Final Results

RNS Number : 7563D

Scottish Mortgage Inv Tst PLC

21 May 2012

 

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 March 2012 of Scottish Mortgage Investment Trust PLC has 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 2012 including the Notice of Annual General Meeting is also available on Scottish Mortgage's page of the Baillie Gifford website at:  www.scottishmortgageit.com

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 March 2012 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

21 May 2012

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

CHAIRMAN'S STATEMENT

Investment Performance

The past year has been a very volatile one for world stockmarkets and, having at one point fallen by over 20% from last year's closing price, the value of your Company's shares staged a significant recovery in the second half of our financial year to close at 708p.  I warned in 2011 that "shareholders should remember that not every year will be as good as the period just ended" and indeed that was prescient. Over the year to 31 March 2012 net asset value (NAV) per share fell by 5.8%, the share price by 4.6% and the benchmark (the FTSE All-World Index in sterling terms) by 2.9%, but these end-of-year statistics disguise the fact that in the period under review our share price fluctuated between a high of 781p and a low of 565p.  

As stated in previous years, performance is primarily assessed over the long term in line with the nature of the investment approach.  During the past five years, the NAV has increased by 39%, the share price by 45% and the benchmark by 26% in total return terms (including capital and income); over ten years the increases are 125% NAV, 139% share price and 73% benchmark. Your Directors regard this as a very satisfactory performance and believe that, in the year under review, our Managers acted with great skill in a very testing investment climate.

The past year has been characterised by low confidence in markets and a tendency for most commentators and participants to focus on negative factors.  In particular, anxiety about the future of the Eurozone and worries about what appears to be a double dip recession in several European countries (including the UK) have been recurrent. To a large extent good news has been ignored, with investors transfixed by some of the horror stories emerging in southern Europe.  Included in the good news is the remarkable health of much of the corporate sector, the good progress made by many developed economies, notably, but not exclusively, Germany, and the continued growth of advancing economies especially China, albeit sometimes at a slightly slower pace than hitherto. But it is the riots on the streets of Athens and the unemployment queues in Spain which have tended to capture the headlines.

It is to the Managers' credit that they have continued to maintain a clear focus on progress at individual company level whilst also being prepared to swim against the tide in their investment approach. They still see considerable investment opportunities. Excitement about the impact of new technologies in many different sectors and continued enthusiasm for opportunities presented by the rapid growth of the Chinese economy come through strongly in the Managers' Review.

Equity investment is not without risk, but the Managers' approach whereby the primary focus is on fundamental and thorough analysis of individual companies and their long term growth prospects, rather than on short term market predictions, is the rational one. Portfolio diversification at company level and also by activity remains important.  We have what is by most standards quite a concentrated portfolio (currently 70 holdings for £2.4 billion of investments) and the Board regularly challenges and questions the Managers on individual investments, diversification, risk concentration and broader trends. 

Shareholders may note that the value of the equity portfolio listed in the UK now stands at 12% of total assets; a decade ago it was close to 50%. The portfolio does not resemble, let alone try to match, the benchmark so there will be times when performance is out of kilter with markets and indices. Scottish Mortgage aims to appeal to investors who seek long term growth from investment in equities chosen on a global basis. I make no apology for the fact that Scottish Mortgage is generally not well suited to investors with short term horizons or those who cannot endure the occasionally violent fluctuations inherent in equity investment. 

Earnings and Dividend

As well as offering capital growth, Scottish Mortgage has provided shareholders with a stream of rising dividends over the years. This year earnings per share were 13.1p (13.3p last year).  A final dividend of 6.8p is proposed which will give a total dividend for the year of 13.0p.  This is a satisfactory increase of 8.3% over last year and is well ahead of all measures of UK inflation (currently 3.6% on an RPI basis).  It is also the 30^th consecutive increase in the total dividend ahead of inflation.

Gearing

Gearing has been maintained at broadly constant levels. Gross assets totalled £2,378m at the year end and our fixed rate debentures and floating rate bank loans of £366m account for 15% of total assets. While the bank loans are at historically low interest rates, our debentures generally carry high coupons, reflecting the radically different conditions which prevailed when they were arranged.

Discount and Buybacks

The discount at which the Company's share price stands to net asset value has continued to narrow and at the end of the financial year it stood at 8% which, while higher than your Directors would like to see, is nonetheless lower than that of our peer group. It is important that the Managers communicate effectively with existing shareholders so that the aspirations of the Company and its owners are aligned. Also important is the quest for a new generation of shareholders. There are opportunities here as the ways in which advisers are remunerated change with the introduction of the Retail Distribution Review (RDR) and this is a particular area of focus for the Managers' marketing department. The Company has maintained its low total expense ratio (0.51%) which is among the lowest in the industry and this important feature should be beneficial in attracting new investors when comparable charges on other funds can be many times higher than those incurred by Scottish Mortgage.

Shares were again bought back last year when supply exceeded demand. A total of 2.9m shares were repurchased, similar to the amount in 2010/11 (3m). These shares were transferred into Treasury from which they can be re-issued in future, but only at a premium to net asset value.  There are now 31m shares in Treasury available for re-issue. Net asset value was enhanced by 1.0p by buybacks this year. Over five years the equivalent figure is 9.1p.

Board and AGM

I am very pleased that Dr Linda Yueh has agreed to join the Board. Linda has depth of knowledge and experience, especially of China, which I believe will be very valuable to Scottish Mortgage, which already has some £400m of investments in Greater China. 

The Annual General Meeting will be held in Edinburgh at Baillie Gifford's offices at 4.30pm on the 28^th June.  James Anderson and Tom Slater will make short presentations on the investments and I hope you will be able to attend. 

Baillie Gifford is holding an investment trust presentation in London on 19^th September at which Scottish Mortgage will be featured. Shareholders interested in receiving details of this event should contact Baillie Gifford's Client Relations Team.

Outlook

Although the health of much of the corporate sector appears to be good in terms of profitability and balance sheet strength, the challenges at a macro-economic level are considerable. Some European economies are faltering but others, notably Germany, are doing very well and it is this remarkable divergence of fortunes which is causing strains of titanic proportions within the Eurozone. Even ardent supporters of the Euro project now belatedly accept that certain countries should not have been admitted to the single currency so early in the piece and their continuing membership seems to be justified on the basis that it acts as a financial straitjacket which, while painful in the short term, will do the patient good in the end; and that, in any event, the release keys were discarded. Much has been achieved in the past year in terms of averting a disorderly default for Greece, but in both that country and elsewhere in southern Europe there remains an uneasy feeling that all that has been bought is more time; enduring solutions are proving elusive.

Looking further afield, there continue to be worrying developments in the likes of North Korea and Iran. While shareholders will realise that we hold no investments in either country, both have the capacity to cause major disruptions to the value of all capital markets in the world. Such worries have perhaps served to obscure a flow of positive news this year, particularly from the United States which could well be approaching an economic turning point as the gradual unwinding of earlier years' excesses moves towards a conclusion. 

For Scottish Mortgage it is the careful selection of individual companies and their subsequent performance which remain the most important influence on future long term returns. Our Managers continue to demonstrate that they are adept at identifying opportunities and, when taken together with the impact of low operating costs, I believe our Company continues to offer its shareholders a compelling investment proposition.

JOHN SCOTT

Chairman

8 May 2012

Past performance is not a guide to future performance.

MANAGERS' REVIEW

Each year the Amazon Annual Report incorporates the original shareholder letter from 1997. Although the origins of Scottish Mortgage are more distant and our thoughts are far less profound than those of Jeff Bezos we think this is an admirable discipline. What follows is therefore a summary of how our investment approach has evolved over the last decade. We should be prepared to be judged by it in the years ahead.

Our Core Investment Beliefs

Whilst fund managers claim to spend much of their careers assessing the competitive advantage of companies they are notoriously reluctant to perform any such analysis on themselves. The tendency is to cite recent performance as evidence of skill despite the luck, randomness and mean-reverting characteristics of most such data. If this does not suffice then attention turns to a discussion of the high educational qualifications, hard work and exotic remuneration packages that the fund manager enjoys. Sometimes the procedural details of the investment process are outlined with heavy emphasis on risk controls. Little attention is given to either the distinctiveness of the approach or the strategic advantages the manager might enjoy in order to make imitation improbable. We think we should try to do better than this.

• We are long term in our investment decisions. It is only over periods of at least five years that the competitive advantages and managerial excellence of companies becomes apparent. It is these characteristics that we want to identify and support. We own companies rather than rent shares. We do not regard ourselves as experts in forecasting the oscillations of economies or the mood swings of markets. Indeed we think that it is hard to excel in such areas as this is where so many market participants focus and where so little of the value of companies lies. Equally Baillie Gifford is more likely to possess competitive advantages for the good of shareholders when it adopts a long term perspective. We are a 100 year old Scottish partnership. We think about our own business over decades not quarters. Such stability may not be exciting but it does encourage patience in this most impatient of industries. We only judge our investment performance over five year plus time horizons. In truth it takes at least a decade to provide adequate evidence of investment skill.

• The investment management industry is ill-equipped to deal with the behavioural and emotional challenges inherent in today's capital markets. Our time frame and ownership structure help us to fight these dangers. We are besieged by news, data and opinion. The bulk of this information is of little significance but it implores you to rapid and usually futile action. This can be particularly damaging at times of stress. Academic research argues that most individuals dislike financial losses twice as much as they take pleasure in gains. We fear that for fund managers this relationship is close to tenfold. Internal and external pressures make the avoidance of loss dominant. This is damaging in a portfolio context. We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain.

• We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the views of investment banks. We try to screen out rather than incorporate their noise. In contrast we think that the world offers joyous opportunities to hear views, perspectives and visions that are barely noticed by the markets. From our office in Shanghai to futurists in California there is more in the investment world than the Financial Times or Wall Street Journal describe.

• We are global in stock selection, asset allocation and attribution. We are active not passive - or far worse - index plus in stock selection. Holding sizes reflect the potential upside and its probability (or otherwise) rather than the combination of the market capitalization and geographical location of the company and its headquarters. We do not have sufficient confidence in our top-down asset allocation skills to wish to override stock selection. We do not have enough confidence in our market timing abilities to wish to add or remove gearing at frequent intervals. We do, however, have strong conviction that our portfolio should be comparatively concentrated, and that it is of little use to shareholders to tinker around the edges of indices. We think this eventually produces better investment results and it certainly makes us more committed shareholders in companies. We suspect that selecting stocks on the basis of the past (their current market capitalization) is a policy designed to protect the security of tenure of asset managers rather than to build the wealth of shareholders. Companies that are large and established tend to be internally complacent and inflexible. They are often vulnerable to assault by more ambitious and vibrant newcomers.

• We are Growth stock investors. Such has been the preference for Value and the search to arbitrage away minor rating differentials that investors find it very hard to acknowledge the extraordinary growth rates and returns that can be found today. The growth that we are particularly interested in is of an explosive nature and often requires minimal fixed assets or indeed capital. We think of it as 'Growth at Unreasonable Prices' rather than the traditional discipline of 'Growth at a Reasonable Price'. We need to be willing to pay high multiples of immediate earnings because the scale of future potential and returns can be so dramatic. On the stocks that flourish the valuation will have turned out to be derisorily low. On the others we will lose money.

• We believe that it is our first duty to shareholders to limit fees. Both the investment management fee (equivalent to 0.32%) and the TER (0.51%) are low by comparative standards but at least adequate in absolute terms. We think that the malign impact of high fees is frequently underestimated. The difference between a TER of 0.5% and one of 1.5% may not appear great but if the perspective is altered to think of costs as a percentage of expected annual returns then the contrast becomes obvious. If annual returns average 10% (sadly they have not in recent years) then this is the difference between removing 5% of your returns or 15% each year. Nor do we believe in a performance fee. Usually it undermines investment performance. It increases pressure and narrows perspective.

Portfolio Comments

The three contentions that we have outlined in the past remain intact. To repeat the formulation of 2010:

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

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

• The Western financial systems are dangerously flawed.

Technological Innovation

We have seriously underestimated this force. It is more powerful than we thought and far broader in its application than we suspected. We now believe it to be the most important influence on the investment world. The opportunities in front of us are likely to be even more dramatic than in the recent past. This is because the very pace of change is in itself accelerating. It is very hard to grasp the implications of this. The minds of normal human beings, let alone those of fund managers with their preoccupation with the immediate, have difficulty in coping with change that is exponential rather than linear and where the guidance offered by the past is so modest.

Apple is perhaps the simplest example of this process as its devices are so dominant and as so much of its story is visible. In product terms this has taken us from the original Apple computer retailing at the equivalent of US$2,500 in today's prices without a monitor, power supply or even a casing to an iPad with at least 10,000x as much processing power for a fifth the price. In 2001 it took 91 weeks to sell one million iPods. In 2011 it took 24 hours to sell one million iPhone 4Ss. For the company this will translate into sales of over US$150bn this fiscal year (with China now running at 20% of sales) with near 40% operating margins and US$110bn in cash.

From the share price lows before the return of Steve Jobs in 1997 a market value of below US$1.5bn has become US$550 bn. Identifying and holding such extraordinary companies is our primary task. Doing so holds far greater rewards than any amount of market prognostication. Whilst we have owned Apple since early 2009 we feel that we deserve more criticism than praise for our actions. Not just did it take us several years to buy the shares but we were also quick to take profits in 2011. Our holding and our profits should have been significantly larger.

We hope that we own several companies that can follow the same path as Apple but are at a much earlier stage of development. As suggested earlier they are businesses with substantial growth opportunities, minimal or negative capital requirements from a young age and what we think are sustainable competitive advantages. This often translates into formidable margins and return on capital. Their advantages lie in network effects or in more traditional dominance by scale but the lack of capital intensity is in common. We think that such companies are extremely unusual in the history of capitalism. The markets are very uncomfortable in dealing with their existence and characteristics. They are hard to fit into the established valuation frameworks - particularly those that stress the relationship between the capitalization of a company and the value of its fixed assets. Although most of these companies are American (or specifically West Coast American) there is little theoretical reason that this need be so. The main exceptions are currently Chinese which is intriguing.

Our two largest holdings continue to be Baidu and Amazon. Both fit into the description above. They also reflect our strong preference for companies that are led by their share-owning founders. Baidu has continued to grow dramatically but the room to expand still seems open-ended. It has only 321,000 paying customers. There are approximately 40 million small businesses in China. Mobile search is growing very rapidly and advertising is becoming critical to the Chinese consumption surge. Amazon may be an even less mature business. Unlike Apple or Baidu it currently operates on very low margins. It has so many opportunities to invest that despite very favourable cash-flow dynamics it can consume all the cash it generates. As long as it is investing in activities where its competitive position ought to be powerful and returns improving then we are content to be very patient investors in such a vision for all the resultant volatility in the share price.

Alternative Energy and Healthcare

We have grown accustomed to the extraordinary pace of change in the electronics and telecommunications industries. As we noted last year similar developments are now working their way into industries in which innovation has previously been blocked by the self-interest of established players. Whilst opposition can still slow progress it is unlikely to be able to do more than delay transformation once the relevant technologies acquire sufficient momentum. We have applied this idea to the alternative energy and healthcare sectors. So far this has proven a significant error in the first case and seems quite promising in the latter. We have now sold First Solar but not before it was one of our worst investment decisions. Whilst the cost of solar energy has fallen even more sharply than we believed likely, the competitive advantage once enjoyed by First Solar has been eaten away by the power of Chinese competition and by the advent of shale gas.

Healthcare requires reform. It is costly, inefficient and frequently fails to provide the best available medical outcomes. Whilst improving this situation will be the task of decades it is possible the pace of technological innovation is starting to chip away at a previously impervious system. Just before his death Steve Jobs remarked that 'I think the biggest innovation of the 21st century will be the intersection of biology and technology. A new era is beginning.' Genome sequencing appears to be the critical scientific advance enabling such a new era. Its costs are also falling at around twice the pace of the famed Moore's Law that has transformed semiconductor performance over the last four decades. We have a large shareholding in Illumina which is the established leader in this technology. We have recently supported the company in its (thus far) successful battle against hostile takeover by Roche. We also have what has become a large holding in Intuitive Surgical, which is not just the dominant leader in robotic surgery but is also the first pure robotics company in any field of activity to become highly profitable and of substantial size.

China

It is fashionable to be gloomy about Chinese prospects. We are not. We think that the transition from a low cost, low valued added export behemoth to a domestic empire driven first by infrastructure and increasingly by consumption is further and more smoothly advanced than was believed possible. Productivity has risen impressively. The trade surplus is largely a memory. Naturally there will be pauses and blockages. Whilst we think the authorities have been right to clamp down on an overly-exuberant housing market before it assumed bubble proportions this could not prevent local excesses nor does it prop up growth. As productivity rises and innovation accelerates the Communist Party is likely to find the process of evolution still more complex.

But such concerns are minor compared with the scale of the achievement and of the remaining potential. We think China has the human capital, the patience and the competing multiplicity of cities and regions to continue its rise. Growth may, indeed should, slow but we doubt it will collapse. We see no eventual reason why China should be poorer than Britain. We are encouraged that we can find enough individual companies of imagination and innovation and with strong competitive moats that this admiration is a matter of practical importance. We have already discussed Baidu but arguably Tencent has been even more prescient in developing the Chinese internet with its focus on social aspects and on mobile. Certainly Facebook respects its prowess.

China's return to prominence has been distinguished more by the absence of dramatic disruptions than by their presence. Whilst American ascent was marked by internal and external wars, booms and busts, the last thirty years of Chinese progress has been remarkable in its consistency. The current comparative serenity in the face of a troubled Western economy equally appears remarkable. In contrast India, Brazil and Russia all appear to be struggling with these changed conditions. Inflation, deficits, uncompetitive industries and political failings have combined in varied guises to trigger significant productivity and growth disappointments. China is very special.

Western Financial Weakness

We do not have much to add to the daily media preoccupation with the systemic fall-out from the catastrophic implosion of the bloated world of finance in 2008-9. But some comment is probably required. At one level we are moderately encouraged. Both the American and German economies show signs of gradually overcoming the damage inflicted by finance. Given that it is now 7 years since the U.S. property bubble initially burst and that American animal spirits are hard to repress entirely in perpetuity this is pleasing but perhaps not surprising. In Germany finance and housing were never so proud but that employment and business confidence remain so buoyant despite banking frailties and Eurozone anxieties is tribute to the remarkable strength of German industry. Further south we are more concerned that Spain still has several years of working through a fearsome housing bust than we are that the age-old infelicities of the Italian state will entirely undermine a population of cautious savers and serious industrialists. Indeed we have recently bought shares in Fiat Auto as an improved generation of managers can combine with the allure of Ferrari to revive the company. Less controversially we would simply observe that replacing Silvio Berlusconi with Mario Monti is also a managerial improvement.

Such notes of comparative optimism may be unusual amongst the unremitting media gloom but they are not raised to obscure our concern at the continuing inability of the financial sector to reform itself. Whilst modest and piece-meal measures have lessened the returns and attraction of investment banking there is no evidence that a culture of stability, restraint and modesty has yet been embraced by the industry or been enforced by regulators. Whilst the shock of the crisis and the generosity of tax-payers may defer disaster, the temptations and immediate rewards of finance capital will remain serious threats to the health of the Western world.

Conclusion

Although it has been a frustrating year we find more to be excited about than to fear. Innovation combined with globalization has enabled the rise of a series of companies with historically unparalleled returns and growth opportunities. We think that this process is far from complete. We think that it is underestimated and misunderstood by markets. Whilst we hope we are aware of the dangers of overconfidence, we are also convinced that impatience and fear have all too often exerted too great an influence on markets. At times over the last year, most notably in late 2011, it has seemed to us that the flight to presumed safety has been as exaggerated as the rush towards technology stocks in 1999-2000.

Market distortions can just as easily result in undue depression as in overvaluation. Indeed given the difficult recent experience of market participants, this currently seems more probable than an outburst of

excessive optimism. Pessimism is very popular. We do not share it.

JAMES ANDERSON

Manager of Scottish Mortgage

8 May 2012

THIRTY LARGEST HOLDINGS AND TWELVE MONTH PERFORMANCE

at 31 March 2012

Name	Business	Fair value 31 March 2012 £'000	% of total assets	Absolute Performance † %	Contribution to absolute performance %	Fair value 31 March 2011 £'000
Baidu	Online search engine	197,279	8.29	6.2	0.8	172,596
Amazon.com	Online retailer	186,895	7.86	12.7	0.6	167,061
PPR	Luxury goods producer and   retailer	136,045	5.72	15.1	0.8	104,138
Brazil CPI Linked 2045	Brazilian government inflation   linked bond	120,575	5.07	8.7	0.7	117,307
Atlas Copco	Engineering	113,961	4.79	(4.2)	0.4	101,279
Tencent Holdings	Internet services	102,012	4.29	15.2	0.6	83,026
Illumina	Biotechnology equipment	70,861	2.98	(23.9)	(0.2)	5,170
Google	Online search engine	70,674	2.97	9.4	0.4	49,369
Intuitive Surgical	Surgical robots	65,370	2.75	63.0	1.4	38,235
Salesforce	Cloud computing and   hosting	61,701	2.59	14.9	0.3	12,405
Vale (CVRD)	Iron ore and nickel mining	60,946	2.56	(18.2)	(0.6)	58,576
Inditex	International clothing retailer	60,201	2.53	22.4	0.4	24,320
Banco Santander	Banking	53,022	2.23	(26.7)	(1.0)	84,357
New Oriental Education &   Technology	Education and training	51,851	2.18	10.2	0.2	37,832
KGHM	Copper mining	51,141	2.15	(22.8)	(0.8)	26,560
ABB	Power systems and   automation	43,642	1.83	(12.5)	(0.1)	32,095
Prudential	International insurance	42,165	1.77	30.3*	0.4*	-
Novozymes	Enzyme manufacturer	41,186	1.73	(2.4)	(0.0)	32,088
Apple	Computer technology	40,894	1.72	71.9	0.7	22,585
Intertek Group	Business support providers	36,746	1.55	25.3	0.4	29,751
Deere	Farm machinery	35,792	1.50	(14.7)	(0.4)	72,557
Reckitt Benckiser	Consumer goods company	35,330	1.49	11.0*	0.2*	-
Rolls-Royce Group	Aerospace equipment	32,480	1.37	33.1	0.5	24,760
Whole Foods Market	Food retailer	32,383	1.36	27.3	0.4	28,929
Telekomunikacja Polska	Fixed and mobile telecoms	31,026	1.30	(3.9)	(0.1)	39,726
Telefonica O2 Czech   Republic	Fixed and mobile telecoms	30,659	1.29	(2.2)	(0.1)	15,886
Aggreko	Power equipment rental	29,702	1.25	43.7	0.5	18,014
BASF	Chemicals	27,811	1.17	4.3	0.2	15,265
Hero Motocorp	Motorcycle and scooter   manufacturer	24,975	1.05	20.4	(0.0)	14,208
Housing Development   Finance Corporation	Mortgage bank	23,296	0.98	(14.7)	(0.2)	18,690
		1,910,621	80.32			1,446,785

†      Absolute performance (in sterling) has been calculated on a total return basis over the period 1 April 2011 to 31 March 2012.

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

Source: Baillie Gifford & Co/StatPro

Past performance is not a guide to future performance.

DISTRIBUTION OF ASSETS

 

		At 31 March 2012 %	At 31 March 2011 %
North America		27.1	33.6
South America		3.6	4.1
Europe		41.9	34.5
	United Kingdom	12.5	9.6
	Eurozone	14.2	11.0
	Developed Europe (non Euro)	8.9	7.8
	Rest of Europe	6.3	6.1
Africa and Middle East		0.4	0.4
Asia		21.2	20.1
	China	16.3	13.6
	India	2.1	1.3
	Japan	0.5	1.6
	Rest of Asia	2.3	3.6
Australasia		-	1.1
Total equities		94.2	93.8
Sterling bonds		-	0.8
Euro denominated bonds		-	0.1
Brazilian real denominated bonds		5.1	4.7
Net liquid assets		0.7	0.6
Total assets (before deduction of loans and debentures)		100.0	100.0

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006. Baillie Gifford & Co is 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:

	2012 £'000		2011 £'000
Investment management fee	7,264		7,276

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 a continuing basis. Details of the Company's investment portfolio are shown in note 9 and on pages 15 to 18 of the Annual Report.

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 2012	Investments £'000	Cash and deposits £'000	Loans and debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	1,026,100	13,249	(163,975)	204	875,578
Euro	337,320	-	(50,842)	364	286,842
Brazilian real	144,926	-	-	2,738	147,664
Swedish krona	127,568	-	-	-	127,568
Hong Kong dollar	111,355	-	-	-	111,355
Polish zloty	81,167	-	-	-	82,167
Indian rupee	48,271	-	-	-	48,271
Swiss franc	43,642	-	-	95	43,737
Danish krone	41,186	-	-	58	41,244
Czech koruna	30,659	-	-	-	30,659
Japanese yen	11,012	29	-	-	11,041
Other overseas currencies	58,791	4,518	-	1,973	65,282
Total exposure to  currency risk	2,062,997	17,796	(214,817)	5,432	1,871,408
Sterling	298,639	3,059	(151,179)	(9,604)	140,915
	2,361,636	20,855	(365,996)	(4,172)	2,012,323

*      Includes net non-monetary assets of £48,000.

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 zloty	66,286	-	-	-	66,286
Indian rupee	32,898	-	-	-	32,898
Swiss franc	32,095	-	-	96	32,191
Danish krone	42,800	-	-	40	42,840
Czech koruna	15,886	-	-	-	15,886
Japanese yen	40,246	-	-	583	40,829
Other overseas currencies	130,913	-	-	1,895	132,808
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.

Currency Risk Sensitivity

At 31 March 2012, 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 2011.

	2012 £'000		2011 £'000
US dollar	47,779		55,494
Euro	14,342		8,572
Brazilian real	7,383		6,884
Swedish krona	6,378		5,953
Hong Kong dollar	5,568		5,677
Polish zloty	4,108		3,314
Indian rupee	2,414		1,645
Swiss franc	2,187		1,610
Danish krone	2,062		2,142
Czech koruna	1,533		795
Japanese yen	552		2,041
Other overseas currencies	3,264		6,640
	93,570		100,767

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	2012			2011
	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
Euro bonds	-	-	-	442	-	8 years
Floating rate:
Sterling bonds (interest rate linked to sterling  LIBOR)	-	-	-	10,697	3.7%	13 years
Euro bonds (interest rate linked  to euro LIBOR)	-	-	-	1,971	2.1%	74 years
Brazilian bonds (index linked)	120,575	12.3%	33 years	117,307	11.5%	34 years
Cash and short-term deposits:
Other overseas currencies	17,796	-	n/a	14,490	-	n/a
Sterling	3,059	0.1%	n/a	209	0.1%	n/a

*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	2012 £'000		2011 £'000
The interest rate risk profile of the Company's financial liabilities at 31 March was:
Floating rate - US$ denominated	61,960		111,666
-     Euro denominated		-	52,939
Fixed rate -  Sterling denominated	151,179		151,378
-     Euro denominated		50,842	54,001
-     US$ denominated		102,015	-
		365,996	369,984

The maturity profile of the Company's financial liabilities at 31 March was:
In one year or less, or on demand	112,802		164,605
In two to five years	102,015		54,001
In more than five years (weighted average period fixed 13 years)	150,504		150,703
No fixed date for repayment	675		675
	365,996	369,984

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 March 2012 would have decreased total net assets and total return on ordinary activities by £17,712,000 (2011 - £16,972,000). 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 2012 would have increased the net asset value per share (with borrowings at fair value) by 0.43p (2011 - decreased by 0.75p). 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 of the Annual Report. 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.

111.0% (2011 - 110.0%) of the Company's net assets are invested in quoted equities. A 3% increase in quoted equity valuations at 31 March 2012 would have increased total assets and total return on ordinary activities by £67,031,000 (2011 - £70,308,000). 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 at the same time as 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:

	2012 £'000	2011 £'000
Fixed interest investments	120,575	140,178
Cash and short term deposits	20,855	14,699
Debtors and prepayments	8,321	15,468
	149,751	170,345

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 in relation to debentures are included in the accounts at the amortised amount of net proceeds after issue, plus accrued finance costs in accordance with FRS26. The fair value of the bank loan is calculated with reference to government bonds of comparable maturity and yield. A comparison with the fair value (closing offer value) is as follows:

	2012			2011
	Par/nominal £'000	Book £'000	Fair £'000	Par/nominal £'000	Book £'000	Fair £'000
8-14% stepped interest  debenture stock 2020	20,000	21,747	31,660	20,000	21,860	29,240
6.875% debenture stock 2023	75,000	74,599	94,140	75,000	74,562	83,303
6-12% stepped interest  debenture stock 2026	50,000	54,158	85,740	50,000	54,281	76,445
4.5% irredeemable debenture  stock	675	675	616	675	675	531
Total debentures	145,675	151,179	212,156	145,675	151,378	189,519
Fixed rate loans		102,015	103,738		54,001	53,737
Total long term borrowings		253,194	315,894		205,379	243,256

All short term borrowings are stated at fair value, which is considered to be equal to their par value.

Deducting long term borrowings at fair value would have the effect of reducing the net asset value per share from 795.6p to 768.7p. Taking the market price of the ordinary shares at 31 March 2012 of 708.0p, this would have given a discount to net asset value of 7.9% as against 11.0% on a debt at par basis. At 31 March 2011 the effect would have been to reduce the net asset value 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.

Investments

31 March 2012	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	2,226,765	7,612	-	2,234,377
Listed debt securities	-	120,575	-	120,575
Unlisted equities	-	-	6,684	6,684
Unlisted debt securities	-	-	-	-
Total financial asset  investments	2,226,765	128,187	6,684	2,361,636

31 March 2011	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	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

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 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 capital of the Company is its share capital and reserves as set out in notes 13 and 14 together with its borrowings (see notes 11 and 12). The objective of the Company is to maximise total return, whilst also generating real dividend growth, from a focused and actively managed global portfolio. The Company's investment policy is set out on page 20 of the Annual Report. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on page 24 of the Annual Report. The Company has the authority to issue and buy back its shares (see pages 26 and 27 of the Annual Report) and changes to the share capital during the year are set out in notes 13 and 14. The Company does not have any externally imposed capital requirements other than the covenants on its loans which are detailed in notes 11 and 12.

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.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page on the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and 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

8 May 2012

INCOME STATEMENT

	For the year ended 31 March 2012				For the year ended 31 March 2011
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total  £'000
(Losses)/gains on investments	-	(94,940)	(94,940)		-	325,193	325,193
Currency gains/(losses)	-	5,974	5,974		-	(4,578)	(4,578)
Income (note 2)	52,689	-	52,689		53,703	-	53,703
Investment management fee	(3,632)	(3,632)	(7,264)		(3,638)	(3,638)	(7,276)
Other administrative expenses	(2,380)	-	(2,380)		(2,438)	-	(2,438)
Net return before finance costs and  taxation	46,677	(92,598)	(45,921)		47,627	316,977	364,604
Finance costs of borrowings	(9,401)	(9,401)	(18,802)		(8,814)	(8,814)	(17,628)
Net return on ordinary activities before taxation	37,276	(101,999)	(64,723)		38,813	308,163	346,976
Tax on ordinary activities	(3,803)	-	(3,803)		(4,439)	-	(4,439)
Net return on ordinary activities after taxation	33,473	(101,999)	(68,526)		34,374	308,163	342,537
Net return per ordinary share (note 3)	13.07p	(39.81p)	(26.74p)		13.32p	119.40p	132.72p

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  2012	At 31 March 2011
	£'000	£'000
FIXED ASSETS
Investments held at fair value through profit or loss	2,361,636	2,486,251
CURRENT ASSETS
Debtors	8,321	15,468
Cash and short term deposits	20,855	14,699
	29,176	30,167
CREDITORS
Amounts falling due within one year (note 5)	(125,295)	(178,745)
NET CURRENT LIABILITIES	(96,119)	(148,578)
TOTAL ASSETS LESS CURRENT LIABILITIES	2,265,517	2,337,673
CREDITORS
Amounts falling due after more than one year (note 5)	(253,194)	(205,379)
	2,012,323	2,132,294
CAPITAL AND RESERVES
Called up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	1,844,229	1,965,865
Revenue reserve	77,914	76,249
SHAREHOLDERS' FUNDS	2,012,323	2,132,294

NET ASSET VALUE PER ORDINARY SHARE	768.7p	816.5p
(After deducting borrowings at fair value) (note 6)
NET ASSET VALUE PER ORDINARY SHARE	795.6p	833.5p
(After deducting borrowings at par)
ORDINARY SHARES IN ISSUE (note 7)	253,619,897	256,519,897

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 March 2012

	Share capital £'000	Capital redemption reserve £'000	Capital reserve† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2011	71,086	19,094	1,965,865	76,249	2,132,294
Net return on ordinary activities after taxation	-	-	(101,999)	33,473	(68,526)
Shares bought back (note 7)	-	-	(19,637)	-	(19,637)
Dividends paid during the year (note 4)	-	-	-	(31,808)	(31,808)
Shareholders' funds at 31 March 2012	71,086	19,094	1,844,229	77,914	2,012,323

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 (note 4)	-	-	-	(29,936)	(29,936)
Shareholders' funds at  31 March 2011	71,086	19,094	1,965,865	76,249	2,132,294

†   ^{The Capital Reserve balance at 31 March 2012 includes investment holding gains on fixed asset investments of £755,250,000 (31 March 2011 - gains of £838,328,000)}

CASH FLOW STATEMENT
	For the year ended 31 March 2012		For the year ended 31 March 2011
	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES (note 8)		44,484		49,530
Servicing of finance
Interest paid	(18,803)		(18,323)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(18,803)		(18,323)
TAXATION
Income tax refunded	38		21
Overseas tax incurred	(3,896)		(4,488)
TOTAL TAX PAID		(3,858)		(4,467)
FINANCIAL INVESTMENT
Acquisitions of investments	(621,168)		(446,404)
Disposals of investments	654,761		414,713
Realised currency profit	3,562		1,099
NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT		37,155		(30,592)
Equity dividends paid (note 4)		(31,808)		(29,936)
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING		27,170		(33,788)
FINANCING
Shares bought back (note 7)	(19,637)		(20,215)
Bank loans repaid	(102,206)		(151,049)
Bank loans drawn down	100,829		200,853
NET CASH (OUTFLOW)/INFLOW FROM FINANCING		(21,014)		29,589
INCREASE/(DECREASE) IN CASH		6,156		(4,199)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash in the period		6,156		(4,199)
Decrease/(increase) in bank loans		1,377		(49,804)
Exchange movement on bank loans		2,412		(5,677)
Other non-cash changes		199		174
MOVEMENT IN NET DEBT IN THE YEAR		10,144		(59,506)
NET DEBT AT 1 APRIL		(355,285)		(295,779)
NET DEBT AT 31 MARCH		(345,141)		(355,285)

 

NOTES

1.	The financial statements for the year to 31 March 2012 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 March 2011. 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.
										2012											2011
										£'000											£'000
2.	Income
	Income from investments and interest receivable									52,681											53,379
	Other income									8											324
										52,689											53,703
									2012 £'000									2011 £'000
3.	Net return per ordinary share
	Revenue return on ordinary activities after taxation								33,473									34,374
	Capital return on ordinary activities after taxation								(101,999)									308,163
	Total net return								(68,526)									342,537
	Weighted average number of ordinary shares								256,199,678									258,103,596
	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.
		2012				2011						2012 £'000								2011 £'000
4.	Ordinary dividends
	Amounts recognised as distributions in the year:
	Previous year's final (paid 4 July 2011)	6.20p				5.80p						15,904								14,968
	Interim (paid 25 November 2011)	6.20p				5.80p						15,904								14,968
		12.40p				11.60p						31,808								29,936
	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 £33,473,000 (2011 - £34,374,000).
		2012				2011						2012 £'000								2011 £'000
4.	Ordinary dividends (Ctd)
	Dividends paid and payable in respect of the year:
	Interim dividend per ordinary share (paid 25 November 2011)	6.20p				5.80p						15,904								14,968
	Proposed final dividend per ordinary share (payable 2 July 2012)	6.80p				6.20p						17,246								15,904
	Adjustment to the previous year's final dividend re shares bought back											-								(84)
		13.00p				12.00p						33,150								30,788
	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 2 July 2012 to all shareholders on the register at the close of business on 1 June 2012.  The ex-dividend date is 30 May 2012. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 11 June 2012.
5.	The bank loans falling due within one year comprise US$99 million and €61 million (2011 - US$99 million, US$80 million and €59.8 million). The bank loans falling due in more than one year comprise US$163 million (2011 - €61 million). During the year bank loans of US$80 million and €59.8 million were repaid and a loan of US$163 million was drawn down.
6.	The fair value of borrowings at 31 March 2012 was £428,696,000 (2011 - £407,861,000). Net asset value per share (after deducting borrowings at fair value) was 768.7p (2011 - 816.5p).
										2012 Number											2011 Number
7.	Share capital: Ordinary shares of 25p each
	Allotted, called up and fully paid							253,619,897											256,519,897
	Treasury shares							30,726,279											27,826,279
	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 2012 a total of 2,900,000 (2011 - 3,000,000) ordinary shares with a nominal value of £725,000 (2011 - £750,000) were bought back at a total cost of £19,637,000 (2011- £20,215,000) and held in treasury.  At 31 March 2012 the Company had authority to buy back a further 35,552,332 ordinary shares. Under the provisions of the Company's Articles the share buy-backs were funded from the capital reserve.
									2012 £'000									2011 £'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								(45,921)									364,604
	Losses/(gains) on investments - securities								94,940									(325,193)
	Currency (gains)/losses								(5,974)									4,578
	Amortisation of fixed income book cost								(3)									(46)
	Decrease in accrued income								1,167									1,028
	Increase in debtors								(19)									(362)
	Increase in creditors								294									4,921
	NET CASH INFLOW FROM OPERATING ACTIVITIES								44,484									49,530
9.	Transaction costs on purchases amounted to £968,000 (2011 - £483,000) and transaction costs on sales amounted to £669,000 (2011 - £455,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 March 2012. The financial information for 2011 is derived from the statutory accounts for 2011 which have been delivered to the Registrar of Companies. The Auditor has reported on the 2011 and 2012 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 2012 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. This will be held on 28 June 2012.
11.	The Annual Report and Financial Statements will be available on the Managers' website www.scottishmortgageit.com† on or around 21 May 2012.
	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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