Scottish Mortgage Investment Trust Annual Results

RNS Number : 0620F

Scottish Mortgage Inv Tst PLC

15 May 2017

 

RNS Announcement: Annual Results

Scottish Mortgage Investment Trust PLC

Legal Entity Identifier: 213800G37DCS3Q9IJM38

Results for the year to 31 March 2017

NAV*	38.1%
Share Price*	40.9%
Benchmark*†	33.1%

*      Source: Morningstar, total return. See disclaimer at the end of this announcement.

†      Benchmark: FTSE All-World index (in sterling terms)

The following is the Annual Results Statement for the year to 31 March 2017 which was approved by the Board on
12 May 2017.

Chairman's Statement

Somewhat breaking with convention for statements of this kind, I would like to open by saying some words about my predecessor as Chairman of Scottish Mortgage, Sir Donald Mackay, who died last November at the age of 79.  Sir Donald was a remarkable man, whose intelligence and acumen were appreciated by governments and businesses alike.  His contribution to the development of this Company was profound, for it was largely under his watch that the Managers were encouraged to pay less attention to benchmarks and what their competitors were up to, and spend more time following their investment beliefs, with greater freedom to back businesses anywhere in the world likely to benefit from the transformational changes we are experiencing, and thus with the potential to deliver exceptional returns for our shareholders. 

As I hope is clear to all, the results have been excellent: we have for some time been the UK's largest conventional investment trust, in March we were admitted to the FTSE 100 index, and our investment performance bears comparison with the very best.  Although Sir Donald stepped down at the end of 2009, much of what has since been achieved at Scottish Mortgage can trace its roots to decisions taken under his stewardship. I am therefore delighted to report that the strong record of performance continues, especially when measured over five and ten year periods, both in terms of the share price and net asset value (NAV) returns.  The table below shows the five and ten year total returns for the Company to 31 March 2017, alongside the Association of Investment Companies (AIC) Global Sector average for comparison.

	Total Return %
	Five Years	Ten Years
NAV	146.6	236.3
Share Price	177.3	302.2
FTSE All-World Index	97.3	148.7
Global Sector Av - NAV	95.3	127.9
Global Sector Av - share price	109.6	141.9

Source: AIC/Morningstar

As it happens, the performance over the last financial year has also been very healthy, with a rise in the NAV per share of over 38% (on a total return basis). Whilst this is obviously pleasing to shareholders, I wish to highlight the importance of judging Scottish Mortgage on the basis of its long term approach.  However good the 12 month figures, I would urge shareholders to focus on the five and ten year performance record, as this is the test which your Board feels best represents the Managers' success or otherwise in following the stated investment policy of the Company. Over any given twelve month period performance may be at least as much due to the fluctuating obsessions of broader markets or geopolitics as any change in the businesses underlying the investments; in the past year, to take one example, performance was flattered by the devaluation of sterling. It is only over the longer term that the impact of investing in individual companies can be said to come to the fore.

Earnings and Dividends

As we experienced in the previous financial year, our income for the period has fallen as the companies in the portfolio have found more productive uses for their capital than returning it to shareholders.  This year's earnings per share were 1.07p, down 36% on 2015/16.

The Company's investment objective is to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. The Managers of Scottish Mortgage have been relentless in pursuing this growth focused investment mandate.  The Board believes this clarity of proposition and purpose is valued by shareholders. The Board therefore has no desire to deflect the Managers from their focus on finding the best growth companies of the future, and encourages them not to dilute their approach by investing in companies which do not fit this objective, in order to pursue a secondary goal of income production.

Whilst the stated investment objective explicitly provides for both capital and income growth, shareholders will be aware from earlier Annual Reports and other statements that the clear expectation should be that this balance will be heavily in favour of capital appreciation over the long term, in line with this growth focused approach. Yet the Board also acknowledges that many of our shareholders appreciate even the modest income component of the total return from their Scottish Mortgage holding.

We are recommending an increased final dividend, providing a total distribution for the year of 3.00 pence per share (2015/16: 2.96p), an increase of just over 1%.  In order to achieve this, given the low level of income in the portfolio, it will be necessary to utilise most of the remaining revenue reserve which, once the final dividend is approved and paid, will stand at just over 0.5 pence per share.

The Board takes this opportunity to repeat the guidance given earlier as to its intentions regarding the future payment of dividends by the Company. Shareholders have already granted the Company the power to pay dividends from capital profits but, thanks to the revenue reserve, to date these have not been needed.  Absent a significant (and unexpected) uplift in income from the portfolio, next year the Board will be obliged either to cut the dividend, or to make use of its power to continue to pay a comparable dividend, supplemented from capital profits as well as the remainder of the revenue reserve.  In view of the explicit dividend growth component of the Company's investment objective, the Board wishes to make clear to shareholders that it would be willing to make such distributions from capital profits, in order to sustain or modestly increase our dividend, provided that the Board is of the view that the total returns being earned by the Company over the long run justify this.  This policy was set out in some detail in my Statement last year.

Low Cost

For the year to 31 March 2017, Scottish Mortgage's "Ongoing Charges Ratio" (OCR) fell to 0.44%, down from 0.45% the previous year. Ensuring that Scottish Mortgage has one of the lowest cost ratios in the sector remains an important competitive advantage for the Company, affording a clear and direct benefit to our shareholders. The Board and Baillie Gifford continually work together in this area and in March 2017 all parties were delighted to announce the introduction of a new tiered fee scale, with effect from 1 April 2017. The annual management charge (AMC) will continue to be 0.3% on the first £4 billion of assets under management, but will fall to 0.25% thereafter.  As a result, provided the assets of the Company remain over £4 billion, this offers the prospect of further reductions in the OCR for the coming year and into the future.

Liquidity Policy

The Board believes that, just as lowering the ongoing charges for the Company is to the long term benefit of all shareholders, so too is lessening the market impact of trading in its shares. Such transactional friction is often an unseen cost to shareholders, which is mitigated by good levels of liquidity in the market.  The Board has adopted a robust liquidity policy for some time now, to lessen the impact of large trading imbalances between buyers and sellers, by the issuance or repurchasing of the Company's shares, as appropriate. This helps to prevent Scottish Mortgage's shares from moving to a substantial premium or discount to the underlying NAV.

In furtherance of this policy, during the year the Company bought back into treasury just over 7 million shares, and sold more than 53 million shares from treasury at a premium to the net asset value. The net result of these operations was an increase in the Company's share capital of just under £155 million - a slightly lower number than last year, but large in comparison to most other investment companies in a period which in general saw a paucity of secondary issuance. The Directors will seek to renew the necessary authorities from shareholders at the Company's Annual General Meeting (AGM) to facilitate the continuance of this policy.  Full details of the Company's liquidity policy may be found in the Company's Annual Report and Financial Statements.

Gearing and Borrowing Policy

The Board of Scottish Mortgage remains committed to the strategic use of borrowings, in the belief that it is in the long term interests of shareholders to be geared into prospective long run equity market returns.  The Board views the capacity to use debt to enhance shareholder returns as one of the principal advantages of the investment trust structure. In line with the long term approach taken, no attempt is made to time short term market moves through tactical shifts in the level of gearing. As assets in the portfolio have risen on the back of strong performance, we have allowed the relative level of gearing to fall slightly, and it stood at a modest 9% at the financial year end. 

For some months, we have been following developments in the market for fixed interest rate sterling debt, realising that we had the opportunity to lock in to long term borrowing arrangements which reflect the historically low interest rate environment which prevails. In early April 2017, the Company announced that it had raised a total of £125 million in long term, fixed rate, senior, unsecured private placement notes, denominated in sterling through the private placement debt market. These notes form part of the existing borrowing facilities for the Company and do not imply any change to the overall level of indebtedness of the Company; they are simply a switch from short term, variable interest rate debt, to instruments which offer us a fixed cost of financing over the next 25 or so years. The Board decided to undertake this transaction at what the Company believes to be attractive pricing levels, with a blended rate of just over 3% per annum, in the strong belief that this should enable us to enhance shareholder returns over the long term. Most funds have already been drawn down, but one tranche will be not be accessed until the maturity in 2020 of a £20 million debenture arranged in the 1980s, on which we pay interest at 14% per annum.
 

Corporate Broker

The Company conducted a review of its corporate broking arrangements as part of the continuing process of revisiting our relationships with all third party providers. Five firms, chosen by the Board, presented to the Company Secretaries to be evaluated against a framework set out by the Board. Two of these - one of which was our incumbent broker, Cenkos - were then selected to present to the Board.  The result was a decision to extend the engagement of Cenkos and to broaden the mandate by appointing Jefferies Hoare Govett as joint broker to the Company.

Scottish Mortgage is now of a scale where the appointment of joint brokers is the norm and I hope that the new arrangement will build on the excellent work which Cenkos has done over the years to broaden the market for our shares and bring them to the attention of new buyers.  We believe that the additional resources available to us from Cenkos and Jefferies working in tandem will bring significant benefit to the Company. The new arrangement took effect from 1 April 2017.

AGM and Shareholder Engagement

The AGM will be held in Edinburgh at the Merchants' Hall, at 4.30pm on 29 June 2017. The joint managers of the Company, James Anderson and Tom Slater, will make a presentation to shareholders on the investments, and take questions.  I do hope you will be able to attend.

The Board and Managers are keen to ensure that all shareholders have a clear understanding of the investment approach taken for the Company.  One of the best ways to do this is through hearing directly from those involved. In recent years the proportion of the Company's share register represented by individual shareholders has grown, particularly as more savers have invested through platforms such as that of Baillie Gifford Savings Management Limited. Last year I highlighted that the Managers intended to hold an event in London specifically aiming to cater for shareholders who are unable to travel to Edinburgh for the AGM and who would otherwise find it difficult to have an opportunity to ask questions of their Managers.  This event proved so popular and successful that the Managers have already held another such event in Birmingham in March of this year and have a further London based Investor Forum scheduled on 22 June.

There are plans to hold more of these Scottish Mortgage Investor Forums across the country over time. I would strongly encourage all shareholders to look at the further details given on the Company's website: www.scottishmortgageit.com with a view to attending.

Investment Strategy

As has been the case for a number of years, the statement of the Managers' Core Investment Beliefs is included within the Annual Report and Financial Statements. The Board continues to believe that one of the most valuable aspects of Scottish Mortgage is the consistency of its approach. Further, the long term investment perspective adopted by the Managers is a clear differentiator in a crowded field. Many claim to adopt a similar strategy, but few have consistently lived up to its challenges in the way that the Managers of Scottish Mortgage have done.

The Board strongly believes that investment risk is a function of the investment time horizon chosen. Over a period of years, investment risk is not defined by movements relative to an index composed of the aggregate performance of a broad and somewhat indiscriminate pool of possible investments, but by the prospect of permanent destruction of investment capital through poor investment decisions.

Unlisted Investments

Last year, we were given permission by our shareholders to hold up to 25% of our assets in unquoted companies, but I explained at the time that your Board sees this as a limit, not a target.  The Managers' report deals in some detail with developments in this sector, and your Board continues to view this initiative with enthusiasm and a route to gaining access to promising companies well before they have any need to access public equity markets. The level of the Company's exposure to unlisted investments at the year end (13%) has not changed significantly over the 12 months (11.8% as at 31 March 2016).

Board Changes and Outlook

The world can and does change and sometimes this happens at a faster rate and is more significant than at others. It would be easy to focus on a number of political risks, from President Trump's unpredictable approach to policy making, to questions over North Korea's true intentions, to the escalation of the troubles in the Middle East, but the task of this Board is to consider the outlook in the context of the portfolio of Scottish Mortgage. In doing so it is important to focus on what will actually make a significant difference to the long run prospects of the companies in which the Managers invest, and to challenge the Managers as to the importance of these factors.

The flexibility of the investment policy of Scottish Mortgage is valuable in this regard, as it allows the Managers to go anywhere in the world to find opportunities and invest in any type of business. The Board views this flexibility as key to the longevity of the success of this investment strategy.  Further, the stock picking approach of the Managers, focused on the long term fundamental characteristics of businesses, tends to favour the selection of those companies with a structural element to their growth, which are aiming to provide what their customers want or need. This should offer the potential for durable growth.

The pace of development and technological change not only represents a huge opportunity to some businesses, but is equally a significant threat to the existence of some of the index incumbents who have failed to invest to adapt to the transformations these technologies are bringing.  If true investment risk is the permanent destruction of capital, the Board believes that not forcing the Managers to hold some of those companies which seem under greatest long term threat from such changes, in the name of diversification, is also beneficial for the long term value creation for shareholders of Scottish Mortgage.

Having started this statement by talking about my predecessor, I will conclude by saying a few words about succession.  After some 16 years on this Board, I feel that it is time to move on and I have therefore decided not to stand for re-election to the Board at the AGM in June.  Following a process led through the Nomination Committee by our Senior Independent Director, Professor John Kay, the Board was unanimous in supporting Fiona McBain as our new Chairman and it is proposed that she will take over from me following the AGM.  Fiona has recently retired as Chief Executive of Scottish Friendly and in her eight years with Scottish Mortgage has proved to be a strong contributor to the Board.  

In closing, I would like to say what a privilege it has been for me to have served on the Board of Scottish Mortgage since 2001 and in the chair since the end of 2009. I joined in the immediate aftermath of 9/11, and we were immediately tested by the fallout from that atrocity, followed by the Iraq War and the Lehman crisis. But, for those who knew how to spot them, there were investment opportunities even in the most challenging times: sixteen years ago Facebook had not been invented but today is used by more than a quarter of the world's population, and Apple was struggling to survive, yet today it is by a large margin the world's most valuable company; all our Board papers are delivered via its ubiquitous iPad, a device which was launched in 2010! Throughout this period of extraordinary change I have been impressed by the capacity of the Managers to remain calm in stormy waters, to retain their faith in the long term value of equities, and to seek out and hold the ones that matter.  They have shown repeatedly that they understand better than almost anyone else the long term changes being experienced in investment markets, with the creation of huge pools of wealth from sectors which did not even exist 20 years ago, and the concomitant destruction of value in many of our more traditional industries. 

Thanks to the skills of the investment Managers, I leave Scottish Mortgage as the largest conventional investment trust, a constituent of the FTSE 100 index with a market capitalisation of over £5 billion, offering one of the lowest OCRs in the business and with an investment record which, while set out in sanitised detail elsewhere in the Annual Report and Financial Statements, I would simply describe as stellar.

John Scott

Chairman

12 May 2017

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

Income statement

	For the year ended 31 March 2017			For the year ended 31 March 2016
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	1,354,245	1,354,245	-	(6,647)	(6,647)
Currency losses	-	(42,958)	(42,958)	-	(7,212)	(7,212)
Income (note 2)	27,796	-	27,796	32,910	-	32,910
Investment management fee	(3,558)	(10,674)	(14,232)	(2,881)	(8,642)	(11,523)
Other administrative expenses	(3,544)	-	(3,544)	(3,176)	-	(3,176)
Net return before finance costs and taxation	20,694	1,300,613	1,321,307	26,853	(22,501)	4,352
Finance costs of borrowings	(4,837)	(14,510)	(19,347)	(4,568)	(13,704)	(18,272)
Net return on ordinary activities before taxation	15,857	1,286,103	1,301,960	22,285	(36,205)	(13,920)
Tax on ordinary activities	(1,721)	-	(1,721)	(857)	-	(857)
Net return on ordinary activities after taxation	14,136	1,286,103	1,300,239	21,428	(36,205)	(14,777)
Net return per ordinary share (note 4)	1.07p	97.31p	98.38p	1.66p	(2.81p)	(1.15p)

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.  

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

 

Balance sheet

	At 31 March 2017 £'000	At 31 March 2016 £'000
Fixed assets
Investments held at fair value through profit or loss	5,298,338	3,922,124
Current assets
Debtors	16,293	4,051
Cash and cash equivalents	76,643	43,973
	92,936	48,024
Creditors
Amounts falling due within one year (note 6)	(367,973)	(303,486)
Net current liabilities	(275,037)	(255,462)
Total assets less current liabilities	5,023,301	3,666,662
Creditors
Amounts falling due after more than one year	(149,710)	(209,218)
	4,873,591	3,457,444
Capital and reserves
Called up share capital	71,086	71,086
Capital redemption reserve	19,094	19,094
Capital reserve	4,754,597	3,313,502
Revenue reserve	28,814	53,762
Shareholders' funds	4,873,591	3,457,444
Net asset value per ordinary share (after deducting borrowings at book)	358.7p	263.4p
Net asset value per ordinary share (after deducting borrowings at fair value) (note 7)	354.6p	259.2p
Net asset value per ordinary share (after deducting borrowings at par)	359.0p	263.8p
Ordinary shares in issue† (note 8)	1,358,569,485	1,312,524,485

 

Statement of changes in equity

For the year ended 31 March 2017

	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	-	-	1,286,103	14,136	1,300,239
Ordinary shares bought back into treasury (note 8)	-	-	(19,558)	-	(19,558)
Ordinary shares issued from treasury (note 8)	-	-	174,550	-	174,550
Dividends paid during the year (note 5)	-	-	-	(39,084)	(39,084)
Shareholders' funds at 31 March 2017	71,086	19,094	4,754,597	28,814	4,873,591

For the year ended 31 March 2016

	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	-	-	(36,205)	21,428	(14,777)
Ordinary shares bought back into treasury (note 8)	-	-	(3,199)	-	(3,199)
Ordinary shares issued from treasury (note 8)	-	-	179,873	-	179,873
Dividends paid during the year (note 5)	-	-	-	(37,671)	(37,671)
Shareholders' funds at 31 March 2016	71,086	19,094	3,313,502	53,762	3,457,444

*      The Capital Reserve balance at 31 March 2017 includes investment holding gains of £2,647,822,000 (31 March 2016 - gains of £1,533,836,000).

 

Cash flow statement

	Year to 31 March 2017 £'000               £'000		Year to 31 March 2016 £'000               £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	1,301,960		(13,920)
Net (gains)/losses on investments	(1,354,245)		6,647
Currency losses	42,958		7,212
Finance costs of borrowings	19,347		18,272
Overseas withholding tax refunded	124		935
Overseas withholding tax incurred	(1,755)		(1,792)
Changes in debtors and creditors	443		(216)
Cash from operations		8,832		17,138
Interest paid		(19,484)		(18,422)
Net cash outflow from operating activities		(10,652)		(1,284)
Cash flows from investing activities
Acquisitions of investments	(723,418)		(619,851)
Disposals of investments	686,952		445,699
Realised currency gain	6,927		3,848
Net cash outflow from investing activities		(29,539)		(170,304)
Equity dividends paid	(39,084)		(37,671)
Ordinary shares bought back into treasury	(19,574)		(3,184)
Ordinary shares sold from treasury	169,422		179,873
Bank loans repaid	(37,903)		(111,963)
Bank loans drawn down	-		111,963
Net cash inflow from financing activities		72,861		139,018
Increase/(decrease) in cash and cash equivalents		32,670		(32,570)
Cash and cash equivalents at start of period		43,973		76,543
Cash and cash equivalents at end of period*		76,643		43,973

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

 

Thirty largest holdings and twelve month performance

Name	Business	Fair Value at 31 March 2017 £'000	% of total assets	Absolute performance† %	Contribution to absolute performance# %	Fair value 31 March 2016 £'000
Amazon.com	Online retailing and cloud computing	510,086	9.5	71.7	7.6	330,117
Tesla Motors	Electric cars, autonomous driving and   solar energy	366,984	6.8	40.0	2.5	185,552
Illumina	Biotechnology equipment	318,103	5.9	21.0	1.9	291,722
Tencent Holdings	Internet services	308,730	5.7	61.8	3.6	190,964
Inditex	International clothing retailer	297,098	5.5	22.8	1.7	231,567
Alibaba Group	Online retail	273,626	5.1	56.8	2.7	164,129
Facebook	Social networking site	257,167	4.8	43.1	2.3	179,697
Baidu	Online search engine	237,505	4.4	3.9	0.1	228,621
Alphabet	Holding company for Google and   associated ventures	199,136	3.7	28.0	1.3	155,518
Ferrari	Luxury automobiles	148,851	2.8	109.4	1.9	27,788
Ctrip.com	Travel agent	131,093	2.4	28.0	0.5	35,752
BASF	Chemicals	118,852	2.2	56.6	1.3	78,624
ASML	Lithography	110,439	2.1	52.1	0.7	42,067
Zalando	International online clothing retailer	108,578	2.0	41.8	0.8	68,231
Atlas Copco	Engineering	107,723	2.0	65.8	1.4	87,657
Kering	Luxury goods producer and retailer	104,970	1.9	70.4	1.2	86,183
Netflix	Subscription service for TV shows and   movies	98,605	1.8	66.2	1.0	36,264
Kinnevik	Investment company	90,981	1.7	21.8	0.4	68,867
Housing Development Finance   Corporation	Indian mortgage provider	78,537	1.5	61.5	0.8	42,009
Intuitive Surgical	Surgical robots	75,393	1.4	45.8	0.7	67,644
Bluebird Bio Inc	Provider of biotechnological products   and services	68,486	1.3	141.3	1.0	22,032
Rolls-Royce Group	Aerospace equipment	63,002	1.2	12.4	0.2	56,982
Workday	Enterprise information technology	60,431	1.1	24.6	0.2	26,714
Grail Inc Series B Pref. u	Clinical stage biotechnology company	59,978	1.1	(0.5)*	-*	-
Nvidia	Visual computing	51,904	1.0	105.1*	0.4*	-
Prudential	International insurance	51,845	1.0	33.1	0.5	76,256
Svenska Handelsbanken	Banking	48,280	0.9	23.9*	0.2*	-
Novozymes	Enzyme manufacturer	47,104	0.9	2.7	0.2	54,045
Renishaw	Electronic equipment	45,076	0.8	72.7	0.6	26,571
You & Mr Jones Class A Units u	Digital advertising	45,064	0.8	29.5	0.3	34,787
		4,483,627	83.3

†      Absolute performance (in sterling terms) has been calculated on a total return basis over the period 1 April 2016 to 31 March 2017.

#      Contribution to absolute performance (in sterling terms) has been calculated to illustrate how an individual stock has contributed to the overall return. It is influenced by both share price performance and the weighting of the stock in the portfolio, taking account of any purchases or sales over the period.

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

^u      Denotes unlisted investment

Source: Baillie Gifford/StatPro. See disclaimer at the end of this announcement.

Past performance is not a guide to future performance.

Distribution of total assets

		At 31 March 2017 %	At 31 March 2016 %
North America		47.9	46.4
South America		0.5	0.4
Europe		30.3	33.7
	United Kingdom	4.4	8.6
	Eurozone	19.6	18.6
	Developed Europe (non euro)	5.9	5.8
	Rest of Europe	0.4	0.7
Africa and Middle East		0.4	0.4
Asia		20.9	19.1
	China	18.5	16.9
	India	2.1	1.7
	Japan	-	0.2
	Rest of Asia	0.3	0.3
		100.0	100.0

Notes to the financial statements

1.	The Financial Statements for the year to 31 March 2017 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out below which are unchanged from the prior year and have been applied consistently. The Company has early adopted the amendments to Section 34 of FRS 102 regarding fair value hierarchy disclosures.
2.	Income			Year to 31 March 2017 £'000		Year to 31 March 2016 £'000
	Income from investments			27,752		32,673
	Other income			44		237
				27,796		32,910
3.	Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Investment Management Agreement is terminable on not less than six months' notice. The annual management fee for the year to 31 March 2017 was 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes), calculated quarterly. With effect from 1 April 2017 the annual management fee is 0.30% on the first £4 billion of total assets less current liabilities (excluding short term borrowings for investment purposes) and 0.25% thereafter, calculated quarterly.
4.	Net Return per Ordinary Share			Year to 31 March 2017 £'000		Year to 31 March 2016 £'000
	Revenue return on ordinary activities after taxation			14,136		21,428
	Capital return on ordinary activities after taxation			1,286,103		(36,205)
	Total net return			1,300,239		(14,777)
	Weighted average number of ordinary shares in issue			1,321,667,362		1,290,467,928
	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) in issue during the year. There are no dilutive or potentially dilutive shares in issue.
5.	Ordinary Dividends	2017	2016		2017 £'000		2016 £'000
	Amounts recognised as distributions in the year:
	Previous year's final (paid 4 July 2016)	1.58p	1.55p		20,795		19,758
	Interim (paid 2 December 2016)	1.39p	1.38p		18,289		17,913
		2.97p	2.93p		39,084		37,671
	Also set out below are 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 £14,136,000 (2016 - £21,428,000).

Notes to the condensed financial statements (ctd)

5.	Ordinary Dividends (Ctd)
		2017	2016	2017 £'000	2016 £'000
	Dividends paid and payable in respect of the year:
	Interim dividend per ordinary share (paid 2 December 2016)	1.39p	1.38p	18,289	17,913
	Proposed final dividend per ordinary share (payable 3 July 2017)	1.61p	1.58p	21,873	20,738
		3.00p	2.96p	40,162	38,651
	If approved the final dividend will be paid on 3 July 2017 to all shareholders on the register at the close of business on 9 June 2017. The ex-dividend date is 8 June 2017. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 12 June 2017.
6.	Creditors falling due within one year include drawings under the following borrowing facilities: Borrowing facilities at 31 March 2017 A 1 year US$165 million revolving loan facility has been arranged with The Royal Bank of Scotland plc. A 2 year US$200 million revolving loan facility as been arranged with National Australia Bank Limited. A 3 year US$85 million loan facility has been arranged with The Royal Bank of Scotland plc. At 31 March 2017 drawings were as follows: The Royal Bank of Scotland plc       US$165 million (revolving facility) at an interest rate (at 31 March 2017) of 1.525%                                                                per annum.                                                                US$85 million at an interest rate of 1.945% per annum. National Australia Bank                     US$200 million (revolving facility) at an interest rate (at 31 March 2017) of 1.792%                                                                per annum. At 31 March 2016 drawings were as follows: The Royal Bank of Scotland plc       US$165 million (revolving facility) at an interest rate (at 31 March 2016) of                                                                        1.1169% per annum.                                                                US$85 million at an interest rate of 1.945% per annum (included in amounts due                                                                after more than one year). State Street Bank and Trust Company  US$50 million at an interest rate of 1.70% per annum. National Australia Bank Limited             US$200 million at an interest rate of 1.43% per annum. During the year the US$50 million 2 year loan with State Street was repaid. The US$165 million 1 year revolving loan with The Royal Bank of Scotland plc ('RBS') was refinanced with a US$165 million 1 year revolving loan from RBS. The US$200 million 2 year loan with National Australia Bank ('NAB') was repaid and refinanced with a revolving US$200 million 2 year loan from NAB. Subsequent to the year end on 6 April 2017 the Company issued the following private placement unsecured loan notes: ¾    £45 million at a coupon of 3.05% maturing on 7 April 2042. ¾    £30 million at a coupon of 3.30% maturing on 6 April 2044. ¾    £30 million at a coupon of 3.12% maturing on 6 April 2047. A further unsecured loan note was agreed for funding on 30 September 2020 to refinance the £20 million 8-14% stepped interest debenture stock maturing on 30 September 2020: ¾    £20 million at a coupon of 3.65% maturing on 6 April 2044. Additionally, the US$165 million 1 year revolving loan with RBS was repaid on 11 April 2017 and replaced with a US$40 million 1 year revolving loan with RBS.

Notes to the condensed financial statements (ctd)

7.	The fair value of borrowings at 31 March 2017 was £566,251,000 (2016 - £553,646,000). Net asset value per share (after deducting borrowings at fair value) was 354.6p (2016 - 259.2p).
8.			2017 Number of Shares	2016 Number of shares
	Share capital: Ordinary shares of 5p each
	Allotted, called up and fully paid		1,358,569,485	1,312,524,485
	Treasury shares		63,161,395	109,206,395
	Total		1,421,730,880	1,421,730,880
	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 2017 a total of 7,005,000 (2016 - 1,250,000) ordinary shares with a nominal value of £350,000 (2016 - £63,000) were bought back at a total cost of £19,558,000 (2016 - £3,199,000) and held in treasury.  At 31 March 2017 the Company had authority to buy back a further 193,072,120 ordinary shares. Under the provisions of the Company's Articles the share buy-backs were funded from the capital reserve. In the year to 31 March 2017, the Company sold 53,050,000 ordinary shares from treasury at a premium to net asset value, with a nominal value of £2,653,000 raising net proceeds of £174,550,000 (31 March 2016 - 68,100,000 ordinary shares raising net proceeds of £179,873,000). At 31 March 2017 the Company had authority to issue or sell from treasury a further 83,302,448 ordinary shares.
9.	Transaction costs on purchases amounted to £261,000 (2016 - £275,000) and transaction costs on sales amounted to £312,000 (2016 - £325,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; the reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
11.	The Annual Report and Financial Statements will be available on the Managers' website www.scottishmortgageit.com‡ on or around 26 May 2017.

‡    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.

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

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

Scottish Mortgage is managed by Baillie Gifford, the Edinburgh based fund management group with around £163 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 11 May 2017).

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.

12 May 2017

For further information please contact:

Catharine Flood, Baillie Gifford & Co

Tel: [phone]

James Budden, Baillie Gifford & Co  

Tel: [phone] or 07507 201208

Roland Cross, Director, Four Broadgate

Tel: [phone] or 07831 401309

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