Half Yearly Report

RNS Number : 9982Q

Scottish Mortgage Inv Tst PLC

28 October 2011

 



Press Release

Scottish Mortgage Investment Trust PLC

Scottish Mortgage is a low cost investment trust that aims to maximise total return over the long term from a focused and actively managed portfolio. It invests globally, looking for strong businesses with above-average returns.

Results for the half-year to 30 September 2011

¾ Over the six months, net asset value per share fell by 20.5%. The share price fell by 16.0%, in line with the benchmark index, the FTSE All World Index in sterling terms, which was down 16.1%.

¾ The portfolio is managed with a long term view and close attention is paid by the Board to five year numbers.  Over the five years to the end of September 2011, net asset value per share total return (capital and dividends) was 28% and in share price terms, 40%. Both were well ahead of the Benchmark Index which returned 15%.

¾ Earnings per share were 10.8p (8.6p in the corresponding period of the previous year). The majority of earnings have been received in the first half. An interim dividend of 6.2p (5.8p) per share is proposed.

¾ Over the past six months equity markets have been weak and volatile. Nervousness has been self feeding with less attention paid to more positive news flow especially at company level.

¾ While difficult, current market conditions have to be endured with a steady eye kept on companies' individual investment cases and also on longer term dynamics and not short term market preoccupations.  

¾ Powerful longer term positive influences, notably the rapid growth of developing countries and the rapid pace of technological advance across many fields, remain in place.

28 October 2011

For further information please contact:

James Budden, Baillie Gifford & Co  

Tel: [phone] or 07507 201208

Roland Cross, Director, Broadgate Mainland Marketing

Tel: [phone] or 07831 401309

Scottish Mortgage is managed by Baillie Gifford & Co, the Edinburgh based fund management group with around £70 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 27 October 2011).

Investment Trusts are UK public limited companies and are not authorised or regulated by the Financial Services Authority.

Past performance is not a guide to future performance.  The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested.

The following is the unaudited Half-Yearly Financial Report for the six months to 30 September 2011.

Responsibility statement

We confirm that to the best of our knowledge:

a)   the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

b)   the Half-Yearly Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, their impact on the financial statements, and a description of the principal risks and uncertainties (note 11) for the remaining six months of the year); and

c)   the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein - see note 3).

By order of the Board

John Scott

Chairman

27 October 2011

Half-yearly management report

Results

Over the six months net asset value per share fell by 20.5% and the benchmark (the FTSE All World Index in sterling terms) fell by 16.1% but thanks to a tightening in the discount the decline in the share price matched the benchmark. 

As has been often repeated in these reports, short term performance will be variable both in absolute terms and also relative to the index. As the portfolio is managed with a long term view in mind, the Board pays much closer attention to five year numbers. Over the five years to the end of September 2011, the net asset value per share total return (capital and dividends) was 28% and in share price terms, 40%.  Both were well ahead of the Benchmark Index which returned 15%.

Earnings and Dividend

Thanks in part to the timing of dividend receipts, earnings per share for the period increased, totalling 10.8p compared to 8.6p in the corresponding period of the previous year. This illustrates in practical terms the current, and often unreported, health of much of the corporate sector. An increased interim dividend of 6.2p per share is proposed (5.8p in the corresponding period last year).

Markets

Over the past six months equity markets have been weak and volatile. In particular, since July they have reacted with intense nervousness to day to day developments in the Eurozone and to the challenges of dealing with the implications of a Greek debt default. This nervousness has been self feeding and little attention has been paid to more promising and positive news flow especially at company level.

The Portfolio

During the period changes were made to the portfolio. These included the sale of some long standing US holdings where performance over time has been good. The proceeds of these sales were used to add to existing holdings where the level of long term conviction is high and also to introduce some new holdings. The strong operational performance of some of the large holdings including, but not exclusively, Amazon (now 10% of total assets) and the Baidu (7%) was noteworthy.  

Performance at the end of the reporting period suffered a reversal when a number of share prices and markets were marked down as short term investors sought shelter in so called "risk off" positions. In the light of this reversal, a careful assessment of the holdings and their individual long term investment merits was made. The overall conclusion was that, while hard, current market conditions have to be endured with a steady eye kept on both the strong individual investment cases and on longer term dynamics and not short term market preoccupations.

Outlook

The IMF September forecast predicts global economic growth of 4% with developed economies (including the US and Europe) in aggregate growing at 1.6% and emerging and developing economies growing at 6.4%. While conditions in developed markets may continue to be tough and achieving growth overall here may be a struggle, many individual companies are likely to continue to do well. Powerful longer term positive influences, notably the rapid growth of developing countries and the rapid pace of technological advance across many fields, remain in place. As stated earlier, painful market conditions may have to be endured for the remainder of the year, and possibly longer, but taking a deliberate long term and unfashionably optimistic view provides succour. 

Past performance is not a guide to future performance.

Income statement (unaudited)

	For the six months ended  30 September 2011			For the six months ended 30 September 2010			For the year ended 31 March 2011
								(audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	49,444	49,444	-	44,367	44,367	-	109,495	109,495
Changes in investment  holding (losses)/gains	-	(461,647)	(461,647)	-	22,609	22,609	-	215,698	215,698
Currency losses	-	(248)	(248)	-	(3,625)	(3,625)	-	(4,578)	(4,578)
Income from investments and interest receivable	38,891	-	38,891	32,124	-	32,124	53,379	-	53,379
Other income	8	-	8	17	-	17	324	-	324
Investment management fee (note 3)	(1,848)	(1,848)	(3,696)	(1,680)	(1,680)	(3,360)	(3,638)	(3,638)	(7,276)
Other administrative expenses	(1,268)	-	(1,268)	(1,085)	-	(1,085)	(2,438)	-	(2,438)
Net return before finance costs and  taxation	35,783	(414,299)	(378,516)	29,376	61,671	91,047	47,627	316,977	364,604
Finance costs of borrowings	(4,692)	(4,692)	(9,384)	(4,335)	(4,335)	(8,670)	(8,814)	(8,814)	(17,628)
Net return on ordinary activities before taxation	31,091	(418,991)	(387,900)	25,041	57,336	82,377	38,813	308,163	346,976
Tax on ordinary activities	(3,319)	-	(3,319)	(2,715)	-	(2,715)	(4,439)	-	(4,439)
Net return on ordinary activities after taxation	27,772	(418,991)	(391,219)	22,326	57,336	79,662	34,374	308,163	342,537
Net return per ordinary share (note 4)	10.83p	(163.34p)	(152.51p)	8.64p	22.20p	30.84p	13.32p	119.40p	132.72p
Dividends paid and proposed per ordinary share (note 5)	6.20p			5.80p			12.00p

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

All revenue and capital items in this 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 (unaudited)

	At 30 September 2011 £'000	At 30 September 2010 £'000	At 31 March 2011 (audited) £'000
Fixed assets
Investments held at fair value through profit or loss	2,078,613	2,241,818	2,486,251
Current assets
Debtors	13,500	6,086	15,468
Cash and short term deposits	22,826	24,159	14,699
	36,326	30,245	30,167
Creditors
Amounts falling due within one year:
Bank loans (note 6)	(116,087)	(165,622)	(164,605)
Other creditors	(17,767)	(6,490)	(14,140)
	(133,854)	(172,112)	(178,745)
Net current liabilities	(97,528)	(141,867)	(148,578)
Total assets less current liabilities	1,981,085	2,099,951	2,337,673
Creditors
Amounts falling due after more than one year:
Bank loans (note 6)	(104,635)	(52,846)	(54,001)
Debenture stocks	(151,279)	(151,465)	(151,378)
	(255,914)	(204,311)	(205,379)
	1,725,171	1,895,640	2,132,294
Capital and reserves
Called up share capital	71,086	71,086	71,086
Capital redemption reserve	19,094	19,094	19,094
Capital reserve	1,546,874	1,726,291	1,965,865
Revenue reserve	88,117	79,169	76,249
Shareholders' funds	1,725,171	1,895,640	2,132,294
Net asset value per ordinary share (after deducting borrowings at fair value) (note 7)	648.7p	714.7p	816.5p
Net asset value per ordinary share (after deducting borrowings at par)	674.7p	736.8p	833.5p
Ordinary shares in issue (note 8)	256,519,897	258,069,897	256,519,897

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 30 September 2011

	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	-	-	(418,991)	27,772	(391,219)
Shares bought back (note 8)	-	-	-	-	-
Dividends paid during the period (note 5)	-	-	-	(15,904)	(15,904)
Shareholders' funds at 30 September 2011	71,086	19,094	1,546,874	88,117	1,725,171

For the six months ended 30 September 2010

	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	-	-	57,336	22,326	79,662
Shares bought back (note 8)	-	-	(8,962)	-	(8,962)
Dividends paid during the period (note 5)	-	-	-	(14,968)	(14,968)
Shareholders' funds at 30 September 2010	71,086	19,094	1,726,291	79,169	1,895,640

For the year ended 31 March 2011 (audited)

	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 8)	-	-	(20,215)	-	(20,215)
Dividends paid during the year (note 5)	-	-	-	(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 30 September 2011 includes investment holding gains on fixed asset investments of

         £376,681,000 (30 September 2010 - gains of £645,239,000 and 31 March 2011 - gains of £838,328,000).

Condensed cash flow statement (unaudited)

	Six months to  30 September 2011 £'000	Six months to  30 September 2010 £'000	Year to  31 March 2011 (audited) £'000
Net cash inflow from operating activities	29,681	29,936	49,530
Net cash outflow from servicing of finance	(9,288)	(9,340)	(18,323)
Total tax suffered	(2,997)	(2,634)	(4,467)
Net cash inflow/(outflow) from financial investment	8,012	(38,494)	(30,592)
Equity dividends paid (note 5)	(15,904)	(14,968)	(29,936)
Net cash inflow/(outflow) before use of liquid resources and financing	9,504	(35,500)	(33,788)
Shares bought back (note 8)	-	(8,962)	(20,215)
Net cash (outflow)/inflow from bank loans (note 6)	(1,377)	49,723	49,804
Increase/(decrease) in cash	8,127	5,261	(4,199)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the period	8,127	5,261	(4,199)
Decrease/(increase) in bank loans (note 6)	1,377	(49,723)	(49,804)
Exchange movement on bank loans	(3,493)	(5,620)	(5,677)
Other non-cash changes	99	87	174
Movement in net debt in the period	6,110	(49,995)	(59,506)
Net debt at start of the period	(355,285)	(295,779)	(295,779)
Net debt at end of the period	(349,175)	(345,774)	(355,285)
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	(378,516)	91,047	364,604
Net losses/(gains) on investments	412,203	(66,976)	(325,193)
Currency losses	248	3,625	4,578
Amortisation of fixed income book cost	(3)	(43)	(46)
Changes in debtors and creditors	(4,251)	2,283	5,587
Net cash inflow from operating activities	29,681	29,936	49,530

Thirty largest holdings and performance (unaudited)

Name	Business	Fair Value at 30 Sept 2011 £'000	% of total assets	Contribution to absolute performance* %
Amazon.com	Online retailer	204,587	9.8	1.6
Baidu	Online search engine	148,084	7.1	(1.7)
Brazil CPI Linked 2045	Brazilian government inflation linked bond	108,352	5.2	(0.2)
PPR	Luxury goods producer and retailer	106,412	5.1	(0.8)
Atlas Copco	Engineering	86,807	4.1	(1.2)
Tencent Holdings	Internet service portal	78,840	3.8	(0.5)
Banco Santander	Banking	64,606	3.1	(0.8)
Google	Online search engine	58,148	2.8	(0.3)
Ilumina	Biotechnology equipment	56,531	2.7	(0.8)
Vale (CVRD)	Iron ore and nickel mining	54,946	2.6	(0.7)
Inditex	International clothing retailer	52,906	2.5	0.2
salesforce.com	Cloud computing software	46,841	2.2	(0.3)
Intuitive Surgical	Surgical robots	45,054	2.1	0.2
New Oriental Education & Technology	Education and training	42,671	2.0	(0.3)
KGHM	Copper mining	42,240	2.0	(0.8)
Novozymes	Enzyme manufacturer	41,501	2.0	(0.1)
Deere	Farm machinery	39,678	1.9	(0.8)
ABB	Power systems and automation	37,969	1.8	(0.4)
First Solar	Solar energy technology	35,340	1.7	(1.8)
Garanti Bankasi	Banking	33,880	1.6	(0.2)
Telefonica O2 Czech Republic	Fixed and mobile telecoms	31,722	1.5	0.0
Reckitt Benckiser Group	Household goods	29,911	1.4	0.0
Meggitt	Aerospace equipment and systems	28,874	1.4	(0.1)
Telekomunikacja Polska	Fixed and mobile telecoms	27,328	1.3	(0.1)
Intertek Group	Business support providers	27,146	1.3	(0.1)
Whole Foods Market	Food retailer	26,073	1.2	0.0
Hero Motocorp	Motorcycle and scooter manufacturer	25,174	1.2	0.0
Taiwan Semiconductor Manufacturing	Semiconductor manufacturer	24,377	1.2	0.0
Rolls Royce Group	Aerospace equipment	23,800	1.1	0.0
Prudential	Life insurance	22,134	1.1	(0.1)
		1,651,932	78.8

*      Contribution to absolute performance has been calculated on a total return basis over the period 1 April 2011 to 30 September 2011.

Source: Baillie Gifford & Co/StatPro.

Past performance is not a guide to future performance.

Distribution of assets (unaudited)

		At 30 September 2011 %	At 30 September 2010 %	At 31 March 2011 %
North America		29.1	28.0	34.2
South America		8.9	12.4	8.9
Europe		41.5	36.4	35.2
	United Kingdom	11.3	11.9	10.2
	Eurozone	13.5	12.1	11.2
	Developed Europe (non Euro)	8.6	6.4	7.7
	Rest of Europe	8.1	6.0	6.1
Africa and Middle East		0.4	0.5	0.4
Asia		20.1	21.5	20.2
	China	14.5	12.8	13.5
	India	2.0	1.4	1.4
	Japan	0.6	2.3	1.6
	Rest of Asia	3.0	5.0	3.7
Australasia		-	1.2	1.1
Total assets (before deduction of loans and debentures)		100.0	100.0	100.0

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 30 September 2011 comprise the statements set out in the previous pages together with the related notes below. They have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 March 2011 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly; accordingly, the Half-Yearly Financial Report has 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.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 March 2011 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain statements under sections 498 (2) or (3) of the Companies Act 2006.
3.	Baillie Gifford & Co are employed by the Company as investment managers and secretaries under a management agreement which can be terminated 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).
4.	Net Return per ordinary share	Six months to  30 September 2011 £'000	Six months to 30 September  2010 £'000	Year to 31 March 2011 (audited) £'000
	Revenue return on ordinary activities after taxation	27,772	22,326	34,374
	Capital return on ordinary activities after taxation	(418,991)	57,336	308,163
	Total net return	(391,219)	79,662	342,537
	Weighted average number of ordinary shares in issue	256,519,897	258,254,050	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 in issue during each period. There are no dilutive or potentially dilutive shares in issue.
5.	Dividends	Six months to  30 September 2011 £'000	Six months to 30 September  2010 £'000	Year to 31 March 2011 (audited) £'000
	Amounts recognised as distribution in the period:
	Previous year's final dividend of 6.20p (2010 - 5.80p), paid 4 July 2011	15,904	14,968	14,968
	Interim dividend for the year ended 31 March 2011 of 5.50p, paid 3 December 2010	-	-	14,968
		15,904	14,968	29,936

Notes to the condensed financial statements (unaudited) (ctd)

5.	Dividends (ctd)	Six months to  30 September 2011 £'000	Six months to 30 September  2010 £'000	Year to 31 March 2011 (audited) £'000
	Dividends paid and proposed in the period:
	Interim dividend for the year ending 31 March 2012 of 6.20p (2011 - 5.80p)	15,904	14,968	14,968
	Final dividend for the year ended 31 March 2011	-	-	15,904
	Adjustment to provision for previous year's final dividend re shares bought back	-	-	(84)
		15,904	14,968	30,788
	The interim dividend was declared after the period end date and has therefore not been included as a liability in the balance sheet. It is payable on 25 November 2011 to shareholders on the register at the close of business on  11 November 2011.  The ex dividend date is 9 November 2011. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 14 November 2011.
6.	The bank loans falling due within one year comprise US$99 million and €61 million (30 September 2010 - US$99 million, ¥6,712.5 million and €59.8 million; 31 March 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 (30 September 2010 - €61 million; 31 March 2011 - €61 million). During the period bank loans of US$80 million and €59.8 million were repaid and a loan of US$163 million was drawn down.
7.	The fair value of the borrowings at 30 September 2011 was £433,041,000 (30 September 2010- £421,076,000; 31 March 2011 - £407,861,000).
8.		At  30 September 2011 Number of shares	At 30 September  2010 Number of shares	At 31 March 2011 (audited) Number of shares
	Share capital: Ordinary shares of 25p each
	Allotted, called up and fully paid	256,519,897	258,069,897	256,519,897
	Treasury shares	27,826,279	26,276,279	27,826,279
	Total	284,346,176	284,346,176	284,346,176
	In the six months to 30 September 2011 there were no ordinary shares bought back (30 September 2010 a total of 1,450,000 ordinary shares were bought back at a total cost of £8,962,000; 31 March 2011 a total of 3,000,000 ordinary shares were bought back at a total cost of £20,215,000). At 30 September 2011 the Company had authority to buy back 38,452,332 ordinary shares.
9.	Transaction costs on purchases amounted to £754,000 (30 September 2010 - £232,000; 31 March 2011 - £483,000) and transaction costs on sales amounted to £546,000 (30 September 2010 - £180,000; 31 March 2011 - £455,000).

Notes to the condensed financial statements (unaudited) (ctd)

10.

Shareholders will be notified on or around 8 November 2011 that the Half-Yearly Financial Report has been published and will be available on the Scottish Mortgage page of the Managers' website www.scottishmortgageit.com. ‡

11.

Principal Risks and Uncertainties The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 22 of the Company's Annual Report and Financial Statements for the year to 31 March 2011. The principal risks and uncertainties have not changed since the publication of the Annual Report which can be obtained free of charge from Baillie Gifford & Co and is available on the Scottish Mortgage page of the Managers' website: www.scottishmortgageit.com.‡ Other risks facing the Company include the following: gearing risk (the use of borrowings can magnify the impact of falling markets); regulatory risk (that the loss of investment trust status or a breach of applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage); operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss); and the risk that the discount can widen. Further information can be found on page 21 of the Annual Report and Financial Statements.

‡    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.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

- ends -

 

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