Annual Financial Report

RNS Number : 9512M

Scottish Mortgage Inv Tst PLC

26 May 2022

 

Scottish Mortgage Investment Trust PLC (SMT)

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 19 May 2022, Scottish Mortgage Investment Trust PLC ("the Company") announces that the Company's Annual Report and Financial Statements for the year ended 31 March 2022, 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 19 May 2022).

Responsibility Statement of the Directors in respect of the Annual Financial Report

The Directors confirm that, to the best of their knowledge:

¾ the Company Financial Statements set out in the Annual Report and Financial Statements, which have been prepared in accordance with United Kingdom Accounting Standards, comprising FRS 102, 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 Company, together with a description of the principal risks and uncertainties it faces.

In the case of each Director in office at the date the Directors' Report is approved:

¾ so far as the Director is aware, there is no relevant audit information of which the Company's Auditors are unaware; and

¾ they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's Auditors are aware of that information.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Principal and Emerging Risks relating to the Company

 

As explained on page 40 of the Annual Report and Financial Statements, there is a 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 increasing geopolitical concerns 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 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 71 to 79 of the Annual Report and Financial Statements. The Board has, in particular, considered the impact of heightened market volatility during the Covid-19 pandemic and over recent months due to macroeconomic and geopolitical concerns, including the Russia-Ukraine war. 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.

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.

Climate and Governance Risk - As investors place increased emphasis on Environmental, Social and Governance (ESG) issues perceived problems on ESG matters in an investee company could lead to that company's shares being less attractive to investors, adversely affecting its share price, in addition to potential valuation issues arising from any direct impact of the failure to address the ESG weakness on the operations or management of the investee company (for example in the event of an industrial accident or spillage). Repeated failure by the Managers to identify ESG weaknesses in investee companies could lead to the Company's own shares being less attractive to investors, adversely affecting its own share price. This is mitigated by the Investment Manager's strong ESG stewardship and engagement policies which are available to view on the Managers' website, bailliegifford.com, and have been reviewed and endorsed by the Company, and have been fully integrated into the investment process as well as the extensive up-front and ongoing due diligence which the Investment Manager undertakes on each investee company. This due diligence includes assessment of the risks inherent in climate change. See page 42 of the Annual Report and Financial Statements. An explanation of how these policies are applied in the context of Scottish Mortgage's long term investment approach is available at scottishmortgageit.com .

Twenty-five companies, representing almost 17 per cent. of the Scottish Mortgage portfolio, are currently involved in tackling the climate crisis. An external provider was engaged to map the carbon footprint of the portfolio. This analysis estimates that the carbon intensity of Scottish Mortgage is 94.5% less than the index and is based on 68.0% of the value of the Company's equity portfolio which reports on carbon emissions and other carbon related characteristics. See page 42 of the Annual Report and Financial Statements.

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

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. Following the relaxation of Covid-19 restrictions by the Scottish and UK Governments, Baillie Gifford has begun to see a gradual rise in office attendance. A hybrid model is now operating with staff determining the most appropriate split between working from home and working in the office. 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 85 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. The Board continues to assess the potential consequences for the Company's future activities including those that may arise from geopolitical tensions and constitutional change. The Board believes that the Company's global portfolio positions the Company to be suitably insulated from such political risks.

Emerging Risks - the Board has regular discussions on principal risks and uncertainties, including any risks which are not an immediate threat but could arise in the longer term. The Board considers that the key emerging risks arise from the interconnectedness of the global economy (including factors such as supply chain constraints and economic sanctions) and the related exposure of the investment portfolio to emerging threats such as the societal and financial implications of an escalation of the Russia-Ukraine war, cyber risk and coronavirus variants or similar public health threat. These are mitigated by the Managers' close links to the investee companies and their ability to ask questions on contingency plans. The Managers believe the impact of such events may be to impact the pace of growth rather than to invalidate the investment rationale over the long term.

Baillie Gifford & Co Limited

Company Secretaries

26 May 2022

 

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