Annual Financial Report
Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Regulated Information Classification: Annual Financial and Audit Reports
Annual Report and Financial Statements
Further to the preliminary statement of audited annual results announced to the Stock Exchange on 13 May 2021, Scottish Mortgage Investment Trust PLC ("the Company") announces that the Company's Annual Report and Financial Statements for the year ended 31 March 2021, including the Notice of Annual General Meeting, has today been posted to shareholders and submitted electronically to the National Storage Mechanism where it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
It is also available on the Company page of the Baillie Gifford website at: www.scottishmortgageit.com (as is the preliminary statement of audited annual results announced by the Company on 13 May 2021).
Covid-19 pandemic - Important note regarding arrangements for the Annual General Meeting (AGM)
The Board of Scottish Mortgage Investment Trust PLC (Scottish Mortgage) recognises the public health risk associated with the Covid-19 pandemic arising from public gatherings and notes the Government's measures restricting such gatherings, travel and attendance at workplaces.
At the same time, the Board is conscious of the legal requirement for Scottish Mortgage to hold its AGM before the end of September. Given the current uncertainty around when public health concerns will have abated, the Board has for the time being decided to aim to follow the Company's customary corporate timetable and, accordingly, the Company's AGM is being convened to take place as scheduled at 4.30pm on Thursday 24 June 2021 at the offices of Baillie Gifford & Co, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN without access for shareholders. The Board will, however, continue to monitor developments and any changes will be advised to shareholders by post and details will be updated on the Company's website. In the meantime, the Board encourages all shareholders to submit proxy voting forms as soon as possible and, in any event, by no later than 4.30pm on 22 June 2021.
We would encourage shareholders to monitor the Company's website at www.scottishmortgageit.com . Should shareholders have questions for the Board or the Managers or any queries as to how to vote, they are welcome as always to submit them by email to trustenquiries@bailliegifford.com or call 0800 917 2112. Baillie Gifford may record your call.
Proposed Amendment to Articles of Association
A special resolution is being proposed at the AGM, Resolution 15, which seeks to amend the Company's Articles of Association by deleting Article 97. Article 97 provides that a director shall be required to hold shares in the Company having, in aggregate, a nominal value of £250 by way of qualification for the office of director.
By way of background, the requirement for each Director to acquire and hold shares in the Company having, in aggregate, a nominal value of £250 is a historical one and, when introduced, would have reflected an expectation that each Director would hold at the very least a small stake in the Company to demonstrate some alignment with other shareholders. Over the years, the Company's share price has increased significantly and now far exceeds the nominal value per share. At the financial year end the Company's share price was £11.37 so any new director appointed at that time would have needed to purchase 5,000 shares at an aggregate cost of nearly £57,000 in order to satisfy the Article 97 provisions. The Directors do not consider that such requirement is conducive going forwards to attracting a diverse range of candidates to the Board and, accordingly, propose that the Articles of Association be amended to remove the directors' shareholding qualification provisions in their entirety.
A copy of the existing Articles and the proposed amended Articles are available on the Company page of the Baillie Gifford website at:
Responsibility Statement of the Directors in respect of the Annual Financial Report
The Directors confirm that, to the best of their knowledge:
¾ the Financial Statements set out in the Annual Report and Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
¾ the Strategic Report set out in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face (as also set out below).
The Directors consider that the Annual Report and Financial Statements, taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Principal and Emerging Risks relating to the Company
As explained on page 41 of the Annual Report and Financial Statements, there is an ongoing process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below.
The Board considers the Covid-19 pandemic and Brexit to be factors which exacerbate existing risks, rather than being new emerging risks. Their impact is considered within the relevant risks.
Financial Risk - the Company's assets consist mainly of listed securities and its principal and emerging financial risks are therefore market-related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 19 to the Financial Statements on pages 73 to 80 of the Annual Report and Financial Statements. The Board has, in particular, considered the impact of heightened market volatility during the Covid-19 pandemic. To mitigate these risks, the Board considers at each meeting various metrics including portfolio concentration, regional and industrial sector weightings, top and bottom stock contributors to performance and contribution to performance by industrial sector. The Managers provide the rationale for stock selection decisions and both the investment strategy and portfolio risk are formally considered in detail at least annually. The Board has considered the potential impact on sterling following the UK's departure from the European Union and subsequent trade agreement. The value of the Company's investment portfolio would be affected by any impact, positively or negatively, on sterling but would be partially offset by the effect of exchange movements on the Company's US$ denominated borrowings.
Private Company Investments - the Company's risk could be increased by its investment in private company investments. These assets may be more difficult to buy or sell, so changes in their valuations may be greater than for listed investments. To mitigate this risk, the Board considers the private company investments in the context of the overall investment strategy and provides guidance to the Managers on the maximum exposure to private company investments. The investment policy limits the amount which may be invested in private companies to 30 per cent. of the total assets of the Company, measured at time of purchase. See page 7 of the Annual Report and Financial Statements.
Investment Strategy Risk - pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or the ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their net asset value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy; the investment portfolio and its performance, the level of premium/discount to net asset value at which the shares trade and movements in the share register.
Discount Risk - the premium/discount at which the Company's shares trade relative to its net asset value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of premium/discount at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.
Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.
Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber security incidents. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Business Risk Department and a summary of the key points is reported to the Audit Committee and any concerns investigated.
Operational Risk - failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption (including any disruption resulting from the Covid-19 pandemic) or major disaster. Since the introduction of the Covid-19 restrictions, almost all Baillie Gifford staff have been working from home and operations have continued very largely as normal. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board. In the year under review, the other key third party service providers have not experienced significant operational difficulties affecting their respective services to the Company.
Leverage Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found on page 86 and in the Glossary of Terms and Alternative Performance Measures on pages 90 to 92 of the Annual Report and Financial Statements.
Political Risk - political developments are closely monitored and considered by the Board. Following the departure of the UK from the European Union and the subsequent trade agreement between the UK and the European Union, the Board continues to assess the potential consequences for the Company's future activities including those that may arise from further constitutional change. The Board believes that the Company's global portfolio, with no significant exposure to the United Kingdom, positions the Company to be suitably insulated from Brexit-related risk .
Baillie Gifford & Co Limited
Company Secretaries
21 May 2021
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