Annual Financial Report

Baillie Gifford UK Growth Trust PLC

04 July 2024

 

Baillie Gifford UK Growth Trust plc

Legal Entity Identifier: 549300XX386SYWX8XW22

Regulated Information Classification: Annual Financial and Audit Reports

Annual Report and Financial Statements

Further to the statement of audited annual results announced to the Stock Exchange on 14 June 2024, Baillie Gifford UK Growth Trust plc ("UK Growth" or "the Company") announces that the Company's Annual Report and Financial Statements for the year ended 30 April 2024, including the Notice of Annual General Meeting, has today been posted to shareholders and submitted electronically to the National Storage Mechanism where it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

It is also available on the UK Growth page of the Baillie Gifford website at: bgukgrowthtrust.com (as is the statement of audited annual results announced by the Company on 14 June 2024).

Responsibility Statement of the UK Growth Directors in respect of the Annual Financial Report

The UK Growth Directors confirm that, to the best of their knowledge:

- the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company;

- the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties they face; and

- the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Principal and Emerging Risks relating to the Company

As explained on pages 55 and 56 of the Annual Report and Financial Statements there is an ongoing process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, regulatory compliance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below. There have been no significant changes to the nature of the principal risks during the year. On pages 34 to 37 of the Annual Report and Financial Statements, an upwards arrow, dash or downwards arrow has been included to show if the risk level has increased, not changed or decreased since it was reported in last year's Annual Report and Financial Statements.

The Board considers heightened macroeconomic and geopolitical concerns to be factors which exacerbate existing areas of risk as categorised and further explained below.

What is the risk?	How is it managed?	Current assessment of risk
Financial risk: The Company's assets consist predominately of listed securities and its principal and emerging risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 18 on pages 87 to 91 of the Annual Report and Financial Statements.	The Board has, in particular considered the impact of heightened market volatility due to macroeconomic factors such as higher inflation and interest rates and geopolitical concerns, including the Russia-Ukraine conflict. To monitor and, where possible, mitigate these risks the Board considers at each meeting various portfolio metrics including individual stock performance, the composition and diversification of the portfolio by sector, purchases and sales of investments and the top and bottom contributors to performance. The Managers provide rationale for stock selection decisions. A strategy meeting is held annually.	This risk increased due to increased market volatility as a result of heightened geopolitical concerns and macroeconomic factors, as well as the UK market being seemingly out of favour with investors.
What is the risk?	How is it managed?	Current assessment of risk
Investment strategy risk: Pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or the ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their net asset value.	To mitigate this risk, the Board regularly reviews and monitors: the Company's objective and investment policy and strategy; the investment portfolio and its performance; the level of discount/premium to net asset value at which the shares trade; and movements in the share register and raise any matters of concern with the Managers.	This risk increased as the market's appetite for growth stocks, typically held by the Company, declined during the recent period of heightened macroeconomic and geopolitical concern.
What is the risk?	How is it managed?	Current assessment of risk
Discount risk: The discount/premium at which the Company's shares trade relative to its net asset value can change. The risk of a widening discount is that it may undermine investor confidence in the Company.	To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.	The Company's shares continued to trade at a discount. In the year to 30 April 2024, the Company bought back 3,841,977 shares.
What is the risk?	How is it managed?	Current assessment of risk
Climate and governance risk: Perceived problems on Environmental, Social and Governance ('ESG') matters in an investee company could lead to that company's shares being less attractive to investors, adversely affecting its share price, in addition to potential valuation issues arising from any direct impact of the failure to address the ESG weakness on the operations or management of the investee company (for example in the event of an industrial accident or spillage). Repeated failure by the Investment Manager to identify ESG weaknesses in investee companies could lead to the Company's own shares being less attractive to investors, adversely affecting its own share price.	This is mitigated by the Investment Managers' thorough ESG stewardship and engagement policies, which are available to view on the Managers' website: bailliegifford.com and have been reviewed and endorsed by the Company, and are fully integrated into the investment process as well as the extensive upfront and ongoing due diligence which the Investment Managers undertake on each investee company. This due diligence includes assessment of the risks inherent in climate change (see page 57 of the Annual Report and Financial Statements). The Directors have considered the impact of climate change on the Financial Statements of the Company and this is included in note 1 to the Financial Statements on page 79 of the Annual Report and Financial Statements.	The Investment Manager continued to employ strong ESG stewardship and engagement policies.
What is the risk?	How is it managed?	Current assessment of risk
Regulatory risk: Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the FCA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains.	To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.	All control procedures were working effectively.
What is the risk?	How is it managed?	Current assessment of risk
Custody and depositary risk: Safe custody of the Company's assets may be compromised through control failures by the Depositary, including breaches of cyber security.	To mitigate this risk, the Audit Committee receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's assured internal controls reports are reviewed by Baillie Gifford's Business Risk Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.	All control procedures were working effectively.
What is the risk?	How is it managed?	Current assessment of risk
Operational risk: Failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets.	To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Audit Committee reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board. The other key third party service providers have not experienced significant operational difficulties affecting their respective services to the Company.	All control procedures were working effectively.
What is the risk?	How is it managed?	Current assessment of risk
Leverage risk: The Company may borrow money for investment purposes (sometimes known as 'gearing' or 'leverage'). If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.	To mitigate this risk, all borrowing facilities require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The Company's investments are predominately in listed securities, at present, that are readily realisable. Further information on leverage can be found on page 103 and in the Glossary of terms and Alternative Performance Measures on pages 104 to 106 of the Annual Report and Financial Statements.	Whilst lenders' willingness to initiate and maintain lending facilities reduced during the year, the one year £30m revolving credit facility was replaced with another one year £30m revolving credit facility which expires in July 2024. Negotiations are underway to replace this facility.
What is the risk?	How is it managed?	Current assessment of risk
Political risk: Political change in areas in which the Company invests or may invest may have practical consequences for the Company.	Political developments are monitored and considered by the Board. The Board continues to assess the potential consequences for the Company's future activities including those that may arise from further constitutional change.	This risk increased as governments and consumers around the world continue to assess the impact of heightened geopolitical tensions.
What is the risk?	How is it managed?	Current assessment of risk
Cyber security risk: A cyber attack on Baillie Gifford's network or that of a third party service provider could impact the confidentiality, integrity or availability of data and systems.	To mitigate this risk, the Audit Committee reviews Reports on Internal Controls published by Baillie Gifford and other third party service providers. Baillie Gifford's Business Risk Department report to the Audit Committee on the effectiveness of information security controls in place at Baillie Gifford and its business continuity framework. Cyber security due diligence is performed by Baillie Gifford on third party service providers which includes a review of crisis management and business continuity frameworks.	This risk is seen as increasing due to recent indications that the continuation of geopolitical tensions could lead to cyber attacks. Emerging technologies, including AI, could potentially increase information security risks. In addition, service providers operate a hybrid approach of remote and office working, thereby increasing the potential of a cyber security threat.
Emerging risks: As explained on pages 55 and 56 of the Annual Report and Financial Statements, the Board has regular discussions on principal risks and uncertainties, including any risks which are not an immediate threat but could arise in the longer term. The Board considers that the key emerging risks arise from the interconnectedness of the global economy and the related exposure of the investment portfolio to external and emerging threats such as the societal and financial implications of an escalation of geopolitical tensions, cyber security risks including developing AI and quantum computing capabilities, new coronavirus variants or similar public health threats. The Board also notes that increased levels of government borrowing may result in an elevated level of interest rates and/or increased market volatility. This is mitigated by the Board discussing at each Board meeting economic and geopolitical factors and how these might impact the Company. The Board also considers the Investment Managers' close links to the investee companies and their ability to ask questions on contingency plans. The Investment Managers believe the impact of such events may be to slow the pace of growth rather than to invalidate the investment rationale over the long term. The Managers monitor certain emerging risks and have established a group to manage the response to any future events that might result in heightened levels of market volatility. Regular exercises are carried out to test the Managers' response to various scenarios.

Baillie Gifford & Co Limited

Company Secretaries

4 July 2024

 

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