Annual Financial Report

RNS Number : 6013Y

Scottish American Investment Co PLC

06 March 2017

 

The Scottish American Investment Company P.L.C.

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 December 2016 has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/nsm.

The Annual Report and Financial Statements for the year ended 31 December 2016 including the Notice of Annual General Meeting is also available on the Company's page of the Baillie Gifford website at: www.saints-it.com

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 December 2016 which require to be published by DTR 4.1 is set out on the following pages.

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

Baillie Gifford & Co Limited

Company Secretary

6 March 2017

Chairman's Statement

The Company's objective is to deliver real dividend growth by increasing capital and growing income. An increased dividend of 10.825p (2015 - 10.70p) will extend the Company's record of raising its dividend to thirty seven consecutive years.

Overview

To say that it has been an eventful year for investment markets is something of an understatement. Looking back over the year of the Brexit vote and of the Republican victory in the US presidential elections, it is striking not just that both of these events were largely unpredicted but also that even those who did predict them generally misjudged the short term impact on markets.

Since President Trump's victory, hopes for a significant boost to the US economy from infrastructure spending and tax cuts have, for the time being at least, outweighed any concerns about longer term debt problems, protectionism and the consequent risk of a decline in global trade.

Closer to home, while sterling was an early casualty of the Referendum result, markets generally stayed calm. But Brexit negotiations have yet to start, and are unlikely to conclude before late 2018. Uncertainty will have a cost, but it is too soon to be sure of the full economic consequences of leaving the EU.

Despite or even partly because of this tumultuous background markets have delivered very good returns over the year, especially for sterling investors who have benefitted from the currency appreciation of their overseas assets. Your Company's investments have benefitted accordingly, particularly equities which represent the majority of SAINTS' portfolio for their long-term income and capital growth potential. In addition it is pleasing to report that the Company's investments in property have again delivered a healthy return, in contrast to many segments of the UK commercial property sector.

Total Return Performance

The Company's net asset value total return (capital and income) for the year was 29.8% and the share price total return was 28.7%. The total return from the global equity market was 29.6%. Whilst it is encouraging that returns have matched the very strong returns of equities generally over the year, it is a coincidence that they are so close, particularly as the Company's portfolio of investments differs markedly from the make up of the global equity index against which performance is often compared. This differentiated portfolio is necessary and appropriate in order for the Company to deliver a high and growing yield and service its borrowings. In addition, both the Managers and your Board have a long term perspective and so we do not believe that it is generally helpful to dwell on the comparison of performance against any equity index over short periods.

Nonetheless it is worth highlighting that, whilst on the one hand the operational performance of the Company's equity investments has been generally encouraging, currency movements have detracted from relative performance over the year. Given that the Company has greater exposure to sterling-denominated assets than their weighting in the comparative global index, sterling's weakness has been unhelpful in this regard. Overall, however, returns have been helped by the sound operational performance already mentioned and also by another good year for the Company's property investments. The principal contributors to and detractors from performance are explained in more detail in the Managers' Review.

Revenues

Earnings per share were almost unchanged at 10.46p, as was investment income of £18.6m. Overseas equity income has been helped by currency movements, and bond income has also increased. Income from property was stable despite some adjustments to the portfolio, and over the course of the year the proportion of rental income which is linked to inflation was again increased. Both managers (Baillie Gifford and, for the Company's property investments, OLIM) continue at the Board's request to place increasing emphasis on supporting the dependability and the future growth of the Company's dividend in line with its objective.

Dividend and Inflation

A final dividend of 2.725p is recommended which will take the full year dividend to 10.825p per share, 1.2% higher than the 2015 dividend of 10.70p.

The recommended dividend is largely, but not fully, covered by this year's earnings. The Company has built up revenue reserves in the past with a view to facilitating the smooth progression of dividends. The Board has taken into account both these reserves (which will stand at 9.53p per share after the recommended final dividend) and the overall performance of and prospects for the Company's investments in recommending a dividend which reinforces its progressive dividend policy. In recent years the Company has effected a significant shift in its allocation away from fixed income investments and towards 'real assets' where income is expected to grow in the future. Your Board is confident that this growth will permit both further increases in the Company's dividend and a return to a fully covered dividend. In the meantime, in an environment where increases in interest rates are increasingly likely, the marked reduction in exposure to fixed income investments should be helpful to total returns.

This year's increase, whilst slightly below the annual rate of inflation of 1.6% as measured by CPI, extends the Company's record of annual dividend increases to thirty seven years. Over the last ten years the Company's dividends have increased at well over the rate of inflation, as will be illustrated on the first chart on page 1 of the Annual Report. Whilst a picture is normally worth a thousand words, it is perhaps an even more striking illustration of the power of compound growth that the 2016 dividend of 10.825p will be some 46% higher than the 2006 dividend of 7.4p.

Borrowings

SAINTS' borrowings take the form of a single £80m debenture which is due for repayment in April 2022. During 2016, the borrowings mainly funded a range of higher yielding commercial property and, to a much lesser extent, some fixed income investments.

The book value of the debenture is £84.1m which, at the year end, was equivalent to approximately 19% of shareholders' funds. The estimated market or fair value of the debenture was £103.2m, a decrease from the previous year's value of £103.6m. Whilst the market value of the Company's borrowings will continue to be influenced by prevailing interest rates, over the coming years we continue to expect declines in both the debenture's book and market values, and a narrowing between those values, as it approaches its final redemption value of £80m.

Outlook

The longer-term implications of both Brexit and President Trump's victory will take a while to emerge. Inflation in the UK is likely to pick up this year as the fall in sterling causes imported goods to become more expensive, as last year's falls in the oil price drop out of the figures and as wages, housing costs and interest rates start to rise. In the US interest rate rises are also likely, and indeed the progression of the economic cycle does raise the question of whether significant fiscal stimulus is actually required. Assuming it gets Congressional approval later in the year, fiscal stimulus which turned out to be unnecessary might have the unfortunate effect of stoking wage inflation that is already evident. Markets have been strong and, whilst inflation often helps equities, it is fair to say both that starting valuations are not particularly low and that the market's earnings growth thus far has not been especially encouraging.

The Board and the Managers are alert to the potential challenges and opportunities arising from the UK electorate's vote to leave the European Union. It is worth emphasising the international nature of the Company's investments, including many of those listed in the UK. It is also important to note the supportive characteristics of the Company's property investments including healthy covenants, long lease lengths and, in many cases, inflation-linked rents. In this environment, your Board endorses the Managers' approach, which is built on investing globally in individual businesses which are operationally dependable and which produce and distribute strong and growing cash-flows. The equity portfolio's prospects for growth and resilience are quite distinct from the prospects for the market as a whole. The Company's investments in property and selected bonds provide additional sources of income and returns. The Board believes that the portfolio as a whole is well placed to support the continued growth of the Company's dividend over time and recent operational performance has largely supported our confidence in the prospects of the Company's portfolio.

The Board and the Managers

My fellow Board members and I would like to record our thanks for all Sir Brian Ivory's considerable efforts on behalf of the Company and its shareholders over many years as a Director and as Chairman, prior to his stepping down from the Board at last April's Annual General Meeting. I hope to carry forward the Chairmanship with similar energy and application.

We were also delighted to welcome Lord Macpherson of Earl's Court (formerly Sir Nicholas Macpherson GCB) to the Board in September. His considerable experience and knowledge will undoubtedly be a great benefit to the Company in the years ahead.

Lastly, I wanted to highlight the appointment of James Dow and Toby Ross as deputy managers of the Company, which was announced at the interim stage. The appointments reflect Baillie Gifford's team-based approach and the Board looks forward to a fruitful and productive working relationship with James, Toby and the manager Dominic Neary in the future.

AGM

The AGM will be held at 11am on Thursday 6 April at Baillie Gifford's offices at Calton Square, 1 Greenside Row, Edinburgh. The Managers will make a presentation on the investment portfolio and there will also be an opportunity to ask questions. The Directors and the Managers look forward to meeting you there.

Peter Moon

Chairman

15 February 2017

Managers' Review

Performance Overview

After a weak start in January equity markets made solid progress over the course of 2016 as the outlook for corporate earnings stabilised, signs of inflation and US growth emerged, and asset prices continued to be supported by monetary policies in many economies. Equity market progress was achieved despite very significant political surprises with the UK's vote to leave the European Union in June and November's election of Donald Trump to be the President of the United States. Strength has been broad-based and, for a UK-based investor, the uptrend has been far stronger than local currency returns would suggest, with general US dollar strength combining with Brexit-related sterling weakness to enhance sterling investment returns.

In the first half of the year quality, dependability and predictability continued to be valued by the market, while in the second half of the year this cautious tone was generally replaced with a rotation into more cyclical, value-oriented stocks as risk appetites returned in advance of the Federal Reserve Board's long-anticipated December rate rise; this trend that was amplified following Donald Trump's success in the US election which has raised hopes for strong fiscal stimulus policies in the US.

The 2016 investment result for SAINTS was accordingly strong, with NAV per share rising by 24.9% to 309.2p from 247.5p on the fair value measure. The NAV total return which includes both capital movements and income receipts was 29.8%, while the share price total return was 28.7%. Total income for the year was £18.6m leading to earnings per share of 10.46p, which compare to £18.6m and 10.47p, respectively, for 2015.

The Company was fully invested throughout the year with the major part of the portfolio being invested in shares of companies listed on world stock markets. Dividend progression amongst SAINTS' equity holdings was positive, with median ordinary dividend growth of 5%; indeed, several portfolio companies including Partners Group, Hong Kong Exchanges, Bankinter, TSMC, Admiral and Cochlear raised their annual dividends by over 20% in 2016. Despite this dividend growth profile, the revenue contribution from equities of £13.5m in 2016 was effectively unchanged versus 2015 as ordinary dividend growth was offset by a lower contribution from special dividends. Rental income in 2016 was also flat at £4.0m as the income from a new purchase along with rent increases across the portfolio served to offset the loss of income from some higher-yielding properties which were sold towards the end of 2015. The revenue contribution from bonds rose modestly to £1.0m primarily as a result of currency movements.

All asset classes contributed positively to the strong investment result recorded for the year with total returns of 26.7% for the equity portfolio, 48.2% for the fixed interest portfolio and 9.3% for the directly-held property portfolio. While the depreciation of sterling following the UK's European Union Referendum was positive in absolute terms for the Company's overseas shareholdings and dividend income, SAINTS' greater emphasis on sterling assets created a significant headwind to relative performance when compared with SAINTS' FTSE All-World comparative index.

At the individual asset level the top contributors to the portfolio's performance were predominantly in the equity portfolio. For example, their market-leading positions and strong customer demand led TSMC, the semiconductor manufacturing company, and Partners Group, the private markets investment manager, to report strong operational and financial results which in turn drove very strong share price performance. The portfolio also benefitted from corporate activity with the announced acquisitions of Linear Technology by Analog Devices, of Reynolds American by British American Tobacco and of Syngenta by ChemChina (all of which, with the exception of ChemChina, were held in SAINTS). Outside of the equity portfolio economic and political optimism in Brazil caused the Brazilian inflation-linked government bond holding to recover strongly in both local currency and sterling terms placing it amongst the top contributors to performance. The largest detractors from performance were concentrated in the UK equity market, and were typically more domestically-oriented companies such as Provident Financial and Capita, the prospects of which were perceived to be less attractive in the wake of the vote to leave the European Union. Capita also reported company-specific challenges later in 2016 which also impacted share price performance negatively.

Whilst being largely driven by the performance of the Company's assets, SAINTS' fair value NAV is also affected by any changes in the market value of its debenture borrowings. In 2016 this fell as UK interest rate expectations continued to rise, leading to a positive impact of 1.6% on the Company's NAV.

Equity Porfolio

Over the year an average of 82.3% of the Company's assets was invested in equities. Expressed as a percentage of shareholders' funds the figure was 100.3%. In the 2014 and 2015 Annual Reports we discussed the evolution of the equity portfolio into a form that is designed to support more directly SAINTS' intention to deliver dependable real dividend growth over time. Our specific actions were to increase the portfolio's exposure to stocks which offer the powerful combination of a dependable income stream, an attractive yield and solid growth prospects (Compounding Machines) while de-emphasising high-yielding but lower growth or higher risk stocks (Capital Decisions and Profitability Transformation), and placing greater demands, in terms of growth and capital return potential, on stocks which offer a lower income stream to the portfolio (Exceptional Revenue Opportunity). The period of transition is now complete and, as a result, turnover of the equity portfolio fell to 16.8% in 2016, which reflects our investment time horizon of at least five years.

While there has been little change to the overall allocations to the four stock categories in 2016, there have been some changes to the holdings within the categories. For example, in Compounding Machines (67%) we added names such as Ambev, the dominant South American brewer, which boasts strong cash generation and in which we see significant opportunities for volume, revenue and margin growth alongside an attractive yield. Challenger, the leading provider of annuity investment products to the Australian postretirement savings market, was also added to the portfolio. The company has an attractive dividend yield and several structural drivers that should drive growth in its business over many years: increases in superannuation savings, a growing retiree population, and the rising emphasis on annuities as a retirement portfolio building block. We also purchased shares in Novo Nordisk, the world's leading diabetes care company whilst we sold the shares of financial companies where we felt that the risk profile around sustained dividend growth had increased, such as Provident Financial following the vote to leave the European Union, and the Bank of China Hong Kong which is vulnerable to continued slowing growth and deleveraging in China.

Exceptional Revenue Opportunities represented 11% of the equity portfolio at the end of 2016. Within this category we added National Instruments, the maker of high-end equipment and software for complex electronic testing. The company has established itself as the leading provider of testing equipment to engineers and scientists and we see a range of drivers of future growth for the company, in particular its increasing presence in new markets such as semiconductor, 5G radio frequency testing, and industrial embedded solutions. Despite these exciting growth opportunities free cash flow generation is strong and dividends are the priority for excess cash, leading the stock to offer a yield above that of global indices. Within this category we sold Zillow, the US real estate web business, as it has become increasingly clear that it will be investing its cash flows heavily into the business over the next few years and therefore will not contribute to the portfolio's income within a reasonable time frame.

The Profitability Transformation category stood at 10% of the equity portfolio at year end. Over the course of the year we said farewell to a number of longer-term holdings within this category where we felt that the potential for fundamental improvement had run its course, particularly where the business has an element of economic sensitivity, such as Harley Davidson (motorcycles), Konecranes (industrial lifting equipment) and Hays (recruitment services). In this category we took new holdings in Kering, the owner of a number of upper-tier clothing and accessories brands, and Pearson, the education business. Initial experiences with these two stocks have been markedly different. While Kering has experienced a rerating on rapidly growing earnings as the expected turnaround of the Gucci and Puma brands appears to be firmly underway, Pearson has been weak as the hoped-for progress in the digital content business has been undermined by a collapse in North American text book sales and has provoked the company to further examine its portfolio of businesses. Within Capital Decisions there were no significant changes and this category represented 12% of the equity portfolio at the end of December 2016.

Direct Property Portfolio

The direct property investments are managed by OLIM Property Limited, a specialist property manager. At the end of 2016 the portfolio consisted of 22 commercial properties in a variety of locations across the United Kingdom. The 2016 total return was 9.3%. The capital value of the property portfolio stood at £61m at the year end, representing 11.8% of the total investment portfolio.

Transactions in the property portfolio over recent years have lent increasing support to SAINTS' investment objective, typically providing a strong stream of growing, dependable, and often inflation-linked rental income and significant capital appreciation potential. SAINTS' property portfolio enters 2017 with a supportive yield of 6.8%, income dependability reinforced by a weighted average unexpired lease length of 19 years, and attractive income growth potential with 61% of rental income RPI-linked and a further 7% on fixed increases.

One property was purchased during the year and none were sold. The new property is a petrol station and convenience store let to Co-operative Foodstores Limited, located in Crawley, the largest town in West Sussex, near Gatwick airport. The property offers an attractive net initial yield of 5.9% with 2% fixed rental increases annually until 2027. Such properties are typical of SAINTS direct property investments - while the headline may appear unexciting, the financial characteristics are extremely appealing and consistent with SAINTS' aims. The purchase of an additional property - a datacentre - was agreed in late December 2016 with the transaction completing in early January 2017. The cost was £15m and funded through the sale of equities in the portfolio.

Bond Porfolio

The allocation to fixed income remained small at 5.0% of total assets. We added the Alibaba Mandatory Exchange Trust to the portfolio - in effect a bond yielding 5.75% which in 2019 converts into the US-listed ADRs of Alibaba, the Chinese internet company. We saw this instrument as an opportunity to gain exposure to the exciting stock appreciation potential of Alibaba whilst simultaneously generating an attractive income stream. A small position in Enquest paper was sold.

Outlook

Asset prices have continued to be propped up by monetary policies globally, yet global GDP growth remains sluggish and inflation relatively benign. Our outlook therefore is optimistic for the companies within the portfolio, tempered with concerns about the path of the world economy. We are entering uncharted waters. There is now a populist President in the US who is talking openly about raising trade barriers, and who more broadly appears keen to roll back the trend towards globalisation which has benefited world economic growth over many years. The UK, meanwhile, is about to undergo a profound change in its relationship with Europe, its largest trading partner.

Against this backdrop central banks and governments around the world must walk a tightrope of promoting steady acceleration in growth and inflation while attempting to return monetary policy to some semblance of normality. Such uncertainties are likely to lead central banks to err towards caution, particularly given the limited firepower available should tightening be pursued too aggressively. Therefore, in the absence of any inflationary shocks, rate rises are likely to be steady and well-signalled. Nonetheless recent developments have prompted a market rotation from defensive stocks into more economically-sensitive areas of the market. It remains to be seen if economic growth and resultant corporate earnings will be sufficiently strong over the coming months and years to maintain this optimistic market mood. In the face of such uncertainty we believe that now, as much as ever, it is important for us to focus on investing the assets of your Company in well-managed businesses with strong balance sheets; that are likely to generate robust and growing cash flows; and which are committed to paying dividends back to their shareholders. While SAINTS' dividend was marginally uncovered in 2015 and 2016 we believe that over the course of a transitionary period since the global financial crisis we have made the right investment decisions to ensure that the structure of SAINTS' revenue account will lead the Company to meet its objective to deliver real dividend growth by increasing capital and growing income into the future. Today more than 70% of SAINTS' revenues derive from the growth engine of the equity portfolio and its dependable dividend income stream, with the majority of the remainder benefiting from the steady and dependable rental income growth of the bespoke property portfolio. It is this structure and our unrelenting focus on generating a dependable and growing stream of income from SAINTS' investment portfolio that we believe will stand shareholders in very good stead through these uncertain times and beyond.

Dominic Neary

James Dow

Toby Ross

Baillie Gifford & Co

15 February 2017

Past performance is not a guide to future performance

Asset Allocation

	At 31 December 2016 %		At 31 December 2015 %
Quoted equities	82.8		82.9
Bonds	5.0		3.9
Direct property	11.8		12.9
Net liquid assets	0.4		0.3
Total assets	100.0		100.0

Performance Attribution

Portfolio Breakdown	Average allocation		Total return#
	SAINTS %	Benchmark %	SAINTS %	Benchmark %
Global equities	100.3	100.0	26.7	29.6
Bonds	5.3		48.2
Direct property	15.1		9.3
Deposits	1.1		-
Debenture at book value	(21.8)		6.8
Portfolio total return (debenture at book value)			29.1	29.6
Other items*			(0.9)
Fund total return (debenture at book value)			28.2	29.6
Adjustment for change in fair value of debenture			1.6
Fund total return (debenture at fair value)			29.8	29.6

*    Includes Baillie Gifford and OLIM management fees.

#    The above returns are calculated on a total return basis with net income reinvested.

Past performance is not a guide to future performance.

Source: Baillie Gifford
 

Thirty Largest Equity Holdings at 31 December 2016

Name	Business	2016 Value £'000	2016 % of total assets	2015 Value £'000
Coca Cola	Beverage manufacturer	12,582	2.4	8,761
WPP	Advertising agency	10,951	2.1	9,914
Johnson and Johnson	Pharmaceuticals and healthcare products	10,414	2.0	5,919
Taiwan Semiconductor Manufacturing	Semiconductor manufacturer	10,307	2.0	7,806
Fastenal	Distribution and sales of industrial supplies	9,842	1.9	6,614
Procter & Gamble	Household product manufacturer	9,711	1.9	6,483
Total	Integrated oil company	9,616	1.9	6,521
Partners Group	Asset management	9,539	1.8	6,680
Reynolds American	Cigarette manufacturer	9,151	1.8	6,817
Prudential	Life insurer	8,990	1.7	3,748
United Parcel Service	Courier services	8,864	1.7	5,755
Scottish & Southern Energy	Electricity utility	8,633	1.7	5,274
Sonic Healthcare	Laboratory testing	8,557	1.7	5,693
Analog Devices	Integrated circuits	8,463	1.6	6,945
Anta Sports Products	Sportswear manufacturer and retailer	8,021	1.6	5,513
Pepsico	Snack and beverage manufacturer	7,861	1.5	6,774
AVI	Staple foods manufacturer	7,856	1.5	5,148
Deutsche Boerse	Securities exchange owner/operator	7,845	1.5	8,218
New York Community Bankcorp	Banking	7,461	1.4	5,822
China Mobile	Mobile telecommunication services	7,297	1.4	5,382
CH Robinson	Delivery and logistics	7,281	1.4	4,175
Atlas Copco	Engineering	7,232	1.4	4,453
Experian	Credit scoring and marketing services	7,034	1.4	4,888
Want Want	Snacks and milk-based products	6,974	1.4	5,566
Alphabet Class A and C	Online search engine	6,877	1.3	5,469
Kimberley-Clark de México	Paper-based household products	6,624	1.3	7,288
McDonald's	Fast food restaurant	6,516	1.3	6,742
Sumitomo Mitsui Trust Holdings	Trust bank and investment manager	6,499	1.3	3,939
Microsoft	Computer software	6,488	1.3	6,185
Admiral	Car insurance	6,478	1.3	6,591
		249,964	48.5	185,083

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:

¾  Dividend per share;

¾  Earnings per share;

¾  The movement in net asset value per ordinary share (after deducting debentures at fair value) compared to the benchmark;

¾  The movement in the share price;

¾  The premium/discount (after deducting debentures at fair value); and

¾  Ongoing charges.

The one, five and ten year records of the KPIs are shown on pages 4, 5 and 21 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 for the next 12 months is set out in the Chairman's Statement and Managers' Report above.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 31 of the Annual Report and Financial Statements.

No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

Management Fee Arrangements

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 Secretary. Baillie Gifford & Co Limited has delegated investment management services to Baillie Gifford & Co. The management of the property portfolio has been delegated to OLIM Property 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 were to occur sooner. The annual management fee is 0.45% of total assets less current liabilities, excluding the property portfolio, calculated on a quarterly basis. The Board is of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence on performance.

The Property Management Agreement sets out the matters over which OLIM Property Limited has discretion and those matters which require Board approval. The Property Management Agreement is terminable on three months' notice. The annual fee is 0.5% of the value of the property portfolio subject to a minimum quarterly fee of £6,250.

The details of the management fees are as follows:

	2016 £'000		2015 £'000
Investment management fee	1,919		1,691
Property management fee	296		281
	2,215		1,972

Principal Risks

As explained on pages 27 and 28 of the Annual Report and Financial Statements, there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. 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. The principal risks associated with the Company are as follows:

Investment Strategy Risk - pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or an ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares.  This may lead to the Company's shares trading at a widening discount to their Net Asset Value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy; the investment portfolio and its performance; the level of discount/premium to Net Asset Value at which the shares trade; and movements in the share register.

Financial Risk - the Company's assets consist mainly of listed securities and its principal 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 47 to 51 of the Annual Report and Financial Statements. To mitigate this risk at each Board meeting the Manager provides an investment policy paper which includes a detailed explanation of significant stock selection decisions and the overall rationale for holding the current portfolio. Consideration is given to portfolio movements and the top and bottom contributors to performance. The investment approach is considered in detail at the annual Strategy Meeting.

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 could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.

Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit by KPMG.

Operational Risk - failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.

Discount Risk - the discount/premium at which the Company's shares trade relative to its Net Asset Value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.

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. 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. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found in Note 18 on page 52 of the Annual Report and Financial Statements and the Glossary of Terms on page 61 of the Annual Report and Financial Statements.

Political Risk - political developments will be closely monitored and considered by the Board and the Managers. The Board has noted the results of the UK referendum on continuing membership of the European Union. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

Viability Statement

In accordance with provision C2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a minimum period of five years. The Directors continue to believe this to be appropriate as it reflects the longer term investment strategy of the Company in terms of both investment horizon and income growth, and to be a period during which, in the absence of any adverse change to the regulatory environment and to the tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing SAINTS nor to the controls in place to effectively mitigate those risks. Moreover, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a minimum period of five years.

In considering the viability of the Company, the Directors have conducted a robust assessment of each of the principal risks and uncertainties detailed above and in particular the impact of market risk where a significant fall in global equities markets would adversely impact the value of the investment portfolio. The Directors have also considered the Company's leverage comprising a fixed term Debenture which has a nominal value of £80m and is redeemable at par in 2022, its income and expenses and dividend policy having undertaken a review of revenue projections over a five year period and its liquidity in the context of the majority of its investments being listed equities which are readily realisable and so capable of being sold to provide funding if required. In addition, all of the key operations required by the Company are outsourced to third party service providers and it is reasonably considered that alternative providers could be engaged at relatively short notice.

Based on the Company's processes for monitoring revenue projections, 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 contained in note 17 to the Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. The Company has no short term borrowings and the redemption date for the Company's debenture is April 2022. Accordingly, the Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement above, that the Company will continue in operational existence for at least 12 months from the date of approval of these Financial Statements.

Financial Instruments

As an investment trust, the Company invests in equities and makes other investments so as to secure its investment objective of increasing capital and growing income in order to deliver real dividend growth. The Company borrows 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 a variety of risks that cause short term variation in the Company's net assets and could result in either a reduction in the Company's net assets or a reduction in the profits available for dividend.

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 reduction in the Company's net assets or its profits available for dividend 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 reviews and agrees policies for managing these risks and the Company's Investment Manager both assesses the exposure to market risk when making individual investment decisions and monitors the overall level of market risk across the investment portfolio on an ongoing basis.

Details of the Company's investment portfolio are shown in note 9 of the Annual Report and Financial Statements. Details of derivative financial instruments outstanding at the Balance Sheet date are shown below.

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 Manager monitors the Company's exposure to foreign currencies and reports to the Board on a regular basis. The Investment Manager assesses 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.

Forward currency contracts are used periodically to limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments. Where appropriate, they are used also to achieve the portfolio characteristics that assist the Company in meeting its investment objectives. Cash amounts received in foreign currencies are converted to sterling on a regular basis.

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 December 2016	Investments £'000	Cash and cash equivalents £'000	Forward currency contracts £'000	Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	154,625	38	(7,600)	-	223	147,286
Euro	48,847	35	(2,520)	-	406	46,768
Hong Kong dollar	25,626	-	-	-	-	25,626
Australian dollar	25,113	-	-	-	-	25,113
Swiss franc	23,169	-	-	-	-	23,169
Other overseas currencies	80,959	-	-	-	274	81,233
Total exposure to currency risk	358,339	73	(10,120)	-	903	349,195
Sterling	155,215	4,101	10,120	(84,112)	(3,009)	82,315
	513,554	4,174	-	(84,112)	(2,106)	431,510

*    Includes net non-monetary assets of £27,000.

At 31 December 2015	Investments £'000	Cash and cash equivalents £'000	Forward currency contracts £'000	Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	120,737	25	(8,141)	-	167	112,788
Euro	36,679	-	(708)	-	375	36,346
Hong Kong dollar	23,255	101	-	-	-	23,356
Swiss franc	20,934	-	-	-	-	20,934
Australian dollar	15,629	-	-	-	-	15,629
Other overseas currencies	54,478	-	-	-	286	54,764
Total exposure to currency risk	271,712	126	(8,849)	-	828	263,817
Sterling	160,156	3,273	8,649	(84,756)	(2,686)	84,636
	431,868	3,399	(200)	(84,756)	(1,858)	348,453

*    Includes net non-monetary assets of £27,000.

Currency Risk Sensitivity

At 31 December 2016, 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 a similar but opposite effect on the financial statement amounts.

The analysis is performed on the same basis for 2015.

	2016 £'000		2015 £'000
US dollar	7,364		5,639
Euro	2,338		1,817
Hong Kong dollar	1,281		1,168
Australian dollar	1,256		782
Swiss franc	1,159		1,047
Other overseas currencies	4,062		2,738
	17,460		13,191

Interest Rate Risk

Interest rate movements may affect directly:

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

¾   the level of income receivable on cash deposits;

¾   the fair value of the Company's fixed-rate borrowings; and

¾   the interest payable on any variable rate borrowings which the Company may take out.

Interest rate movements may also impact upon the market value of the Company's investments other than its fixed income securities.

The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

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

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

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

Movements in interest rates, to the extent that they affect the fair value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value.

The interest rate risk profile of the Company's financial assets and liabilities at 31 December is shown below.

Financial Assets

	2016			2015
	Fair value £'000	Weighted average interest rate	Weighted average fixed rate period*	Fair value £'000	Weighted average interest rate	Weighted average fixed rate period*
Fixed rate:
UK bonds	-	-	-	1,735	23.8%	n/a
US dollar denominated bonds	7,622	5.75%	2 years	-	-	-
Floating rate:
Brazilian bonds (interest rate linked   to Brazilian CPI)	7,568	10.4%	28 years	6,336	11.8%	29 years
Fixed Interest Collective Investment Funds:
US dollar denominated fund	10,564	2.3%	n/a	8,583	1.0%	n/a
Cash and short term deposits:
Other overseas currencies	73	-	n/a	126	-	n/a
Sterling	4,101	0.2%	n/a	3,273	0.4%	n/a

*       Based on expected maturity date.

Financial Assets

		2016 £'000		2015 £'000
The interest rate risk profile of the Company's financial liabilities at 31 December was:
Fixed rate - sterling		84,112		84,756
The maturity profile of the Company's financial liabilities at 31 December was:
In more than five years - 6 years (2015 - 7 years)	84,112		84,756

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 December 2016 would have decreased total net assets and total return on ordinary activities by £1,006,000 (2015 - £829,000) and would have increased the net asset value per share (with debenture at fair value) by 2.6p (2015 - 3.3p). 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 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.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 17 to 20 of the Annual Report and Financial Statements. In addition, a list of the 30 largest equity holdings together with various analyses of the portfolio by asset class and industrial sector are contained above.

98.5% of the Company's net assets are invested in quoted equities. A 5% increase in quoted equity valuations at 31 December 2016 would have increased total assets and total return on ordinary activities by £21,244,000 (2015 - £17,855,000). A decrease of 5% 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 Company's holdings in direct property and unlisted investments, which are not considered to be readily realisable, amount to 14.6% of net assets at 31 December 2016 (2015 - 18.6%). The Company has the power to take out borrowings, which give it access to additional funding when required.

The Board gives guidance to the Investment Managers as to the maximum amount of the Company's resources that should be invested in any one holding and to the maximum aggregate exposure to any one entity (see investment policy on page 6 of the Annual Report and Financial Statements). The Board also sets parameters for the degree to which the Company's net assets are invested in quoted equities.

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 Manager makes 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 Manager on the credit ratings of those bonds and other securities in which the Company has invested;

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 Depositary has delegated the custody function to Bank of New York Mellon SA/NV London Branch. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board;

¾  investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. 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, 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 Investment Manager of the creditworthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and

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

Credit Risk Exposure

The exposure to credit risk at 31 December was:

	2016 £'000	2015 £'000
Bonds	25,754	16,654
Cash and short term deposits	4,174	3,399
Debtors and prepayments	1,116	1,115
	31,044	21,168

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 the long term borrowings which are stated at amortised cost. The fair value (determined as the asking price as traded on an active market) of the debenture stock is shown below.

	2016			2015
	Nominal £'000	Book £'000	Fair £'000	Nominal £'000	Book £'000	Fair £'000
8% debenture stock 2022	80,000	84,112	103,200	80,000	84,756	103,600

Gains and Losses on Hedges

The following forward currency contracts were open at 31 December:

At 31 December 2016 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	$9,400,000	Sterling	£7,599,892	8/2/17	11
Euro	€2,950,000	Sterling	£2,520,543	8/2/17	(11)
					-

At 31 December 2015 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	$12,000,000	Sterling	£8,141,373	13/1/16	181
Euro	€960,000	Sterling	£707,738	13/1/16	19
					200

Realised currency gains/(losses) are taken to the capital reserve and are not reflected in the revenue account unless they are of a revenue nature.

Capital Management

The capital of the Company is its share capital and reserves as set out in notes 13 and 14 of the Annual Report and Financial Statements together with its borrowings (see note 12 of the Annual Report and Financial Statements). The objective of the Company is to deliver real dividend growth by increasing capital and growing income. The Company's investment policy is set out on page 6 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 on pages 7 and 8 and on pages 27 and 28 of the Annual Report and Financial Statements. The Company has the authority to issue and buy back its shares (see pages 24 and 25 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in notes 13 and 14 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its debenture which are detailed in note 12 of the Annual Report and Financial Statements.

Alternative Investment Fund Managers (AIFMD) Directive

In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM remuneration policy is available at www.bailliegifford.com or on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) are available at www.bailliegifford.com.

The Company's maximum and actual leverage levels (see Glossary of Terms on page 61 of the Annual Report and Financial Statements) at 31 December 2016 are shown below:

Leverage

	Gross Method	Commitment Method
Maximum limit	3.00:1	2.00:1
Actual	1.26:1	1.20:1

Investments

As at 31 December 2016		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Securities
Listed equities/funds		424,881	1,919	-	426,800
Bonds		-	15,190	10,564	25,754
Property
Freehold		-	-	61,000	61,000
Total financial asset investments		424,881	17,109	71,564	513,544

As at 31 December 2015		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Securities
Listed equities/funds		350,346	1,808	-	352,154
Other equities		-	-	7,061	7,061
Bonds		1,735	6,335	8,583	16,653
Property
Freehold		-	-	56,000	56,000
Total financial asset investments		352,081	8,143	71,644	431,868

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with FRS 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. Property investments are not financial assets and therefore the fair value hierarchy does not apply to these assets.

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).

Statement of the Directors' Responsibilities in Respect of the Annual Report and the Financial Statements

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

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with applicable law and UK Accounting Standards including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that 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. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page on 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:

-  the Financial Statements, which have been prepared in accordance with applicable law and UK Accounting Standards 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 provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

-  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.

By order of the Board

Peter Moon

15 February 2017

Income Statement

	For the year ended 31 December 2016			For the year ended 31 December 2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments - securities	-	87,566	87,566	-	7,038	7,038
Net gains on investments - property	-	1,265	1,265	-	1,643	1,643
Currency losses	-	(1,084)	(1,084)	-	(272)	(272)
Income (note 2)	18,630	-	18,630	18,626	-	18,626
Management fees	(775)	(1,440)	(2,215)	(690)	(1,282)	(1,972)
Other administrative expenses	(968)	-	(968)	(1,137)	-	(1,137)
Net return before finance costs and taxation	16,887	86,307	103,194	16,799	7,127	23,926
Finance costs of borrowings	(2,015)	(3,741)	(5,756)	(2,028)	(3,767)	(5,795)
Net return on ordinary activities before taxation	14,872	82,566	97,438	14,771	3,360	18,131
Tax on ordinary activities	(933)	293	(640)	(858)	226	(632)
Net return on ordinary activities after taxation	13,939	82,859	96,798	13,913	3,586	17,499
Net return per ordinary share (note 3)	10.46p	62.16p	72.62p	10.47p	2.70p	13.17p

The total column of this statement is 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 there is no other comprehensive income.

Balance Sheet

	At 31 December 2016		At 31 December 2015
	£'000	£'000	£'000	£'000
Fixed assets
Investments - securities	452,554		375,868
Investments - property	61,000		56,000
		513,554		431,868
Current assets
Debtors	1,116		1,115
Cash and cash equivalents	4,174		3,399
	5,290		4,514
Creditors
Amounts falling due within one year	(3,222)		(3,173)
Net current assets		2,068		1,341
Total assets less current liabilities		515,622		433,209
Creditors
Amounts falling due after more than one year		(84,112)		(84,756)
Net assets		431,510		348,453
Capital and reserves
Called up share capital		33,349		33,290
Share premium		2,131		1,534
Capital redemption reserve		22,781		22,781
Capital reserve		356,897		274,038
Revenue reserve		16,352		16,810
Shareholders' funds		431,510		348,453
Net asset value per ordinary share (debenture at fair value)		309.2p		247.5p
Net asset value per ordinary share (debenture at book value)		323.5p		261.7p
Ordinary shares in issue (note 6)		133,395,943		133,160,943

Statement of Changes in Equity

For the year ended 31 December 2016

		Share capital £'000	Share Premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2016		33,290	1,534	22,781	274,038	16,810	348,453
Shares issued		59	597	-	-	-	656
Net return on ordinary activities after taxation		-	-	-	82,859	13,939	96,798
Dividends paid in the year (note 4)		-	-	-	-	(14,397)	(14,397)
Shareholders' funds at 31 December 2016		33,349	2,131	22,781	356,987	16,352	431,510

For the year ended 31 December 2015

		Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2015		33,169	357	22,781	270,452	17,047	343,806
Shares issued		121	1,177	-	-	-	1,298
Net return on ordinary activities after taxation		-	-	-	3,586	13,913	17,499
Dividends paid in the year (note 4)		-	-	-	-	(14,150)	(14,150)
Shareholders' funds at 31 December 2015		33,290	1,534	22,781	274,038	16,810	348,453

 

Cash Flow Statement

	Year Ended 31 December 2016		Year Ended 31 December 2015
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	97,438		18,131
Net gains on investments - securities	(87,566)		(7,038)
Net gains on investments - property	(1,265)		(1,643)
Currency losses	1,084		272
Finance costs of borrowings	5,756		5,795
Overseas withholding tax	(625)		(651)
Changes in debtors and creditors	233		(79)
Other non-cash changes	(65)		(93)
Cash from operations		14,990		14,694
Interest paid		(6,400)		(6,400)
Net cash inflow from operating activities		8,590		8,294
Cash flows from investing activities
Acquisitions of investments	(83,824)		(106,814)
Disposals of investments	91,034		104,757
Forward currency contracts	(1,691)		188
Net cash inflow/(outflow) from investing activities		5,519		(1,869)
Cash flows from financing activities
Equity dividends paid	(14,397)		(14,150)
Shares issued	656		1,298
Net cash outflow from financing activities		(13,741)		(12,852)
Increase/(decrease) in cash and cash equivalents		368		(6,427)
Exchange movements		407		(151)
Cash and cash equivalents at 1 January		3,399		9,977
Cash and cash equivalents at end of 31 December*		4,174		3,399

*      Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

 

Notes

1.	The Financial Statements for the year to 31 December 2016 have been prepared in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland and on the basis of the accounting policies set out in the Annual Report and Financial Statements for the year ending 31 December 2015. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained above. 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 no short term borrowings and the redemption date for the Company's debenture is April 2022. 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 on page 8 of the Annual Report and Financial Statements, that the Company will continue in operational existence for a period of at least 12 months from the date of approval of these Financial Statements. 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	2016 £'000	2015 £'000
	Income from investments
	UK dividend	3,176	3,666
	UK interest	157	238
	Overseas dividends	10,316	10,017
	Overseas interest	873	660
		14,522	14,581
	Other income
	Deposit interest	64	17
	Rental income	4,021	4,004
	Other income	23	24
		4,108	4,045
	Total income	18,630	18,626
	Total income comprises
	Dividends from financial assets designated at fair value through profit or loss	13,492	13,683
	Interest from financial assets designated at fair value through profit or loss	1,030	898
	Interest from financial assets not at fair value through profit or loss	64	17
	Other income not from financial assets	4,044	4,028
		18,630	18,626

 

3.

Net return per ordinary share

2016

2015

Revenue

Capital

Total

Revenue

Capital

Total

Net return per ordinary share

10.46p

62.16p

72.62p

10.47p

2.70p

13.17p

Revenue return per ordinary share is based on the net revenue on ordinary activities after taxation of £13,939,000 (2015 - £13,913,000) and on 133,291,026 (2015 - 132,864,655) ordinary shares of 25p, being the weighted average number of ordinary shares in issue during the year. Capital return per ordinary share is based on the net capital gain for the financial year of £82,859,000 (2015 - net capital gain of £3,586,000), and on 133,291,026 (2015 - 132,864,655) ordinary shares of 25p, being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.

4.

Ordinary dividends

2016

2015

2016 £'000

2015 £'000

Amounts recognised as distributions in the year:

Previous year's final (paid 5 April 2016)

2.70p

2.65p

3,595

3,516

First interim (paid 24 June 2016)

2.70p

2.65p

3,598

3,516

Second interim (paid 23 September 2016)

2.70p

2.675p

3,602

3,559

Third interim (paid 16 December 2016)

2.70p

2.675p

3,602

3,559

10.80p

10.65p

14,397

14,150

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 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution out of current year profits by way of dividend for the year is £13,939,000 (2015 - £13,913,000).

2016

2015

2016 £'000

2015 £'000

Dividends paid and payable in respect of the year:

First interim (paid 24 June 2016)

2.70p

2.65p

3,598

3,516

Second interim (paid 23 September 2016)

2.70p

2.675p

3,602

3,559

Third interim (paid 16 December 2016)

2.70p

2.675p

3,602

3,559

Current year's proposed final dividend (payable 12 April 2017)

2.725p

2.70p

3,635

3,595

10.825p

10.70p

14,437

14,229

If approved the final dividend of 2.725p will be paid on 12 April 2017 to all shareholders on the register at the close of business on 10 March 2017. The ex-dividend date is 9 March 2017. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for the receipt of elections for reinvestment of this dividend is 22 March 2017.

5.

The fair value of the 8% Debenture Stock 2022 at 31 December 2016 was £103.2m (2015 - £103.6m).

6.

During the year, 235,000 (2015 - 485,000) shares were issued at a premium to net asset value raising proceeds of £656,000 (2015 - £1,298,000). At 31 December 2016 the Company had authority to buy back 19,960,825 ordinary shares and to allot 13,081,092 ordinary shares without application of pre-emption rights in accordance with the authorities granted at the AGM in April 2016. No shares were bought back during the year.

^†           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.

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

Legal Entity Identifier: 549300NF03XVC5IFB447

Regulated Information Classification: Annual financial and audit reports

- ends -

 

END

 

 

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