Annual Financial Report

RNS Number : 5282M

Scottish Mortgage Inv Tst PLC

25 May 2010

 

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT AND PROPOSED NEW ARTICLES OF ASSOCIATION

Copies of the Annual Report and Financial Statements for the year ended 31 March 2010 and the proposed new Articles of Association of Scottish Mortgage Investment Trust PLC have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Annual Report and Financial Statements for the year ended 31 March 2010 including the Notice of Annual General Meeting is also available on the Scottish Mortgage's page of the Baillie Gifford website at:

www.scottishmortgageit.com

At the Annual General Meeting to be held on 28 June 2010, it is proposed that new Articles of Association be adopted in order to update the Company's current Articles of Association to take account of the final implementation of the Companies Act 2006. More detail on the proposed changes to the Articles of Association is set out in the Directors' Report, the Notice of Annual General Meeting and the Appendix to the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 March 2010. Copies of the new Articles of Association are available for inspection at Royal London House, 22-25 Finsbury Square, London  EC2A 1DX and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 March 2010 which require to be published by DTR 4.1 is set out on the following pages.

Baillie Gifford & Co

Company Secretaries

25 May 2010

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

CHAIRMAN'S STATEMENT

Results

The end of our last financial year coincided with a welcome turning point for equities, which recovered strongly after many months of retreat. So I am pleased to be able to report that, in the 12 months to 31 March 2010, not only did stock markets stage a remarkable rally from the lows of Spring 2009, Scottish Mortgage also delivered an exceptional performance and more than made up the ground that was lost in the previous year. By all measures we were considerably ahead of our benchmark: over the year to 31 March 2010, net asset value per share appreciated by 81%, while the increase in the FTSE All World Index (in sterling) was 45%. The share price started the year at 353p and was 609p at its close, representing a 73% increase - a new year-end high for Scottish Mortgage.

Investment Philosophy and Five Year Record

After the extreme disruption endured in 2008/09, the past twelve months demonstrate the considerable value of a soundly based investment philosophy and the benefits of sticking to fundamental beliefs. Scottish Mortgage's style is first of all determined by a long term perspective. An approach is then taken where the assessment of the prospects and progress of individual companies is kept to the fore. This "bottom-up" approach is in contrast to attempts to anticipate shorter term trends and market direction.

In keeping with the long term approach, the five year record is much more relevant than one year's individual figures - however good the past 12 months' numbers may be. I am happy to report that over five years the share price total return (both capital and dividends) has been 104% (or 15.3% on an annualised basis) and the net asset value return was 86% (13.2% per annum). These can be compared to 58% returned on the same basis by the FTSE All World Index (9.6% per annum).

Investment and International Environment

The Managers' Review contains a full commentary on the progress of Scottish Mortgage's investments and the investment perspective encompassed by the current portfolio. The past year saw a resumption (or, in the case of China, an acceleration) of growth, across most economies. The financial and banking system is once again functioning, although in many developed economies a legacy of the crisis has been the transfer of debt from the private to the public sector and reluctance on the part of the banks to lend, due partly to regulatory, capital and liquidity constraints, to those businesses most in need of funding. While the move away from some of the extraordinary excesses seen in financial markets is to be welcomed, the paucity of bank lending is undoubtedly hindering the nascent economic recovery in Britain and other developed economies; low base rates are of little use to companies who cannot access funds.

Within the developed world, governments and regulators are still grappling with the problem of finding acceptable ways to ensure that banking crises can be averted in future, while at the same time trying to maintain confidence in some of the worst-hit economies, of which Greece is so far the most prominent example. While Western governments' attentions are occupied with such issues, it is already evident that economic and political influence is shifting inexorably away from Europe and the United States towards rapidly growing powers, particularly in Asia, at a considerable pace. It is also apparent that the recent crisis has, at a corporate level, produced winners as well as losers; many companies which successfully weathered the crisis have emerged in stronger and often dominant positions compared to their weakened competitors.

Borrowings

Borrowings have been maintained at roughly the same level in absolute terms throughout the year and being geared into rising markets has benefited performance. The relative level of the borrowings, or gearing ratio, has fallen as the value of the assets has risen. Gearing is reviewed at all Board meetings and, provided the Company's risk profile remains commensurate with that which the Board has agreed with the Manager, borrowings may be increased should the expected returns from investment opportunities be deemed to outweigh the costs. At the financial year end, total assets were £2.2bn and borrowings were £315m.

Earnings and Dividend

Earnings per share this year were 11.2p compared to 12.7p in the previous year, when the total included a non-recurring element of 1.5p derived from the substantial recovery of VAT from HMRC. Thus, underlying earnings were maintained year-on-year. In an environment where many companies have cut or even suspended their dividends, we regard this as a very satisfactory outcome for Scottish Mortgage's portfolio.

A final dividend of 5.8p per share is proposed which will give a total of 11.3p for the year. Last year's total dividend payment was 12.3p per share, or 10.8p if the non-recurring VAT element of 1.5p is excluded, so this represents an increase of 4.6% in the underlying rate and represents a real increase as RPI rose by 4.4% in the period. This is the 28th successive year that Scottish Mortgage has increased its dividend at a faster rate than inflation.

Forecasting future earnings is not a precise science as the portfolio changes throughout the year but at this stage the Managers expect to see an increase in earnings in 2010/11. Earnings are now derived predominantly from overseas holdings so currency fluctuations will have an impact. Your Board recognises that a growing dividend return is important to shareholders and intends, as far as possible, to build on its long record in this regard. Distributable revenue reserves currently stand at 22p per share and your Board is prepared to use these if the need arises.

Discount and share buybacks

While performance was strong this year, it is disappointing to report that the discount has widened, admittedly in line with many other large trusts and the sector as a whole. In an effort to contain the discount, we have tried to address the apparent imbalance between demand and supply for our shares. In total, 12.6m shares (4.6%) were bought back during the course of the year, compared to 1.9m shares in the previous year. One attraction of buying back shares at a discount is that net asset value per share for the continuing shareholders is enhanced, the effect of this uplift in 2009/10 being 8.7p per share. While the Board understands the attractions of buying back shares, a significant feature of Scottish Mortgage is its low running cost for shareholders. To maintain this advantage, it is important that the scale of the Company is maintained with costs spread across a large asset base; our total expense ratio of 0.52% is among the lowest in the industry and an important part of the overall investment proposition. To this end, seeking and sustaining demand for Scottish Mortgage shares is a priority for the Managers and great efforts are made to find new buyers to replace those who decide to exit.

The Board

My predecessor, Sir Donald MacKay, retired in December 2009. Sir Donald served as a Director from 1999 and as Chairman from 2003, overseeing considerable change notably to the way the investments are managed and in the significant increase in holdings in overseas stocks; Scottish Mortgage today offers a fundamentally different investment proposition as compared with only 10 years ago. I believe that we - Shareholders, the Managers and this Board - owe Sir Donald a considerable debt of gratitude for the effective way in which he has handled these changes.

Considerable thanks are also due to Geoff Ball who retired following the 2009 AGM having given over 25 years of valuable service to the Company, including several years as a most effective Senior Independent Director; that position is now fulfilled by Mike Gray. 2010 also saw the resignation of Lord Strathclyde who joined the Board in 2004 and who has stood down to fulfil extensive political commitments; his insights and advice will be missed.

AGM

At the AGM the Company is putting forward a resolution to change the Articles of Association to reflect the implementation of the last parts of the Companies Act 2006 which came into force on 1 October 2009. Further information on the resolution can be found on page 27 in the Directors' Report and details of the main changes proposed are set out in the Appendix to the Notice of Annual General Meeting on page 57 in the Annual Report and Financial Statements.

The AGM will be held at 4.30pm on 28 June in the Edinburgh offices of Baillie Gifford & Co (see map on page 54 in the Annual Report and Financial Statements). James Anderson, Chief Investment Officer of Baillie Gifford and who has responsibility for the investments, will give a presentation and answer shareholders' investment questions. The Board welcomes this opportunity to meet shareholders and refreshments will be served after the presentation.

Outlook

The shape of the world as defined by economic, corporate and also environmental considerations is shifting rapidly and the Scottish Mortgage portfolio is alive to these developments. Change of this scale can be unsettling and comes with risk and uncertainty but seismic shifts also provide rich seams of opportunity.

Overall, the Managers conclude that there is no current shortage of companies with exciting growth prospects. These are often, but not exclusively, those companies exposed to domestic growth in countries where wealth is increasing and being spread rapidly. Opportunities also lie amongst exporters of goods and services and with strong, well managed concerns in the developed world. In particular, one set of companies that the Managers seek to identify is young businesses at an early stage of possibly rapid growth. Within the Managers' Review there is a thought-provoking account of a recent trip to China written by Tom Slater, Scottish Mortgage's Deputy Manager. As ever there is considerable uncertainty about precisely how economies and trade patterns will develop, but your Board takes a positive long term view of the global outlook.

The experience of the past two years suggests that Scottish Mortgage shares will be volatile against the comparative index, sometimes considerably so in the short term; while the Board considers that it has an appropriate benchmark, it does not engage in slavish attempts to track any index but instead strives to deliver to shareholders long term absolute and relative returns that are well above average. I am delighted that Scottish Mortgage has done this so effectively in the past year.

JOHN SCOTT

17 May 2010

Past performance is not a guide to future performance.

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

MANAGERS' REVIEW

The last 12 months have demonstrated the dangers of undue attention to annual performance data. Last year we seemed to be terrible investors. This year we appear brilliant. All this comes about with the same process, the same portfolio shape, overwhelmingly the same investments and the same people. We are not conscious that we have become any cleverer this year. Overall we are happy with the way that our companies have coped with the tough environment of the last two years (with sad but inevitable exceptions) but we think that much of their achievement was demonstrated at precisely the time that their share prices were under extreme pressure.

Frequently markets are simply absurd. The notion that we should judge ourselves by endlessly benchmarking ourselves against their erratic behavior is one that we completely reject. Our task is to build wealth for shareholders over long periods of time with indices simply as a background guide to our basic competence over the decades. Overall we think that we have done quite a reasonable job but this is for other shareholders to judge.

Our principal investment contentions

It may be worth repeating once more the three convictions that have dominated our strategy over the last five years. Despite the fragile economic times and the frenetic activity in markets these have remained solid signposts for us. They are that;

•     The rise of China (and to a lesser extent other emerging economies) is transforming the global economic scene.

•     Stock markets underestimate the power of technological change in exaggerated revulsion to the bubble of 1998-2000.

•     The Western financial systems are dangerously flawed.

It is, of course, dangerously easy to be sucked into seeing evidence that confirms the ideas that one is advocating and it is almost equally challenging to spot the point at which concepts that are fundamentally valid have simply been pushed too far by overblown market sentiment. Nevertheless we see little reason to retreat from these three contentions. Indeed in each case we appear to have underestimated their importance.

China

It is on this topic that we feel most guilty of feebleness. We have grasped that the mean-reversion of China to a position of global economic leadership was probable. Yet we have underestimated both the awesome pace and scale of this development and the conclusions that this should have forced us towards in stock selection. Whilst we are generally more interested in economic exposures than in location of corporate headquarters we feel this is insufficient excuse for this time last year having less than 6% of our portfolio in Chinese companies. The total has now risen to close to 9% which still seems modest by any measure apart from that of commonly used indices.

This is not to say that we have any desire to simply buy exposure to corporate China in general but it is to point to the single most important mental shift that we have gone through in the last year. It is that we think that China is now home to an entrepreneurial fury that is leading to the creation of great individual businesses. In the years ahead we think it probable that individual private Chinese ventures will provide much of the innovation in the world. There has already been a marked structural shift in our portfolio from state owned behemoths such as China Mobile towards youthful and ambitious companies such as Baidu and Tencent within the same telecom and internet space. New Oriental Education (the leading English language school), Ctrip (online travel) and Belle (shoe retailing) are other examples of companies with open-ended growth opportunities, competitive strengths and focused strategies that would have appealed to us wherever in the world they could be found over the last 100 years.

We regularly review threats to continued Chinese progress. A year ago we thought the immediate challenge was preventing the anti-crisis stimulus from seeping into speculation. The domestic stock market has shown little sign of this but the coastal housing market has plainly become too buoyant. Fortunately, and in marked contrast to the West, the authorities are prepared both to call incipient bubbles and to counteract them so we are satisfied that common sense is likely to prevail. We do not believe that a consequent slowdown in the housing market would undermine the Chinese economy.

Beyond this immediate concern the next stage of China's rise would be greatly assisted by the focus of growth shifting from the advanced Eastern provinces to encompass the interior as well as from exports to domestic demand. We spent a fascinating three weeks touring China in March to investigate such questions with a particular stress on provinces from Inner Mongolia to Sichuan that do not enjoy the historic coastal advantages and prejudices. We returned more optimistic than when we left. It appears to us that demand has shifted decisively to domestic demand whilst growth in the rural interior seems to be both stronger and sounder than we had feared. We see no sign as yet that the Chinese Communist Party is either unpopular or that it has made major policy mistakes that are likely to prompt serious discontent. Both are entirely plausible causes of friction in the future.

Emerging markets no more?

We have always felt that China is of an importance that puts it in a category of its own. We are wary of generalizing about China let alone of incorporating it in a category defined as 'emerging markets.'  Indeed we now feel that the time has come to abandon this phrase. The consequent gain in accuracy and clarity has investment benefits. The phrase has come to be used to denote economic backwardness and high risk. This makes little current sense. We find it hard to see much of urban China as low in wealth (private or public). We think it unwise to think of China and Brazil as high risk when their balance sheets, trade positions and financial structures appear so much more solid than our own. It is a pleasing irony that one of the few countries in recent years to have been reclassified as 'developed' from emerging is Greece. Our own preference would be to assess individual companies, cities and regions at best and individual countries at most. If the investment world demands generalizations then we would suggest a line running from 'rising (super) powers' to 'declining empires' as the most helpful in our work. Where the USA proves to be on this continuum will be critical in the years ahead.

Technological innovation

Where America has remained a land of opportunity in recent years has been in technological innovation. Whilst the British corporate sector has created little of new shareholder or social value over the last 30 years this sad state of affairs is far from true of America. That this is so is principally to the credit of the technology sector and in geographical terms of a small portion of the North-West Coast. All the arrogance of Harvard and greed of Wall Street cannot completely obscure this extraordinary achievement.

On a more mundane but practical level it has also been critical to Scottish Mortgage. Two years ago we wrote that 'investing in technology companies involves a willingness to accept both volatility and diverse returns in the search for a select band of companies that will prove to be persistent winners… but the rewards for doing so can be dramatic.' Whilst we still need to be cautious in declaring that we have found persistent victors we have certainly had experiences of both diverse returns and apparent victories. It may be co-incidence but we have had more and greater victories when investing in (broadly defined) Silicon Valley and (so far) China than elsewhere in the world. Amazon has risen to be our largest holding after fine business and share-price performance. This is the first time since 1983 that a US stock has been our largest holding. Our admiration for Amazon lies partly in the scale of the business opportunity but still more in the attitudes inculcated by management. This is a company with contempt for the quarterly earnings game, a commitment to continuous innovation (however disruptive) and an intolerance of internal agendas and bureaucracies that makes future success more than normally likely.

One of the most challenging issues for us is that the success of Amazon, Apple, Google, Nintendo and Baidu has been such that these giants are increasingly clashing with each other as there are comparatively few other pools of profit left to destroy. We are wary of coming to definitive views as to the likely course and consequences of these internecine struggles as we have great respect for the abilities of all involved. The combination of the increasing pace and complexity of technological change, the almost instant geographical reach of innovation and the highly appealing returns that the winning companies earn mean that we are willing to accept such clashes as an inevitable drawback of businesses with great growth opportunities.

As already noted we have seen our technology investments spread into China but we also believe that we need to widen our interest beyond traditional sector boundaries. We suspect that the combination of scientific progress, venture capital interest, demographic demands and financial imperatives mean that healthcare will be a prime focus of future technological innovation. We do not believe that that the traditional big pharmaceutical companies will lead this sweeping change. A good, if thus far rare, example of what we are looking for comes in our purchase of Intuitive Surgical which is the world leader in robotic surgery. It has thrived on scientific collaboration from Stanford, research support from the US armed forces, better clinical outcomes and a claim to reduce healthcare costs. It now has 90% of the world market for such systems. We hope that we will be able to report on more holdings of this type in future years.

Western finance: still rotten?

The machinations of the Western financial sector continue to trouble us. Last year we remarked that we saw no evidence of 'less complexity or reduced avarice.' Sadly this still appears to be the case in the investment banking world. What improvements there have been seem to be coming from outside pressures. Capital requirements are somewhat less indulgent than in the past, the intellectual mood does appear to have shifted against extreme market fundamentalism and governmental and legal activism is at least plausible. We regard it is inevitable that any process of re-regulation will have flaws but we still believe that this is a small price to pay if the systemic risks to the world economy posed by excessive gearing, ill-considered risk analysis and untrammelled greed in the financial sector can be brought under control. This is not populism. It is necessary for the proper functioning of our financial system. We will continue to have limited holdings in the Western financial system until this occurs and what we do have will be concentrated in those rare institutions (notably Banco Santander, Progressive Insurance and Berkshire Hathaway) in which we have faith in the ethics and seriousness of the management. We feel no need to be tempted by the morass of unreformed financial institutions.

Conclusion and Outlook

We are all aware of the shocks that the global economy has been prey to in recent years. We doubt, however, that there has been sufficient rethinking of the investment landscape as a consequence of what we have seen and should have learnt. Our attitudes to and understanding of risk needs to be rethought. This has transforming consequences. The idea that risk should be defined as volatility around an index and that it can be measured has always seemed exceedingly presumptuous. Nevertheless from heavily leveraged investment banks to the most staid of investment trusts this has generally been the default position of risk managers and hence asset allocation. This has led most equity portfolios to a concentration on large Western companies as the perceived safe default choice without much thought as to the underlying exposures of these entities (rather similar to the automatic trust in AAA rated mortgage debt that has so haunted the bond markets). We doubt that 'Western' or 'large' will prove synonyms for either 'safe' or 'wealth-creating' in the decades ahead. We are convinced though that the world offers a wealth of opportunities. We think that the global economy is more solidly based, indeed more exciting, and more capable of dragging untold millions out of poverty than at any stage in history. Naturally events and accidents can occur and stock markets will always be prone to vigorous oscillations but we tend to see such occurrences as distractions from a fundamentally optimistic picture. If this is right and if the Managers carry out their task competently then the prospects for Scottish Mortgage shareholders ought to be bright indeed.

JAMES ANDERSON

Manager of Scottish Mortgage

6 May 2010

China Trip Note

James and I recently returned from overlapping trips to China with our colleague, Wanyi Yao. We were trying to increase our understanding of the huge changes that are occurring in the region through meetings with companies, government officials, academics and entrepreneurs. We spent time in the megacities of Beijing and Shanghai as well as travelling to the western centres of Chongqing and Chengdu, the plains of Inner Mongolia and the provincial capitals of Anhui, Liaoning and Zhejiang.

There is a lot of concern in financial markets that the Chinese economy is experiencing an unsustainable boom at present. We do not share these misgivings. We believe the pace of fixed asset investment is not the result of a housing bubble but a necessary consequence of the process of urbanisation. In Beijing, for example, there is a requirement for huge further investment to ease congestion. Car ownership in Beijing is less than 20% of the level seen in the United States but it is quite clear to anyone who has spent a day there that the road network can barely support current usage. The subway system is to be expanded from the current six lines (which serve a municipal population of twenty two million people) to nineteen lines by 2020.This necessary investment in mass transit is mirrored in at least ten other major Chinese cities.

As we drove along the expressway from Shanghai to Hangzhou, we could see the pillars that are being erected for the new high speed rail link between the two cities. The scale of this infrastructure investment is astonishing, with concrete pillars standing fifteen meters tall supporting a concrete base for the track and stretching for thousands of kilometres. In fact, seventeen thousand kilometres of high speed rail links are currently under construction. Such investment projects underpin our confidence in prospective demand for many of our global industrial holdings such as iron ore producer, Vale or engineering company, Atlas Copco.

It is a popular misconception that the Chinese authorities are not concerned about climate change. It was quite clear from meetings with state controlled companies such as Shanghai Electric (which has been funding a rapidly growing wind turbine manufacturer) or Longyuan Power (China's largest windfarm operator) that the Chinese government is taking this issue seriously. The tariff structure and investment incentives are being put in place to support a huge construction programme in green energy generation. A visit to the University of Science and Technology in Hefei highlighted that funding is also flowing into research on the development of the electricity grid to cope with greater participation from renewable sources. Perhaps even more importantly, a trip to one of the country's fifty four high technology zones showed that there is a clear understanding within government that Chinese companies have to increase research and development spending and move into higher value sectors of the economy. Given the growth opportunity in their domestic market, they see green energy as an area in which they can be world leaders.

The desire to shift economic focus from commodity industries was articulated by many of the people we met. This was most noticeable in the financial sector where the pace of change seems to be accelerating. We were struck by the thoughtful and open manner of the government officials responsible for this. Perhaps one big difference from Western countries is that the brightest graduates are as likely to be attracted to a career in government as they are to private sector employment. Therefore those responsible for financial regulation may be better placed to identify and prevent industry excess. One of the lessons that the Chinese have taken from the recent crisis is that the financial sector has to serve the real economy and that the connection between the two must be maintained as they grow. Therefore they are happy to encourage the development of new financial products but only if they support the development of new and strategically important industries. Perhaps this is a lesson which we have not yet fully understood here in the UK.

Whilst consumption remains a relatively small part of the China's economy, there is little evidence that as Chinese society becomes wealthier, the propensity to spend will be lower than anywhere else. Because the overall population is large, even having a small proportion of people with meaningful disposable incomes already translates into huge spending power. We had an interesting meeting with Gucci China (a subsidiary of the fund's holding in Pinault-Printemps Redoute) and the development of their business illustrates this well. Gucci now generates 15% of global revenues in China having entered the market in 1997. One of the interesting facets of the market is that consumers appear to be much more loyal to individual brands and the corollary of this may well be that successful brands have a larger opportunity in China. The scale of demand for luxury products appears to be leading to higher prices than elsewhere in the world.

Whilst in Beijing, we met the former leader of Google China, who left to start up an incubator fund focused on technology companies. In some areas, such as Internet gaming, the Chinese are the pioneers of new business models and this was an opportunity to see whether this reflects a growing culture of innovation and start-up investment in technology. It quickly became clear that there is no shortage of new ideas and the interest that this particular venture has generated suggests great potential enthusiasm. For example, the fund has had over one hundred thousand CVs over the few months since its formation, suggesting that many potential employees have been looking for a way into this industry. As the entrepreneurial ecosystem starts to build and capital becomes more readily available, we think the creativity that is unleashed will form the foundation of many exciting new businesses.

After visiting a local hospital and health bureau in north eastern China, we met the senior researcher of the State Council who drafted China's Healthcare Reform White Paper. Over the next three years, the government will invest the equivalent of £85bn in healthcare, aiming to provide basic health insurance to all (it was interesting to discover that healthcare insurance coverage is already over 90% in urban China). These headline figures are likely to understate the true level of investment as they do not capture the spending of local government. Whilst we have yet to find attractive potential investments in this area, a visit to an unlisted pharmaceutical company in Chengdu, which is seeing explosive volume growth in the drugs it sells, was illustrative of the opportunities which are being created. The huge commitment to healthcare and the associated increase in spending levels will be an important new driving force for the Chinese economy. The increase in healthcare infrastructure investment will directly promote economic growth and the implementation of reform will improve the health of citizens and social security, thereby stimulating consumption and sustaining economic growth in the long-run.

With questions about rural reform in mind, we travelled westwards to one of the largest and most populous agricultural provinces - Sichuan. Whilst rural development has been ongoing since the 1970s, this time the direction is quite different and the success (or otherwise) of the policy will have far-reaching consequences. State sponsored land privatisation in selected villages in Sichuan is underway which should create wealth for rural inhabitants as well as increasing agricultural productivity through a move to large-scale farming. One consequence of this may be an increase in the number of migrant workers relocating to urban areas, which has positive implications for productivity growth. Sichuan already exports over twenty million migrant workers to the coastal provinces of eastern China. However, as further urbanisation takes place, megacities are reaching saturation point and therefore the strategic development of smaller cities and towns is of increasing importance. From an investment point of view we are questioning whether large banks with existing rural networks are the best way to facilitate rural reform and benefit from these changes. There are implications for a wide range of businesses from the domestic real estate developers to our holding in John Deere, the farm machinery business.

In summary, we remain very enthusiastic about the prospects for growth in Chinese infrastructure investment and domestic consumption. A great deal of progress is being made in fields as disparate as renewable energy, financial services, healthcare, agricultural reform and early stage technology investment. We believe markets continue to underestimate the importance of the changes that are taking place and this is throwing up many exciting opportunities for us as long term investors.

TOM SLATER

Deputy Manager of Scottish Mortgage

6 May 2010

THIRTY LARGEST EQUITY HOLDINGS AND EQUITY PERFORMANCE at 31 March 2010
Name	Business	Fair value 31 March 2010 £'000	% of total assets	Performance †		Contribution to absolute performance %	Fair value 31 March 2009 £'000
				Absolute %	Relative %
Amazon.com	Online retailer	120,009	5.6	75.4	18.2	3.6	62,512
Petrobras	Oil producer	108,260	5.0	56.2	5.3	4.7	87,056
Banco Santander	Banking	84,691	3.9	95.3	31.6	4.6	34,179
Atlas Copco	Engineering	83,831	3.9	104.5	37.8	5.7	60,044
Baidu.com	Online search engine	77,278	3.6	220.7	116.2	2.6	5,357
Nintendo	Games consoles and software	71,659	3.3	13.1	(23.8)	(0.1)	49,315
Vale (CVRD)	Iron ore and nickel mining	58,268	2.7	138.4	60.7	4.4	41,632
Google	Online search engine	47,770	2.2	54.0	3.8	2.1	44,751
PPR	Luxury goods producer and    retailer	47,517	2.2	104.9	38.1	1.9	18,132
Deere	Farm machinery	47,030	2.2	74.2	17.4	1.8	27,478
Walgreen	Pharmacy chain	43,022	2.0	36.8	(7.8)	1.1	31,826
Standard Chartered	Banking	42,768	2.0	112.7	43.3	2.3	20,617
Taiwan    Semiconductor    Manufacturing	Semi-conductor manufacturer	40,303	1.9	14.7	(22.7)	0.5	22,523
Berkshire    Hathaway	Insurance	37,503	1.7	36.2	(8.2)	0.8	27,523
Progressive    Insurance	Property and casualty    insurance	37,106	1.7	35.3	(8.8)	0.8	27,640
KGHM	Copper mining	34,170	1.6	1.8*	(9.7)*	0.1*	-
New Oriental    Education &    Technology	Education and training	34,118	1.6	34.5*	16.4*	0.5*	-
Tencent Holdings	Internet service portal	30,900	1.4	155.3	72.1	1.2	7,566
ABB	Electronic and electrical equipment	30,747	1.4	51.4	2.0	0.8	18,094
Meggitt	Aerospace equipment and    systems	30,731	1.4	146.5	66.2	1.7	11,542
First Solar	Solar energy technology	30,640	1.4	(12.7)	(41.2)	(0.5)	25,693
Sandvik	Engineering	30,322	1.4	119.9	48.2	3.4	37,111
Rockwell    Automation	Industrial automation    providers	29,708	1.4	149.8	68.4	1.8	12,167
Brown-Forman	Wine and spirits producer	29,384	1.4	47.6	(0.5)	0.7	20,254
Schlumberger	Oil services	29,280	1.3	50 .0	1.1	1.3	28,276
Apple	Computer technology	28,323	1.3	111.1	42.3	1.1	7,019
Australia and    New Zealand    Banking	Banking	27,916	1.3	30.4*	16.3*	0.2*	-
Telekomunikacja     Polska	Fixed and mobile telecoms	26,050	1.2	2.3*	(9.2)*	-*	-
Wal Mart Stores	General retailer	25,658	1.2	12.5*	(14.8)*	0.1*	-
Richemont	Luxury goods	25,553	1.2	136.5	59.4	1.3	10,903
		1,390,515	64.4				739,210

^† Absolute and relative performance has been calculated on a total return basis over the period 1 April 2009 to
   31 March 2010.  Absolute performance is in sterling terms; relative performance is against the benchmark: FTSE

   All World Index (in sterling terms).

* Figures relate to part-period returns where the equity has been purchased during the period.

Source: Baillie Gifford & Co/StatPro

Past performance is not a guide to future performance.

DISTRIBUTION OF ASSETS

 

		At 31 March 2010 %			At 31 March 2009 %
Equities:	United Kingdom	11.1			9.0
	Continental Europe	19.0			23.6
	North America	28.2			28.1
	China	8.9			5.0
	Asia Pacific	7.5			6.0
	Emerging Markets	14.7			14.4
	Japan	3.9			5.7
Total equities		93.3			91.8
Sterling denominated bonds		0.7			0.3
Euro denominated bonds		0.2			0.2
Brazilian real denominated bonds		4.7			5.1
Net liquid assets		1.1			2.6
Total assets (before deduction of loans and debentures)		100.0			100.0

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 the Companies Act 2006. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than six months' notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.08% of total assets less current liabilities (excluding short term borrowings for investment purposes). The management fee is levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co; however the OEICs' share class held by the Company does not itself attract a management fee. The details of the management fee are as follows:

	2010 £'000		2009 £'000
Investment management fee	6,054		5,642

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 maximising total return, whilst also generating real dividend growth, from a focused and actively managed global portfolio. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility. Risk provides the potential for both loss and gains and in assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.

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

Market Risk

The fair value of future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board 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. Details of the Company's investment portfolio are shown in note 10 and pages 15 to 18 in the Annual Report and Financial Statements.

Currency Risk

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

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

At 31 March 2010	Investments £'000	Cash and deposits £'000	Loans and debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	966,429	77	(65,265)	1,290	902,531
Euro	189,318	-	-	227	189,545
Brazilian real	122,707	-	-	2,280	124,987
Swedish krona	114,153	-	-	-	114,153
Japanese yen	83,436	-	(59,969)	1,161	24,628
Swiss franc	56,300	-	(37,891)	(375)	18,034
Other overseas currencies	328,496	-	-	309	328,805
Total exposure to  currency risk	1,860,839	77	(163,125)	4,892	1,702,683
Sterling	269,650	18,821	(151,552)	306	137,225
	2,130,489	18,898	(314,677)	5,198	1,839,908

*      Includes net non-monetary assets of £52,000.

At 31 March 2009	Investments £'000	Cash and deposits £'000	Loans and debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	591,706	-	(69,067)	1,136	523,775
Euro	148,661	-	-	368	149,029
Brazilian real	71,430	-	-	1,797	73,227
Swedish krona	97,155	-	-	-	97,155
Japanese yen	79,642	-	(60,040)	895	20,497
Swiss franc	44,399	28,935	(37,121)	(18)	36,195
Other overseas currencies	203,332	-	-	638	203,970
Total exposure to  currency risk	1,236,325	28,935	(166,228)	4,816	1,103,848
Sterling	125,662	6,839	(151,705)	(4,307)	(23,511)
	1,361,987	35,774	(317,933)	509	1,080,337

*      Includes net non-monetary assets of £19,000.

Currency Risk Sensitivity

At 31 March 2010, 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 2009.

	2010 £'000		2009 £'000
US dollar	45,127		26,189
Euro	9,477		7,451
Brazilian real	6,249		3,661
Swedish krona	5,708		4,857
Japanese yen	1,231		1,025
Swiss franc	902		1,810
Other overseas currencies	16,440		10,199
	85,134		55,192

Interest Rate Risk

Interest rate movements may affect directly:

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

• the level of income receivable on cash deposits;

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

• the interest payable on the Company's variable rate borrowings.

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

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

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

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value at fair value.

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

Financial Assets	2010			2009
	Fair value £'000	Weighted average interest rate	Weighted average period until maturity *	Fair value £'000	Weighted average interest rate	Weighted average period until maturity *
Fixed rate:
Sterling bonds (perpetual)	9,630	7.6%	N/A	416	8.2%	N/A
Euro bonds	2,326	3.1%	7 years	771	3.1%	8 years
US bonds (perpetual)	-	-	-	404	8.0%	N/A
Floating rate:
Sterling bonds (interest rate linked to sterling  LIBOR)	5,701	3.7%	14 years	4,931	4.7%	10 years
Euro bonds (interest rate linked  to Euro LIBOR)	1,001	4.5%	75 years	1,115	6.3%	76 years
Brazilian bonds (index linked)	101,836	11.0%	35 years	71,430	10.5%	36 years

*Based on expected maturity date

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

Financial Liabilities	2010 £'000		2009 £'000
The interest rate risk profile of the Company's financial liabilities at 31 March was:
Floating rate - US$ denominated	65,265		69,067
Fixed rate -  Sterling denominated	151,552		151,705
-     Yen denominated		59,969	60,040
-     Swiss franc denominated		37,891	37,121
		314,677	317,933

The maturity profile of the Company's financial liabilities at 31 March was:
In one year or less, or on demand	163,125		69,067
In two to five years	-		97,161
In more than five years (weighted average period fixed 14 years)	150,877		151,030
No fixed date for repayment	675		675
	314,677	317,933

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 March 2010 would have decreased total net assets and total return on ordinary activities by £14,624,000 (2009 - £9,221,000). A decrease of 100 basis points would have had an equal but opposite effect.

An increase of 100 basis points in bond yields as at 31 March 2010 would have increased the net asset value per share (with borrowings at fair value) by 0.58p (2009 - 2.44p). 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 Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the benchmark.

Other Price Risk Sensitivity

Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 16 to 18 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a list of the 30 largest equity investments by their aggregate market value are contained in the Managers' Review Section in the Annual Report and Financial Statements.

109.24% of the Company's net assets are invested in equities. A 3% increase in quoted equity valuations at 31 March 2010 would have increased total assets and total return on ordinary activities by £60,300,000 (2009 - £38,488,000). A decrease of 3% 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 potentially significant but the majority of the Company's assets are investments in quoted securities that are believed to be readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.

The Company has the power to take out borrowings, which give it access to additional funding when required.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

•     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.

•     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.

•     The Company's listed investments are held on its behalf by The Bank of New York Mellon (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.

•     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.

•     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. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board.

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

Credit Risk Exposure

The maximum exposure to credit risk at 31 March was:

	2010 £'000	2009 £'000
Fixed interest investments	120,494	79,067
Cash and short term deposits	18,898	35,774
Debtors and prepayments	9,824	9,073
	149,216	123,914

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 borrowing. Long term borrowings are included in the accounts in accordance with FRS26. A comparison with the fair value (closing offer value) is as follows:

	2010			2009
	Par/nominal £'000	Book £'000	Fair £'000	Par/nominal £'000	Book £'000	Fair £'000
8-14% stepped interest debenture stock 2020	20,000	21,961	31,890	20,000	22,052	31,721
6.875% debenture stock 2023	75,000	74,525	82,313	75,000	74,488	77,282
6-12% stepped interest debenture stock 2026	50,000	54,391	78,800	50,000	54,490	76,249
4.5% irredeemable debenture  stock	675	675	525	675	675	540
Total debentures	145,675	151,552	193,528	145,675	151,705	185,792
Fixed rate loans		-	-		97,161	99,100
Total long term borrowings		151,552	193,528		248,866	284,892

All short term borrowings are stated at fair value.

Deducting long term borrowings at fair value would have the effect of reducing the net asset value per share from 711.2p to 692.8p. Taking the market price of the ordinary shares at 31 March 2010 of 609.0p, this would have given a discount to net asset value of 12.1% as against 14.4% on a debt at par basis. At 31 March 2009 the effect would have been to reduce the net asset value from 399.3p to 383.8p. Taking the market price of the ordinary shares at 31 March 2009 of 353.0p, this would have given a discount to net asset value of 8.0% as against 11.6% on a debt at par basis.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to 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 Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

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 Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager 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 known as 'gearing'. 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. The majority of the Company's investments are in quoted securities that are readily realisable.

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital (see note 14 in the Annual Report and Financial Statements) which is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 20 in the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 26 and 27 in the Annual Report and Financial Statements.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, 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 Generally Accepted 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 period. In preparing these financial statements, the Directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•     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 Managers section in the Annual Report and Financial Statements, confirm that, to the best of their knowledge:

•     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

•     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

JOHN SCOTT

17 May 2010

INCOME STATEMENT

	For the year ended 31 March 2010				For the year ended 31 March 2009
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total  £'000
Gains/(losses) on investments	-	837,604	837,604		-	(691,354)	(691,354)
Currency gains/(losses)	-	1,593	1,593		-	(50,819)	(50,819)
Income (note 2)	49,174	-	49,174		57,470	-	57,470
Investment management fee	(3,027)	(3,027)	(6,054)		(2,821)	(2,821)	(5,642)
Recovered VAT (note 3)	-	-	-		3,850	1,816	5,666
Other administrative expenses	(2,289)	-	(2,289)		(1,885)	-	(1,885)
Net return before finance costs and taxation	43,858	836,170	880,028		56,614	(743,178)	(686,564)
Finance costs of borrowings	(8,414)	(8,414)	(16,828)		(10,786)	(11,548)	(22,334)
Net return on ordinary activities before taxation	35,444	827,756	863,200		45,828	(754,726)	(708,898)
Tax on ordinary activities	(5,244)	1,143	(4,101)		(11,257)	7,860	(3,397)
Net return on ordinary activities after taxation	30,200	828,899	859,099		34,571	(746,866)	(712,295)
Net return per ordinary share (note 4)	11.18p	306.88p	318.06p		12.67p	(273.74p)	(261.07p)

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

All revenue and capital items in the above 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 March  2010	At 31 March 2009
	£'000	£'000
FIXED ASSETS
Investments held at fair value through profit or loss	2,130,489	1,361,987
CURRENT ASSETS
Debtors	9,824	9,073
Cash and short term deposits	18,898	35,774
	28,722	44,847
CREDITORS
Amounts falling due within one year (note 6)	(167,751)	(77,631)
NET CURRENT LIABILITIES	(139,029)	(32,784)
TOTAL ASSETS LESS CURRENT LIABILITIES	1,991,460	1,329,203
CREDITORS
Amounts falling due after more than one year (note 6)	(151,552)	(248,866)
	1,839,908	1,080,337
CAPITAL AND RESERVES
Called-up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	1,677,917	918,702
Revenue reserve	71,811	71,455
SHAREHOLDERS' FUNDS	1,839,908	1,080,337

NET ASSET VALUE PER ORDINARY SHARE	692.8p	383.8p
(After deducting borrowings at fair value) (note 7)
NET ASSET VALUE PER ORDINARY SHARE	711.2p	399.3p
(After deducting borrowings at par)
ORDINARY SHARES IN ISSUE (note 8)	259,519,897	272,089,897

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 March 2010

	Share capital £'000	Capital redemption reserve £'000	Capital reserve†† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2009	71,086	19,094	918,702	71,455	1,080,337
Net return on ordinary activities after taxation	-	-	828,899	30,200	859,099
Shares bought back †	-	-	(69,684)	-	(69,684)
Dividends paid during the year#	-	-	-	(29,844)	(29,844)
Shareholders' funds at 31 March 2010	71,086	19,094	1,677,917	71,811	1,839,908

For the year ended 31 March 2009

	Share capital £'000	Capital redemption reserve £'000	Capital reserve†† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2008	68,497	21,683	1,676,329	69,935	1,836,444
Adjustment to reserves*	2,589	(2,589)	-	-	-
Net return on ordinary activities after taxation	-	-	(746,866)	34,571	(712,295)
Shares bought back †	-	-	(10,761)	-	(10,761)
Dividends paid during the year#	-	-	-	(33,051)	(33,051)
Shareholders' funds at 31 March 2009	71,086	19,094	918,702	71,455	1,080,337

*    The adjustment to the share capital and capital redemption reserve is to reflect that when shares have been bought back in prior years and held in treasury they should not have been treated as cancelled.

†† The Capital Reserve balance at 31 March 2010 includes a gain of £622,630,000 relating to the revaluation of investments (31 March 2009 - loss of £170,580,000).

^†    See note 8

^#     See note 5

CASH FLOW STATEMENT
	For the year ended 31 March 2010		For the year ended 31 March 2009
	£'000	£'000	£'000	£'000
Net cash inflow from operating Activities (note 9)		40,740		56,685
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(18,968)		(21,862)
TAXATION
Income tax paid	(13)		(20)
Overseas tax incurred	(4,080)		(3,381)
TOTAL TAX PAID		(4,093)		(3,401)
FINANCIAL INVESTMENT
Acquisitions of investments	(460,680)		(387,778)
Disposals of investments	527,163		595,292
Realised currency (loss)/profit	(1,508)		5,132
Net cash INFLOW from financial investment		64,975		212,646
EQUITY DIVIDENDS PAID (note 5)		(29,844)		(33,051)
NET CASH INFLOW BEFORE FINANCING		52,810		211,017
FINANCING
Shares bought back	(69,684)		(10,761)
Bank loans repaid	(66,874)		(227,492)
Bank loans drawn down	66,872		49,980
NET CASH OUTFLOW FROM FINANCING		(69,686)		(188,273)
(DECREASE)/INCREASE IN CASH		(16,876)		22,744
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash in the period		(16,876)		22,744
Decrease in bank loans		2		177,512
Exchange movement on bank loans		3,101		(55,951)
Other non-cash changes		153		133
MOVEMENT IN NET DEBT IN THE YEAR		(13,620)		144,438
NET DEBT AT 1 APRIL		(282,159)		(426,597)
NET DEBT AT 31 MARCH		(295,779)		(282,159)

 

 

NOTES

1.	The financial statements for the year to 31 March 2010 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 March 2009. 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 is subject to the UK's regulatory environment.
								2010									2009
								£'000									£'000
2.	Income
	Income from investments and interest receivable							48,561									54,363
	Other income							613									3,107
								49,174									57,470
3.	Recovered VAT
	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. During the year to 31 March 2009, in respect of the periods 1990 to 1996 and 2000 to 2007 the Company received a reimbursement of £5,666,000 which was been allocated to revenue and capital in the manner in which it had originally been charged, plus £1,910,000 of interest thereon.
							2010 £'000								2009 £'000
4.	Net return per ordinary share
	Revenue return						30,200								34,571
	Capital return						828,899								(746,866)
	Total return						859,099								(712,295)
	Weighted average number of ordinary shares						270,102,144								272,833,733
	Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares during each period. There are no dilutive or potentially dilutive shares in issue.
		2010				2009				2010 £'000						2009 £'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 1 July 2009)	5.50p				5.30p				14,955						14,521
	Interim (paid 13 November 2009)†	5.50p				6.80p				14,889						18,530
		11.00p				12.10p				29,844						33,051
	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 842 of the Income and Corporation Taxes Act 1988 are considered.  The revenue available for distribution by way of dividend for the year is £30,200,000 (2009- £34,571,000).

 

NOTES (Ctd)

		2010			2009					2010 £'000				2009 £'000
5.	Ordinary Dividends (Ctd)
	Dividends paid and proposed in the period:
	Interim dividend per ordinary share (paid 13 November 2009) †	5.50p			6.80p					14,889				18,530
	Proposed final dividend per ordinary share (payable 1 July 2010)	5.80p			5.50p					15,052				14,965
	Adjustment to the previous year's final dividend re shares bought back									(10)				-
		11.30p			12.30p					29,931				33,495
	† The interim dividend for the year ending 31 March 2009 includes a non-recurring 1.5p per share.
	The final dividend was declared after the period end date and has therefore not been included as a liability in the balance sheet. If approved the final dividend will be paid on 1 July 2010 to all shareholders on the register at the close of business on 4 June 2010.  The ex-dividend date is 2 June 2010. The Company's Registrars offer a Dividend Reinvestment Plan (see page 50 in the Annual Report and Financial Statements) and the final date for elections for this dividend is 10 June 2010.
6.	The bank loans falling due within one year comprise US$99 million, ¥8,500 million and CHF60.5 million (2009 - US$99 million). There were no bank loans falling due in more than one year at 31 March 2010. (2009 - ¥8,500 million and CHF60.5 million drawn down under a facility which is repayable June 2010). During the year a bank loan of US$99 million was repaid and a bank loan of US$99 million was drawn down.
7.	The fair value of borrowings at 31 March 2010 was £356,653,000 (2009 - £353,959,000). Net asset value per share (after deducting borrowings at fair value) was 692.8p (2009 - 383.8p).
								2010 Number							2009 Number
8.	Share capital: Ordinary shares of 25p each
	Allotted, called-up and fully paid					259,519,897								272,089,897
	Treasury shares					24,826,279								12,256,279
	Total					284,346,176								284,346,176
	The Company's authority permits it to hold shares bought back 'in treasury'. Such treasury shares may be subsequently either sold for cash (at, or at a premium to, net asset value per ordinary share) or cancelled.  In the year to 31 March 2010 a total of 12,570,000 (2009 - 1,900,000) ordinary shares with a nominal value of £3,142,500 (2009 - £475,000) were bought back at a total cost of £69,684,000 (2009 - £10,761,000) and held in treasury.  At 31 March 2010 the Company had authority to buy back a further 28,365,043 ordinary shares.

NOTES (Ctd)

		2010 £'000		2009 £'000
9.	RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
	Net return on ordinary activities before finance costs and taxation	880,028		(686,564)
	(Gains)/losses on investments - securities	(837,604)		691,354
	Currency (gains)/losses	(1,593)		50,819
	Amortisation of fixed income book cost	(79)		(103)
	Decrease in accrued income	270		1,058
	Decrease/(increase) in debtors	449		(491)
	(Decrease)/increase in creditors	(731)		612
	NET CASH INFLOW FROM OPERATING ACTIVITIES	40,740		56,685
10.	Transaction costs on purchases amounted to £829,000 (2009 - £596,000 and transaction costs on sales amounted to £576,000 (2009 - £811,000).
11.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 March 2010.  The financial information for 2009 is derived from the statutory accounts for 2009, which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2009 and 2010 accounts, their reports for both years were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985 and, for the 2010 accounts, did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 28 June 2010.
12.	The Annual Report and Financial Statements will be available on the Managers' website www.scottishmortgageit.com on or around 25 May 2010.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

FR AAMATMBITBLM