Annual Report and Circular

RNS Number : 1477W
Edinburgh Worldwide Inv Trust PLC
20 December 2013
 



Edinburgh Worldwide Investment Trust plc

 

Circular and Annual Financial Report

 

The Company has today published a circular (the "Circular") containing notice of the Annual General Meeting of the Company and seeking approval to make certain changes to the Company's investment policy.

The Directors, as advised by Baillie Gifford & Co (the Company's Investment Manager) believe that the investment policy of the Company should be broadened to allow the Company to invest in companies at a much earlier point in their growth cycle and accordingly are proposing changes to the Company's current investment policy.

The Directors believe that the proposals will prove beneficial to the potential growth of the portfolio and will improve the Company's differentiation and attractiveness to investors. As a result, it is hoped that this will lead to improved liquidity of the Company's shares and limit discount volatility.

Full details of the changes to be made to the Company's current investment policy are set out in the Circular. Copies of the Circular are available for inspection during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the offices of Baillie Gifford & Co, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

A copy of the Circular will also be available free of charge via the National Storage Mechanism at http://www.morningstar.co.uk/uk/NSM.

 

Expected Timetable

Latest time and date for receipt of forms of direction

12 noon on 20 January 2014

Latest time and date for receipt of forms of proxy

12 noon on 23 January 2014

Annual General Meeting

12 noon on 27 January 2014

 

 

A copy of the Annual Report and Financial Statements for the year ended 31 October 2013 has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Circular and Annual Report and Financial Statements for the year ended 31 October 2013 are also available on Edinburgh Worldwide's page of the Baillie Gifford website at:http://www.edinburghworldwide.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 October 2013 which require to be published by DTR 4.1 is set out on the following pages.

 

 

Baillie Gifford & Co

Company Secretaries

20 December 2013


Chairman's Statement

 

Performance

It is pleasing to note that performance has been strong over the past year. In the year to 31 October 2013, the Company's net asset value per share increased by 35.6% and the share price rose 44.4%. The MSCI All Countries World Index (in sterling terms) increased 21.0% during this period. The Company's discount narrowed over the year from 12.1% to 6.3%.

Over the ten years that Baillie Gifford & Co has been managing the Company's assets, in total return terms, net asset value per share has increased by 191%, the share price by 245% and the MSCI All Countries World Index by 132%.

Despite this performance, the Company's discount has been in double digits for most of the year. Liquidity in the Company's shares has been suboptimal in comparison to alternative offerings, with only sporadic periods of notable trading activity. Disappointingly, this has been the pattern over recent years. These points are of concern to your Board and Managers as they dissuade current and potential shareholders from investing, so we are proposing to address this.

 

Proposed Change to Investment Policy

The Company's investment objective is to achieve long term capital growth by investing in listed companies throughout the world. At this year's Annual General Meeting, shareholder authority is being sought to broaden the Company's investment policy.

In 2003, the Company adopted a long term concentrated approach to investment. At the time such a strategy was relatively unconventional amongst global growth sector funds. This is no longer the case and the lack of differentiation has potentially contributed to a decline in liquidity of the Company's shares and resulted in greater discount volatility, despite periods of good performance. Such factors are becoming ever more important areas for consideration by key investment trust buyers, many of which are aggregating an increasing amount of business, and also to those investors new to the investment trust sector.

Having liaised with a number of shareholders, your Board believes that, in order to address the areas of concern, a shift in emphasis should be made within the portfolio, resulting in the Company investing principally in smaller, less mature companies at the time of initial investment than at present. This approach would result in a less concentrated portfolio of holdings. Research would remain based on the same process and the objective would continue to be one of trying to achieve long term capital appreciation. Therefore, the strategy employed would be an extension of that used at present although focusing on taking a stake in companies at an earlier stage in their growth cycle. A fuller outline of the proposal is set out in the accompanying circular. With a well resourced management team, a global perspective and clear focus, the Board is of the view that the Managers are able to identify some of the most attractive growth opportunities in such companies.

 

Management Fee

With effect from 1 April 2013, the annual management fee payable to Baillie Gifford & Co has been 0.95% on the first £50m of net assets and 0.65% on the remainder, with no separate secretarial or performance fee element. Further information is contained in note 3 on page 31 of the Annual Report and Financial Statements. The simplification of the fee structure removes the volatility created by the performance fee and reduces the ongoing charges as the Company grows. Had the former fee structure been in place for the entire year, approximately a further £274,000 would have been payable to the Managers.

 

Gearing

The Managers invest in companies that are believed to have long term attractions, over at least five years, and the Company will therefore typically be geared to maximise potential returns. Gearing was maintained throughout the year and was 8% at the year end (2012: 17%).

The Company has a £29.8m fixed rate multi-currency loan with National Australia Bank which expires in September 2014. Borrowings are drawn in USD, EUR and GBP.

Earnings and Dividend

The net revenue return per share for the year was 1.68p, notably lower than the 2.50p in 2012, reflecting the sale of some higher yielding investments. Although the Company's objective is one of capital growth, with any income received from the underlying holdings being subsidiary to this objective, the Board is mindful of the importance some shareholders place on the dividend. The Company has revenue reserves equating to around two years' of dividend payments. Accordingly, an unchanged final dividend of 1.50p is being recommended, making the total for the year 2.00p, unchanged from last year.

 

The Company's registrar operates a dividend reinvestment plan which can be used to buy additional shares. Further details can be found on page 43 of the Annual Report and Financial Statements.

 

Regulation

The Alternative Investment Fund Managers Directive came into law in July 2013 although the Company has until July 2014 to comply fully with the requirements. This EU legislation is an attempt to prevent some of the issues that have occurred as a result of perceived poor oversight of the financial services industry. The legislation requires the Company to appoint a depositary as well as an Alternative Investment Fund Manager (AIFM). Following a period of discussion, the Board has agreed in principle to appoint Baillie Gifford & Co Ltd as the Company's AIFM and BNY Mellon as depositary.

 

Annual General Meeting

The Annual General Meeting of the Company will be held at Baillie Gifford's offices in Edinburgh at 12 noon on Monday 27 January 2014. The Company will again seek to renew its share buyback, issuance and treasury share powers. The Notice of the Annual General Meeting and an explanation of each resolution are set out in the separate circular which is being sent to shareholders with the Annual Report.

Mark Urquhart, the Partner at Baillie Gifford who manages the portfolio at present, as well as Douglas Brodie and John MacDougall, the proposed manager and deputy manager, will give a presentation and answer any questions. Your Board will also be available to respond to any questions that you may have. I hope that you will be able to attend.

 

Outlook

Developed markets on the whole have been buoyant whilst Emerging Markets have lagged. However, markets have been volatile, fuelled in part by talk of Federal Reserve tapering and debate about how robust economic growth will prove if monetary stimulus is removed. The extent of quantitative easing by Japan may counter-act this but its potential effects are unknown. China's GDP slowing to a 'mere' 7.8% has re-ignited worries about a Chinese 'hard landing' although details of economic and social reforms announced at the Communist Party's recent Third Plenum of the 18th Party Congress has seemingly turned market sentiment bullish.

Despite the uncertain macro outlook, many companies remain in rude health operationally, notably those exposed to themes such as transformational technology. The speed of developments in robotics, 3D printing, genomics, mobile computing and the cloud has been staggering. Being able to identify the companies best placed to take advantage of these developments, or the respective market leaders of the future, are the Managers' key focus.

An overview is provided by the Managers on page 8 of the Annual Report and Financial Statements.

 

David HL Reid

 

 

 

 

 

Managers' overview

 

Once again I would like to reiterate, as every year, that our objective in managing Edinburgh Worldwide is to run a concentrated portfolio of companies with good growth prospects for the long-term. Whilst it is pleasing that many of the businesses in the portfolio have produced strong returns over the last twelve months our focus is on returns over five years and more. It is notable that several of the strongest absolute performers over the last year were sizeable laggards in the previous period - most publicly Facebook which has risen almost 140% in the last twelve months and most spectacularly Ctrip which is up over 170% over the same period. Such are the vagaries of measurement over short periods of time...

Having managed the portfolio for ten years it feels appropriate to spend a short amount of time looking back over this period. As the Chairman has noted the ten year performance record is a good one and many of the holdings which have delivered these returns have been held for many years. However it is also very pertinent how much the world has changed in the last ten years. In 2003 when we took over the management of Edinburgh Worldwide the world was a pretty different place - stockmarkets were slowly emerging from the bursting of the TMT bubble, China's economy was gaining increasing momentum and banks were storing up a myriad of future problems. Smartphones were several years away from being invented, no-one had heard of the term 'social network' and the cost of sequencing the human gene was still prohibitive.

The technological changes over the intervening ten years in terms of the capability of devices and the speed of connection have created a plethora of investment opportunities and concomitant disruption to existing industries. Who could have predicted ten years ago that a tablet computer as thin as a pad of paper would allow one to read e-mails, browse the web, stream movies, share documents and all the other features we already take for granted? As we survey the next decade from the vantage point of 2013 the one thing we can be sure of is that there will be large unexpected changes and many investable companies which have not yet been formed. This sense of nascent opportunity is one of the reasons for the proposed change in emphasis in the investment approach described in the Chairman's Statement.

As we survey the portfolio holdings over the last year, the most pleasing feature is the consistently strong operational performance across many of the businesses in very different industries. We have seen strong results from Google where the move to mobile search is helping to accelerate its growth rates and the company is starting to monetise YouTube effectively; Illumina where the demand for genetic sequencing equipment continues to rise as more governments look to genetic solutions as a way to reduce the ever increasing healthcare burdens and Tesla where the demand for well-designed electric-powered vehicles seems to be taking off rapidly.

Portfolio turnover for the year was 21% which compares to 13% in the previous year. New holdings were purchased in ARM - a Cambridge based developer of the intellectual property which goes into myriad smartphone and tablet semiconductors; LinkedIn which we think has an excellent opportunity to disrupt the recruitment industry with its growing network of professional contacts; Lululemon which is expanding its brand of high-end sports clothing internationally; Tesla which is spectacularly disrupting the automotive market; FEI - a company which produces very powerful microscopes which we think will benefit from an increasing trend to nanotechnology; China Financial Services which has a strong position in the growing market for lending to Chinese SMEs; IP Group which provides exposure to several different UK university-led entities and Splunk which is a leader in the nascent market of data diagnostics. We also added to Google, HDFC and Aggreko during the year trying to use short-term weakness in share prices to our long-term advantage. Sales were made of America Latina Logistica where we fear the Brazilian government's more interventionist tone means less good future returns for minority shareholders; Pactera Technologies where the pressures of rising wages in China have capped the potential growth rate of the business; Sandvik where the outlook for mining equipment demand has deteriorated and new management have underwhelmed us and FLIR where we worry about the cost of its expansion. Other sales through the year included the remaining small holding in the Brazilian miner, Vale, and small holdings in Noah and Hengdeli - two small Chinese companies where the investment case had not gone as planned. We made reductions in Apple, eBay, L'Oréal and Kering to help fund the purchases outlined above.

We believe we are experiencing a period where the ability of companies to use technology to disrupt existing business models and grow is unparalleled and the rewards in terms of profitability for those businesses which are the winners in new areas can be very large indeed. These trends are arguably even stronger in some of the smaller businesses which Edinburgh Worldwide has owned - companies such as IP Group and Tesla described above or iRobot which has experienced strong growth in domestic robots and Stratasys where the market for 3D printing continues to expand rapidly. As such, as we look forward to the next ten years it is my strong belief that investing in a more focused manner in some of these less mature businesses should prove a very rewarding long-term strategy.

 

Mark A. Urquhart

Baillie Gifford & Co

 



Portfolio and equity performance at 31 October 2013

 

 

 

Name

 

 

Business

Fair value

2013

£'000

% of total assets

Performance†

Fair value 2012

£'000

Absolute

%

Relative

%

Amazon.com

E-commerce and cloud computing

18,013

7.4

56.6    

26.0  

13,870

Tencent

Chinese social network

14,039

5.8

55.3    

25.0  

9,085

Google

Web-based search engine

12,683

5.2

52.0    

22.3  

7,495

Baidu

Chinese online search engine

10,955

4.5

51.3    

21.7  

7,240

Whole Foods Market

Organic food stores

10,351

4.3

37.1    

10.3  

7,746

Apple

Phones, tablets and computers

10,053

4.2

(10.1)   

(27.7) 

14,258

Facebook

Social networking site

9,747

4.0

138.7    

92.0  

4,084

Kering

Luxury brand conglomerate

9,433

3.9

34.1    

7.9  

8,068

Inditex

Fashion retail

9,116

3.8

31.5    

5.8  

7,047

Salesforce

Cloud-based software

8,881

3.7

46.6    

18.0  

6,059

Illumina

Gene sequencing equipment

8,797

3.6

97.3    

58.7  

4,577

eBay

Internet auction and payments

7,967

3.3

9.5    

(11.9) 

9,472

Novozymes

Enzyme manufacturer

7,104

2.9

43.8    

15.7  

5,762

Hermes

Luxury goods

6,307

2.6

26.4    

1.7  

5,044

Atlas Copco

Industrial compressors and mining

  equipment

5,938

2.5

16.8    

(6.1) 

6,129

Housing Development

  Finance Corporation

Indian mortgage provider

5,766

2.4

0.3    

(19.3) 

3,633

TripAdvisor

Travel advice website

5,689

2.4

89.5*   

62.8* 

-

Intuitive Surgical

Robotic surgery

5,087

2.1

(31.3)   

(44.7) 

7,404

Linkedin Corp

Professional networking site

5,044

2.1

93.9*   

67.2* 

-

FEI

Electron microscopes

4,696

1.9

18.9*   

17.1* 

-

Lululemon Athletica

Athletics clothing

4,059

1.7

(3.6)*  

(10.6)*

-

New Oriental Education

  and Technology

 

English-language schools

3,971

1.6

58.3   

27.3  

2,548

L'Oreal

Personal care

3,965

1.6

37.4   

10.5  

3,572

Ctrip

Travel agent - China

3,964

1.6

171.9   

118.7  

1,456

Stratasys

3D printing

3,735

1.5

70.3   

37.0  

2,193

BMW

Premium car manufacturer

3,733

1.6

47.3   

18.5  

2,613

ARM Holdings

Semiconductor design

3,527

1.5

39.8*  

11.6* 

-

Aggreko

Power equipment rental

3,471

1.4

(24.0)  

(38.8) 

2,803

Sanrio

Hello Kitty and Mr Men franchise owner

3,359

1.4

67.8   

35.0  

1,654

Seattle Genetics

Biotech cancer drugs

3,256

1.4

54.0   

23.9  

2,115

Burberry

Luxury fashion

3,151

1.3

34.5   

8.2  

2,395

iRobot

Robots for domestic and military use

2,955

1.2

89.0   

52.1  

1,565

IP Group

UK university start-up funding

2,933

1.2

8.6* 

4.1*

-

Deere

Farm and construction machinery

2,718

1.1

(2.0)  

(21.1) 

3,429

Belle International

Footwear - China

1,852

0.8

(22.8)  

(37.9) 

2,436

Tesla Motors

Premium electric vehicles

1,350

0.6

219.0*  

197.1*

-

China Financial Services

SME Lending - China

1,030

0.4

33.7*  

31.8*

-

Splunk

Data diagnostics

330

0.1

3.5*  

4.3*

-

Total equities


229,025

94.6




Net liquid assets


12,944

5.4




Total assets at fair value (before deduction of loans)

241,969

100.0




† Absolute and relative performance has been calculated on a total return basis over the period 1 November 2012 to 31 October 2013. For investments held for part of the year the return is for the period they were held.

Absolute performance is in sterling terms; relative performance is against MSCI All Countries World Index (in sterling terms).

* Figures relate to part-period returns.

Source: Baillie Gifford & Co/StatPro.

 



Distribution of assets

 



At 31 October 2013 %

At 31 October 2012

%

Equities:

USA

51.8

47.8


China

14.7

16.3


France

8.1

8.9


UK

5.4

2.8


Spain

3.8

3.8


Denmark

2.9

3.1


Sweden

2.5

5.1


India

2.4

1.9


Germany

1.6

1.4


Japan

1.4

1.8


Switzerland

-

0.9


Brazil

-

3.4


South Korea

-

1.1

Total equities

94.6

98.3

Net liquid assets

5.4

1.7

Total assets (before deduction of loans)

100.0

100.0

 

Related party transactions

 

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 21 of the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

With effect from 1 April 2013 the annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated quarterly. The fee previously was 0.80% per annum of the market value of the Company's shares, calculated quarterly, plus a performance fee. No performance fee was payable for the period to 31 March 2013 and none is payable under the new arrangements.

Until 31 March 2013, the Company paid a secretarial fee to Baillie Gifford which was adjusted annually in line with the Retail Price Index. The secretarial fee for the five months to 31 March 2013 was £34,000 (year to 31 October 2012 - £78,000) (see note below).

The details of the management fee and secretarial fee are as follows:

 


2013

£'000


2012

£'000





Investment management fee

1,365


1,076

Secretarial fee

34


78

 

Principal risks and uncertainties

 

As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of achieving long term capital growth. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

 

 

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 Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis.

 

(i) Currency Risk

Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.

The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on 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.

Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.

 

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below. The main changes to net currency exposure during the year were as follows: exposure to the US dollar increased due to net purchases and appreciation of the US dollar denominated equities; exposure to the euro increased due to appreciation of the euro denominated equities and exposure to the Swiss franc decreased due to sales of Swiss franc denominated equities.

 

 

At 31 October 2013

 

Investments

£'000


Cash and deposits

£'000


Bank Loans

£'000


Other debtors and creditors*

£'000


Net exposure

£'000

US dollar

144,303


6,656


(10,177)


250 


141,032 

Euro

32,553


1,451


(9,646)


11 


24,369 

Swedish krona

5,937


-



30 


5,967 

Danish krone

7,104


-




7,104 

Hong Kong dollar

16,921


-




16,921 

Other overseas currencies

9,124


1



17 


9,142 

Total exposure to currency risk

215,942


8,108


(19,823)


308 


204,535 

Sterling

13,083


4,973


(10,000)


(445)


(7,611)


229,025


13,081


(29,823)


(137)


212,146 

 

* Includes net non-monetary assets of £10,000.

 

 

At 31 October 2012

 

Investments

£'000


Cash and deposits

£'000


Loans

£'000


Other debtors and creditors*

£'000


Net exposure

£'000

US dollar

108,267


52


(10,149)


136 


98,306 

Euro

26,344


2,428


(9,169)


15 


19,618 

Swedish krona

9,425


-




9,425 

Swiss franc

1,722


-




1,729 

Danish krone

5,762


-




5,762 

Hong Kong dollar

15,601


717




15,618 

Other overseas currencies

10,756


-



20 


10,776 

Total exposure to currency risk

177,877


2,497


(19,318)


178 


161,234 

Sterling

5,198


860


(10,000)


(401)


(4,343)


183,075


3,357


(29,318)


(223)


156,891 

 

* Includes net non-monetary assets of £10,000.

Currency Risk Sensitivity

At 31 October 2013, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2012.

 

 

2013

£'000


2012

£'000

US dollar

7,062


4,915

Euro

1,219


981

Swedish krona

298


471

Swiss franc

-


87

Danish krone

355


288

Hong Kong dollar

846


781

Other overseas currencies

457


539


10,227


8,062

 

(ii) Interest Rate Risk

Interest rate movements may affect directly:

 

¾ the fair value of investments in fixed interest rate securities;

¾ the level of income receivable on cash deposits;

¾ the fair value of fixed-rate borrowings; and

¾ the interest payable on any variable rate borrowings.

 

Interest rate movements may also impact upon the market value of the Company's investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.

The Company 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 October is shown below:

 

Financial Assets

The cash deposits generally comprise overnight call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.



Financial Liabilities


2013

£'000

2012

£'000

The interest rate risk profile of the Company's financial liabilities at 31 October was:

Fixed rate      - Sterling denominated

10,000

10,000

                      - US$ denominated

10,177

10,149

                      - Euro denominated

9,646

9,169


29,823

29,318

The maturity profile of the Company's financial liabilities at 31 October was:


In less than one year, but not more than one year



                      - repayment of loan

29,823

-

                      - accumulated interest

729

781

In more than one year, but not more than five years



                      - repayment of loan

-

29,318

                      - accumulated interest

-

715


30,552

30,814

 

Interest Rate Risk Sensitivity

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

 

(iii) 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 Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 9 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the comparative index: investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the comparative index.

 

Other Price Risk Sensitivity

Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on page 12 of the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio and an analysis of the investment portfolio by broad industrial or commercial sector is given on page 13 of the Annual Report and Financial Statements.

 

108.0% (2012 - 116.7%) of the Company's net assets are invested in equities. A 10% increase in quoted equity valuations at 31 October 2013 would have increased total assets and total return on ordinary activities by £22,903,000 (2012 - £18,308,000). A decrease of 10% would have had an equal but opposite effect.

 

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board monitors the exposure to any one holding.

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 12 of the Annual Report and Financial Statements.

 

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 Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question.

¾ The Board regularly receives information from the Investment Managers on the credit ratings of those bonds and other securities in which the Company has invested.

¾ The Company's listed investments are held on its behalf by RBC Investor Services Trust acting as agent, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment 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 Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

¾ Transactions involving derivatives, and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers of the creditworthiness of that counterparty.

¾ Cash is only held at banks that are regularly reviewed by the Managers.

 

Credit Risk Exposure

The exposure to credit risk at 31 October was:

 

2013

£'000

2012

£'000

Cash and short term deposits

13,081

3,357

Debtors and prepayments

715

235


13,796

3,592

 

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 financial assets and liabilities of the Company are stated at fair value in the balance sheet with the exception of long term borrowings which are stated at amortised cost in accordance with FRS26.

 


2013

2013


2012

2012


Book

£'000

Fair*

£'000


Book

£'000

Fair*

£'000

Fixed rate loan

29,823

30,117


29,318

29,918

Total long term borrowings

29,823

30,117


29,318

29,918

*The fair value of the bank loan is calculated with reference to government bonds of comparable yield and maturity.

 

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed in note 13 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 6 of the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 20 of the Annual Report and Financial Statements.

 

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:        reflects financial instruments quoted in an active market.

Level 2:       reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

Level 3:       reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

 

The valuation techniques used by the Company are explained in the accounting policies on page 30 of the Annual Report and Financial Statements.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy.  None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

 

Other Risks

Other risks faced by the Company include the following:

 

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the UKLA Listing Rules and the Companies Act  or the Company being subject to tax on capital gains. 

Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit and Management Engagement 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.

 

Operational/Financial Risk

Failure of the Managers' accounting 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. The Managers have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.

 

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

 

 

 

 

Gearing Risk

The Company may borrow money for investment purposes. 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.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. Covenant levels are reviewed regularly. The Company's investments are in quoted securities that are readily realisable.

 

Statement of directors' responsibilities in respect of the annual report and the financial statements

 

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and UK Accounting Standards (UK GenerallyAccepted Accounting Practice). 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 year. 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 UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors 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.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

¾ the financial statements, which have been prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

¾ 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.

¾ the Directors' 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.

 

By order of the Board

David HL Reid

Chairman

12 December 2013



Income Statement

 


For the year ended 31 October 2013

For the year ended 31 October 2012


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Gains on investments

-  

57,734  

57,734  

7,680  

7,680 

Currency (losses)/gains

-  

(699)

(699)

725  

725 

Income (note 2)

1,987  

-  

1,987  

2,414 

-  

2,414 

Investment management fee

(341)

(1,024)

(1,365)

(269)

(807)

(1,076)

Other administrative expenses

(435)

-  

(435)

(479)

-  

(479)

Net return before finance costs and taxation

1,211  

56,011  

57,222  

1,666 

7,598  

9,264 

Finance costs of borrowings

(200)

(599)

(799)

(197)

(592)

(789)

Net return on ordinary activities before taxation

1,011  

55,412  

56,423  

1,469 

7,006  

8,475 

Tax on ordinary activities

(188)

-  

(188)

(244)

-  

(244)

Net return on ordinary activities after taxation

823  

55,412  

56,235  

1,225 

7,006  

8,231 

Net return per ordinary share (note 4)

1.68p

113.07p

114.75p

2.50p

14.30p

16.80p

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

 



Balance Sheet

 

 

At 31 October 2013

£'000

At 31 October 2012

£'000

Fixed assets



Investments held at fair value through profit or loss

229,025  

183,075 




Current assets



Debtors

715  

235 

Cash and short term deposits

13,081  

3,357 


13,796  

3,592 

Creditors



Amounts falling due within one year (note 5)

(30,675)

(458)

Net current assets

(16,879)

3,134 

Total assets less current liabilities

212,146  

186,209 




Creditors



Amounts falling due after more than one year

-  

(29,318)

Total net assets

212,146  

156,891 




Capital and reserves



Called up share capital

2,450  

2,450 

Share premium

82,180  

82,180 

Special reserve

35,220  

35,220 

Capital reserve

89,678  

34,266 

Revenue reserve

2,618  

2,775 

Shareholders' funds

212,146  

156,891 

Net asset value per ordinary share

(after deducting borrowings at fair value)

432.31p

318.93p

Net asset value per ordinary share

(after deducting borrowings at par)

432.91p

320.16p

Ordinary shares in issue

49,004,319  

49,004,319 

 

 

 



Reconciliation of movements in shareholders' funds

 

For the year ended 31 October 2013

 

 

Called up share capital

£'000

Share premium

£'000

Capital reserve £'000

Revenue reserve

£'000

 Shareholders' funds

£'000

Shareholders' funds at 1 November 2012

2,450

82,180

35,220

34,266

2,775 

156,891 

Net return on ordinary activities after taxation

-

-

-

55,412

823 

56,235 

Dividends paid during the year (note 3)

-

-

-

-

(980)

(980)

2,450

82,180

35,220

89,678

2,618 

212,146 

 

For the year ended 31 October 2012

 


Called up share capital

£'000

Share premium

£'000

Special reserve

£'000

Capital reserve

£'000

Revenue reserve

£'000

 Shareholders' funds

£'000

Shareholders' funds at

1 November 2011

2,450

82,180

35,220

27,260

2,530 

149,640 

Net return on ordinary activities after taxation

-

-

-

7,006

1,225 

8,231 

Dividends paid during the year (note 4)

-

-

-

-

(980)

(980)

Shareholders' funds at

31 October 2012

2,450

82,180

35,220

34,266

2,775 

156,891 

 



Cash Flow Statement

 

 

For the year ended

31 October 2013

 

For the year ended

31 October 2012

 

 

£'000

          £'000

£'000

£'000

Net cash inflow from operating activities (note 8)

 

365 

 

868 

Servicing of finance





Interest paid

(801)

 

(787)

 

Net cash outflow from servicing of finance


(801)


(787)


 

 

 

 

Taxation





Overseas tax incurred

(199)

 

(248)

 


 

 

 

 

Total tax paid


(199)


(248)


 

 

 

 

Financial investment





Acquisitions of investments

(30,133)

 

(27,653)

 

Disposals of investments

41,666 

 

22,973 

 

Realised currency (loss)/gain

(194)

 

62 

 

Net cash inflow/(outflow) from financial investment

 


11,339 


(4,618)

Equity dividends paid (note 3)

 


(980)


(980)

Increase/(decrease) in cash


9,724 


(5,765)


 

 

 

 

Reconciliation of net cash flow to movement in net debt





Increase/(decrease) in cash in the period

 

9,724 

 

(5,765)

Exchange movement on bank loans

 

(505)

 

663 

Movement in net debt in the year


9,219 


(5,102)

Net debt at 1 November


(25,961)


(20,859)

Net debt at 31 October


(16,742)


(25,961)


Notes

 

    

1.    

The financial statements for the year to 31 October 2013 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 October 2012, which are unchanged from the prior year and have been applied consistently.

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 assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis.

Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future.

The Directors consider the Company's functional currency to be sterling as 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.

2.    

Income

2013

£'000

2012

£'000

Income from investments

1,973

2,398

Deposit interest

14

16


1,987

2,414

 

 

 

 

3.    

Ordinary dividends

2013

2012

2013

£'000

2012

£'000

Amounts recognised as distributions in the period:





Previous year's final (paid 6 February 2013)

1.50p

1.50p

735

735

Interim (paid 18 July 2013)

0.50p

0.50p

245

245

 

2.00p

2.00p

980

980

 

We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £823,000 (2012 - £1,225,000).

 

Ordinary dividends

2013

2012

2013

£'000

2012

£'000

Dividends paid and payable in respect of the year:





Interim dividend per ordinary share (paid 18 July 2013)

0.50p

0.50p

245

245

Proposed final dividend per ordinary share (payable 6 February 2014)

1.50p

1.50p

735

735

 

2.00p

2.00p

980

980

 

If approved the final dividend will be paid on 6 February 2014 to all shareholders on the register at the close of business on 10 January 2014.  The ex-dividend date is 8 January 2014. The registrars, Computershare Investor Services plc, offer a dividend reinvestment plan. The final date for the receipt of elections for the dividend reinvestment plan is 16 January 2014.

 



 

4.    

Net return per ordinary share

 

Revenue

2013 Capital

 

Total

 

Revenue

2012

Capital

 

Total

Net return on ordinary activities after taxation

1.68p

113.07p

114.75p

2.50p

14.30p

16.80p

 

Revenue return per ordinary share is based on the net return on ordinary activities after taxation of £823,000 (2012: £1,225,000) and on 49,004,319 ordinary shares, being the weighted average number of ordinary shares in issue during each year.

Capital return per ordinary share is based on the net capital gain for the financial year of £55,412,000 (2012: £7,006,000) and on 49,004,319 ordinary shares, being the weighted average number of ordinary shares in issue during each year.

There are no dilutive or potentially dilutive shares in issue.

5.    

Included in amounts due within one year is £29,823,000 (2012:£29,318,000) drawn-down under a fixed rate facility with National Australia Bank Limited for €11.4m, US$16.35m and £10.0m which expires on 30 September 2014. The drawings were as follows:

 

At 31 October 2013 and 31 October 2012

National Australia Bank Limited:

€11,400,000 at an interest rate of 2.96% per annum.

US$16,350,000 at an interest rate of 2.28% per annum.

£10,000,000 at an interest rate of 2.68% per annum.

The main covenant relating to the loan facility with National Australia Bank Limited is: total borrowings shall not exceed 35% of the Company's adjusted gross assets.

6.    

The Company incurred transaction costs on purchases of £55,000 (2012 - £43,000) and on sales of £34,000 (2012 - £13,000).

7.    

At the Annual General Meeting on 31 January 2013 the Company renewed its authority to purchase shares in the market, in respect of 7,345,747 ordinary shares (equivalent to 14.99% of its issued share capital at that date). No shares were bought back during the year to 31 October 2013 or 2012. At 31 October 2013 the Company had authority to buy back 7,345,747 ordinary shares.

8.    

Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities

2013

£'000

2012

£'000

 

Net return before finance costs and taxation

57,222 

9,264 

 

Gains on investments

(57,734)

(7,680) 

 

Currency  losses/(gains)

699 

(725) 

 

Decrease/(increase) in accrued income

152 

(8) 

 

Increase in debtors

(43)

(14) 

 

Increase in creditors

69 

31 

 

Net cash inflow from operating activities

365 

868 

9.    

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 October 2013. The financial information for 2012 is derived from the statutory accounts for 2012 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2012 accounts, their report was unqualified and did not contain a statement under section 495 to 497 of the Companies Act 2006. The statutory accounts for 2013 are unaudited and will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

10. 

The Report and Accounts will be available on the Edinburgh Worldwide page of the Managers' website http://www.edinburghworldwide.co.uk on or around 20 December 2013.

11. 

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

- ends -

 

 

 


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