Annual Financial Report

RNS Number : 1249H

Scottish Mortgage Inv Tst PLC

23 May 2011

 

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 2011 and the proposed new Articles of Association of Scottish Mortgage Investment Trust PLC have been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do

The Annual Report and Financial Statements for the year ended 31 March 2011 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 30 June 2011, it is proposed that new Articles of Association be adopted in order to amend Article 108 (Directors' fees). More detail on the proposed changes to the Articles of Association is set out in the Directors' Report, Directors' Remuneration Report and the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 March 2011. A copy of the proposed new Articles of Association of the Company are available for inspection at the offices of Dickson Minto W.S., Broadgate Tower, 20 Primrose Street, London EC2A 2EW and at the registered office of the Company, Calton Square, I Greenside Row, Edinburgh EH1 3AN during normal business hours on any week day (Saturdays, Sundays and public holidays excepted) from the date of the Notice of the Annual General Meeting until the conclusion of the Annual General Meeting.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 March 2011 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

CompanySecretaries

23 May 2011

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

CHAIRMAN'S STATEMENT

Investment Performance

The past year has again been a good one for Scottish Mortgage: net asset value (NAV) per share rose by 18% and the share price by 22%, both well ahead of the 6% increase in our benchmark (the FTSE All World Index in sterling terms). Closing at 742 pence, the share price set a new record for the year end. Despite the reverses seen in the wake of the 2008 Lehman-precipitated financial crisis our five year figures, too, are excellent. These in many ways are more important to shareholders and at 31 March 2011 the five year total return (capital and dividends) was 58% in share price terms (53% in NAV) while the benchmark total return was 35%. While shareholders should remember that not every year will be as good as the period just ended, it is pleasing to report that Scottish Mortgage was the top performing trust in the Global Growth Sector over five years in NAV terms as shown by the Association of Investment Companies' rankings at 31 March 2011.

Investment Philosophy

The Managers' investment philosophy has not changed and remains one to which the Directors fully subscribe. Companies are analysed by the Managers using a process which includes appraisal of: the strength of management, competitive position, the customer perspective, the prospects for sales and margins and the current and potential valuation. Also of particular importance to the Managers' view is establishing how their assessment differs from the market and trying to answer the question "what will happen after five years?". The approach and perspective is neither short term nor market led. Instead considerable effort is made to identify major changes in trends that might take place within intervals of decades rather than individual years. The Managers' Review that follows gives an original view of the investment perspective and provides insight into Baillie Gifford's modus operandi and investment process, both of which are central to what this Trust offers its owners.

The Managers also fully support the Board's desire to maintain Scottish Mortgage's low cost advantage. At 0.51%, the total expense ratio is amongst the lowest of similar international funds. Low costs significantly boost cumulative long term returns.

As pointed out in previous years, Scottish Mortgage does not attempt to track any index and as we have seen its performance is therefore likely to diverge from the benchmark we have adopted as most suitable for a global growth fund. There will be some years when relative returns are negative as well as years when returns are positive but when the index does better than the Company. That is the characteristic of Scottish Mortgage's investment proposition and, in the Directors' view, the shares are an investment for those who can tolerate this volatility and who consequently are likely to be long term holders.

World View

The past twelve months have been marked by continued recovery in equity markets as, notwithstanding earthquakes, well explosions and revolutions, confidence has largely been maintained. Companies generally have performed well, the financial system has been relatively stable as banks strengthen their balance sheets and, in the public sector in some countries (notably the UK), attention has turned to cutting government expenditure and debt. Interest rates in the US and Europe have stayed low, many economies have been subject to continued stimulus through quantitative easing and other measures while inflation, though present, has not generally proved problematic.

The strength of the German economy has been particularly impressive while those who feared a double dip recession in the US and other parts of the developed world have been spared such disappointment. Peripheral parts of Europe have struggled considerably and are likely to require support from the centre for some time yet. However bleak the current financial outlook for several troubled Eurozone states, for now the indications from (particularly) Germany are that the bail-outs required by Greece, Ireland and Portugal are a price that has to be paid to defend the integrity of the Euro and to protect the balance sheets of those banks whose lending to other Eurozone countries has perhaps verged on the imprudent.

That great engine of growth, the Chinese economy, has been restrained somewhat by central policy tightening, a welcome necessity given earlier fears of overheating. Nonetheless, in 2010 Chinese growth was still a remarkable 10.3% and the year will be remembered as the one when China overtook Japan to become the world's second largest economy. Many developing nations continue to enjoy good growth rates and have increasingly stable financial, social and political systems as well as a rapidly expanding class of consumers.

Gearing

We continue to believe in the use of gearing as a tool to enhance shareholder returns, particularly when we are able to access borrowings at low cost, assisted by the Company's Aaa long term credit rating. Throughout the period Scottish Mortgage's gearing ratios have been maintained at a broadly constant level. As asset prices rose, this entailed additional borrowings and a further €61million was taken out during the year. At the year end gross assets totalled £2,500 million and borrowings of £370 million represented 15% of that total. If the value of our cash deposits and bond portfolio is taken into account, net gearing was approximately 10%.

Earnings and Dividend

Earnings at 13.3p per share were buoyant, increasing 19% on the previous year and a final dividend of 6.2p (2010 - 5.8p) is proposed. This will give a total for the year of 12p, a 6.2% increase on last year's 11.3p and an increase over the past five years of 41%. If approved by shareholders, this provides a doubling of the dividend in ten years and will represent for the 29th successive year a dividend increase greater than the prevailing rate of UK inflation.

Discount and Buybacks

The discount has narrowed during the year; while the Board finds this gratifying, we often wonder, given the remarkable changes which this Company has seen in the past decade and the performance record achieved, why our shares trade at a discount at all. The Managers continue to focus their marketing efforts on maintaining a good flow of relevant information to existing shareholders and potential shareholders. Attracting new generations of long term owners is important for our future and Scottish Mortgage continues to invest in this project.

As in previous years, when supply exceeded immediate demand shares were bought back. Over the year 3 million shares were re-purchased (considerably fewer than the 12.6 million re-purchased in the preceding year) and were transferred into treasury, thus enhancing NAV per share by 1.1p.

AGM

The Annual General Meeting will be held in Edinburgh at Baillie Gifford's offices at 4.30pm on 30th June (there is a map contained within the Notice of the Meeting towards the end of the Report).

One resolution to be put to the Meeting is a request to increase the limit on Directors' fees. Although the current level remains within the allowed ceiling authorised by the Company's Articles, the Resolution seeks to replace specific limits with an aggregate limit for all Directors which will provide flexibility in future years.

At the Meeting, James Anderson, your Manager, and his Deputy, Tom Slater, will make short presentations on the investments. The Directors very much hope that we will meet you then.

Outlook

We are living in times of extraordinary economic change and any coherent investment strategy needs to take account of the growing importance of China and the rapid economic development of countries such as Brazil and India; and at the same time the relative stagnation of so many economies in what used to be called the developed world. In the past 20 years, the Chinese economy has grown over sixfold far outstripping the US and Japan.

The Managers remain enthusiastic about the long term outlook and currently find an abundance of interesting long term investment propositions. Two familiar and important contentions suggest that this is a good time to take a long term view of markets. First, many countries are growing rapidly and developing a large, mainly urban and consumption driven, middle class. Secondly, we appear to be in a phase of accelerating technological discovery, the impact of which is likely to be felt beyond the traditionally defined technology sector including, amongst others, in the fields of healthcare, biotech, robotics, artificial intelligence, agriculture and alternative energy. These themes are developed in the Managers' Review that follows.

Concurrent with these economic changes, the interested investor has a dazzling array of schemes and opportunities to have money managed in ever more exotic, ostensibly scientific - and often expensive - manners. Yet it is far from clear that any of these approaches has, on a reasonably consistent basis, outperformed the entirely straight forward approach that Scottish Mortgage pursues. Indeed, once high and often multiple levels of management fees are taken into account in these more complex approaches, it is rarely the investor who comes out in front.

So, this is a good moment to reflect on what Scottish Mortgage is seeking to offer its shareholders: 99% of our equity exposure is achieved by holding the shares of companies individually selected by our Managers, as distinct from investing in other funds or derivatives. Our aim is to provide a long term transparent, low cost and tradeable investment vehicle which captures exposure to a diversified portfolio of companies around the world, capable of delivering returns that exceed both inflation and the market average. By any measure, our Managers have succeeded in recent years and I know that shareholders will join me in congratulating them on their continuing success.

JOHN SCOTT

Chairman

12 May 2011

Past performance is not a guide to future performance.

MANAGERS' REVIEW

The global economy has seldom been stronger. The pace of economic change has never been greater. We suspect that this will only accelerate over the next decade. This has profound implications for investors. Preoccupation with unpredictable short term oscillations in economies and markets has opened up a deep gulf between the crucial determinants of economic progress and speculative behaviour. It seems most unlikely that the future of the global economy and of intelligent stock selection lies in an ability to pontificate about Greek, Irish and Portuguese debt. One of the virtues of a global investment trust with access to long term capital ought to be its ability to transcend such fashions.

What happened in the year under review?

Once again the inexorable development of China is our starting-point. It seems to us that the transition from a low-cost exporting behemoth to a consumer of first resort and a crucible for innovative corporate models was the key story of last year. Whilst we suggested last year that this might eventually happen we are surprised by just how fast the change appears to be occurring. In the course of 2010 China became the home of the world's fastest computer, the world's fastest train and the world's largest genome sequencing institute. Most importantly of all the startling results obtained by the Shanghai region in the OECD backed PISA educational survey revealed just how quickly China is upgrading its human capital. This demands that our mental models of the Chinese economy need constant revision. This is directly relevant for our portfolio. After a year of extraordinary share price performance our largest holding is now the Chinese internet search company Baidu. It and our sixth largest equity position in Tencent are representative of the dynamism, scale and national characteristics of the Chinese internet. Such companies are offering challenges to the US business models that have been so dominant in the innovation of the last century.

Whilst the continuing ascent of the Chinese economy has been the dominant feature of the last year the greatest surprise has been the extraordinary revival of the German economy. This has received remarkably little attention amidst the travails of far smaller and far less sophisticated economies. For years it has been popular to belittle the virtues of the sober German approach in contrast to the glitz, leverage and inequalities so beloved of Anglo-American finance capitalism. We do not think this is merely a moment of simple cyclical optimism. Fortified by a recent visit to Berlin we consider it likely that Germany can enjoy growth rates above 3% for several years to come as the recovery broadens into increased capital expenditure and even consumption. We think that German industry has patiently priced itself back into international competitiveness, re-oriented its trade towards rising nations and established enviable brand leadership in key sectors. Meanwhile governments of both left and right have maintained national fiscal order whilst the populace has resisted the lure of property inflation. That many German banks have failed to operate with similar sense is a persistent failure but one that is unlikely to undermine overall prosperity. It seems to us that much of this follows the model of the revival of Scandinavian economies in the last 10 years after tough struggles against debt and competitiveness problems. These economies are now thriving. This too appears sustainable. As yet we have been more successful in identifying individual corporate successes in Sweden (Atlas Copco once again) and Denmark (Novozymes) than in Germany itself.

The decade ahead

Thus far we have described the world in traditional national terms. Whilst the current prospects of China and Germany justify this approach we suspect that the next decade will require a gradual retreat from such convenient labels. Scottish Mortgage has spent much of the last decade shifting from an indulgent home-market bias. As late as 2005 our four largest holdings were all UK listed companies (none of which we now own nor regret selling). We have succeeded in moving to a genuinely global perspective but the comparative simplicities of this beneficial change are now showing signs of fraying. At one level there has always been a potential weakness: the fund management industry has a tendency to link national economic circumstances and corporate performance more tightly than underlying reality permits. Such institutional biases are containable but the future seems likely to hold more serious challenges to our current investment methodology.

Dominant cities

Corporate prospects are simultaneously becoming more local and more global. This statement requires explanation. We are finding that an increasing percentage of our investment ideas and holdings are concentrated in a smaller and smaller number of cities (or at most regions). Dramatic corporate success seems to be much more frequently achieved in a limited number of locations combining openness to innovation, educational prowess, social liberalism and access to supportive finance. If we can understand the way this process seems to work and identify the 20-30 cities that are the key exemplars then we stand a better chance of investing successfully. This does not mean that we will ignore other locations but it does require us to comprehend the cultures of these cities rather than seeking refuge in outmoded generalizations such as 'emerging markets.' In specific terms it is why we are in the process of opening a Shanghai research office. It is also why if this experiment proves successful we would be more likely to look to replicate it in San Francisco rather than in a more immediately obvious candidate city like Rio de Janeiro.

The all-important pace of change

Whilst the origins of corporate wealth may well be dominated by a comparatively small number of cities the speed and power of technological change is likely to overwhelm such considerations. If the current rates of exponential change continue (or even accelerate) in fields as diverse as genetics, robotics, data availability, nanotechnology and synthetic biology then the importance of geography may be subsumed in greater challenges. Companies, societies and indeed humanity will be intensely strained by the pace of change. Geographic boundaries may become relatively meaningless. Machines are not concerned by geography. It will almost certainly be another blow to believers in conventional risk metrics. It will eventually defy belief that largeness and safety were once closely equated. Tragically BP and Tokyo Electric Power should have given pause for thought amongst proponents of this notion in 2010-11 but there is little sign of such open-mindedness.

Our emphasis on the ferocious pace of change may well appear abstruse and abstract but we are already finding that the most critical characteristic to search for in our investment process is a management mentality and business model flexibility that can thrive amidst rapidly changing conditions. From Jeff Bezos and his conscious policy of intense low cost experimentation to exploit technological improvements at Amazon to the re-thinking of sourcing policies that has so aided the dramatic international expansion of Inditex (Zara) we think that such attitudes are the key to building competitive advantage over the years ahead. Relying on leadership inertia will fail.

Cloud computing

The combination of managerial excellence with accelerating technological progress has taken us in some new directions in recent months. We have come to the view that cloud computing now has the ability both to cut costs and improve service levels across the corporate and government sectors as expanded upon in the Trip Note that follows this Review. This development is very likely to be at the cost of traditional hardware and software giants but presents very substantial opportunities for new entrants. We have gradually been building a holding in salesforce.com. It seems to us to be the single company with the breadth of product and ambition that might make it the dominant company in the industry over the next decade. We think that the market preoccupation with a high immediate multiple of earnings is very myopic. We also admire the efforts of Rackspace to make itself the highest service option within cloud outsourcing. It has done this principally by thoughtful motivation of employees including by share options that are spread much more broadly than is commonly the case.

New directions in healthcare

A year ago we argued that healthcare was ripe for sweeping change. We also expressed frustration that we had made limited progress in identifying companies that could lead this transformation. We continue to view the historic pharmaceutical and medical supply companies as likely to be casualties rather than beneficiaries of this development. With healthcare providers finally proving less generous, with research budgets ever more squeezed to maintain earnings and with many of the supposed clinical advances of the last decade looking increasingly questionable we think problems abound. Internally these companies are victims of their own immense bureaucracies. We own none of them.

To our relief we are now starting to find attractions in a different group of healthcare companies. We have continued to add to our holding in Intuitive Surgical (the robot surgery leader). It may make the human surgeons seem quaint and redundant as the years go by. We have recently started buying Illumina which is the dominant supplier of tools for the genomics industry. This is a field where progress in science and price is so rapid that we think it is mistaken to worry that thus far it has not delivered significant clinical benefits. Again these are both companies that are convinced of the need for continuing innovation and prepared to spend boldly in pursuit of continued leadership.

Conclusion

As should have become apparent we are increasingly disillusioned by the dominant preoccupations and methodologies of the financial services industry. We do not believe that following the endless twists and turns of macroeconomic gyrations, quarterly earnings or market sentiment offers good odds of success. This is speculation not investment. It surprises us how little the chaos of recent years has deterred others from such highly competitive pursuits. We are delighted if others think that they can play these games more successfully than history suggests. Instead we base our investment inclinations on the comparatively predictable forces of technological change and the re-emergence of great civilizations. Since we believe still more strongly in the increasing power of these twin forces than last year we once again suggest that the probability is that if the Managers prove reasonably competent then the long term prospects should be bright.

JAMES ANDERSON

Manager of Scottish Mortgage

12 May 2011

California/Arizona Trip Note

The most complex order management system that exists today, operating a vast supply chain and distribution infrastructure, can be used with great ease. If you have ever shopped on Amazon.com then you have already done it. Interacting with computer software through a web browser is a model that has application well beyond retailing consumer goods and is paving the way for a sea change in the IT world. The longstanding idea of delivering IT services remotely (known as Cloud Computing) is finally turning in to reality and in the process is creating some exciting investment opportunities.

With these changes in mind I went to Arizona and California to develop our thinking as to who the beneficiaries could be. The trip also provided an opportunity to meet a number of people from other holdings on the west coast of the United States, a part of the world that boasts some of the most innovative companies we can invest in.

Salesforce.com is based in downtown San Francisco with offices looking out onto the Bay Bridge and cable car station. It was founded in 1999 by its larger-than-life CEO Marc Benioff, a serial entrepreneur, author and philanthropist. Benioff set out to attack the behemoths of the enterprise software market such as SAP, Microsoft and his former employer, Oracle. His approach has been to use the Internet to deliver a service, as opposed to the traditional approach of selling software and an expensive implementation package. The benefit for consumers is that they can dramatically reduce their computer hardware requirements and the associated in-house management expertise. Eleven years later, salesforce.com's model has attracted 83,000 customers. The computer power required to support this customer base is around 3% of what would be required using a traditional hardware/software approach. We cannot predict how much enterprise technology spending could one day find its way onto salesforce.com's platform but recent developments have seen the company expanding well beyond its original sales management remit and the opportunity exists to become many times larger than it is today.

Whilst the cost savings from this technology change represent a major opportunity to increase efficiency in the corporate sector, it is the potential for unleashing creativity on a much wider scale that seems most exciting. When a company interacts with its customers through the Internet and the supporting IT infrastructure can be outsourced, small businesses with a good idea can achieve astonishing scale in a very short time. I met a number of young businesses which are not yet listed but may, in the future, make it into Scottish Mortgage's portfolio. Their achievements are quite different from what we have seen before. Take Groupon, which is a local advertising and group shopping business. It had four hundred subscribers in November 2008. It now has over 65 million. This growth would not have been possible without the rapid spread of an idea through the Internet combined with the ability to outsource all the infrastructure required to support such a huge subscriber base to another company (in this case, Amazon.com's web services operation).

One striking aspect of the move to cloud computing is the way users are taking matters into their own hands. It is no longer necessary to commission a colleague in the IT department to buy in hardware and software and configure it before one can start experimenting. Instead, users with limited technological knowledge can immediately deploy powerful software. The subscription nature of these services means limited upfront spending and the cost of experimentation is vastly reduced. This should provide a boost to productivity and it also prompts us to change our mental model of how competition in technology works. We had previously believed that high switching costs for customers would mean incumbent IT providers had an enduring competitive advantage. This now seems much less clear and was, in part, behind the decision to sell our holdings in SAP and Cisco.

We think that in cloud computing, as in many areas, we can learn from watching the actions of those corporate leaders whose opinions we respect. It came as no surprise that Jeff Bezos, CEO of Amazon, was one of the first to identify this idea and the opportunities it presented. To understand how Amazon's web services business works, it is necessary to step back and think about the infrastructure underlying the cloud computing model. Businesses shut down their computer servers and run their applications on pooled equipment in remote locations. Nicholas Carr in his book "The Big Switch" draws out the many parallels with the period one hundred years ago when companies stopped producing their own power and plugged into the newly built electric grid. The economies of scale and efficiency that this process produced have direct relevance to the changes in computing we are seeing today. The centralised power plants of the electric grid have an equivalent in the vast data centres that are required to supply the computing power for cloud-based applications. Amazon has already developed the software and services to run such facilities based on more than a decade of work for its own website. It is able to deliver performance, reliability and security on a very large scale which is what cloud-based infrastructure requires. We are seeing a trend for young businesses with no legacy IT systems, such as games producer Zynga and movie distributor Netflix, choosing to use Amazon's services rather than investing time and energy in building their own IT departments.

The other big player in the provision of cloud infrastructure is also held within Scottish Mortgage's portfolio. Rackspace has taken a different approach from Amazon. Where Amazon provides the nuts and bolts for a customer to build their own system, Rackspace has focused on providing a high level of service. Some companies will embrace this new model and be comfortable using online tools to build their services, but others will find it more challenging and require assistance. It is this second group of business which Rackspace is targeting. Excellent customer service has been something of a rarity in the IT business: even Apple's inspirational leader, Steve Jobs, suggested we were holding our telephones wrongly, rather than admitting there were problems with his product. If Rackspace is able to deliver consistently in this area then its addressable market should be substantial.

Whilst the principal focus of the trip was on cloud computing, this was also an opportunity to follow up on outstanding questions at some of our other holdings. Google's headquarters (also known as the Googleplex) is a leafy 60 acre complex in Mountain View looking out over San Francisco bay. The quirky campus with its free bicycles, solar panels and life size replica of SpaceShipOne houses one of the most innovative engineering businesses we have seen in recent years. We think Google's growth potential remains significant as the migration of advertising dollars towards online formats continues and there remains a large gap between consumption of online media and the associated advertising spend. Its culture seems very unusual in the corporate world in that it is prepared to experiment with new technologies and businesses without fear of failure, even when that failure is very public. Amongst the company's experiments has been the development of an operating system for mobile phones and this has turned out to be prescient. Google's market share in smartphones has surged from a negligible level two years ago to around 1/3rd of the US market today. As the Internet moves increasingly away from desktop computers to mobile devices, Google looks very well placed to build a new and complementary stream of profits.

The application of technology-driven productivity gains to industries that have historically seen a slower pace of evolution is throwing up some very interesting opportunities. One such area is renewable energy. We have found it challenging to identify renewable energy businesses that posses sustainable competitive advantages but think one such is First Solar. As befits a solar panel manufacturer, First Solar is located in the Sonoran Desert, Arizona. Since 2004, the company has reduced the cost of solar energy generation by over 20% per annum. The compounding effect of this is powerful, with a cumulative cost reduction over that period of 75%. With this kind of progress, you do not have to look very far into the future to see an end to subsidies for this technology and, with it, a tipping point in usage. The solar industry is also achieving far greater acceptance with mainstream utilities, as illustrated by the imminent construction project at Gila Bend, Arizona. This will be the largest solar plant to date with an output of 280MW, enough to power 77,000 homes. However, this may well be dwarfed by First Solar's planned installation in Ordos, China, with a memorandum of understanding signed for a 2GW plant, equivalent in output to a large coal or nuclear generation facility.

We think the shift to cloud computing will become one of the more important trends in technology over the coming years. This should create significant opportunities for a number of companies, many of which are located in the San Francisco bay area. Innovation continues to increase the addressable market for many technology businesses and we think this is a fertile area for identifying attractive growing businesses.

TOM SLATER

Deputy Manager of Scottish Mortgage

12 May 2011

THIRTY LARGEST EQUITY HOLDINGS AND EQUITY PERFORMANCE at 31 March 2011
Name	Business	Fair value 31 March 2011 £'000	% of total assets	Performance †		Contribution to absolute performance %	Fair value 31 March 2010 £'000
				Absolute %	Relative %
Baidu.com	Online search engine	172,596	6.9	118.2	101.4	5.3	77,278
Amazon.com	Online retailer	167,061	6.7	25.5	15.8	2.1	120,009
PPR	Luxury goods producer and   retailer	104,138	4.2	11.7	3.1	0.5	47,517
Atlas Copco	Engineering	101,279	4.0	65.3	52.5	2.6	83,831
Banco Santander	Banking	84,357	3.4	(12.1)	(18.9)	(0.4)	84,691
Tencent Holdings	Internet service portal	83,026	3.3	14.7	5.8	0.5	30,900
Deere	Farm machinery	72,557	2.9	56.4	44.3	1.5	47,030
First Solar	Solar energy technology	63,624	2.5	24.0	14.4	0.5	30,640
Vale (CVRD)	Iron ore and nickel mining	58,576	2.4	2.7	(5.3)	0.1	58,268
Google	Online search engine	49,369	2.0	(2.2)	(9.8)	(0.2)	47,770
Schlumberger	Oil services	40,716	1.6	40.9	30.0	0.6	29,280
Telekomunikacja    Polska	Fixed and mobile telecoms	39,726	1.6	13.7	4.9	0.5	26,050
Intuitive Surgical	Medical equipment	38,235	1.5	(8.5)	(15.6)	(0.2)	13,744
New Oriental    Education &    Technology	Education and training	37,832	1.5	10.7	2.2	0.2	34,118
Berkshire Hathaway	Insurance	36,542	1.5	(2.6)	(10.2)	-	37,503
Garanti Bankasi	Banking	35,449	1.4	(4.1)	(11.5)	-	24,781
Meggitt	Aerospace equipment and   systems	34,450	1.4	15.4	6.5	0.3	30,731
Nintendo	Games consoles and software	34,334	1.4	(21.6)	(27.7)	(1.2)	71,659
Progressive     Insurance	Property and casualty  insurance	33,629	1.3	10.7	2.1	0.2	37,106
Walgreen	Pharmacy chain	32,561	1.3	4.3	(3.8)	(0.1)	43,022
ABB	Electronic and electrical   equipment	32,095	1.3	7.0	(1.3)	0.1	30,747
Novozymes	Enzyme manufacturer	32,088	1.3	32.0	21.8	0.5	24,441
Brown-Foreman	Wine and spirits producer	31,988	1.3	11.9	3.3	0.2	29,384
Intertek Group	Business support providers	29,751	1.2	41.9	31.0	0.6	21,336
Whole Foods    Market	General retailer	28,929	1.1	72.8	59.4	0.6	16,773
Australia and New    Zealand Banking     Group	Banking	27,922	1.1	5.4	(2.7)	0.1	27,916
British American    Tobacco	Tobacco	27,200	1.1	15.5	6.6	0.3	24,694
KGHM	Copper mining	26,560	1.1	65.1	52.3	0.4	34,170
Petrobras	Oil producer	25,660	1.0	(11.9)	(18.7)	(1.1)	108,260
Omnicom	Advertising agency	25,614	1.0	21.6	12.2	0.2	21,398
		1,607,864	64.3				1,315,047

^† Absolute and relative performance has been calculated on a total net return basis over the period 1 April 2010 to
   31 March 2011.  Absolute performance is in sterling terms; relative performance is against the benchmark: FTSE

   All World Index (in sterling terms).

Source: Baillie Gifford & Co/StatPro

Past performance is not a guide to future performance.

DISTRIBUTION OF ASSETS

 

		At 31 March 2011 %	At 31 March 2010 %
North America		33.6	28.2
South America		4.1	8.7
Europe		34.5	35.6
	United Kingdom	9.6	11.1
	Eurozone	11.0	8.6
	Developed Europe (non Euro)	7.8	9.7
	Rest of Europe	6.1	6.2
Africa and Middle East		0.4	0.5
Asia		20.1	19.0
	China	13.6	8.9
	India	1.3	1.6
	Japan	1.6	3.9
	Rest of Asia	3.6	4.6
Australasia		1.1	1.3
Total equities		93.8	93.3
UK corporate bonds		0.8	0.7
Euro denominated bonds		0.1	0.2
Brazilian real denominated bonds		4.7	4.7
Net liquid assets		0.6	1.1
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:

	2011 £'000		2010 £'000
Investment management fee	7,276		6,054

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 9 and on pages 15 to 18.

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 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 2011	Investments £'000	Cash and deposits £'000	Loans and debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	1,205,079	14,490	(111,666)	1,975	1,109,878
Euro	278,083	-	(106,940)	292	171,435
Brazilian real	135,151	-	-	2,524	137,675
Swedish krona	119,070	-	-	-	119,070
Hong Kong dollar	113,548	-	-	-	113,548
Polish zloti	66,286	-	-	-	66,286
Danish krone	42,800	-	-	40	42,840
Japanese yen	40,246	-	-	583	40,829
Swiss franc	32,095	-	-	96	32,191
Other overseas currencies	179,697	-	-	1,895	181,592
Total exposure to  currency risk	2,212,055	14,490	(218,606)	7,405	2,015,344
Sterling	274,196	209	(151,378)	(6,077)	116,950
	2,486,251	14,699	(369,984)	1,328	2,132,294

*      Includes net non-monetary assets of £51,000.

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
Hong Kong dollar	79,405	-	-	-	79,405
Polish zloti	60,221	-	-	-	60,221
Danish krone	38,625	-	-	30	38,655
Japanese yen	83,436	-	(59,969)	1,161	24,628
Swiss franc	56,300	-	(37,891)	(375)	18,034
Other overseas currencies	150,245	-	-	279	150,524
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.

Currency Risk Sensitivity

At 31 March 2011, 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 2010.

	2011 £'000		2010 £'000
US dollar	55,494		45,127
Euro	8,572		9,477
Brazilian real	6,884		6,249
Swedish krona	5,953		5,708
Hong Kong dollar	5,677		3,970
Polish zloti	3,314		3,011
Danish krone	2,142		1,933
Japanese yen	2,041		1,231
Swiss franc	1,610		902
Other overseas currencies	9,080		7,526
	100,767		85,134

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	2011			2010
	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)	9,761	7.5%	n/a	9,630	7.6%	n/a
Euro bonds	442	-	8 years	2,326	3.1%	7 years
Floating rate:
Sterling bonds (interest rate linked to sterling  LIBOR)	10,697	3.7%	13 years	5,701	3.7%	14 years
Euro bonds (interest rate linked  to euro LIBOR)	1,971	2.1%	74 years	1,001	4.5%	75 years
Brazilian bonds (index linked)	117,307	11.5%	34 years	101,836	11.0%	35 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	2011 £'000		2010 £'000
The interest rate risk profile of the Company's financial liabilities at 31 March was:
Floating rate - US$ denominated	111,666		65,265
-     Euro denominated		52,939	-
Fixed rate -  Sterling denominated	151,378		151,552
-     Euro denominated		54,001	-
-     Yen denominated		-	59,969
-     Swiss franc denominated		-	37,891
		369,984	314,677

The maturity profile of the Company's financial liabilities at 31 March was:
In one year or less, or on demand	164,605		163,125
In two to five years	54,001		-
In more than five years (weighted average period fixed 13 years)	150,703		150,877
No fixed date for repayment	675		675
	369,984	314,677

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 March 2011 would have decreased total net assets and total return on ordinary activities by £16,972,000 (2010 - £14,624,000). 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 2011 would have decreased the net asset value per share (with borrowings at fair value) by 0.75p (2010 - increased by 0.58p). 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 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.

110.0% of the Company's net assets are invested in quoted equities. A 3% increase in quoted equity valuations at 31 March 2011 would have increased total assets and total return on ordinary activities by £70,308,000 (2010 - £60,300,000). 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:

	2011 £'000	2010 £'000
Fixed interest investments	140,178	120,494
Cash and short term deposits	14,699	18,898
Debtors and prepayments	15,468	9,824
	170,345	149,216

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:

	2011			2010
	Par/nominal £'000	Book £'000	Fair £'000	Par/nominal £'000	Book £'000	Fair £'000
8-14% stepped interest  debenture stock 2020	20,000	21,860	29,240	20,000	21,961	31,890
6.875% debenture stock 2023	75,000	74,562	76,445	75,000	74,525	82,313
6-12% stepped interest  debenture stock 2026	50,000	54,281	83,303	50,000	54,391	78,800
4.5% irredeemable debenture  stock	675	675	531	675	675	525
Total debentures	145,675	151,378	189,519	145,675	151,552	193,528
Fixed rate loans		54,001	53,737		-	-
Total long term borrowings		205,379	243,256		151,552	193,528

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 833.5p to 816.5p. Taking the market price of the ordinary shares at 31 March 2011 of 742.0p, this would have given a discount to net asset value of 9.1% as against 11.0% on a debt at par basis. At 31 March 2010 the effect would have been to reduce the net asset value 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.

Investments

31 March 2011	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	2,338,177	5,429	-	2,343,606
Listed debt securities	9,761	117,307	8,523	135,591
Unlisted equities	-	-	2,467	2,467
Unlisted debt securities	-	-	4,587	4,587
Total financial asset  investments	2,347,938	122,736	15,577	2,486,251

31 March 2010	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	2,009,995	-	-	2,009,995
Listed debt securities	11,689	101,836	4,684	118,209
Unlisted equities	-	-	-	-
Unlisted debt securities	-	-	2,285	2,285
Total financial asset  investments	2,021,684	101,836	6,969	2,130,489

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

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 1158 of the Corporation Tax Act 2010, (formerly section 842 ICTA 1988) could lead to the Company being subject to tax on capital gains. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1158 are not breached. 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.

Major regulatory change could impose unnecessary compliance burdens on the Company or threaten the viability of the investment company structure. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk - failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Manager 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 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. 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 13) which is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 20. Shares may be issued and/or repurchased as explained on pages 25 and 26.

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 respectively; 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 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 Managers 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 (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

12 May 2011

INCOME STATEMENT

	For the year ended 31 March 2011				For the year ended 31 March 2010
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments	-	325,193	325,193		-	837,604	837,604
Currency (losses)/gains	-	(4,578)	(4,578)		-	1,593	1,593
Income (note 2)	53,703	-	53,703		49,174	-	49,174
Investment management fee	(3,638)	(3,638)	(7,276)		(3,027)	(3,027)	(6,054)
Other administrative expenses	(2,438)	-	(2,438)		(2,289)	-	(2,289)
Net return before finance costs and taxation	47,627	316,977	364,604		43,858	836,170	880,028
Finance costs of borrowings	(8,814)	(8,814)	(17,628)		(8,414)	(8,414)	(16,828)
Net return on ordinary activities before taxation	38,813	308,163	346,976		35,444	827,756	863,200
Tax on ordinary activities	(4,439)	-	(4,439)		(5,244)	1,143	(4,101)
Net return on ordinary activities after taxation	34,374	308,163	342,537		30,200	828,899	859,099
Net return per ordinary share (note 3)	13.32p	119.40p	132.72p		11.18p	306.88p	318.06p

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  2011	At 31 March 2010
	£'000	£'000
FIXED ASSETS
Investments held at fair value through profit or loss	2,486,251	2,130,489
CURRENT ASSETS
Debtors	15,468	9,824
Cash and short term deposits	14,699	18,898
	30,167	28,722
CREDITORS
Amounts falling due within one year (note 5)	(178,745)	(167,751)
NET CURRENT LIABILITIES	(148,578)	(139,029)
TOTAL ASSETS LESS CURRENT LIABILITIES	2,337,673	1,991,460
CREDITORS
Amounts falling due after more than one year (note 5)	(205,379)	(151,552)
	2,132,294	1,839,908
CAPITAL AND RESERVES
Called-up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	1,965,865	1,677,917
Revenue reserve	76,249	71,811
SHAREHOLDERS' FUNDS	2,132,294	1,839,908

NET ASSET VALUE PER ORDINARY SHARE	816.5p	692.8p
(After deducting borrowings at fair value) (note 6)
NET ASSET VALUE PER ORDINARY SHARE	833.5p	711.2p
(After deducting borrowings at par)
ORDINARY SHARES IN ISSUE (note 7)	256,519,897	259,519,897

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 March 2011

	Share capital £'000	Capital redemption reserve £'000	Capital reserve† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2010	71,086	19,094	1,677,917	71,811	1,839,908
Net return on ordinary activities after taxation	-	-	308,163	34,374	342,537
Shares bought back (note 7)	-	-	(20,215)	-	(20,215)
Dividends paid during the year	-	-	-	(29,936)	(29,936)
Shareholders' funds at 31 March 2011	71,086	19,094	1,965,865	76,249	2,132,294

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 (note 7)	-	-	(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

 ^{†The Capital Reserve balance at 31 March 2011 includes investment holding gains on fixed asset investments of £838,328,000 (31 March 2010 - gains of £622,630,000).}

CASH FLOW STATEMENT
	For the year ended 31 March 2011		For the year ended 31 March 2010
	£'000	£'000	£'000	£'000
Net cash inflow from operating Activities (NOTE 8)		49,530		40,740
SERVICING OF FINANCE
Interest paid	(18,323)		(18,968)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(18,323)		(18,968)
TAXATION
Income tax refunded/(paid)	21		(13)
Overseas tax incurred	(4,488)		(4,080)
TOTAL TAX PAID		(4,467)		(4,093)
FINANCIAL INVESTMENT
Acquisitions of investments	(446,404)		(460,680)
Disposals of investments	414,713		527,163
Realised currency profit/(loss)	1,099		(1,508)
Net cash (OUTFLOW)/INFLOW from financial investment		(30,592)		64,975
EQUITY DIVIDENDS PAID (note 4)		(29,936)		(29,844)
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING		(33,788)		52,810
FINANCING
Shares bought back (note 7)	(20,215)		(69,684)
Bank loans repaid	(151,049)		(66,874)
Bank loans drawn down	200,853		66,872
NET CASH INFLOW/(OUTFLOW) FROM FINANCING		29,589		(69,686)
DECREASE IN CASH		(4,199)		(16,876)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Decrease in cash in the period		(4,199)		(16,876)
(Increase)/decrease in bank loans		(49,804)		2
Exchange movement on bank loans		(5,677)		3,101
Other non-cash changes		174		153
MOVEMENT IN NET DEBT IN THE YEAR		(59,506)		(13,620)
NET DEBT AT 1 APRIL		(295,779)		(282,159)
NET DEBT AT 31 MARCH		(355,285)		(295,779)

 

NOTES

1.	The financial statements for the year to 31 March 2011 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 March 2010. 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 22 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. The Board approves borrowing limits and reviews regularly the amount of any borrowings and compliance with banking covenants. The US$99 million loan from The Bank of New York Mellon has been renewed for a further year, the £100 million multi-currency loan from ING N.V. was replaced with a one year £100 million multi-currency loan facility from Lloyds TSB Bank plc and a two year €61 million facility was arranged with The Royal Bank of Scotland plc. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
										2011											2010
										£'000											£'000
2.	Income
	Income from investments and interest receivable									53,379											48,581
	Other income									324											593
										53,703											49,174
									2011 £'000									2010 £'000
3.	Net return per ordinary share
	Revenue return on ordinary activities after taxation								34,374									30,200
	Capital return on ordinary activities after taxation								308,163									828,899
	Total net return								342,537									859,099
	Weighted average number of ordinary shares								258,103,596									270,102,144
	Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares (excluding treasury shares) during each period. There are no dilutive or potentially dilutive shares.
		2011				2010						2011 £'000								2010 £'000
4.	Ordinary dividends
	Amounts recognised as distributions in the year:
	Previous year's final (paid 1 July 2010)	5.80p				5.50p						14,968								14,955
	Interim (paid 3 December 2010)	5.80p				5.50p						14,968								14,889
		11.60p				11.00p						29,936								29,844
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered.  The revenue available for distribution by way of dividend for the year is £34,374,000 (2010 - £30,200,000).
		2011				2010						2011 £'000								2010 £'000
4.	Ordinary dividends (Ctd)
	Dividends paid and payable in the year:
	Interim dividend per ordinary share (paid 3 December 2010)	5.80p				5.50p						14,968								14,889
	Proposed final dividend per ordinary share (payable 4 July 2011)	6.20p				5.80p						15,904								15,052
	Adjustment to the previous year's final dividend re shares bought back											(84)								(10)
		12.00p				11.30p						30,788								29,931
	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 4 July 2011 to all shareholders on the register at the close of business on 3 June 2011.  The ex-dividend date is 1 June 2011.
5.	The bank loans falling due within one year comprise US$99 million, US$80 million and €59.8 million (2010 - US$99 million, ¥8,500 million and CHF60.5 million). The bank loans falling due in more than one year comprise €61 million (2010 - Nil). During the year bank loans of US$99 million and £100 million were renewed and a new two year €61 million facility entered into.
6.	The fair value of borrowings at 31 March 2011 was £407,861,000 (2010 - £356,653,000). Net asset value per share (after deducting borrowings at fair value) was 816.5p (2010 - 692.8p).
										2011 Number											2010 Number
7.	Share capital: Ordinary shares of 25p each
	Allotted, called-up and fully paid							256,519,897											259,519,897
	Treasury shares							27,826,279											24,826,279
	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 2011 a total of 3,000,000 (2010 - 12,570,000) ordinary shares with a nominal value of £750,000 (2010 - £3,142,500) were bought back at a total cost of £20,215,000 (2010 - £69,684,000) and held in treasury.  At 31 March 2011 the Company had authority to buy back a further 37,134,677 ordinary shares.
									2011 £'000									2010 £'000
8.	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								364,604									880,028
	Gains on investments - securities								(325,193)									(837,604)
	Currency losses/(gains)								4,578									(1,593)
	Amortisation of fixed income book cost								(46)									(79)
	Decrease in accrued income								1,028									270
	(Increase)/decrease in debtors								(362)									449
	Increase/(decrease) in creditors								4,921									(731)
	NET CASH INFLOW FROM OPERATING ACTIVITIES								49,530									40,740
9.	Transaction costs on purchases amounted to £483,000 (2010 - £829,000 and transaction costs on sales amounted to £455,000 (2010 - £576,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 March 2011. The financial information for 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies. The Auditor has reported on the 2010 and 2011 accounts, the report for both years was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The statutory accounts for 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. this will be held on 30 June 2011.
11.	The Annual Report and Financial Statements will be available on the Managers' website www.scottishmortgageit.com† on or around 23 May 2011.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment. † Neither the contents of the 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

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