Results for the six months to 30 Sept 2015

RNS Number : 7778E

Scottish Mortgage Inv Tst PLC

06 November 2015

 

RNS Announcement

Scottish Mortgage Investment Trust PLC

Results for the six months to 30 September 2015

The following is the unaudited Interim Financial Report for the six months to 30 September 2015 which was approved by the Board on 5 November 2015.

Interim management report

Results and Approach

Scottish Mortgage remains clear in its focus as a long term growth investment trust, with an objective to maximise total returns to shareholders, which it aims to achieve primarily through capital appreciation.

The investment philosophy underpinning the portfolio remains the same. The Managers continue to take a committed, long-term approach to investing in businesses across the world which have the potential to grow much faster than the broader market. 

Over the past 6 months, the net asset value (NAV) per share decreased by 10.9% and the share price fell by 9.7%. In comparison, the FTSE All World Index fell by 11.8%.  As commented in previous reports, the Managers highlight that this is too short a period over which to judge the investment approach and stress that the long term performance figures are more representative of the success or otherwise of the strategy. Over the last 5 years, the total return for the NAV was 77%, and 104% for the share price. The Index returned 48% over the same period. 

Demand for the Company's shares has remained healthy throughout the period and they have traded around or at a small premium to the underlying NAV. As per the policy set out in the Chairman's Statement in the Annual Report, from time to time the Company undertook to aid liquidity in the market by issuing shares from treasury to meet investor demand. Over the six month period, the Company issued over 48m shares, generating net proceeds in excess of £128m. 

Share issuance provides the additional benefit of growing the Company. As the largest conventional investment trust, the Board firmly believes that Scottish Mortgage's size is a clear competitive advantage, as costs are spread over a wider shareholder base enabling us to offer lower costs to all.

Earnings and Dividend

Earnings per share were 1.23p over the six months to 30 September 2015 compared with 1.62p for the same period last year, which represents a fall of 24.1%. This trend of lower earnings, foreshadowed in the Annual Report, is expected to continue. The fall is due to the large number of companies in the portfolio, particularly in the US, which are reinvesting in their own businesses' future growth rather than paying cash out to shareholders.  Whilst this ought to be beneficial for future capital growth and is entirely consistent with Scottish Mortgage's own growth focus, it does affect the earnings level in the portfolio.

The Board is aware that dividends are important to a number of shareholders and the intention remains at least to maintain the dividend. An unchanged interim dividend of 1.38p will be paid.

The Portfolio 

At the end of September, there were 73 equity holdings in the portfolio, which remains relatively concentrated in the 30 largest stocks (78.8%). The weighting within an individual holding reflects both the Managers' level of conviction in the particular stock and its share price performance. In line with the five year plus investment horizon, portfolio turnover remains correspondingly low, (under 20% per annum).

In this report last year, the Company's holdings within the unlisted equity space were highlighted, against the background of Alibaba choosing to undertake an initial public offering, at a market capitalisation of c.US$168bn. Since then, the trend of companies preferring to raise capital in the private markets and list on a public stock exchange much later in their development has progressed further and faster than expected. This is an extremely important shift for growth investors who primarily invest in the public equity markets, as it results in a loss of access to a considerable period of value creation in these exciting growth companies. 

Many modern companies have developed new business models. They are no longer depend on an extraordinary capital injection funded from the public markets, but are financing their development from internally generated cash flows by the time they reach a size appropriate for a public listing. Many of these 'capital-lite' business opportunities have been created by the technologies underpinning the development of the internet but they span a wide range of established and new industries.

A significant number of the new companies, which the Managers have considered for investment over the past 12 months, have one or more founder-owners within their management teams. (This mirrors a broad trend within the existing portfolio.)  Such individuals tend to want to run their businesses on a sustainable multi-year growth basis.  The destructive short term demands of Wall Street in particular around quarterly earnings targets for public companies, combined with the lower capital requirements of many of these businesses, have contributed to this trend to raise capital in the private market, rather than through an earlier listing on a stock exchange. Instead companies are seeking to partner with a relatively small number of investors who share their long term horizon.

Scottish Mortgage and Baillie Gifford have developed a reputation for patient long term investing, which is a real asset in this regard. Further, Scottish Mortgage's closed-end nature is particularly well suited to investing across the capital structure, as the portfolio does not have a predefined lifespan and can continue to hold its stake in a business when it chooses to list on a public market, acting as a proper long term partner and providing stability through the challenging period around any future initial public listing, to the benefit of all concerned.

Over the past six months, Scottish Mortgage has invested in a number of unlisted companies. These include Home24, a European online furniture retailer developed by Rocket Internet; Airbnb, an online travel platform, changing the shape of the global holiday accommodation market; Funding Circle, which is dis-intermediating the provision of capital between savers and small and medium sized enterprises in the UK, in direct competition to the banks; and Thumbtack, a US-based online directory and ratings platform for the provision of tradesmen's services. Within the last twelve months, private investments have also been made in the US cyber security and analytics company Palantir and the Indian e-commerce company, Flipkart. 

In total, at the end of September, 16 unlisted investments accounted for 10% of the portfolio.  As the Managers believe this trend in the corporate funding markets is likely to continue, shareholders should expect both these figures to rise.

It is worth emphasising, however, that the increase in the number of holdings in unlisted companies within the portfolio reflects the wider shift in corporate financing markets and does not represent a change in the investment approach taken by the Managers. These are not immature venture capital style businesses, but established, often highly cash generative companies, typically with valuations well over US$1bn, which would have previously been accessed through the public equity markets. Many of those within the portfolio, such as Spotify are already global brands.

Outlook

The relatively recent developments of e-commerce and social media still have a considerable amount of structural growth potential. Yet it is the application of the technologies which have underpinned these two shifts to a range of other industries which is particularly firing the enthusiasm of the Managers. The Managers strongly believe that we are on the cusp of transformative change in a range of areas, including healthcare, transportation and energy. As with e-commerce and social media, the Managers believe the majority of the value created by these shifts may well be concentrated in the hands of a few extraordinary companies, whose positions are reinforced by scale and network effects, giving rise to the potential for greater longevity of growth.

Against such a backdrop, it is a particularly exciting time to be a growth stock picker.

The principal risks and uncertainties facing the Company are set out at the end of this document.

5 November 2015

Past performance is not a guide to future performance.

Responsibility statement

We confirm that to the best of our knowledge:

a)   the condensed set of financial statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b)   the Interim 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 condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)   the Interim 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).

By order of the Board

John Scott

Chairman

5 November 2015

 

Income statement (unaudited)

	For the six months ended  30 September 2015			For the six months ended 30 September 2014
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	112,266	112,266	-	63,607	63,607
Changes in investment holding gains and losses	-	(479,614)	(479,614)	-	190,203	190,203
Currency gains/(losses)	-	5,467	5,467	-	(4,739)	(4,739)
Income from investments and interest receivable	22,127	-	22,127	24,934	-	24,934
Investment management fee (note 3)	(1,374)	(4,122)	(5,496)	(1,192)	(3,576)	(4,768)
Other administrative expenses	(1,584)	-	(1,584)	(1,415)	-	(1,415)
Net return before finance costs and taxation	19,169	(366,003)	(346,834)	22,327	245,495	267,822
Finance costs of borrowings	(2,254)	(6,761)	(9,015)	(2,185)	(6,555)	(8,740)
Net return on ordinary activities before taxation	16,915	(372,764)	(355,849)	20,142	238,940	259,082
Tax on ordinary activities	(1,216)	-	(1,216)	(365)	-	(365)
Net return on ordinary activities after taxation	15,699	(372,764)	(357,065)	19,777	238,940	258,717
Net return per ordinary share (note 4)	1.23p	(29.22p)	(27.99p)	1.62p	19.54p	21.16p
Dividends paid and proposed per ordinary share† (note 5)	1.38p			1.38p

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.

 

Balance sheet (unaudited)

	At 30 September 2015 £'000	At 31 March 2015 (audited) £'000
Fixed assets
Investments held at fair value through profit or loss (note 6)	3,509,838	3,747,288
Current assets
Debtors	2,690	3,693
Cash and short term deposits	58,765	76,543
	61,455	80,236
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(273,964)	(111,149)
Other creditors	(6,235)	(7,085)
	(280,199)	(118,234)
Net current liabilities	(218,744)	(37,998)
Total assets less current liabilities	3,291,094	3,709,290
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(56,113)	(225,665)
Debenture stocks	(150,244)	(150,407)
	(206,357)	(376,072)
	3,084,737	3,333,218
Capital and reserves
Called up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	2,928,611	3,173,033
Revenue reserve	65,946	70,005
Shareholders' funds	3,084,737	3,333,218
Net asset value per ordinary share (after deducting borrowings at fair value) (note 8)	233.9p	262.4p
Net asset value per ordinary share (after deducting borrowings at par)	238.7p	268.0p
Ordinary shares in issue (note 9)	1,294,024,485	1,245,674,485

 

Statement of Changes in Equity (unaudited)

For the six months ended 30 September 2015

	Called up Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2015	71,086	19,094	3,173,033	70,005	3,333,218
Net return on ordinary activities after taxation	-	-	(372,764)	15,699	(357,065)
Shares sold from treasury (note 9)	-	-	128,342	-	128,342
Dividends paid during the period (note 5)	-	-	-	(19,758)	(19,758)
Shareholders' funds at 30 September 2015	71,086	19,094	2,928,611	65,946	3,084,737

For the six months ended 30 September 2014

	Called up Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2014	71,086	19,094	2,429,523	78,010	2,597,713
Net return on ordinary activities after taxation	-	-	238,940	19,777	258,717
Shares bought back	-	-	(13,730)	-	(13,730)
Shares sold from treasury	-	-	1,148	-	1,148
Dividends paid during the period (note 5)	-	-	-	(18,646)	(18,646)
Shareholders' funds at 30 September 2014	71,086	19,094	2,655,881	79,141	2,825,202

*          The Capital Reserve balance at 30 September 2015 includes investment holding gains on fixed asset investments of £1,296,892,000 (30 September 2014 - gains of £1,403,318,000).

 

Condensed cash flow statement (unaudited)

	Six months to  30 September 2015 £'000	Six months to  30 September 2014 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	(355,849)	259,082
Net losses/(gains) on investments	367,348	(253,810)
Currency (gains)/losses	(5,467)	4,739
Finance costs of borrowings	9,015	8,740
Overseas withholding tax	(1,172)	(1,666)
Changes in debtors and creditors	620	2,457
Cash from operations	14,495	19,542
Interest paid	(9,094)	(8,981)
Net cash inflow from operating activities	5,401	10,561
Net cash (outflow)/inflow from investing activities	(131,763)	51,458
Equity dividends paid (note 5)	(19,758)	(18,646)
Shares bought back	-	(29,337)
Shares sold from treasury	128,342	-
Net cash inflow from bank loans (note 7)	-	63,862
Net cash inflow from financing activities	108,584	15,879
(Decrease)/increase in cash and cash equivalents	(17,778)	77,898
Cash and cash equivalents at start of period	76,543	21,705
Cash and cash equivalents at end of period*	58,765	99,603

*      Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

 

Thirty largest holdings and performance (unaudited)

Name	Business	Fair Value at 30 Sept 2015 £'000	% of total assets	Contribution to absolute performance† %
Amazon.com	Online retailer	377,401	10.6	2.6
Illumina	Biotechnology equipment	277,343	7.8	(0.7)
Inditex	International clothing retailer	207,726	5.8	0.2
Tesla Motors	Electric cars	177,051	5.0	0.7
Baidu	Online search engine	156,155	4.4	(2.4)
Tencent Holdings	Internet services	148,087	4.2	(0.6)
Facebook	Social networking site	134,322	3.8	0.2
Google	Online search engine	120,267	3.4	0.2
Alibaba Group	Online retail	105,125	2.9	(1.3)
Fiat Chrysler Automobiles	Automobiles	82,084	2.3	(0.7)
Prudential	International insurance	81,648	2.3	(0.4)
Atlas Copco	Engineering	79,213	2.2	(0.7)
BASF	Chemicals	75,430	2.1	(0.6)
Kering	Luxury goods producer and retailer	74,467	2.1	(0.4)
Kinnevik	Investment company	65,493	1.8	(0.3)
Zalando	International clothing retailer	65,128	1.8	0.4
Rolls-Royce Group	Aerospace equipment	56,606	1.6	(0.6)
Novozymes	Enzyme manufacturer	49,654	1.4	(0.1)
Intuitive Surgical	Surgical robots	49,073	1.4	(0.2)
Apple	Computer technology	48,872	1.4	(0.2)
Housing Development Finance   Corporation	Mortgage bank	44,113	1.2	(0.2)
LinkedIn Corp	Business-related social networking site	39,920	1.1	(0.4)
Palantir Technologies Inc*	Data analysis	39,357	1.1	0.2
Rocket Internet	Internet startup factory	37,930	1.1	(0.6)
Banco Santander	Banking	37,845	1.1	(0.6)
Magnit OJSC	Retailer	37,634	1.0	(0.1)
ARM Holdings	Semiconductor and software design    company	37,477	1.0	(0.2)
Reckitt Benckister	Consumer goods	35,868	1.0	0.1
ASML Holding	Lithography	34,230	1.0	(0.2)
Flipkart*	Indian e-commerce	33,951	0.9	0.1
		2,809,470	78.8

† Contribution to absolute performance has been calculated on a total return basis over the period 1 April 2015 to 30 September 2015.

* Denotes unlisted security.

Source: Baillie Gifford/StatPro.

Past performance is not a guide to future performance.

 

Distribution of assets (unaudited)

			At 30 September 2015 %	At 31 March 2015 %
North America			48.0	38.7
South America			0.8	1.2
Europe			35.0	37.7
	United Kingdom		9.5	9.3
	Eurozone		18.1	20.6
	Developed Europe (non Euro)		5.9	6.2
	Rest of Europe		1.5	1.6
Africa and Middle East			0.5	nil
Asia			15.7	22.4
	China		13.1	19.6
	India		2.2	2.1
	Japan		0.2	0.3
	Rest of Asia		0.2	0.4
Total assets (before deduction of loans and debentures)			100.0	100.0

 

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 30 September 2015 comprise the statements set out in the previous pages together with the related notes below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014 and have not been audited or reviewed by the Auditor pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Company has adopted FRS 102 for its financial year ending 31 March 2016. Following the application of the new reporting standards and the AIC's issued Statement of Recommended Practice, there has been no impact on the Company's Income Statement, Balance Sheet or Statement of Changes in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for the periods previously reported.  The Condensed Cash Flow Statement has been restated to reflect presentational changes required and does not include any other material changes. The financial statements for the six months to 30 September 2015 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 2015.
	Going Concern The Company's assets, the majority of which are 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. Accordingly, the Interim 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.
2.	The financial information contained within this Interim 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 2015 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report, and did not contain statements under sections 498 (2) or (3) of the Companies Act 2006.
3.	Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed by the Company as its Alternative Investment Fund Manager (AIFM) and Company Secretary. The investment management function has been delegated to Baillie Gifford & Co. The management agreement can be terminated on six months' notice. With effect from 1 April 2014 the annual management fee is 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes), calculated quarterly. The annual fee previously was 0.32% calculated quarterly on the same basis.
4.	Net Return per ordinary share	Six months to  30 September 2015 £'000	Six months to 30 September 2014 £'000
	Revenue return on ordinary activities after taxation	15,699	19,777
	Capital return on ordinary activities after taxation	(372,764)	238,940
	Total net return	(357,065)	258,717
	Weighted average number of ordinary shares in issue	1,275,927,764	1,223,091,562
	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.

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

5.	Dividends			Six months to  30 September 2015 £'000		Six months to 30 September 2014 £'000
	Amounts recognised as distributions in the period:
	Previous year's final dividend of 1.55p (2014 - 1.52p), paid 6 July 2015			19,758		18,646
				19,758		18,646
	Dividends paid and proposed in the period:
	Interim dividend for the year ending 31 March 2016 of 1.38p (2015 - 1.38p)			17,858		16,844
				17,858		16,844
	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 4 December 2015 to shareholders on the register at the close of business on 20 November 2015.  The ex dividend date is 19 November 2015. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 23 November 2015.
6.	Fair Value In accordance with FRS 102 and FRS 104, fair value measurements have been classified using the following fair value hierarchy: Level A - Quoted prices for identical instruments in active markets Level B - Prices of a recent transaction for identical instruments Level C - Valuation techniques that use: (i)   observable market data; or (ii)  non-observable data.
	Investments held at fair value through profit or loss
	As at 30 September 2015	Level A £'000	Level B £'000		Level C £'000		Total £'000
	Listed equities/funds	3,105,133	21,982		-		3,127,115
	Listed debt securities	-	28,593		-		28,593
	Unlisted equities	-	-		354,130		354,130
	Total financial asset investments	3,105,133	50,575		354,130		3,509,838
	As at 31 March 2015	Level A £'000	Level B £'000		Level C £'000		Total £'000
	Listed equities/funds	3,535,168	23,686		-		3,558,854
	Listed debt securities	-	38,110		-		38,110
	Unlisted equities	-	-		150,324		150,324
	Total financial asset investments	3,535,168	61,796		150,324		3,747,288

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

	There have been no transfers between levels of fair value hierarchy during the period. The fair value of listed investments is bid price or, in the case of FTSE 100 constituents or holdings on certain recognised overseas exchanges, last traded price. They are categorised as level A if they trade in an active market and level B if they are traded on a market which is not considered to be active. The fair value of unlisted investments is determined using valuation techniques, determined by the Directors, based upon observable and/or non-observable data such as latest dealing prices, stockbroker valuations, net asset values and other information, as appropriate. The Company's holdings in unlisted investments are categorised as level C (ii) as the valuation techniques applied include the use of non-observable data.
7.	The bank loans falling due within one year are a US$200 million loan with National Australia Bank Limited ('NAB'), a US$165 million loan with The Royal Bank of Scotland ('RBS') and a US$50 million loan with State Street Bank and Trust Company ('State Street') (31 March 2015 - US$165 million loan with State Street). The bank loan falling due in more than one year is a US$85 million with RBS (31 March 2015 - US$200 million loan with NAB, a US$50 million loan with State Street and a US$85 million loan from RBS). During the period the US$165 million loan with State Street was repaid and replaced with US$165 million loan from RBS.
8.	The fair value of the borrowings at 30 September 2015 was £537,751,000 (31 March 2015 - £552,353,000).
9.		At  30 September 2015 Number of shares	At 31 March 2015 (audited) Number of shares
	Share capital: Ordinary shares of 5p each
	Allotted, called up and fully paid	1,294,024,485	1,245,674,485
	Treasury shares	127,706,395	176,056,395
		1,421,730,880	1,421,730,880
	In the six months to 30 September 2015, the Company sold 48,350,000 ordinary shares from treasury at a premium to net asset value raising net proceeds of £128,342,000 (year to 31 March 2015 - 25,600,000 shares sold from treasury). At 30 September 2015 the Company had authority to issue or sell from treasury a further 171,338,672 ordinary shares. In the six months to 30 September 2015 no ordinary shares were bought back. In the year to 31 March 2015 a total of 6,625,000 ordinary shares were bought back at a total cost of £13,730,000. At 30 September 2015 the Company had authority to buy back a further 189,012,580 ordinary shares.
10.	Transaction costs on acquisitions within the portfolio amounted to £230,000 (30 September 2014 - £139,000) and transaction costs on sales amounted to £232,000 (30 September 2014 - £138,000). These costs are included in the book cost of acquisitions and in the net proceeds of disposals.
Shareholders will be notified on or around 16 November 2015 that the Interim Financial Report has been published and will be available on the Scottish Mortgage page of the Managers' website www.scottishmortgageit.com. ‡
Principal Risks and Uncertainties The principal risks facing the Company are financial risk, regulatory risk, operational risk, premium/discount volatility and leverage risk. An explanation of these risks and how they are managed is set out on page 8 of the Company's Annual Report and Financial Statements for the year to 31 March 2015 which is available on the Company's website: www.scottishmortgageit.com.‡ The principal risks and uncertainties have not changed since the date of that report.

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

Scottish Mortgage Investment Trust PLC is an actively managed, low cost investment trust, investing in a concentrated global portfolio of companies with the aim of maximising its total return over the long term. It looks for strong businesses with above-average returns and aims to achieve a greater return than the FTSE All-World Index (in sterling terms) over a five year rolling period.

You can find up to date performance information about Scottish Mortgage on the Scottish Mortgage page of the Managers' website at www.scottishmortgageit.com^‡

‡    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.

Scottish Mortgage is managed by Baillie Gifford & Co, the Edinburgh based fund management group with over £119 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 5 November 2015).

Investment Trusts are UK public limited companies and are not authorised or regulated by the Financial Conduct 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. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares.

5 November 2015

For further information please contact:

Catharine Flood, Baillie Gifford & Co  

Tel: [phone]

Roland Cross, Director, Four Broadgate

Tel: [phone] or 07831 401309

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