Scottish Mortgage Interim Results to 30 September

RNS Number : 3172O

Scottish Mortgage Inv Tst PLC

04 November 2016

 

RNS Announcement

Scottish Mortgage Investment Trust PLC

Results for the six months to 30 September 2016

The following is the unaudited Interim Financial Report for the six months to 30 September 2016 which was approved by the Board on 3 November 2016.

Interim management report

Results and Approach

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the Managers believe to be the best growth businesses, operating in any industry and anywhere around the world. The Company's investment objective is to maximise total returns to shareholders, which it aims to achieve primarily through capital appreciation as these businesses grow. The portfolio is not constructed by reference to any benchmark index. The flexibility inherent in this approach allows the Managers to invest only where they see the best opportunities at any given time and for the portfolio to evolve over the long term.

Over the past 6 months, both the net asset value (NAV) and price per share rose by 25% on a total return basis; for context, the FTSE All World Index rose by 18% over the same period.  All three of these figures were favourably influenced by the falls in the pound against other currencies over the period, raising the sterling value of overseas assets.  The Managers reiterate previous comments that six months is too short a period over which to judge the investment approach taken and 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 165%, and 183% for the share price. The total return from the Index was 105% over the same period. 

Over the six months to 30 September, the Company continued to implement its long standing liquidity policy, both buying back shares and issuing shares from treasury, as appropriate. These transactions were modest in size and the net result was a very small decrease of 805,000 shares in the level of the Company's issued share capital over the period.

Scottish Mortgage remains the largest conventional investment trust listed on the London Stock Exchange. The Board continues to view its comparative scale and low cost structure as clear competitive advantages.

Earnings and Dividend

Earnings per share were 0.80p over the six months to 30 September 2016 compared with 1.23p for the same period last year, which represents a fall of 35%. This is a continuation of the trend of lower earnings, which has been highlighted repeatedly in the Company's reports in recent years. The fall is due to the large number of companies in the portfolio reinvesting for their future growth, rather than paying out cash to shareholders. As growth investors, disciplined long term focused capital allocation is precisely what the Managers seek in a company.

The Board and the Managers believe that it is important to approach investment from a total return perspective over a period of at least five years. Whilst anticipating that capital appreciation will be the foremost reason for shareholders' investment in Scottish Mortgage, the Board is nevertheless conscious that many shareholders also value the dividends paid, which have grown consistently, if slowly, over a long period.  The intention remains to continue with the stated dividend policy, as set out in the Chairman's statement in the 2016 Annual Report. To this end, a modestly increased interim dividend of 1.39p per share will be paid, representing a rise of 0.7% over the previous year's figure of 1.38p.

The Portfolio 

As simple as Scottish Mortgage's investment proposition is, the Managers and Board believe it is also increasingly rare.  All investing starts from asking whether the price to be paid today offers the potential for an appropriate level of return over the applicable investment time horizon.  In general, the investment industry seems to measure, analyse and judge companies over ever shorter periods, more in the order of twelve weeks or fewer, than over periods measured in years. In the short term, equity market returns can be dominated by external factors such as politics and macro economics, as well as pure swings in sentiment. However, if a company has a strong durable competitive advantage which enables it to sustain a growth rate above the broader market average, earning an attractive return on its own invested capital, its shareholders should see this reflected in their own returns on investment over the long term. Short term focused analysis will tend to underestimate dramatically the value of the few businesses able to do this, which in turn provides a real opportunity for those willing to focus on the long term prospects for individual businesses. More than that, in order to grow to their full potential, companies need shareholders who are prepared to support long term capital investment, despite the fact that it may come at the expense of short term earnings.

At the end of September 2016, the portfolio included investments in 67 different individual companies. The portfolio remains relatively concentrated, with the 30 largest holdings accounting for 83% of the assets. Within this, the individual position sizes are reflective of both the relative levels of the conviction of the Managers in their investment cases and the shares' individual price performances.

Despite wider macro economic and political concerns around the world, which are preoccupying many investors, over the past six months a number of the largest holdings in the portfolio have released strong operational results, showing a re-acceleration of their growth rates. These include Alphabet (Google), Facebook, Amazon, Alibaba, Baidu and Tencent. The long standing common elements contributing to their success include: strong corporate cultures, driven by their founder/managers; a focus on providing what their customers either want or need; and a willingness to invest for the long term to enable them to adapt to, and increasingly to anticipate, their customers' evolving demands.

These network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. It is no accident that Baidu, Alphabet, and Facebook are leaders in this area. Machine learning in particular is an iterative and accelerating process, meaning that it becomes increasingly hard to catch up with those at the forefront. Those who succeed will be able to offer better services based on the technology to their customers. The Managers have accordingly sold out of those second tier network businesses which they believe will be the losers in this next round, such as Twitter and LinkedIn. In contrast, the Managers have recently invested in a company, NVIDIA, which designs graphics processing units (GPUs). The company is the dominant provider of GPUs and currently its main market is the computer gaming industry. However, the processing structure of a GPU is better suited to the computational tasks required to support virtual or augmented reality, AI and autonomous vehicles, than the alternative central processing units used in traditional computing. This dramatically expands the company's potential addressable markets. 

The importance of data, or more accurately the real time processing of vast volumes of data to support new business models and technologies, has moved beyond the area traditionally thought of as 'information technology'. This shift is happening much faster than many realise and will eventually impact almost every industry.

Within the portfolio there are a number of other companies, outwith the technology sector, taking advantage of these developments. Electric cars are really driven by their software. Improvements in data gathering and real time processing have enabled technology to reach the stage where the adoption of autonomous vehicles is largely a matter of time and acceptance, rather than of technological capability. Tesla is at the forefront of this. The requisite hardware for such capability now comes as standard on all new Tesla vehicles, and it will simply require an 'over the air' software update in the future to activate it.  Our understanding in the field of genomics has seen a step change resulting from the data produced through gene sequencing. As well as the testing company Illumina, there are now a number of companies in the portfolio which are developing potentially curative treatments for a range of diseases as a direct result of this. These are, however, still at an early stage. Further, we are now entering the stage of the commercialisation of our understanding in this area as it applies to the wider field of biology. The Managers have recently invested in Ginkgo Bioworks, a company looking to industrialise biological processes to manufacture a range of products, such as rose oil, for use in the food and cosmetic industries.

Outlook

There is a strong structural asymmetry in equity market returns, given the potential for a successful company to grow to many times its size. This means it is of critical importance to be a patient optimist.  The greatest investment mistakes come not from those investments which fail, but from the opportunities missed. Whilst others are focused on questions around political issues in the United States of America, what global GDP figures will be or whether the Federal Reserve will raise interest rates, those able to take a long term and global approach can focus on investing in those companies which are placed to benefit from the significant structural shifts which are occurring on the back of technological progress. A number of these companies have already reached significant scale, but have the potential and capital to grow substantially from here. This is truly exciting.

Here in the United Kingdom, a considerable amount of time and energy is being devoted to the question of whether the UK will manage to negotiate a constructive ongoing relationship with its nearest neighbours, following the referendum this summer. At the margin, in the short term a weaker pound has increased the value of overseas returns for UK investors, including for Scottish Mortgage. As global growth investors, the long term impact from the referendum outcome is muted. The challenges faced by the UK are not likely to have a significant impact on the long term structural growth opportunities to which the portfolio is exposed and, in any event, the vast majority of the companies within Scottish Mortgage's portfolio derive the bulk of their revenues overseas. Less than 5% of the portfolio is currently invested in UK listed companies.

Put simply, amidst all the gloom and worry this is a great time to be a long term global growth stock picker.

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

3 November 2016

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

3 November 2016

 

Income statement (unaudited)

	For the six months ended  30 September 2016			For the six months ended  30 September 2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	110,182	110,182	-	112,266	112,266
Changes in investment holding gains and losses	-	770,789	770,789	-	(479,614)	(479,614)
Currency (losses)/gains	-	(34,271)	(34,271)	-	5,467	5,467
Income from investments and interest receivable	17,577	-	17,577	22,127	-	22,127
Investment management fee (note 3)	(1,674)	(5,021)	(6,695)	(1,374)	(4,122)	(5,496)
Other administrative expenses	(1,724)	-	(1,724)	(1,584)	-	(1,584)
Net return before finance costs and taxation	14,179	841,679	855,858	19,169	(366,003)	(346,834)
Finance costs of borrowings	(2,380)	(7,140)	(9,520)	(2,254)	(6,761)	(9,015)
Net return on ordinary activities before taxation	11,799	834,539	846,338	16,915	(372,764)	(355,849)
Tax on ordinary activities	(1,239)	-	(1,239)	(1,216)	-	(1,216)
Net return on ordinary activities after taxation	10,560	834,539	845,099	15,699	(372,764)	(357,065)
Net return per ordinary share (note 4)	0.80p	63.55p	64.35p	1.23p	(29.22p)	(27.99p)
Dividends paid and proposed per ordinary share (note 5)	1.39p			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 2016 £'000	At 31 March 2016 (audited) £'000
Fixed assets
Investments held at fair value through profit or loss (note 6)	4,691,109	3,922,124
Current assets
Debtors	2,279	4,051
Cash and short term deposits	89,088	43,973
	91,367	48,024
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(346,420)	(288,736)
Other creditors	(7,258)	(14,750)
	(353,678)	(303,486)
Net current liabilities	(262,311)	(255,462)
Total assets less current liabilities	4,428,798	3,666,662
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	-	(59,139)
Debenture stocks	(149,895)	(150,079)
	(149,895)	(209,218)
	4,278,903	3,457,444
Capital and reserves
Called up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	4,145,196	3,313,502
Revenue reserve	43,527	53,762
Shareholders' funds	4,278,903	3,457,444
Net asset value per ordinary share (after deducting borrowings at fair value) (note 8)	321.7p	259.2p
Net asset value per ordinary share (after deducting borrowings at par)	326.5p	263.8p
Ordinary shares in issue (note 9)	1,311,719,485	1,312,524,485

 

Statement of Changes in Equity (unaudited)

For the six months ended 30 September 2016

	Share capital £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 April 2016	71,086	19,094	3,313,502	53,762	3,457,444
Net return on ordinary activities after taxation	-	-	834,539	10,560	845,099
Shares bought back into treasury	-	-	(19,558)	-	(19,558)
Shares sold from treasury (note 9)	-	-	16,713	-	16,713
Dividends paid during the period (note 5)	-	-	-	(20,795)	(20,795)
Shareholders' funds at 30 September 2016	71,086	19,094	4,145,196	43,527	4,278,903

For the six months ended 30 September 2015

	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

*    The Capital Reserve balance at 30 September 2016 includes investment holding gains on fixed asset investments of £2,304,626,000 (30 September 2015 - gains of £1,296,892,000).

 

Condensed cash flow statement (unaudited)

	Six months to  30 September 2016 £'000	Six months to  30 September 2015 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	846,338	(355,849)
Net (gains)/losses on investments	(880,971)	367,348
Currency losses/(gains)	34,271	(5,467)
Finance costs of borrowings	9,520	9,015
Overseas withholding tax	(1,214)	(1,172)
Changes in debtors and creditors	2,127	620
Cash from operations	10,071	14,495
Interest paid	(9,636)	(9,094)
Net cash inflow from operating activities	435	5,401
Net cash inflow/(outflow) from investing activities	106,239	(131,763)
Equity dividends paid (note 5)	(20,795)	(19,758)
Shares bought back	(19,574)	-
Shares sold from treasury	16,713	128,342
Net cash outflow from bank loans (note 7)	(37,903)	-
Net cash (outflow)/inflow from financing activities	(61,559)	108,584
Increase/(decrease) in cash and cash equivalents	45,115	(17,778)
Cash and cash equivalents at start of period	43,973	76,543
Cash and cash equivalents at end of period*	89,088	58,765

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

 

List of investments at 30 September 2016 (unaudited)

Name	Business	Fair Value at 31 March 2016 £'000	Fair Value £'000	% of total assets	Contribution to absolute performance† %	Significant net changes in the holding over the period
Amazon.com	Online retailer	330,117	515,069	10.8	5.9
Illumina	Biotechnology equipment	291,722	361,778	7.6	1.8
Inditex	International clothing retailer	231,567	288,701	6.0	1.6
Tencent Holdings	Internet services	190,964	284,689	6.0	2.8
Alibaba Group	Online retail	164,129	243,088	5.1	2.2
Baidu	Online search engine	228,621	241,298	5.1	0.2
Tesla Motors	Electric cars	185,552	234,295	4.9	(0.2)
Facebook	Social networking site	179,697	223,505	4.7	1.4
Alphabet	Online search engine	155,518	179,509	3.8	0.7
Ctrip.com	Travel agent	35,752	101,203	2.1	0.2	Significant addition
Ferrari	Automobiles	27,788	99,856	2.1	0.6	Significant addition
BASF	Chemicals	78,624	98,687	2.1	0.7
Atlas Copco	Engineering	87,657	96,147	2.0	0.8
Zalando	International clothing retailer	68,231	95,998	2.0	0.7
Kering	Luxury goods producer and   retailer	86,183	78,635	1.6	0.5
Intuitive Surgical	Surgical robots	67,644	68,581	1.4	0.5
Housing Development   Finance Corporation	Mortgage bank	42,009	68,400	1.4	0.6
Kinnevik	Investment company	68,867	68,314	1.4	0.2
Workday	Enterprise information   technology	26,714	64,017	1.4	0.3
Netflix	Subscription service for TV   shows and movies	36,264	63,295	1.3	0.1
Prudential	International insurance	76,256	62,537	1.3	0.1
Rolls-Royce Group	Aerospace equipment	56,982	60,201	1.3	0.1
ASML Holding	Lithography	42,067	57,568	1.2	0.3
Novozymes	Enzyme manufacturer	54,045	50,320	1.1	0.2
Apple	Computer technology	58,850	48,714	1.0	0.1
Palantir Technologies Inc#	Data integration software and   service provider	41,479	45,895	1.0	0.2
You and Mr Jones#	Digital advertising agency	34,787	42,687	0.9	0.2	Increase in fair valuation
Bluebird Bio Inc	Provider of biotechnological   products and services	22,032	38,881	0.8	0.5
Thumbtack Series G   Pref.#	Online directory service for local    businesses	34,787	38,491	0.8	0.1
Rocket Internet	Internet startup factory	44,793	38,383	0.8	(0.3)

Name	Business	Fair Value at 31 March 2016 £'000	Fair Value £'000	% of total assets	Contribution to absolute performance† %	Significant net changes in the holding over the period
Renishaw	Electronic equipment	26,571	38,184	0.8	0.4
Hellofresh C3 Pref.#	Grocery retailer	19,821	23,985	0.5	0.1	Increase in fair valuation
Hellofresh C4 Pref.#	Grocery retailer	-	10,349	0.2	0.1	Participated in additional funding round
		19,821	34,334	0.7	0.2
Home24 Series D Pref.#	Online furniture retailer	26,164	20,096	0.4	(0.2)	Decrease in fair valuation
Home24 Series E Pref.#	Online furniture retailer	-	8,651	0.2	-	Participated in additional funding round
		26,164	28,747	0.6	(0.2)
Salesforce	Cloud computing and hosting	26,352	28,181	0.6	0.1
Zocdoc D2 Pref.#	Online platform for searching for   doctors and booking   appointments	20,875	26,388	0.6	0.2	Increase in fair valuation
Magnit OJSC	Retailer	21,815	25,271	0.5	0.1
Svenska Handelsbanken	Banking	-	25,214	0.5	0.1	New purchase
Tableau Software	Analytics software	-	24,818	0.5	(0.1)	New purchase
Brazil CPI Linked 2045	Brazilian government inflation   linked bond	17,241	23,393	0.5	0.2
Airbnb Series E Pref.#	Online market place for travel   accommodation	17,394	21,707	0.5	0.2	Increase in fair valuation
Dropbox Class B   Common#	Online storage	28,889	21,689	0.5	(0.3)	Decrease in fair valuation
Curevac#	Biotechnology	19,820	21,627	0.5	0.1
Juno Therapeutics	Clinical stage biotechnology   company	23,739	20,693	0.4	(0.1)
Flipkart Series G Pref.#	Indian e-commerce	26,836	19,881	0.4	(0.1)	Decrease in fair valuation
JAND Inc Series A Ord.   (Warby Parker)#	Online and physical glasses   retailer	4,848	5,955	0.1	-
JAND Inc Series D Pref.   (Warby Parker)#	Online and physical glasses   retailer	12,552	13,298	0.3	-
		17,400	19,253	0.4	-
NVIDIA	Interactive 3D graphics provider	-	19,253	0.4	0.1	New purchase
Spotify#	Online music streaming service	17,394	19,246	0.4	0.1
Intarcia Therapeutics   Series EE Pref.#	Biotechnology	-	19,246	0.4	-	New purchase
Internet Plus Holdings   Series B Pref.#	Local services aggregator	17,394	19,246	0.4	0.1
Denali Therapeutics#	Biotechnology	-	19,246	0.4	0.1	New purchase
Souq#	Owner and operator of online   retail e-commerce website	17,394	19,246	0.4	0.1
Essence Healthcare#	Cloud-based health provider	16,609	18,378	0.4	0.1
Name	Business	Fair Value at 31 March 2016 £'000	Fair Value £'000	% of total assets	Contribution to absolute performance† %	Significant net changes in the holding over the period
Innovation Works   Development Fund#	Investment company	18,282	17,073	0.4	-	Decrease in fair valuation
Alnylam Pharmaceuticals	Biotechnology	14,272	17,057	0.4	0.1
Astra International	Automotive conglomerate	12,933	16,601	0.3	0.1
Funding Circle Series E   Pref.#	Facilitates loans to small and   medium enterprises	11,053	15,790	0.3	0.1	Increase in fair valuation
Transferwise#	Online money transfer	13,915	15,396	0.3	-
Jeronimo Martins	Retailer	13,132	15,372	0.3	0.1
Under Armour	Develops, markets and   distributes branded   performance products	-	13,888	0.3	-	New purchase
SurveyMonkey#	Online surveys	12,318	13,805	0.3	0.1
JD.com	Online direct sales company	10,714	11,675	0.2	-
Anaplan Inc Series E   Pref.#	Enterprise planning software	10,436	11,548	0.2	-
Udacity#	Online education	10,436	11,547	0.2	-	Increase in fair valuation
WI Harper Fund VII#	Venture capital	12,050	11,034	0.2	-	Cash distribution received
Gingko Bioworks#	Bio-engineering company	-	9,993	0.2	-	New purchase
Skyscanner#	Online flight search	9,800	9,800	0.2	-
Flatiron Health Series C   Pref.#	Software and data aggregation   for oncology	6,957	7,698	0.2	-
Castlight Health Inc	Healthcare information company	4,158	5,734	0.1	0.1
Level E Maya Fund	Artificial intelligence based   algorithmic trading	4,973	5,320	0.1	-
Solarcity	Solar energy production	5,349	4,712	0.1	-
WI Harper Fund VIII#	Venture capital fund	2,408	2,960	0.1	-	Additional investment
Sinovation Fund III#	Venture capital fund	-	1,777	<0.1	-	New purchase
ARCH Ventures Fund IX#	Venture capital fund	-	346	<0.1	-	New purchase
Total Investments			4,691,109	98.2
Net liquid assets			84,109	1.8
Total Assets			4,775,218	100.0

† Contribution to absolute performance has been calculated on a total return basis over the period 1 April 2016 to 30 September 2016.

^#  Denotes unlisted security.

The following investments were sold out during the period: Advantest, ARM Holdings, Baillie Gifford Global Discovery Fund, Banco Santander, Burberry Group, Fiat Chrysler Automobiles, Genomic Health, KGHM, Lending Club, LinkedIn, Myriad Genetics, Reckitt Benckiser, Splunk, Stratasys, Twitter and Whole Foods Market.

Source: Baillie Gifford/StatPro.

Past performance is not a guide to future performance.

 

Distribution of assets (unaudited)

			At 30 September 2016 %	At 31 March 2016 %
North America			48.7	46.4
South America			0.5	0.4
Europe			28.6	33.7
	United Kingdom		4.4	8.6
	Eurozone		18.2	18.6
	Developed Europe (non Euro)		5.5	5.8
	Rest of Europe		0.5	0.7
Africa and Middle East			0.4	0.4
Asia			21.8	19.1
	China		19.7	16.9
	India		1.8	1.7
	Japan		-	0.2
	Rest of Asia		0.3	0.3
Total assets (before deduction of loans and debentures)			100.0	100.0

	Listed Equities %	Unlisted Equities %	Bonds %	Net Liquid Assets %	Total %
30 September 2016	85.9	11.8	0.5	1.8	100.0
31 March 2016	87.0	11.8	0.4	0.8	100.0

 

Notes to the condensed financial statements (unaudited)

1.	The condensed Financial Statements for the six months to 30 September 2016 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 Financial Statements for the six months to 30 September 2016 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 2016.
	Going Concern Having considered the nature of the Company's assets, its liabilities, projected income and expenditure together with the Company's investment objective and policy, dividend policy and principal risks and uncertainties, as set out at the end of this document, it is the Directors' opinion that the Company has adequate resources to continue in operational existence for the foreseeable future. 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 Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Interim Financial Statements.
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 2016 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. The annual management fee is 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes), calculated quarterly.
4.	Net return per ordinary share	Six months to  30 September 2016 £'000	Six months to 30 September 2015 £'000
	Revenue return on ordinary activities after taxation	10,560	15,699
	Capital return on ordinary activities after taxation	834,539	(372,764)
	Total net return	845,099	(357,065)
	Weighted average number of ordinary shares in issue	1,313,269,731	1,275,927,764
	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 2016 £'000		Six months to 30 September 2015 £'000
	Amounts recognised as distributions in the period:
	Previous year's final dividend of 1.58p (2015 - 1.55p), paid 4 July 2016			20,795		19,758
				20,795		19,758
	Dividends paid and proposed in the period:
	Interim dividend for the year ending 31 March 2017 of 1.39p (2016 - 1.38p)			18,233		17,858
				18,233		17,858
	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 2 December 2016 to shareholders on the register at the close of business on 18 November 2016.  The ex dividend date is 17 November 2016. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 21 November 2016.
6.	Fair Value The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit and loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement. Level 1 - using unadjusted quoted prices for identical instruments in an active market; Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on                market data) and; Level 3 - using inputs that are unobservable (for which market data is unavailable). The Company's investments are financial assets designated at fair value through profit or loss. An analysis of the Company's financial asset investments based on the fair value hierarchy described above is shown below.
	Investments held at fair value through profit or loss
	As at 30 September 2016	Level 1 £'000	Level 2 £'000		Level 3 £'000		Total £'000
	Listed equities/funds	4,098,323	5,320		-		4,103,643
	Listed debt securities	-	23,393		-		23,393
	Unlisted equities	-	-		564,073		564,073
	Total financial asset investments	4,098,323	28,713		564,073		4,691,109
	As at 31 March 2016	Level 1 £'000	Level 2 £'000		Level 3 £'000		Total £'000
	Listed equities/funds	3,415,656	23,580		-		3,439,236
	Listed debt securities	-	17,241		-		17,241
	Unlisted equities	-	-		465,647		465,647
	Total financial asset investments	3,415,656	40,821		465,647		3,922,124
	There have been no transfers between levels of the fair value hierarchy during the period. The fair value of listed investments is bid price or, in the case of the FTSE 100 constituents or holdings on certain recognised overseas exchanges, last traded price. Listed investments are categorised as Level 1 if they are valued using unadjusted quoted prices for identical instruments in an active market and as Level 2 if they do not meet all these criteria but are, nonetheless, valued using market data.

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

	Unlisted Investments The Company's holdings in unlisted investments are categorised as Level 3. Unlisted investments are valued at fair value by the Directors following a detailed review and appropriate challenge of the valuations proposed by the Managers. The Managers' unlisted investment policy applies methodologies consistent with the International Private Equity and Venture Capital Valuation guidelines ('IPEV'). These methodologies can be categorised as follows: -  Market Approach (a. Price of Recent Investment; b. Multiples; c. Industry Valuation Benchmarks; and d. Available Market Prices); -  Income Approach (Discounted Cash Flows); and -  Replacement Cost Approach (Net Assets). The nature of the unlisted portfolio currently (generally young, rapidly growing companies using technology to create new, or disrupt existing, business models) will influence the valuation methodology applied. The price of a recent investment or available market prices for secondary transactions are likely to be the most appropriate approaches. Methodologies using multiples or discounted cash flows are likely to be inappropriately subjective where earnings are very low. An absence of relevant industry peers will often preclude the application of the Industry Valuation Benchmarks method. The Replacement Cost Approach is likely to result in a misleadingly conservative valuation of the typical companies within the current unlisted portfolio, where financial net assets are less important than intangible technological assets. The policy, however, recognises that the robustness of a transaction based valuation will erode as the length of time from the relevant transaction increases. Additionally, the background to the transaction must be considered. In these cases, alternative techniques consistent with IPEV guidelines may have to be employed. The unlisted investments are valued according to a three monthly cycle of measurement dates. The fair value of the unlisted investments will be reviewed before the next scheduled three monthly measurement date on the following occasions: -  At the year end and half year end of Scottish Mortgage; and -  Where there is an indication of a change in fair value as defined in the IPEV guidelines (commonly referred to as 'trigger' events).
7.	The bank loans falling due within one year are a US$200 million revolving loan with National Australia Bank Limited ('NAB'), a US$165 million revolving loan with The Royal Bank of Scotland ('RBS') and a US$85 million fixed rate loan with RBS (31 March 2016 - US$200 million fixed rate loan with NAB, a US$165 million revolving loan with RBS and a US$50 million fixed rate loan with State Street Bank and Trust Company ('State Street')). There are no bank loans falling due in more than one year (31 March 2016 - US$85 million fixed rate loan with RBS). During the period the US$200 million fixed rate loan with NAB was repaid and replaced with a  US$200 million revolving loan with NAB and the US$50 million fixed rate State Street loan was repaid on expiry.
8.	The fair value of the borrowings at 30 September 2016 was £555,823,000 (31 March 2016 - £553,646,000).
9.		At  30 September 2016 Number of shares	At 31 March 2016 (audited) Number of shares
	Share capital: Ordinary shares of 5p each
	Allotted, called up and fully paid	1,311,719,485	1,312,524,485
	Treasury shares	110,011,395	109,206,395
		1,421,730,880	1,421,730,880
	In the six months to 30 September 2016, the Company sold 6,200,000 ordinary shares from treasury at a premium to net asset value raising net proceeds of £16,713,000 (year to 31 March 2016 - 68,100,000 shares sold from treasury). At 30 September 2016 the Company had authority to issue or sell from treasury a further 130,152,448 ordinary shares. In the six months to 30 September 2016 the Company bought back 7,005,000 ordinary shares into treasury at a total cost of £19,558,000. In the year to 31 March 2016 a total of 1,250,000 ordinary shares were bought back into treasury at a total cost of £3,199,000. At 30 September 2016 the Company had authority to buy back a further 193,072,120 ordinary shares.

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

10.	Transaction costs on acquisitions within the portfolio amounted to £156,000 (30 September 2015 - £230,000) and transaction costs on sales amounted to £221,000 (30 September 2015 - £232,000). These costs are included in the book cost of acquisitions and in the net proceeds of disposals.
Shareholders will be notified on or around 14 November 2016 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, unlisted investments risk, regulatory risk, custody and depositary risk, operational risk, premium/discount volatility, leverage risk and political risk. An explanation of these risks and how they are managed is set out on pages 8 and 9 of the Company's Annual Report and Financial Statements for the year to 31 March 2016 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 £144 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 13 November 2016).

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.

3 November 2016

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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