario that it believes would affect the going concern status or viability of the Company. As the vast majority of the Company's assets are denominated in US dollars, the Company's greatest exposure to any potential impact from Brexit is through fluctuations in the exchange rate at which the value of its assets are converted into sterling (the Company's functional currency and that in which it reports its results).
Outlook
Notwithstanding the continuing uncertain times that we all continue to live in, as long term investors in exceptional growth companies, our portfolio managers see many excellent companies about which to be optimistic. Moreover, their strong growth potential is generally dependent on their ability to take advantage of their opportunities rather than on the performance of the wider global economy. All that being the case, the Board and the Managers remain confident in our outlook.
Tom Burnet
Chairman
2 August 2019
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
* See disclaimer at the end of this announcement.
Managers' Review
Baillie Gifford US Growth Trust IPO marked Baillie Gifford's first new investment trust launch in over three decades. The firm does not launch new investment companies very often, but there were compelling reasons to do so in this case. As many of you will have heard us say, our aim is to identify and own the exceptional growth companies in America. In the past, most of these exceptional growth companies were listed but companies have been choosing to stay private for longer and increasingly we are finding that the best opportunities are unquoted. The closed-ended nature of Baillie Gifford US Growth Trust makes it the ideal structure from which to allocate capital across the listed and unquoted opportunity set. The stability of its capital base provides a bedrock for significant allocations to unquoted securities if the balance of opportunities dictates it.
It is common practice to take stock of performance in communications such as these but with a track record of a little over one year, it is our belief that it would be premature to do so here. We would very kindly ask shareholders to judge us over periods of at least five years. Rather than focus on performance, we would like firstly to draw your attention to our investment principles, which we have laid out at the end of this report. We hope that, by publishing our investment framework in this and future communications, we will provide shareholders with a useful reminder of our philosophy and a yardstick with which to measure us.
Turning to the portfolio, we take a long term view when investing which leads to low portfolio turnover. It is notable that twelve of the top fifteen positions at the end of the month of launch (March 2018) remained in the top 15 at the end of the reporting period (May 2019). We hope that many of them will remain holdings long into the future as this is likely to be a sign of success.
Shortly following the launch of the Company, we invested its capital into a portfolio of listed equities which largely mirrored the Baillie Gifford American Fund, an open-ended fund which the US Equity team at Baillie Gifford has been running since 1997. We have been gradually increasing our exposure to unlisted securities since then as compelling opportunities have arisen. We have invested in a total of 12 unquoted securities. 11 of these remained unquoted at the end of the reporting period. Lyft, the consumer ride-sharing company, listed on the Nasdaq in March 2019. Collectively the unquoted securities accounted for just under 11% of the portfolio at the end of May 2019. We have included a short description of each of these in the Review of Investments below.
Two of the critical contentions that we made at the time of the IPO were, firstly, that there was a significant opportunity to deploy capital into unquoted securities, and secondly, that we would be able to gain access to the best of these opportunities due to Baillie Gifford's reputation as a patient and supportive provider of capital. Whilst acknowledging how early we are on this journey, our confidence in these two contentions is higher than ever. We have been absolutely delighted by the quality of the opportunities that we have been able to allocate capital to.
One example of such a company is Butterfly Network. Butterfly has the potential to be a disruptive force in the medical imaging industry. It has redesigned ultrasound from the bottom up based on semiconductor technology. In doing so, it has produced a product which is smaller, cheaper, and more powerful than traditional ultrasound machines. The device plugs in to an iPhone and, using artificial intelligence, is able to guide a physician to capture an image and then, in an increasing number of cases, process that image in order to augment diagnosis. The device costs US$2,000, which is an order of magnitude less expensive than current equivalents. We believe Butterfly could potentially democratise access to imaging in both developed and developing markets. On the latter, there was recently a wonderful article in the New York Times which outlined how Butterfly's devices are being used by practitioners to make diagnoses in rural villages in Uganda. Butterfly is a great example of where shareholders' assets are being deployed to a cause which could be very worthwhile both financially and socially.
Another important aspect that we have stressed in previous communications is the critical role that asymmetry plays in driving long term stock market returns. Academic studies have clearly shown that, over the very long term, most of the net excess return for the market is attributable to a small number of companies that do exceptionally well.
We are of the view that the pattern of returns that we have seen historically may turn out to be even more pronounced in future, given the pace of change affecting many industries. In other words, the gaps between the winners and losers are more likely to widen than shrink. The disruption enabled by the emergence of new technologies started in a few select industries, such as retail and advertising, but it is spreading more broadly. We are now seeing digital, mobile and machine learning technologies applied in insurance, banking and, as outlined above with Butterfly Network, in the healthcare sector.
Another part of the global economy where we expect to see significant transformation over the next decade is the transportation sector. It is an area which has seen little change since the Ford Model T started rolling off the production line over 110 years ago. People still buy cars, fill them up with petrol, and then drive them from A to B. But there are some major problems with this model. Firstly, petrol is a hydrocarbon, and it is probably not in society's best interests that we keep burning hydrocarbons at the rate we have been doing historically. Secondly, car ownership is inefficient with the average car being used only about 5% of the time. Given that Americans collectively spend around US$1 trillion per year on their cars this low capacity utilisation represents a huge waste of resources. Finally, humans are fallible - we are easily distracted, which leads to accidents. Tragically, 1.4 million people are killed every year on roads around the world, making road traffic injuries one of the ten leading causes of death across all age groups and the leading cause of death in young people between the ages of 5 and 29 years.
These challenges are not insurmountable, however. There are three important and parallel technology-driven shifts underway right now which could reshape the transportation sector over the coming decades. These are: (1) the transition from petrol engines to electric vehicles ('EVs'); (2) the shift from car ownership to ride-sharing; and (3) the move from human-driven cars to autonomous vehicles. The exact slope of the adoption curve for each of these new products is currently unknown, but the arguments for their mainstream adoption in the long term are compelling.
Whilst all three of these technology-led evolutions are currently at a nascent stage, the first - the shift from petrol to EVs - is most advanced. It sounds strange to say it now, but it was not so long ago that electric cars were undesirable. Tesla has, pretty much single-handedly, made electric cars cool. EVs are fast, safe, clean and increasingly affordable. Whilst true plug-in EVs still represent a small proportion of annual car sales in the US and globally, the trends are indicative of a major shift underway. In the US, EVs made up just over 2% of new car sales in 2018 representing an almost doubling of market share year over year. In California, arguably a leading indicator for the adoption of new technologies, EVs comprised almost 8% of new vehicle sales last year. The astonishing fact that the Tesla Model 3 was the best-selling car in the US by revenue based on the last four quarters, coming in ahead of the Toyota Camry, perhaps marks a major milestone on the coming transformation of the car industry and the end of our reliance on a major finite resource.
The second of the major technology-led shifts in the transportation sector, that from car ownership to ride-sharing, is also gathering momentum, as anyone who has used the services of Uber or Lyft will attest. What we may be seeing with these services is the beginning of a major change in mindset amongst consumers. For so called digital-natives, on-demand services such as Airbnb and ride-sharing are the new normal. The changing attitudes towards driving are strikingly evident in the UK, where the proportion of 17 to 20 year olds with a driving licence has plummeted from almost half in the early 90s to under one-third in 2014.
Last year fewer than 1% of miles driven in the US were on the ride-share networks which serves to highlight the scale of the opportunity. We invested in Lyft for the Company in the middle of 2018 when it was still private. Our work has led us to conclude that Lyft is a company with a strong social purpose and genuinely distinctive culture. These softer points, whilst admittedly intangible and difficult to measure, may add up to a significant source of edge. The fact that Lyft has risen from a very distant position in the US market to challenge Uber highlights the importance of factors like culture in consumer-facing businesses.
If Lyft does succeed in weaning consumers off car ownership it could act as a catalyst for much bigger societal changes. Many US cities have been optimised for cars rather than people. If more trips are taken on the ride-sharing networks then fewer parking structures will be required, freeing up room for more green spaces or perhaps even denser cities, with more people living closer to where they work. There is potentially scope for ride-sharing to be a substitute for a significant proportion of car ownership in its current form, perhaps 5% -10% of miles driven. This is still a very meaningful market opportunity for Lyft. However, for ride-sharing to reach a much greater penetration figure will require the cost of ride-sharing to come down substantially, and for that we need autonomy.
The third technology-led shift, the move from human-driven cars to autonomous-vehicles, is arguably the least mature but the impact of its adoption could be truly transformational across several different domains. A decade and a half ago progress in autonomous driving technology was being led by a select number of academic institutions like Stanford and Carnegie Mellon. However, the centre of gravity has shifted to the commercial space with Alphabet's Waymo, Tesla and Aurora arguably leading the way, albeit with quite different approaches. We have exposure to all three of these companies in the Company, the most recent investment being Aurora, which is an unquoted company founded by the former head of Waymo, Chris Urmson. We believe broad exposure to this area is appropriate given the potential scale of its impact. There is no consensus on when true autonomy will become mainstream which is not surprising given the enormous range of edge cases that any system will have to deal with (e.g. roadworks, snow), but most would agree that the remaining problems are solvable, and it will not be that long until we are being driven around by computers.
Ride-sharing is still quite expensive on a per-mile basis. Around two-thirds of the total cost is attributable to the driver. By incorporating autonomous technology into ride-share networks, it is possible that costs would fall to a level where it would be almost inconceivable that anyone would want to own a car for practical purposes. In addition, autonomous software, when deployed at scale, ought to have the potential to be orders of magnitude safer than human drivers, leading to a drastic reduction in road fatalities and injuries. It will also free up time that would otherwise have been spent driving for productive work and save consumers considerable money. Lyft is investing significant capital in the development of its own ride-sharing capabilities and is also working closely with Waymo to trial autonomous Waymo vehicles on the Lyft network in a small area just outside of Phoenix, Arizona.
The three major shifts outlined above are likely to lead to a complete redrawing of the landscape in the multi-trillion-dollar global transportation industry over the next decade. This will lead to dislocation not only within transportation but across a whole host of industries which support the current status quo. What will come of the traditional car companies and their supply chains and distribution and support networks? What about the oil companies? Or the car insurers? These businesses make up a substantial proportion of market indices. Fortunately, disruption also brings opportunities and in an actively managed growth portfolio, we can direct capital to exceptional growth companies like Tesla and Lyft and Aurora and Alphabet which are the agents of these changes and where, as with Butterfly, their success could simultaneously result in high returns and strong and lasting net benefits to society.
The above is just a snapshot of the technology led change which is underway in society. We believe that we will come to view these times on a par with the industrial revolution. Baillie Gifford US Growth Trust, with its long term and genuinely active approach which bridges across the listed and unquoted opportunity set, provides the ideal vehicle to navigate these shifting waters and to hopefully identify and own the exceptional companies which are driving these important societal shifts.
Investment Principles
To our shareholders
Our core task is to invest in the exceptional growth businesses in America. Over the full course of time, these companies will develop deep competitive moats and generate abnormal profits and unusually high shareholder returns. We endeavour to generate returns for our clients by helping in the creation and improvement of such useful enterprise. To the extent that we are successful in identifying these companies, we believe that we can multiply the wealth of our clients over the long term.
Managing shareholders' money is a huge privilege, and not one we take lightly. It is a relationship, not a transaction. Relationships can only be built on a foundation of trust and understanding. It is with this that we seek to lay out the fundamental principles by which we will manage your money and the framework for how we make decisions so that you, our shareholders, can decide whether it aligns with your investment philosophy.
¾ We believe the fundamental measure of our success will be the value we create for our shareholders over the long term. It is only over periods of five years or more that the characteristics we look for in businesses become apparent. Our turnover has been in the teens, consistent with our time horizon. We ask that our shareholders measure our performance over similar periods.
¾ Short term volatility is an inevitable feature of the market, and we will not manage the portfolio to reduce volatility at the expense of long term gain. Many managers are risk-averse and fear loss more than they value gain. Therefore, they accept smaller, more predictable risks rather than the larger and less predictable ones. We believe that this is harmful to long term returns, and we will not shy away from making investments that are perceived to be risky if we believe that the potential payoffs are worthwhile. This means that our performance may be lumpy over the short term.
¾ We believe, and academic work has shown, that long term equity returns are dominated by a small handful of exceptional growth companies that deliver outsized returns. Most stocks do not matter for long term equity returns, and investors will be poorly served by owning them. In our search for exceptional growth companies, we will make mistakes. But the asymmetry inherent in equity markets, where we can make far more in a company if we are right than lose if we are wrong, tells us that the costliest of mistakes is excessive risk aversion.
¾ We do not believe that the index is the right starting point for portfolio construction. The index allocates capital based on size. We believe that capital should be allocated based on marginal return and the ability to grow at those rates of return. Big companies are not immune to disruption. We do not manage the portfolio to an active share target, but we expect the active share of this fund to be high.
¾ The role of capital markets has changed, and we have evolved with it. As companies are remaining private for longer, so too have we broadened our search for exceptional growth companies into private companies. We are largely indifferent to a company's private or public status. We will conduct diligent analysis and allocate capital to where the highest returns are likely to be.
¾ We may discuss long term trends and themes present in the portfolio, but we do not plan on discussing short term performance. We believe our duty is to maximise the long term wealth of our shareholders, and that creating narratives around short term performance serves our shareholders poorly.
¾ We will endeavour to operate in the most efficient, honest, and economical way possible. That means keeping our management fees and ongoing costs low. We recognise that even modest amounts, when allowed to compound over long periods of time, add up to staggering sums, and we do not wish to dilute the compounding of returns with the compounding of costs.
With this foundation, we hope to build Baillie Gifford US Growth Trust into a world class savings vehicle. We are grateful that you have joined us on this journey, and we look forward to a long and hopefully prosperous relationship with you.
Review of Investments
A review of the Company's ten largest investments and the unlisted securities as at 31 May 2019 is given below.
Top Ten Holdings
Amazon
8.7% of total assets
Amazon addresses huge market opportunities in the form of global retail and global IT spending. In retail, it competes on price, selection, and convenience and is improving all three as it gets bigger. Amazon's AWS division is less mature than its retail business, but it is no less exciting. Here, Amazon is in a clear position of leadership in what could turn out to be one of the largest and most important market shifts of our time. Both opportunities are outputs of what is perhaps most distinctive of all about Amazon - its culture. Amazon optimises for customer delight. The company is run with a uniquely long term perspective. It is willing to be bold and scale its experiments (and failures) as it grows. These cultural distinctions allow Amazon to possess the rare and attractive combination of scale and immaturity.
MarketAxess Holdings
5.3% of total assets
Most corporate bonds are currently traded in a very old-fashioned manner via telephone. This is a time-consuming process for traders trying to source the bonds from/for willing sellers/buyers. MarketAxess operates an electronic trading platform for credit securities. The platform connects buy-side investors and the broker-dealer community, facilitating electronic transactions in a cost-effective and efficient manner. The company has established strong trading networks and is innovating on capabilities and products to create a more liquid, transparent, and efficient way for clients to trade bonds. This is driving a secular shift towards electronic trading. Over time, the market opportunity should grow as the company leverages the opportunity to expand into other credit products. The business is inherently scalable and benefits from network effects, making the marginal returns very attractive.
Netflix
4.8% of total assets
Netflix has the potential to become the first truly global content and distribution media brand. Its base of more than 150 million subscribers allows it to invest in building a strong customer proposition though its library of exclusive and desirable content. This in turn attracts more subscribers, creating a powerful flywheel that distances itself from other likely competitors. The shift from linear TV to on-demand streaming is still in the early stages, and Netflix is a prime beneficiary.
Shopify
4.8% of total assets
Shopify provides software tools which allow merchants to easily set-up and manage their businesses across an increasingly complex and fragmented retail landscape. Shopify's software helps to make merchants more efficient by automating large swathes of their operations (e.g. marketing, inventory management, payments, order processing, shipping) thus allowing them to focus on product market fit. The company maintains a rapid pace of innovation and is run by an impressive founder who has built a distinctive merchant-focused culture.
Wayfair
4.8% of total assets
Wayfair is an online furniture retailer but thinks of itself as a software company with an edge in logistics for large pieces of furniture. Furniture has historically been a difficult category for e-commerce due to the challenges of providing a good experience. Consumers want to visualise the product in their homes; they want to know exactly when the product will be delivered so they can be at home to receive it; and they want to know that they can easily return the product should it not meet their expectations. Suppliers are incredibly fragmented and do not have the scale to deliver these experiences to the consumer. Wayfair has managed to bring all the suppliers together under its brand and is applying its tech expertise to create a superior customer experience. On the front end, it has built a visual browsing platform, allowing customers to search by image, or to visualise a piece of furniture in their homes to scale. On the back end, it has built a sophisticated logistics and distribution network that ensures speedy and reliable delivery to consumers. The business is capital light and has a negative working capital, meaning that growth is largely self-funded. Online penetration of homeware is still in the low teens and we believe there is substantial opportunity for the company ahead.
Illumina
3.9% of total assets
Illumina is the global leader in next-generation sequencing equipment and consumables. The company's mission is 'to improve human health by unlocking the power of the genome'. Given the inefficiencies in the healthcare system, the opportunities to do so are vast. The availability of low-cost whole genome sequencing is helping to drive a better understanding of the molecular basis of disease, which in turn is leading to greater insights and better decision making. One example of this is the use of sequencing as a companion diagnostic tool in cancer. Most cancer drugs only work in a small subset of cancer patients. In the past, doctors relied on educated guesswork to make treatment decisions. With sequencing information, they are now able to do so based on underlying genetics, leading to better outcomes for patients and cost savings for the system.
Alphabet
3.8% of total assets
Alphabet continues to see strong growth in its core Google search business, where the strength of the company's competitive position affords it a pivotal role in the migration of advertising dollars from traditional media to the internet. Whilst search has been around for some time, it continues to improve at an impressive rate and we believe there remains scope for significant innovation and continued strong growth. The company has a distinctive, long term focused culture, led by the co-founders, which encourages bold thinking and innovation. We think there is a reasonable probability that one of the company's many new ventures outside of search could become a substantial revenue and profit generator in future.
Mastercard
3.6% of total assets
Mastercard is one of two dominant payment networks. It is a scalable, asset-light business that is benefiting from a structural shift away from paper-based payments to electronic forms. Mastercard is ideally placed to benefit from this trend given reliability, security and scale, all of which act as tremendous barriers to entry. Novel forms of payment technology are built on its network and are accelerating the pace of adoption. We think Mastercard can sustain its profitability while growing its revenue at above average rates for many years to come.
3.6% of total assets
Facebook has been a major disruptive force in the US$650 billion global advertising market. With its unparalleled reach, it has embedded itself into users lives with multiple properties as infrastructure. This provides a strong foundation for the company to innovate, creating new products and services to bring the world closer together. We are still early in the multi-decade paradigm shift that has advertisers desperately seeking ways to reach users where they now live: online. In the near term, Facebook will be a prime beneficiary of this shift. Over the long term, we believe the potential of the platform reaches far beyond advertising.
The Trade Desk
3.1% of total assets
The advertising industry is undergoing a wholesale shift in the way that advertising is bought and sold. Whereas in the past advertising was bought and sold in bundles, in the digital world, advertising can be transacted on a 1 to 1 basis, targeting only the audiences that are relevant. The Trade Desk provides the technology that enables this targeted buying of advertising through real-time auctions. Its platform connects media buyers to a wide range of digital inventory and provides a set of tools to help buyers determine what price to pay for those ad opportunities. This is known as programmatic advertising - the buying of advertising using data. Programmatic advertising is still in its infancy and is growing rapidly, supported by higher efficacy and a tangible demonstration of return on investment. As the programmatic industry becomes mainstream, it will consolidate around a handful of buying platforms, and we believe that The Trade Desk will emerge as the leading buying platform for the independent internet.
Unlisted Securities
Affirm
0.4% of total assets
Affirm is a consumer finance company founded by Max Levchin, one of the founders of PayPal. It seeks to empower consumers to advance their financial well-being through honest financial products. This means offering simple, transparent products through the use of technology (online/app), and eschewing practices such as hidden or late fees that creates misalignment between the lender and the consumer. Its initial focus is point of sale credit through online merchants. This is a cost-effective way to acquire customers, giving Affirm a platform to build its brand while spending almost nothing on marketing. Affirm has a net promoter score of 83 out of 100, which is rare for any company, let alone a financial services company. This provides a strong foundation for Affirm to deeper integrate themselves in the financial lives of their customers and merchants.
Aurora Innovation
0.8% of total assets
Aurora Innovation is developing driverless car technologies. The company was co-founded by Chris Urmson, who previously led Google's driverless car efforts. Drew Bagnell and Sterling Anderson, Urmson's co-founders, were previously key to autonomous vehicles at Uber and Tesla respectively. The three of them have assembled a world class team at Aurora. Unlike some of its competitors, Aurora is choosing to focus entirely on developing the autonomous driver and is partnering for access to vehicles and ride-sharing networks to deploy its technology. This brings a degree of focus on the hard problem of driverless vehicles which its rivals arguably lack. Whilst the company is early in its development, the quality of the team combined with their strategic approach means that the odds of success may be tilted in Aurora's favour. If Aurora can crack the technical challenges of autonomous driving, the addressable market is potentially very large.
Butterfly Network
0.8% of total assets
Butterfly Network has developed a breakthrough portable ultrasound which is dramatically cheaper, simpler and easier to use than previous technologies. This has been achieved through a wholesale redesign of the ultrasound from the bottom up using semiconductor technology. Not only is it lower cost, it is also smaller, has greater functionality, and there is more scope to add value through software and artificial intelligence. We believe that the product has a chance of becoming a hugely disruptive technology which dramatically expands the ultrasound market and improves access to imaging in both developed and developing countries.
Indigo Agriculture
0.8% of total assets
Indigo is trying to change agriculture through microbiology and data science. It has found a way to increase crop yields by coating seeds in naturally occurring microbes. Increasing yields has the potential to improve farmer profitability, which in turn provides a strong incentive for farmers to adopt Indigo's technology. Alongside the core microbial seed technology, Indigo is also trying to help farm profitability by building a transparent end to end supply chain system and connecting the buyers directly to the farmers. This is an ambitious undertaking, but the opportunity is very large and Indigo's holistic approach, combining both novel technology and business model, could give them an edge.
JRSK (Away)
0.6% of total assets
Away is a direct to consumer travel-lifestyle brand. It sells luggage and other travel-related products through its website and seven offline stores in the US and UK. The company has built a brand which resonates strongly with younger consumers. It has excelled in customer service, community building and storytelling on social media. Furthermore, by selling direct, Away has been able to keep costs low and offer consumers access to high-quality products at attractive prices. Longer term, we believe there is an opportunity to build Away into a global lifestyle brand.
Niantic
0.8% of total assets
Niantic makes augmented reality games. The company was founded by John Hanke in 2010 as a start-up inside of Alphabet. Prior to founding Niantic, Hanke's team were responsible for the development of Google Earth and Google Maps. In 2015 Niantic spun out of Alphabet during a restructuring and secured funding from Nintendo and Alphabet. Niantic launched Pokémon Go in 2016 and Harry Potter: Wizards Unite in 2019. Whilst these novel augmented-reality games are interesting, what is most exciting is that they are helping Niantic to build the world's only planet-scale augmented reality platform. Over the long term, this platform has the potential to serve as an operating system for hardware and applications which connect the digital world with the physical world.
Peloton Interactive
1.1% of total assets
Peloton sells connected fitness equipment. The company offers its customers a way to access fun and motivating instructor-led fitness classes from the comfort of their own homes. Peloton's bikes and treadmills come with large screens, allowing users to stream live and on-demand classes from the company's studios in New York and London. The company maintains tight control over the customer experience. For example, it produces its own content, runs its own stores and even delivers the bikes. As a result, customer satisfaction is extremely high, user churn is very low, and long term subscriber economics ought to be attractive. We believe the market opportunity for a high quality and convenient fitness service like this could be large.
Slack Technologies
1.2% of total assets
Slack is a workplace collaboration and communication tool for teams. At its core, Slack is a tool that enables more efficient information flow. It began as information flow between people within an organisation, but has broadened out to people and applications, and eventually, across organisations. The proliferation of software in every aspect of business, as well as the growth of cloud and mobile computing, is creating an opportunity for Slack to be the new layer of business technology stack that brings people, applications, and data together onto a single hub. It acts as the place where people can effectively work together, access critical applications and services, and find important information to do their best work. Its rapid and viral adoption, its high user engagement, and its user love provides a strong foundation for it to become the unifying layer that ties all the applications for the enterprise together - a new 'operating system' for the enterprise.
Since the period end Slack Technologies has listed on the New York Stock Exchange (see Subsequent Events below).
Space Exploration Technologies (SpaceX)
2.1% of total assets
SpaceX designs, manufactures and launches advanced rockets and spacecraft. By fully embracing innovation and vertical integration, the company has opened up a series of cost and capability improvements which are transforming the space industry. We are excited by the long-term potential this creates.
Tanium
1.0% of total assets
At its core, Tanium is a powerful, lightweight communication protocol that can be used for gathering data, querying data sets, or sending instructions. The first application is in cyber security, where Tanium's product provides near real-time visibility and control on computer networks with theoretically unlimited scale, operating at speeds 4 orders of magnitude faster than the next best solution. It has been deployed by the US armed forces and around 50% of the Fortune 100. The company has continued to develop new use cases, and we believe Tanium's software could become ubiquitous across all chip-enabled devices.
Zipline International
1.2% of total assets
Zipline is a drone delivery company. It uses drones to deliver medical supplies, predominantly in Africa where traditional delivery methods are impeded by poor infrastructure. With Zipline's drones, patients in rural hospitals can have access to critical medical supplies in a matter of minutes, rather than hours or days. It is a classic example of a company which is leveraging new technologies to transform an industry that has seen little innovation for decades. Whilst Zipline largely operates in Africa today, the company's drone delivery technology has the potential to transform large swathes of the global medical delivery industry in the long term.
|
List of Investments as at 31 May 2019 |
|
Name |
Business |
2019 Value £'000 |
2019 % of total assets* |
|
Amazon |
Online retailer and cloud computing provider |
26,278 |
8.7 |
|
MarketAxess Holdings |
Electronic bond trading platform |
16,130 |
5.3 |
|
Netflix |
Subscription service for TV shows and movies |
14,641 |
4.8 |
|
Shopify Class A |
Cloud-based commerce platform provider |
14,584 |
4.8 |
|
Wayfair |
Online furniture and homeware retailer |
14,381 |
4.8 |
|
Illumina |
Gene sequencing equipment and consumables |
11,827 |
3.9 |
|
Alphabet Class A |
Online search and other online services |
11,469 |
3.8 |
|
Mastercard Class A |
Global electronic payments network |
10,837 |
3.6 |
|
Facebook Class A |
Social networking platform |
10,784 |
3.6 |
|
The Trade Desk |
Advertising technology company |
9,444 |
3.1 |
|
Abiomed |
Manufacturer of heart pumps |
8,996 |
3.0 |
|
Grubhub |
Online take-out ordering |
8,680 |
2.9 |
|
Tesla |
Electric cards, autonomous driving and solar energy |
8,461 |
2.8 |
|
First Republic Bank |
Private banking |
8,319 |
2.8 |
|
Space Exploration Technologies Series J Preferred u |
Rocket and spacecraft company |
5,221 |
1.7 |
|
Space Exploration Technologies Series K Preferred u |
Rocket and spacecraft company |
1,190 |
0.4 |
|
|
|
6,411 |
2.1 |
|
Roku |
Online media player |
6,212 |
2.1 |
|
Novocure |
Electric field based cancer therapies |
6,049 |
2.0 |
|
CoStar Group |
Commercial property information provider |
5,841 |
1.9 |
|
Watsco |
Air conditioning, heating and refrigeration equipment distributor |
5,746 |
1.9 |
|
Tableau Software Class A |
Analytics software |
5,421 |
1.8 |
|
Penumbra |
Medical tools to treat vascular diseases |
4,157 |
1.4 |
|
Chegg |
Online education company |
3,982 |
1.3 |
|
New Relic |
Cloud-based performance management software |
3,794 |
1.3 |
|
Glaukos |
Ophthalmic medical technology company |
3,776 |
1.2 |
|
Interactive Brokers Group |
Online broker |
3,759 |
1.2 |
|
Slack Technologies Series H Preferredu |
Collaboration software |
3,697 |
1.2 |
|
HEICO Class A |
Aerospace parts |
3,659 |
1.2 |
|
Fortive |
Diversified industrial company |
3,652 |
1.2 |
|
Zipline International Series C Preferredu |
Drone-based medical delivery |
3,521 |
1.2 |
|
Peloton Interactive Series F Preferredu |
Connected fitness equipment |
3,333 |
1.1 |
|
Stitch Fix |
Online clothing retailer |
3,305 |
1.1 |
|
Tanium Class Bu |
Online security management |
3,174 |
1.0 |
|
Lyft† |
Ridesharing |
2,896 |
1.0 |
|
Yext |
Digital knowledge management |
2,715 |
0.9 |
|
Alnylam Pharmaceuticals |
Therapeutic gene silencing |
2,657 |
0.9 |
|
Redfin |
Technology-based real estate brokerage firm |
2,565 |
0.8 |
|
Markel |
Speciality insurer |
2,527 |
0.8 |
|
Wabtec |
Technology products and services provider for the rail industry |
2,396 |
0.8 |
|
Aurora Innovation Series B Preferredu |
Self-driving technology |
2,380 |
0.8 |
|
Niantic Series C Preferredu |
Augmented reality games |
2,380 |
0.8 |
|
Butterfly Network Series D Preferredu |
Portable ultrasound and diagnostics |
2,359 |
0.8 |
|
Denali Therapeutics |
Clinical stage neurodegeneration company |
2,314 |
0.8 |
|
Indigo Agriculture Series E Preferredu |
Agricultural technology company |
2,290 |
0.8 |
|
DistributionNOW |
Oilfield drilling equipment distributor |
2,194 |
0.7 |
|
2U |
Educational technology company |
2,073 |
0.7 |
|
NVIDIA |
Graphics chips |
2,044 |
0.7 |
|
Activision Blizzard |
Videogame company |
2,013 |
0.7 |
|
Moderna |
Therapeutic messenger RNA |
1,939 |
0.6 |
|
JRSK Series D Preferredu |
Travel and lifestyle brand |
1,785 |
0.6 |
|
Agios Pharmaceuticals |
Cancer therapies |
1,397 |
0.5 |
|
Affirm Series F Preferredu |
Consumer finance |
1,190 |
0.4 |
|
Total Investments |
|
296,434 |
98.2 |
|
Net Liquid Assets |
|
5,396 |
1.8 |
|
Total Assets |
|
301,830 |
100.0 |
* Total assets less current liabilities, before deduction of borrowings.
u Denotes unlisted security.
† In line with the conditions of the IPO, investors with holdings prior to the listing are subject to a lock in period preventing trading of the holding. This expires on 30 September 2019.
|
|
Listed equities % |
Unlisted Securities† % |
Net liquid assets % |
Total % |
|
31 May 2019 |
87.4 |
10.8 |
1.8 |
100.0 |
Figures represent percentage of total assets.
† Includes holdings in preference shares and ordinary shares.
Distribution of total assets*
Sectoral as at 31 May 2019
|
|
At 31 May 2019 % |
|
Communication Services |
12.9 |
|
Consumer Discretionary |
26.1 |
|
Consumer Staples |
0.8 |
|
Financials |
10.6 |
|
Health Care |
15.1 |
|
Industrials |
12.0 |
|
Information Technology |
19.9 |
|
Real Estate |
0.8 |
|
Net Liquid Assets |
1.8 |
|
|
100.0 |
* Total assets less current liabilities before deduction of borrowings.
Key Performance Indicators
The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:
- the movement in net asset value per ordinary share;
- the movement in the share price;
- the movement of the net asset value and share price performance compared to the comparative index;
- the premium/discount of the share price to the net asset value per share; and
- the ongoing charges ratio.
An explanation of these measures can be found in the Glossary of Terms and Alternative Performance Measures at the end of this announcement.
The KPIs for the period from 7 February 2018 to 31 May 2019 are shown on page 1 of the Annual Report and Financial Statements.
In addition to the above, the Board considers peer group comparative performance.
Future Developments of the Company
The outlook for the Company is set out in the Chairman's Statement and the Managers' Report above.
Capital Structure
The Company's capital structure as at 31 May 2019 consisted of 229,800,000 ordinary shares of 1p each.
Share Issuances and Share Buy-backs
At the General Meeting held on 5 March 2018 special resolutions were passed granting the Directors special power to buy-back shares and to allot equity securities or sell ordinary shares held in treasury for cash.
Under the allotment authority the Directors have a general authority to allot ordinary shares and C shares, of up to an aggregate nominal amount equal to the difference between the nominal amount of shares issued at the Company's IPO and £10 million (i.e. up to 827,000,000 (in aggregate) ordinary shares or C shares of a nominal value of £0.01 each). As at 31 May 2019, the Company had issued 56,800,000 ordinary shares representing 32.8% of the called up share capital at 23 March 2018, the launch date of the Company, at a premium to net asset value on 91 separate occasions at an average price of 122.7p per share raising proceeds of £70 million. Between 1 June 2019 an 1 August 2019 the Company issued a further 3,300,000 shares raising proceeds of £4,750,000. This leaves the ability to issue a further 766,900,000 shares under the existing authority as at 1 August 2019. The authority lasts until the end of the period of five years from the date of the passing of that resolution.
During the period to 31 May 2019 the Company did not buy-back any ordinary shares. The buy-back authority expires at the end of the Company's first Annual General Meeting and the Directors will be seeking to renew the authority at the forthcoming Annual General Meeting to buy back shares. Details of the resolution can be found on page 18 and 19 of the Annual Report and Financial Statements.
Transactions with Related Parties and the Managers and Secretaries
The Directors' fees and shareholdings are detailed in the Directors' Remuneration Report on pages 25 and 26 of the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the period no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.
Baillie Gifford & Co Limited has been appointed as the Company's Alternative Investment Fund Manager and Company Secretaries. Details of the terms of the Investment Management Agreement are set out on page 17 of the Annual Report and Financial Statements and details of the fees during the period and the balance outstanding at the period end are shown in notes 3 and 11 of the Annual Report and Financial Statements respectively.
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 have been further sub-delegated to Baillie Gifford Overseas Limited.
The Investment Management Agreement between the AIFM and the Company 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. Compensation fees would only be payable in respect of the notice period if termination by the Company were to occur within a shorter notice period.
The annual management fee is 0.70% on the first £100m of net assets and 0.55% on the remaining net assets.
|
|
|
|
|
|
|
2019 £'000 |
|
Investment management fee |
|
|
|
|
|
1,893 |
Investment management fee outstanding as at 31 May 2019 amounted to £438,000.
Principal Risks
As explained on pages 21 and 22 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 below. As oversight of this risk, the Board considers at each meeting various metrics including industrial sector weightings, top and bottom stock contributors to performance and sales and purchases of investments. Individual investments are discussed with the portfolio managers together with their general views on the various investment market and sectors. A strategy meeting is held annually.
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. 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 pages 3 and 4 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 breaches of cyber security. To monitor potential risk, the Audit Committee 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.
Unlisted Investments - the Company's risk could be increased by its investment in unlisted securities. 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 securities in the context of the overall investment strategy and provides guidance to the Managers on the maximum exposure to unlisted securities. The Investment Policy limits the amount which may be invested in unlisted securities to 50% of the total assets of the Company, measured at the time of investment.
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 Audit Committee reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board and a summary of the key points is reported to the Audit Committee and any concerns investigated.
Leverage Risk - the Company may borrow money for investment purposes (sometimes known as 'gearing' or 'leverage'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. The Company can also make use of derivative contracts. 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 below and the Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Political and Associated Economic Risk - the Board is of the view that political change in areas in which the Company invests or may invest may have practical consequences for the Company. Political developments are closely monitored and considered by the Board. The Board continues to monitor developments as they occur regarding the UK 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 at present, the Board believes that the Company's portfolio, which predominantly comprises companies which are incorporated or domiciled in the United States, positions the Company to be suitably insulated from Brexit-related risk.
Viability Statement
In accordance with provision C.2.2 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 five years. The Directors believe this period to be appropriate as it is reflective of the longer term investment strategy of the Company, and to be a period during which, in the absence of any adverse change to the regulatory environment and to the favourable tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing the Company nor to the adequacy of the mitigating controls in place. Furthermore, the Directors do not reasonably envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period.
In considering the viability of the Company, the Directors have conducted a robust assessment of each of the Company's principal risks and uncertainties detailed above and in particular the impact of market risk where a significant fall in American equity markets would adversely impact on the value of the Company's investment portfolio. The Directors have also considered the Company's leverage and liquidity in the context of the unsecured floating rate loan facility which is due to expire in August 2023, the income and expenditure projections and the fact that the Company's investments comprise mainly readily realisable quoted equity securities which can be sold to meet funding requirements if necessary. Specific leverage and liquidity stress testing was conducted during the period. In addition, all of the key operations required by the Company are outsourced to third party providers and alternative providers could be engaged at relatively short notice if necessary. The Board has specifically considered the market uncertainty arising from the UK's negotiations to leave the European Union and can see no scenario that it believes would affect the going concern status or viability of the Company.
Based on the Company's processes for monitoring operating costs, share price discount/premium, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years as a minimum.
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 set out above and contained in the Financial Instruments below.
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) (Tax) 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 set out above which assesses the prospects of the Company over a period of five years, that the Company will continue in operational existence for a period of at least twelve 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 of maximising capital appreciation from a focussed and actively managed portfolio of investments predominantly in listed and unlisted US companies. The Company may borrow money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. 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 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 short term volatility. Risk provides the potential for both losses and gains. In assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.
Market Risk
The fair value or 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 of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager 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 above. The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. In the period to 31 May 2019 no such transactions were entered into. The Company's Investment Manager may not enter into derivative transactions without the prior approval of the Board.
Currency Risk
The Company's assets, liabilities and income are principally denominated in US dollars. The Company's functional currency and that in which it reports is sterling. Consequently, movements in the US dollar/sterling exchange rate will affect the sterling value of those items.
The Investment Manager monitors the Company's US dollar exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas 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 overseas 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.
US dollar 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.
|
At 31 May 2019 |
Investments £'000 |
Cash and deposits £'000 |
Loans £'000 |
Other debtors and creditors* £'000 |
Net exposure £'000 |
|
US dollar |
296,434 |
5,572 |
(11,901) |
(103) |
290,002 |
|
Total exposure to currency risk |
296,434 |
5,572 |
(11,901) |
(103) |
290,002 |
|
Sterling |
- |
380 |
- |
(453) |
(73) |
|
|
296,434 |
5,952 |
(11,901) |
(556) |
289,929 |
* Includes net non-monetary assets of £23,000.
Currency Risk Sensitivity
At 31 May 2019, if sterling had strengthened by 5% against the US dollar, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by £14,500,000. A 5% weakening of sterling against the US dollar, with all other variables held constant, would have had an equal but opposite effect on the Financial Statement amounts.
Interest Rate Risk
Interest rate movements may affect directly the level of income receivable on cash deposits and the interest payable on any variable rate borrowings.
They may also impact upon the market value of investments as 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 the income receivable on cash deposits.
The Company may finance part of its activities through borrowings at approved levels. The amount of any such borrowings and the approved levels are monitored and reviewed regularly by the Board.
The interest rate risk profile of the Company's financial assets and liabilities at 31 May 2019 is shown below.
Financial Assets
|
|
|
2019 |
||||
|
|
|
|
|
|
Fair value |
Weighted average interest rate |
|
Cash: |
|
|
|
|
|
|
|
US dollar |
|
|
|
|
5,572 |
0.8% |
|
Sterling |
|
|
|
|
380 |
0.1% |
|
|
|
|
|
|
5,952 |
|
The cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.
Financial Liabilities
|
|
|
2019 |
||||
|
|
|
|
|
Book value £'000 |
Weighted average interest rate |
Weighted average period until maturity |
|
Bank loans: |
|
|
|
|
|
|
|
US$ denominated - floating rate |
|
|
|
11,901 |
4.1% |
11 days |
Interest Rate Risk Sensitivity
An increase of 100 basis points in interest rates, with all other variables being held constant, would have decreased the Company's total net assets and total return on ordinary activities for the period from 7 February 2018 to 31 May 2019 by £101,000. This is mainly due to the Company's exposure to interest rates on its floating rate bank loan and cash balances. A decrease of 100 basis points would have had an equal but opposite effect.
Other Price Risk
Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Company's portfolio of unlisted Level 3 investments are not necessarily affected by market performance, however the valuations are affected by the performance of the underlying securities in line with the valuation criteria in note 1(c). The Board meets regularly and at each meeting reviews investment portfolio performance, the investment portfolio and the rationale for the current investment portfolio positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the comparative index. Investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.
Other Price Risk Sensitivity
A full list of the Company's investments is given above. In addition, an analysis of the investment portfolio by broad industrial or commercial sector is shown on page 15 of the Annual Report and Financial Statements.
91.0% of the Company's net assets are invested in quoted equities. A 5% increase in quoted equity valuations at 31 May 2019 would have increased total assets and total return on ordinary activities by £13,196,000. A decrease of 5% would have had an equal but opposite effect.
11.2% 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 38 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 May 2019 |
Impact |
|
Valuation Technique |
Fair Value of Investments £'000 |
Key variable input* |
Variable Input Sensitivity (%) |
|
£'000† |
% of net assets |
|
Recent Transaction/ Adjusted Recent transaction |
28,823 |
Selection of appropriate benchmark Selection of comparable companies Probability estimation of liquidation event# Application of valuation basis
|
±10 |
|
±2,882 |
±1.0 |
|
Multiples |
3,697 |
Estimated sustainable earnings Selection of comparable companies Application of illiquidity discount Probability estimation of liquidation event# Application of valuation basis
|
±20 |
|
±739 |
±0.3 |
|
Total |
32,520 |
|
|
|
±3,621 |
±1.3 |
† Impact on net assets and net return after taxation.
# 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 38 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 not significant as the majority of the Company's assets are investments in quoted securities (91.0% of net assets as at 31 May 2019) that are readily realisable. The Board provides guidance to the Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.
The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's current borrowing facility is detailed in note 11 of the Annual Report and Financial Statements. Under the terms of the borrowing facility, borrowings are repayable on demand at their current carrying value.
Borrowings Falling Due within One Year
|
|
|
2019 £'000 |
|
ING Bank N.V., London Branch |
|
11,901 |
Borrowing Facilities
The Company entered into a US$25 million five year revolving credit facility with ING Bank N.V., London Branch on 1 August 2018. At 31 May 2019, there were drawings of US$15 million at an interest rate of 4.10063%.
The main covenants relating to the loan are that borrowing should not exceed 30% of the Company's adjusted net asset value and the Company's minimum adjusted net asset value shall be £70 million. The adjusted net asset value calculation includes the deduction of 100% of any unlisted securities. There were no breaches in the loan covenants during the period to 31 May 2019.
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:
¾ 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;
¾ 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 Managers monitor the Company's risk by reviewing the Custodian's internal control reports and reporting its findings to the Board;
¾ 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 before any transfer of cash or securities away from the Company is completed;
¾ the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Managers; and
¾ cash is only held at banks that are regularly reviewed by the Managers. At 31 May 2019 all cash deposits were held with the custodian bank.
Credit Risk Exposure
The exposure to credit risk at 31 May 2019 was:
|
|
|
2019 £'000 |
|
Cash and short term deposits |
|
5,952 |
|
Debtors and prepayments |
|
51 |
|
|
|
6,003 |
The maximum exposure in cash during the period from 7 February 2018 to 31 May 2019 was £171,396,000 and the minimum was £nil. None of the Company's financial assets are past due or impaired.
Fair Value of Financial Assets and Financial Liabilities
The Directors are of the opinion that the carrying amount of financial assets and liabilities of the Company in the Balance Sheet approximate their fair value.
Capital Management
The capital of the Company is its share capital and reserves as set out in notes 12 and 13 of the Annual Report and Financial Statements together with its borrowings (see note 11 of the Annual Report and Financial Statements). The objective of the Company is to invest predominantly in listed and unlisted US companies in order to achieve capital growth. The Company's investment policy is set out on page 3 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 and changes to the share capital during the period are set out in notes 12 and 13 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loan which are detailed in note 11 of the Annual Report and Financial Statements.
Subsequent Events
Unlisted Investments
Slack Technologies listed on 20 June 2019 by way of a direct listing on the New York Stock Exchange. The reference price issued prior to listing of US$26 and the closing price on the first day after trading of US$38.64 represented an uplift of 40.6% and 109.0% from the valuation applied as at 31 May 2019. As neither price was known or supported at the period end, management have not adjusted the period end valuation and any uplift in valuation from the period end date will be reported within the unrealised gains and losses on investments for the year ended 31 May 2020.
Share Price and Net Asset Value Movements
Subsequent to the period end investment valuations have continued to increase through the underlying investment performance since the period end valuation, resulting in an increase in investment valuation of 14.2% and a related movement in net asset value of 13.4%. As at 1 August 2019 the share price was 14.7% higher than as at 31 May 2019. As all movements relate to post period end activity these will be reported within the Annual Report for the year ended 31 May 2020.
AIFM Remuneration
In accordance with the Alternative Investment Fund Managers 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. In accordance with the Directive, the AIFM's 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 also available at www.bailliegifford.com.
Leverage Exposure
The Company's maximum and actual leverage levels (see Glossary of Terms and Alternative Performance Measures at the end of this announcement) at 31 May 2019 are shown below:
|
|
|
|
Gross method |
Commitment method |
|
Maximum limit |
|
|
2.50:1 |
2.00:1 |
|
Actual |
|
|
1.04:1 |
1.04:1 |
Investments
|
As at 31 May 2019 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Listed securities |
263,914 |
- |
- |
263,914 |
|
Unlisted ordinary shares |
- |
- |
3,174 |
3,174 |
|
Unlisted preference shares† |
- |
- |
29,346 |
29,346 |
|
Total financial asset investments |
263,914 |
- |
32,520 |
296,434 |
† 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.
During the period from 7 February 2018 to 31 May 2019 investments with a book cost of £2,286,000 were transferred from Level 3 to Level 1 on becoming listed.
Investments in securities are financial assets held at fair value through profit or loss. In accordance with Financial Reporting Standard 102, the tables above 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 39 of the Annual Report and Financial Statements.
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial period. Under that law they have elected to prepare the Financial Statements in accordance with applicable law and United Kingdom Accounting Standards including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'.
Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to:
¾ select suitable accounting policies and then apply them consistently;
¾ make judgements and accounting estimates that are reasonable and prudent;
¾ state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;
¾ assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
¾ 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 laws and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, a Directors' Remuneration Report and a 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 Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in Respect of the Annual Financial Report
We confirm that to the best of our knowledge:
¾ the Financial Statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and net return of the Company; and
¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
We consider the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
On behalf of the Board
Tom Burnet
Chairman
2 August 2019
Income Statement
For the period from 7 February 2018 to 31 May 2019
|
|
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
Gains on investments |
- |
50,864 |
50,864 |
|
Currency gains |
- |
1,040 |
1,040 |
|
Income (note 2) |
699 |
- |
699 |
|
Investment management fee |
(1,893) |
- |
(1,893) |
|
Other administrative expenses |
(359) |
- |
(359) |
|
Net return before finance costs and taxation |
(1,553) |
51,904 |
50,351 |
|
Finance costs of borrowings |
(401) |
- |
(401) |
|
Net return on ordinary activities before taxation |
(1,954) |
51,904 |
49,950 |
|
Tax on ordinary activities |
(100) |
- |
(100) |
|
Net return on ordinary activities after taxation |
(2,054) |
51,904 |
49,850 |
|
Net return per ordinary share (note 4) |
(1.09p) |
27.54p |
26.45p |
The total column of this statement represents the profit and loss account of the Company. The supplementary revenue and capital 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 the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and comprehensive income for the period.
Balance Sheet
As at 31 May 2019
|
|
£'000 £'000 |
|
|
Fixed assets |
|
|
|
Investments held at fair value through profit or loss |
|
296,434 |
|
Current assets |
|
|
|
Debtors |
51 |
|
|
Cash and cash equivalents |
5,952 |
|
|
|
6,003 |
|
|
Creditors |
|
|
|
Amounts falling due within one year (note 6) |
(12,508) |
|
|
Net current liabilities |
|
(6,505) |
|
Net assets |
|
289,929 |
|
Capital and reserves |
|
|
|
Share capital |
|
2,298 |
|
Share premium account |
|
68,839 |
|
Special distributable reserve |
|
168,942 |
|
Capital reserve |
|
51,904 |
|
Revenue reserve |
|
(2,054) |
|
Shareholders' funds |
|
289,929 |
|
Net asset value per ordinary share |
|
126.17p |
|
Ordinary shares in issue (note 8) |
|
229,800,000 |
Statement of Changes in Equity
For the period from 7 February 2018 to 31 May 2019
|
|
Redeemable preference shares £'000 |
Share £'000 |
Share premium account £'000 |
Special distributable reserve £'000 |
Capital Reserve £'000 |
Revenue reserve £'000 |
Shareholders' £'000 |
|
Shareholders' funds at 7 February 2018 |
- |
- |
- |
- |
- |
- |
- |
|
Redeemable preference shares issued |
50 |
- |
- |
- |
- |
- |
50 |
|
Ordinary shares issued |
- |
2,298 |
237,781 |
- |
- |
- |
240,079 |
|
Redemption of redeemable preference shares |
(50) |
- |
- |
- |
- |
- |
(50) |
|
Cancellation of share premium |
- |
- |
(168,942) |
168,942 |
- |
- |
- |
|
Net return on ordinary activities after taxation |
- |
- |
- |
- |
51,904 |
(2,054) |
49,850 |
|
Shareholders' funds at 31 May 2019 |
- |
2,298 |
68,839 |
168,942 |
51,904 |
(2,054) |
289,929 |
Cash Flow Statement
For the period from 7 February 2018 to 31 May 2019
|
|
£'000 £'000 |
|
|
Cash flows from operating activities |
|
|
|
Net return on ordinary activities before taxation |
|
49,950 |
|
Net gains on investments |
|
(50,864) |
|
Currency gains |
|
(1,040) |
|
Finance costs of borrowings |
|
401 |
|
Overseas withholding tax |
|
(98) |
|
Changes in debtors and creditors |
|
440 |
|
Cash from operations* |
|
(1,211) |
|
Finance costs paid |
|
(287) |
|
Net cash outflow from operating activities |
|
(1,498) |
|
Cash flows from investing activities |
|
|
|
Acquisitions of investments |
(271,569) |
|
|
Disposals of investments |
25,999 |
|
|
Net cash outflow from investing activities |
|
(245,570) |
|
Cash flows from financing activities |
|
|
|
Ordinary shares issued |
240,079 |
|
|
Bank loans drawn down |
28,778 |
|
|
Bank loans repaid |
(17,024) |
|
|
Net cash inflow from financing activities |
|
251,833 |
|
Increase in cash and cash equivalents |
|
4,765 |
|
Exchange movements |
|
1,187 |
|
Cash and cash equivalents at 7 February 2018 |
|
- |
|
Cash and cash equivalents at 31 May 2019 |
|
5,952 |
* Cash from operations includes dividends received in the period of £651,000 and interest received of £35,000.
|
Notes to the Financial Statements |
|
||||
|
Baillie Gifford US Growth Trust plc (the 'Company') was incorporated under the Companies Act 2006 in England and Wales as a public limited company with registered number 11194060. The Company is an investment company within the meaning of section 833 of the Companies Act 2006 and carries on business as an investment trust. |
|||||
|
1. |
Principal Accounting Policies The Financial Statements for the period from 7 February 2018 to 31 May 2019 have been prepared in accordance with FRS 102, 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and on the basis of the accounting policies set out below. The Company was incorporated on 7 February 2018 and therefore no comparative information has been provided. |
||||
|
|
(a) Basis of Accounting All of the Company's operations are of a continuing nature and the Financial Statements are prepared on a going concern basis under the historical cost convention, modified to include the revaluation of fixed asset investments at fair value through profit or loss, and on the assumption that approval as an investment trust under section 1158 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011 will be retained. It is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement above, that the Company will continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements. The Company's assets, the majority of which are readily realisable, exceed its liabilities significantly.
|
||||
|
|
The Financial Statements have been prepared in accordance with the Companies Act 2006, applicable UK Accounting Standards, the Association of Investment Companies ('AIC') Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018 with consequential amendments. In order to reflect better the activities of the Company and in accordance with guidance issued by the AIC, supplementary information which analyses the profit and loss account between items of a revenue and capital nature has been presented in the Income Statement. Although the Company invests in US dollar investments, the Directors consider the Company's functional currency to be sterling, as the Company's share capital is denominated in sterling, the entity is listed on a sterling stock exchange in the UK, the Company's shareholders are predominantly based in the UK and the Company and its investment manager, who are subject to the UK's regulatory environment, are also UK based. Financial assets and financial liabilities are recognised in the Company's Balance Sheet when it becomes a party to the contractual provisions of the instrument. |
||||
|
|
(b) Accounting Estimates, Assumptions and Judgements The preparation of the Financial Statements requires the use of estimates, assumptions and judgements. These estimates, assumptions and judgements affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available, the actual outcome may differ from these estimates. The key sources of estimation and uncertainty relate to the fair valuation of the unlisted investments. |
||||
|
|
Judgements The Directors consider that the preparation of the Financial Statements involves the following key judgements: (i) the determination of the functional currency of the Company as sterling (see rationale in 1(a) above); and (ii) the fair valuation of the unlisted investments. The key judgements in the fair valuation process are: (i) the Managers' determination of the appropriate application of the International Private Equity and Venture Capital Valuation ('IPEV') Guidelines 2018 to each unlisted investment; and (ii) the Directors' consideration of whether each fair value is appropriate following detailed review and challenge. The judgement applied in the selection of the methodology used (see 1(c) below) for determining the fair value of each unlisted investment can have a significant impact upon the valuation. |
||||
|
|
Estimates The key estimate in the Financial Statements is the determination of the fair value of the unlisted investments by the Managers for consideration by the Directors. This estimate is key as it significantly impacts the valuation of the unlisted investments at the Balance Sheet date. The fair valuation process involves estimation using subjective inputs that are unobservable (for which market data is unavailable). The main estimates involved in the selection of the valuation process inputs are: (i) the selection of appropriate comparable companies in order to derive revenue multiples and meaningful relationships between enterprise value, revenue and earnings growth. Comparable companies are chosen on the basis of their business characteristics and growth patterns; (ii) the selection of a revenue metric (either historical or forecast); (iii) the application of an appropriate discount factor to reflect the reduced liquidity of unlisted companies versus their listed peers; (iv) the estimation of the probability assigned to an exit being through an initial public offering ('IPO') or a company sale;
|
||||
|
|
(v) the selection of an appropriate industry benchmark index to assist with the valuation validation or the application of valuation adjustments, particularly in the absence of established earnings or closely comparable peers; and (vi) the calculation of valuation adjustments derived from milestone analysis (i.e. incorporating operational success against the plan/forecasts of the business into the valuation). |
||||
|
|
Fair value estimates are cross-checked to alternative estimation methods where possible to improve the robustness of the estimates. As the valuation outcomes may differ from the fair value estimates a price sensitivity analysis is provided in Other Price Risk Sensitivity in note 16 on page 47 of the Annual Report and Financial Statements to illustrate the effect on the Financial Statements of an over or under estimation of fair values. The risk of an over or under estimation of fair values is greater when methodologies are applied using more subjective inputs. |
||||
|
|
Assumptions The determination fair value by the Managers involves key assumptions dependent upon the valuation technique used. As explained in 1(c) below, the primary technique applied under the IPEV Guidelines is the Multiples approach. . The valuation process recognises also, as stated in the IPEV Guidelines, that the price of a recent investment may be an appropriate starting point for estimating fair value. The |
||||
|
|
The Multiples approach involves subjective inputs and therefore presents a greater risk of over or under estimation and particularly in the absence of a recent transaction. |
||||
|
|
The key assumptions for the Multiples approach are that the selection of comparable companies provides a reasonable basis for identifying relationships between enterprise value, revenue and growth to apply in the determination of fair value. Other assumptions include: (i) the discount applied for reduced liquidity versus listed peers; (ii) the probabilities assigned to an exit being through either an IPO or a company sale; and (iii) that the application of milestone analysis and industry benchmark indices are a reasonable basis for applying appropriate adjustments to the valuations. Valuations are cross-checked for reasonableness to alternative Multiples-based approaches or benchmark index movements as appropriate. |
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|
|
(c) Investments The Company's investments are classified, recognised and measured at fair value through profit or loss in accordance with sections 11 and 12 of FRS 102. Changes in fair value of investments and gains and losses on disposal are recognised as capital items in the Income Statement. |
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|
|
Purchases and Sales Purchases and sales of investments are accounted for on a trade date basis. Expenses incidental to purchase and sale are written off to capital at the time of acquisition or disposal. All investments are designated as valued at fair value through profit or loss upon initial recognition and are measured at subsequent reporting dates at fair value. |
||||
|
|
Listed Investments The fair value of listed security investments is the last traded price on recognised overseas exchanges. |
||||
|
|
Unlisted Investments Unlisted investments are valued at fair value by the Directors following a detailed review and appropriate challenge of the valuations proposed by the Managers. The Managers' unlisted investment valuation policy applies techniques consistent with the International Private Equity and Venture Capital Valuation ('IPEV') Guidelines 2018. The techniques applied are predominantly market-based approaches. The market-based approaches available under IPEV are set out below and are followed by an explanation of how they are applied to the Company's unlisted portfolio:
|
||||
|
|
- Multiples; - Industry Valuation Benchmarks; and - Available Market Prices. |
||||
|
|
The nature of the unlisted portfolio currently will influence the valuation technique applied. The valuation approach recognises that, as stated in the IPEV Guidelines, the price of a recent investment, if resulting from an orderly transaction, generally represents fair value as at the transaction date and may be an appropriate starting point for estimating fair value at subsequent measurement dates. However, consideration is given to the facts and circumstances as at the subsequent measurement date, including changes in the market or performance of the investee company. Milestone analysis is used where appropriate to incorporate the operational progress of the investee company into the valuation. Additionally, the background to the transaction must be considered. As a result, various multiples-based techniques are employed to assess the valuations particularly in those companies with established revenues. Discounted cashflows are used where appropriate. An absence of relevant industry peers may preclude the application of the Industry Valuation Benchmarks technique and an absence of observable prices may preclude the Available Market Prices approach. All valuations are cross-checked for reasonableness by employing relevant alternative techniques.
|
||||
|
|
The unlisted investments are valued according to a three monthly cycle of measurement dates. The fair value of the unlisted investments will be reviewed before the next scheduled three monthly measurement date on the following occasions: - at the period end and half year end of the Company; and - where there is an indication of a change in fair value as defined in the IPEV guidelines (commonly referred to as 'trigger' events). |
||||
|
|
Gains and Losses Gains and losses on investments, including those arising from foreign currency exchange differences, are recognised in the Income Statement as capital items.
The Managers monitor the investment portfolio on a fair value basis and use the fair value basis for investments in making investment decisions and monitoring financial performance. |
||||
|
|
(d) Cash and Cash Equivalents Cash and cash equivalents include cash in hand and deposits repayable on demand. Deposits are repayable on demand if they can be withdrawn at any time without notice and without penalty or if they have a maturity or period of notice of not more than one working day. |
||||
|
|
(e) Financial Liabilities Bank loans and overdrafts are classified as loans and are measured at amortised cost. They are initially recorded at the proceeds received net of direct costs. |
||||
|
|
(f) Income (i) Income from equity investments is brought into account on the date on which the investments are quoted ex-dividend or, where no ex-dividend date is quoted, when the Company's right to receive payment is established. (ii) If scrip dividends are taken in lieu of dividends in cash, the net amount of the cash dividend declared is credited to the revenue account. Any excess of shortfall in the value of the shares received over the amount of the cash dividend foregone is recognised as capital. (iii) Special dividends are treated as repayments of capital or income depending on the facts of each particular case. (iv) Overseas dividends include the taxes deducted at source. (v) Interest receivable on bank deposits and underwriting commission are recognised on an accruals basis. |
||||
|
|
(g) Expenses All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement except where (i) they relate directly to the acquisition or disposal of an investment (transaction cost), in which case they are recognised as capital within losses/gains on investments; and (ii) they relate directly to the buy-back/issuance of shares, in which case they are added to the buy-back cost or deducted from the share issuance proceeds. |
||||
|
|
(h) Finance Costs Finance costs are accounted for on an accruals basis and on an effective interest rate basis and are charged through the revenue account. |
||||
|
|
(i) Taxation Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those enacted or substantively enacted at the reporting date. Deferred taxation is provided on an undiscounted basis on all timing differences which have originated but not reversed by the Balance Sheet date, calculated at the tax rates expected to apply when the timing differences reverse, based on what has been enacted or substantially enacted, relevant to the benefit or liability. Deferred tax assets are recognised only to the extent that it is more likely than not that there will be taxable profits from which underlying timing differences can be deducted. |
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|
|
(j) Foreign Currencies Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or revenue reserve as appropriate. Foreign exchange movements on investments are included in the Income Statement within gains or losses on investments. |
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|
|
(k) Special Distributable Reserve The special distributable reserve can be used for the repurchase of shares and may be distributed by way of dividend. |
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|
|
(l) Capital Reserve Gains and losses on disposal of investments, changes in the fair value of investments held and realised and unrealised foreign exchange differences of a capital nature are dealt with in this reserve after being recognised in the Income Statement. Purchases of the Company's own shares may be funded from this reserve. |
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|
|
(m) Single Segment Reporting The Company is engaged in a single segment of business, being investment business, consequently no business segmental analysis is provided. |
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|
2. |
Income |
|
2019 £'000 |
||
|
|
Income from investments |
|
664 |
||
|
|
Other income |
|
35 |
||
|
|
|
|
699 |
||
|
3. |
Net Return per Ordinary Share |
2019 Revenue |
2019 Capital |
2019 Total |
|
| Revenue return on ordinary activities after taxation |
(1.09p) |
27.54p |
26.45p |
||
|
|
Revenue return per ordinary share is based on the net revenue loss on ordinary activities after taxation of £2,054,000 and on 188,466,423 ordinary shares, being the weighted average number of ordinary shares in issue during the period from 7 February 2018 to 31 May 2019. Capital return per ordinary share is based on the net capital gain for the financial period of £51,904,000 and on 188,466,423 ordinary shares, being the weighted average number of ordinary shares in issue during the period from 7 February 2018 to 31 May 2019. Total return per ordinary share is based on the total gain for the financial period of £49,850,000 and on 188,466,423 ordinary shares, being the weighted average number of ordinary shares in issue during the period from 7 February 2018 to 31 May 2019. There are no dilutive or potentially dilutive shares in issue. |
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|
4. |
Ordinary Dividends There are no dividends paid and proposed in respect of the period from 7 February 2018 to 31 May 2019. There is no investment income available for distribution by way of dividend for the period from 7 February 2018 to 31 May 2019 due to the revenue loss of £2,054,000 in the period. |
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|
5. |
|
|
2019 Number of shares |
2019 £'000 |
|
| Share capital: Ordinary shares of 1p each |
|
|
|
||
| Allotted, called up and fully paid |
|
229,800,000 |
2,298 |
||
|
|
On incorporation, the share capital of the Company was £50,000.01 represented by one ordinary share with a nominal value of 1p and 5,000,000 redeemable preference shares with a nominal value of 1p, which were held by Baillie Gifford & Co Limited to allow the Company to commence business and to exercise its borrowing powers. The redeemable preference shares were to be redeemed upon completion of the IPO out the proceeds of the IPO. At its IPO on 23 March 2018, the Company issued 172,999,999 ordinary shares of 1p and raised gross proceeds of £173,000,000 which was used to finance the initial investments of the Company. The issue costs in respect of the initial investment were £2,273,000, which were made up of set up costs of £453,000 and commission of £1,820,000. On 26 June 2018 the Company, by special resolution, redeemed the redeemable preference shares as confirmed by an Order of the High Court of Justice, Chancery Division. The Company has authority to allot shares under section 551 of the Companies Act 2006. The Board has authorised use of this authority to issue new shares at a premium to net asset value in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the period from the IPO, 23 March 2018 to 31 May 2019, the Company issued a total of 56,800,000 shares on a non pre-emptive basis (nominal value £568,000, representing 32.8% of the issued share capital at 23 March 2018) at a premium to net asset value (on the basis of debt valued at par value), raising proceeds of £69,029,000, which has been invested in accordance with the Company's investment policy. Over the period from 31 May 2019 to 1 August 2019 the Company has issued a further 3,300,000 shares at a premium to net asset value, raising proceeds of £4,795,000. The Company has authority to buy back up to 75 million shares on an ad hoc basis. The number of shares to be acquired other than pursuant to an offer made to shareholders generally between the date of the special resolution granting the general authority and the date of the first Annual General Meeting of the Company shall not exceed 14.99% of the shares issued pursuant to the IPO. No shares were bought back in the period to 31 May 2019. At 31 May 2019 the Company had authority to buy back a further 75 million ordinary shares. |
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|
6. |
Transaction costs on purchases amounted to £55,000 and transaction costs on sales amounted to £12,000, being £67,000 in total these have been recognised within losses/gains on investments. |
|
|
|
Glossary of Terms and Alternative Performance Measures ('APM') Total Assets The total value of all assets held less all liabilities (other than liabilities in the form of borrowings). Shareholders' Funds and Net Asset Value Shareholders' funds is the value of all assets held less all liabilities, with borrowings deducted at book cost. Net Asset Value (NAV) is the value of all assets held less all liabilities, with borrowings deducted at either fair value or par value as described below. Per share amounts are calculated by dividing the relevant figure by the number of ordinary shares in issue. Borrowings at Par Value (APM) Borrowings are valued at nominal par value. Borrowings at Fair Value (APM) Borrowings are valued at an estimate of their market worth. 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. Total Return (APM) The total return is the return to shareholders after reinvesting any dividend on the date that the share price goes ex-dividend. Ongoing Charges Ratio (APM) The total recurring expenses (excluding the Company's cost of dealing in investments and borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value).
|
|
|
|
Ongoing Charges Calculation |
|
31 May 2019 £'000 |
|
|
|
Investment management fee |
|
|
1,893 |
|
|
Other administrative expenses |
|
|
359 |
|
|
Total expenses |
|
|
2,252 |
|
|
Total Expenses annualised* |
(a) |
1,890 |
|
|
|
Average daily cum-income net asset value |
(b) |
244,760 |
|
|
|
Ongoing charges |
|
(a÷b) |
0.77% |
|
|
* The total expenses above cover the period 23 March 2018 to 31 May 2019, a period of 435 days.
|
|||
|
|
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. Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds. Invested gearing is the Company's borrowings at par less cash and brokers' balances expressed as a percentage of shareholders' funds. |
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|
|
Leverage (APM) For the purposes of the Alternative Investment Fund Managers 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.
|
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