Annual Financial Report

Baillie Gifford US Growth Trust PLC

28 August 2024

 

Baillie Gifford US Growth Trust plc (USA)

Legal Entity Identifier: 213800UMIOUWXZPKE539

Regulated Information Classification: Annual Financial and Audit Reports

Annual Report and Financial Statements

Further to the statement of audited annual results announced to the Stock Exchange on 22 August 2024, Baillie Gifford US Growth Trust plc ("the Company") announces that the Company's Annual Report and Financial Statements for the year ended 31 May 2024, including the Notice of Annual General Meeting, has today been posted to shareholders and submitted electronically to the National Storage Mechanism where it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

It is also available on the Company website at: bgusgrowthtrust.com (as is the statement of audited annual results announced by the Company on 22 August 2024).

Responsibility statement of the Directors in respect of the Annual Financial Report

Each of the Directors who were in office during the year ending 31 May 2023 and remain in office at the date of approval of the Financial Statements confirm that, to the best of their knowledge:

-    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;

-      the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy; and

-        the Strategic report and Directors' report include 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.

Principal and emerging risks relating to the Company

As explained on pages 70 and 71 of the Annual Report and Financial Statements there is an ongoing 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 and emerging risks facing the Company, including those that would threaten its business model, future performance, regulatory compliance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below.

The Board considers heightened macroeconomic and geopolitical concerns to be factors which exacerbate existing risks, rather than discrete risks, within the context of an investment trust. Their impact is considered within the relevant risks.

What is the risk?	How is it managed?	Current assessment of risk
Financial risk: The Company's assets consist mainly of listed securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 17 to the Financial Statements on pages 104 to 111 of the Annual Report and Financial Statements.	The Board has, in particular, considered the impact of heightened market volatility during recent months due to macroeconomic factors such as higher inflation, interest rates and geopolitical concerns. To mitigate this risk the Board considers at each meeting various portfolio metrics including individual stock performance and weightings, the top and bottom contributors to performance, purchases and sales of investments and relative sector weightings against the comparative index. The portfolio managers provide their rationale for stock selection decisions. A comprehensive strategy meeting is held annually to facilitate challenge of the Company's strategy. The value of the Company's investment portfolio would be affected by any impact, positively or negatively, on sterling but such impact would be partially offset by the effect of exchange rate movements on the Company's dollar denominated borrowings.	This risk is considered to be high but unchanged as a result of heightened macroeconomic and geopolitical concerns which continue to create a challenging environment for businesses, but with some signs that interest rate pressures, for example, may be starting to recede.
What is the risk?	How is it managed?	Current assessment of risk
Private company investment risk: The Company's liquidity risk could be increased by its investment in private company 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 private company securities in the context of the overall investment strategy and provides guidance to the Managers on the maximum exposure to private company securities. The investment policy limits the amount which may be invested in private company securities to 50% of the total assets of the Company in aggregate, measured at the time of investment.	There has been no significant change to the number of private company investments during the period. At 31 May 2024, private company investments comprised 34.1% of total assets.
What is the risk?	How is it managed?	Current assessment of risk
Investment strategy risk: Pursuit of 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 wide 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 and raises any matters of concern with the Managers.	This risk is considered to be stable as there are signs that the market's appetite for growth stocks, typically held by the Company, is recovering following the recent period of heightened macroeconomic and geopolitical concerns.
What is the risk?	How is it managed?	Current assessment of risk
Environmental social and governance risk: Perceived problems on environmental, social and governance ('ESG') matters in an investee company could lead to that company's shares being less attractive to investors, adversely affecting its share price, in addition to potential valuation issues arising from any direct impact of the failure to address the ESG weakness on the operations or management of the investee company (for example a failure to identify a pathway to Net Zero or poor employment practices). Repeated failure by the Managers to identify ESG weaknesses in investee companies could lead to the Company's own shares being less attractive to investors, adversely affecting its own share price.	This is mitigated by the Managers' strong ESG stewardship and engagement policies which are available to view on the Managers' website, bailliegifford.com, and which have been reviewed and endorsed by the Company, and which have been fully integrated into the investment process as well as the extensive up-front and ongoing due diligence which the Managers undertake on each investee company. Due diligence includes assessment of the risks inherent in climate change as well as ongoing positive engagement on ESG-related issues (see pages 17 to 19 of the Annual Report and Financial Statements).	The Managers continue to embed analysis of ESG factors within the investment process. Although climate activists have recently targeted the Managers' sponsorship of cultural events, media coverage has been balanced and has largely recognised that the objective is not to seek perfection but to focus on materiality and the direction of travel, with the understanding that engagement can encourage responsibility and meaningful change.
What is the risk?	How is it managed?	Current assessment of risk
Discount risk: The discount/premium at which the Company's shares trade relative to its net asset value can change. The risk of a wide discount is that it may undermine investor confidence in the Company and shareholders selling their shares will get less than the net asset value of those shares.	To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares, when deemed by the Board to be in the best interests of the Company and its shareholders. The liquidity policy is set out on page 46 of the Annual Report and Financial Statements.	The Company's discount narrowed during the year. Over the year to 31 May 2024 the Company bought back 7,925,000 shares to be held in treasury. The Board continues to monitor closely the discount and the impact of the current liquidity policy being applied.
What is the risk?	How is it managed?	Current assessment of risk
Regulatory risk: Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UK 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.	All control procedures are working effectively. There have been no material regulatory changes that impacted the Company during the year.
What is the risk?	How is it managed?	Current assessment of risk
Custody and Depositary risk: Safe custody of the Company's assets may be compromised through control failures by the Depositary, including breaches of cyber security.	To mitigate this risk, the 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 who also agree uncertificated private portfolio holdings to confirmations from investee companies. The Custodian's assured 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.	All control procedures were working effectively.
What is the risk?	How is it managed?	Current assessment of risk
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. The Audit Committee reviews Baillie Gifford's Report on Internal Controls and 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.	All control procedures are working effectively. The other key third party service providers have not experienced significant operational difficulties affecting their respective services to the Company.
What is the risk?	How is it managed?	Current assessment of risk
Cyber security risk: A cyber attack on Baillie Gifford's network or that of a third party service provider could impact the confidentiality, integrity or availability of data and systems.	To mitigate this risk, the Audit Committee reviews reports on Internal Controls published by Baillie Gifford and other third party service providers. Baillie Gifford's Business Risk department reports to the Audit Committee on the effectiveness of information security controls in place at Baillie Gifford and its business continuity framework. Cyber security due diligence is performed by Baillie Gifford on third party service providers which includes a review of crisis management and business continuity frameworks.	This risk is seen as increasing due to recent indications that the continuation of geopolitical tensions could lead to cyber attacks. Emerging technologies, including AI, could potentially increase information security risks.
What is the risk?	How is it managed?	Current assessment of risk
Leverage risk: The Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. The Company can also make use of derivative contracts. The use of such contracts may have a gearing effect so as to enhance, or worsen, returns relative to the amount invested in this way.	To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found on page 119 and the Glossary of terms and alternative performance measures on pages 124 to 127 of the Annual Report and Financial Statements.	No significant change in risk level. The Company refinanced its existing loan facilities with revolving credit facilities during the period.
What is the risk?	How is it managed?	Current assessment of risk
Political risk: The Board is of the view that political change in areas in which the Company invests or may invest may have financial consequences for the Company.	Political developments are closely monitored and considered by the Board. The Board has particular regard to macroeconomic and geopolitical tensions, and monitors portfolio diversification.	This risk is increasing as governments and consumers around the world continue to assess the impact of heightened geopolitical tensions and conflicts as well as challenging macroeconomic conditions.
Emerging risks: As explained on pages 70 and 71 of the Annual Report and Financial Statements the Board has regular discussions on principal risks and uncertainties, including any risks which are not an immediate threat but could arise in the longer term. The Board considers that the key emerging risks arise from the interconnectedness of global economies and the related exposure of the investment portfolio to external and emerging threats such as the societal and financial implications of escalating geopolitical tensions, cyber security risks including developing AI and quantum computing capabilities and new infectious diseases or similar public health threats. This is mitigated by the Managers' close links to the investee companies and their ability to ask questions on contingency plans. The Managers believe the impact of such events may be to slow growth rather than to invalidate the investment rationale over the long term.

Baillie Gifford & Co Limited

Company Secretaries

28 August 2024

 

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