Annual Financial Report

RNS Number : 7116S

Scottish Mortgage Inv Tst PLC

22 May 2009

 

Regulatory Announcement

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

ANNUAL REPORT AND ACCOUNTS 

Copies of the Annual Report and Accounts for the year ended 31 March 2009 have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Annual Report and Accounts for the year ended 31 March 2009 is also available on the Scottish Mortgage Investment Trust website at:

http://edg1.vcall.com/IR/EU002087/

The unedited full text of those parts of the Annual Report and Accounts for the year ended March 2009 which require to be published by DTR 4.1 is set out on the following pages. 

Baillie Gifford & Co

Company Secretaries

22 May 2009

CHAIRMAN'S STATEMENT

This has been a very difficult year for equity markets and Scottish Mortgage: net asset value per share and the share price both fell by 41% while the FTSE All World Index fell by 23% in sterling terms over the period. However, earnings were higher and the dividend has been increased. The pace and force of market events was extraordinary even in the context of Scottish Mortgage's hundred year history. The identification and assessment of companies from around the world that are capable of returning long term earnings growth is the strategic priority especially during periods of turbulent markets and economic crisis. 

A year ago it was evident that confidence within the Western financial system was failing in an alarming way but the crisis that followed was of an unexpected magnitude and historic in scale. Confidence in financial markets evaporated in a brutal fashion after the collapse of Lehman Brothers in September. The consequent dramatic and destructive impact on the real economy was global and not limited to the areas of operation of the mainly Western banks and institutions that had failed. 

While our portfolio had only a modest level of investment in Western financial companies, the large holdings which gave exposure to the long term trend of global growth suffered dramatic falls in value in the months between September and November. This, and the way in which many other holdings in the portfolio were marked down in an often apparently indiscriminate way, explains the fall in net asset value over the year. The extent of the fall was exacerbated by the level of gearing. 

Outside the three month period described, market conditions were relatively normal and this was reflected in less volatile and better absolute and relative performance during those months. However, markets gripped by fear and panic do not take into account a sensible, considered and rational long term view. Although the short term consequences may sometimes prove painful, the Board supports the Managers in a strategy that sticks to a long term view and focuses on the prospects of individual companies. The portfolio does not attempt to match the index and there will be periods of marked underperformance as well as outperformance as was the case during part of last year. As of 31 March 2009, the five year share price total return (capital and dividends) was 27% and the net asset value total return, 12%. By way of comparison, the FTSE All World Index total return over the same period has been 16%. While a period of high volatility will be natural in the aftermath of a shock such as the recent one, an improvement in the long term trend and an eventual return to economic normality can be expected. It is interesting to note that over six months to the end of April 2009 the share price rose by 82p, a 25% increase (over the same short period the benchmark index rose 5%). 

The Managers carefully reviewed the portfolio in the second half of the financial year in light of the rapid change in markets and the Board then made a strategic assessment of the impact of events. These are continuing processes but the broad conclusion to date is that the overall strategy to invest in equities for the long term on a global basis is appropriate given the increasingly global nature of economic activity and trade. A central strategic thesis that countries outside of the Western economic block will become increasingly, and possibly rapidly, influential appears strengthened not diminished. The drop in economic activity will obviously affect company earnings, especially this year, but the deterioration in operating conditions is not universal. While there are some companies in the portfolio where operating conditions have deteriorated significantly, a large number of the holdings continue to operate effectively and in many cases enjoy strengthened relative positions. Also, many financially sound companies are now trading on historically attractive valuations; those that survive this severe shock are likely to enjoy dominant positions for some years to come. The task of the Managers is to identify such companies. The Managers' Review gives a detailed investment perspective of the portfolio.

Gearing

As markets fell great care was taken to manage the level of gearing. This was achieved by not renewing some borrowing facilities when they expired and also by the early repayment of other bank borrowings. While it is painful to sell investments in such conditions, it was important to ensure in those highly unpredictable markets that gearing was not allowed to rise beyond agreed levels. At the financial year end, total assets were £1,398m and borrowings were £318m. Investments in equities totalled £1,283m. Gearing magnifies gains in rising markets and, conversely, losses in falling markets. Gearing and the associated strategic issues are discussed by the Board and Managers on a regular basis.

Earnings and Dividend

Earnings per share were 12.7p (9.8p in the previous year) and included an element of past years' recovered VAT and associated interest of 1.5p per share. Excluding the VAT repayment, underlying earnings were therefore 14% higher which is a noteworthy achievement in the context of wider markets and one which provides confidence in the underlying investments. 

A final dividend of 5.5p is proposed which will give a total of 12.3p for the year, an increase of 19% on the previous year's total of 10.3p. Stripping out the non-recurring VAT repayment, the underlying rate of dividend increase is 4.9% and well ahead of the 0.4% decrease in the Retail Price Index over the same period. 

The Board is firmly committed to returning an increasing dividend to shareholders and in the event of a temporary shortfall in earnings, the revenue reserve is available for this very purpose. Revenue reserves stand at 21p per share of which over 6.5p has been accumulated since 2000. 

The Centenary AGM

This year's AGM will be the Company's 100th and will be held in The Merchants' Hall, 22 Hanover Street, Edinburgh on Thursday 25 June 2009 at 4pm. At the meeting, the Managers will give a short presentation on the investments after which refreshments will be served. I hope that you will consider attending. Although the year just past has been extremely difficult, the Board and Managers are conscious that a 100 year record is significant as it underlines the enduring aims and encouraging resilience of the Trust's business. I am happy to report that a history of Scottish Mortgage has been commissioned and will be sent to all shareholders this year. 

The Board

During the year two new Directors of a very high calibre with diverse and extremely relevant experience were welcomed to the Board: Professor John Kay and Fiona McBain. Geoff Ball who joined the Board in 1983 will retire on the day of the AGM. The Company has been fortunate in its association with Mr Ball and as the current Chairman I would like to thank Geoff for his single-hearted commitment and outstandingly helpful contribution to Scottish Mortgage over the past twenty five years. 

Outlook

There is no denying that the outlook is uncertain, even more so than in an average year. As ever, within a wide range, many different outcomes are possible. 

Ironically, the crisis can yield opportunities: the financial impact has been highly destructive but it may yield a simpler, and healthier, structural model for banking and finance. Above all, the continued growth and increasing importance, and even dominance, of non-Western economies, especially China, represent a major opportunity for shareholders today. By historic coincidence, this echoes the prospect facing initial Scottish Mortgage subscribers in 1909; then it was the expansion of America that was to fuel an ensuing span of long term economic growth and technological advancement. Today, after the passage of 100 years, it is still the identification and subsequent performance of individual companies and the success of their management, or otherwise, that will dictate long term shareholder returns. 

Sir Donald MacKay
14 May 2009

Past performance is not a guide to future performance.

  MANAGERS' REVIEW

We have had three strategic investment contentions over the last five years. They have been that:

•    the rise of China (and to a lesser extent other emerging economies) will transform the global economic scene;

•    stockmarkets underestimate the power of technological innovation in exaggerated revulsion to the bubble of 1998-2000; and

•    the Western financial systems are dangerously flawed.

We sincerely believe that each of these three hypotheses have survived the extraordinary conditions of the last 12 months. Indeed we would argue that their explanatory power has only grown during this time of crisis. It has therefore thoroughly disturbed us that our shareholders have suffered so badly over the reporting period. We continue, however, to measure ourselves over rolling five year timeframes as an absolute minimum as we deeply believe that anything less is far more likely to encapsulate luck rather than skill. Even more dangerously, yearly assessment tends to endorse the pursuit of momentum in share prices rather than rewarding the gradual underlying value built by outstanding companies exploiting persistent opportunities. Therefore whilst we are sorry that the last year has been so tough (and damaging to our longer term record) we will only abandon our contentions and our stocks when their long-run prospects have deteriorated rather than when the dreadful mood of the market has hurt their immediate valuation. Unless the important facts change nor will our portfolio. We aim to be investors not speculators.

China

Twelve months ago China was suffering from a phase of economic overheating. Agricultural inflation, wage increases and property exuberance all needed to be dampened down. Government policy was aimed at accomplishing this. It succeeded. China was therefore enjoying a classic, traditional economic cycle of its own before the onset of the world financial crisis. Arguably we should have been paying even more attention to developments in China as the domestic stockmarket, for all its faults, indicated that first inflation and then the industrial and real estate slowdown were serious issues. 

Since the global financial crisis of last autumn China's structural strengths have, however, been seen in full relief. The contrast with the travails of the West as well as with less well-positioned developing nations is startling. China's dramatic monetary stimulus is already feeding through to renewed bank lending whilst the room for fiscal expansion has been exploited but far from exhausted. This appears to be translating into an early and dramatic recovery of the economy despite the much feared export decline. At present we would expect China to account for up to 150% of total world growth in 2009.

Whilst this response has been formidable both in scale and apparent success it is every bit as important for us to contemplate the long term implications of China's evolution. We do not wish to imply either that there are not severe challenges or that the Chinese Communist Party has discovered the eternal secrets of economic management. In the next year the banking system needs to ensure that the monetary stimulus is channelled into productive investment rather than speculation. Beyond this timeframe the need to shift the balance of the economy from exports to the internal market, from East to West, from the cities of the coast to the rural interior are major challenges. We would not despair that they can be accomplished. China has already delivered the world's largest car market over 20 years of progress and the world's largest internet user base over a decade. Sensible reforms to healthcare too seem more easily achieved than in America.

The challenge for us is to reflect the changing nature of the Chinese economy in our portfolio. The shift towards domestic consumption and away from exports and even a moderation in the use of commodities mean that exposure more often needs to be sought in Greater China's own companies rather more than has been our historic policy. With the considerable assistance of my Chinese colleague Wanyi Yao we are gradually embarking on this evolution as opportunities permit. Our holdings in Tencent, China Merchants Bank, and Baidu.com as well as in China Mobile should be seen in this light. With the burgeoning rapprochement between China and Taiwan, TSMC might appropriately be included in this list.  

Russia, Brazil and India

In the other key emerging markets for world growth the response to crisis has been less overwhelmingly successful. The most obvious casualty has been Russia. This has hurt our portfolio. The exaggerated appetite for debt finance displayed by many oligarchs and the large capital needs of the resource industry have been shown up. We do not think that these developments are insurmountable but they do moderate our prior enthusiasm. We have sold Norilsk Nickel where oligarch debt has opened the door to increased state machinations and cut back our position in Gazprom as current energy prices make the enormous investment programme problematic. We have no plans to make any further reductions.

We feel no such need for apology in the case of our substantial Brazilian holdings. The economy is enduring some current weakness but shows no signs of losing its fundamental balance. We are happy both to loan money to the Brazilian government (via our long term inflation protected bond holding) and to back the investment needs of Petrobras. Their remarkable oil discoveries in offshore Brazil seem to us to be much more significant than the wild oscillations of the spot oil price. The rewards for these projects are years ahead whilst the cost equation is improving as few apart from Petrobras are in a position to invest in such assets. To put it another way our enthusiasm for Petrobras is based on its own long term prospects not on a speculation about the course of monthly oil prices.

India shows encouraging signs of suffering less from the financial crisis than it did from the inflationary pressures and overheating of early last year. Our problem remains identifying attractive companies at reasonable prices. We admire the manner in which both Hero Honda (motorbikes) and HDFC (mortgage finance) are navigating their sectoral challenges.

Technology

Possibly the most puzzling experience of last year was the abject share price performance of our technology stocks in the autumn. This puzzles us because we can think of few companies that are in a better position to ride out the crisis. The industry in general, and the companies that we own in particular, tend to have extremely strong cash positions and are well used to deflationary trading conditions. Just as we were disturbed by their sharp declines so we are now pleased that there is every indication that the strengths of these businesses are being acknowledged. Indeed from Amazon to Google to Apple there are clear indications that both innovation and structural changes tend to be magnified in tough times and that these companies are actually thriving rather than merely surviving. Whilst the virtues of these three companies are gradually and variably being recognised by the markets there are still other stocks in related areas that we are increasingly enthused by as they remain out of investment favour. The principal example of this is Nintendo, which continues to churn out high returns and generate impressive cash flow by thinking differently about the gaming industry. We are delighted to continue to add to our holding as the market worries about exchange rates and monthly sales figures. Sadly we can find nothing else of similar attractions in the wastelands of the Japanese corporate sector. 

We maintain our belief in investing in leading alternative energy businesses. We can understand their weak showings over the last year as (unlike the companies above) they do need access to bank and project finance. Yet we do not think that their prospects and value has been destroyed by challenging but temporary circumstances. Indeed those with relatively strong financial and competitive advantages may well emerge from this downturn in even stronger positions than we had estimated. We certainly judge that this is the case for Vestas (wind) and First Solar (thin film) whilst we hope, with less confidence, that this remains so for its fellow solar company Q-Cells. It seems to us that the two most important governments in the world are increasingly committed to alternative energy development. This is imminently important in both America and China although we will need to observe the competitive implications of Chinese investment in this area very carefully.

The Aftermath of the Western Financial Debacle  

We had long been concerned by the complexities, gearing and greed inculcated by far too much of the Western financial sector. Our direct exposure has been low. It would have been better if it had been non-existent. This, however, was less critical to our fortunes than the complete freezing of the financial system after the Lehman collapse. We confess to surprise that the deplorable conduct of the banking industry translated into an inability to provide even the most basic financial services to the real economy in a manner not seen at least since the 1930's and arguably not for several centuries. This situation was untenable for long and is being gradually corrected but even the temporary stoppage of credit has severely damaged the global economy.  

Where does this sad series of events leave our attitude to the financial sector? We would like to say that bank managements are demonstrating a return to their dull reputations of yore and to less exotic reward structures but we see little evidence that this is true. From Barclays to Goldman Sachs there is no evidence of less complexity or reduced avarice. At the same time the re-financing of banking systems by state injection appears to us to be less than satisfactory. Creaking organisations such as Citi are being kept alive in an echo of Japanese 'zombie' banks whilst politics in Britain or America prevents full state control in the manner that served Sweden so well after its banking crisis. These drawbacks seem likely to lessen the available benefits for those financial institutions that have been both more prudently run and that have the interests of shareholders rather than insiders at their heart. Some benefits will, however, remain in the shape of higher spreads on new business and the balance sheet strength to expand organically and by acquisition. It is in this spirit that we own Berkshire Hathaway where the shrinking of insurance capacity can be exploited by Mr Buffett and Banco Santander where Snr. Botin can reap the advantages of his prior prudence as demonstrated in his part of the fateful ABN Amro deal.

Conclusion and Outlook

Over time we think that the crisis of 2008-9 will come to be seen as a defining event in the decline of the West and the rise of China. Whether this proves an absolute decline of the West or merely a relative one depends heavily on far-sighted political leadership as the financial and demographic challenges rise. We are more encouraged by progress in America than Britain on this score. The rise of China is unlikely to be smooth but it is also likely to encompass areas as yet little changed from defence relations to the global monetary system. We suspect too that it will become evident even to the most determined mathematical risk modellers 
that danger lies more in the West than in the emerging giants. 

In the coming year we suspect that there will be many surprises. These are just as likely to be positive as negative despite the experiences of the last year. It appears to us that the scale of monetary and fiscal easing globally combined with the easing of the credit squeeze, a vicious inventory cycle and the sharp collapse of a commodity boom are now exerting very expansionary forces on the global economy. It is not inconceivable that animal spirits revive. It is conceivable that inflation rather than deflation is in eventual prospect. We will endeavour to plot our way around these challenges whilst remembering just how unpredictable markets can be in the short-run. Last year saw falls of historic proportions bringing decade long capital returns on equities into negative territory. This is unusual and suggests that a prolonged deep recession and savage corporate earnings falls are already discounted by markets. Such an atmosphere could easily prove a splendid time to invest and a questionable one at which to become pessimistic.  

We maintain our belief in both our investment process and the economic viewpoints that have guided us over the last five years. The value of our companies lies not in the earnings of the next quarter or year but in their ability to deliver cash flows for their shareholders over decades. We will always make mistakes but we genuinely believe that more of our companies are in a stronger rather than a weaker position than a year ago. In the bulk of these cases it is because they can participate in the rising wealth of the emerging economies, that their competitive positions have been strengthened by the collapse of flawed financial models, or that their prospects are built on exceptional innovation. For all the difficulties of the last year we do not think that this is a framework for a global portfolio which we should be at all ashamed of now or in the future.

THIRTY LARGEST EQUITY HOLDINGS AND EQUITY PERFORMANCE  as at 31 March 2009
Name	Business	Fair value 31 March 2009 £'000	% of total assets	Performance †		Contribution to absolute performance %	Fair  value 31 March 2008 £'000
				Absolute %	Relative %
Petrobras	Oil producer	87,056	6.2	(16.9)	4.4	(0.4)	96,399
Amazon.com	Online retailer	62,512	4.5	42.6	79.1	3.2	61,714
Atlas Copco	Engineering	60,044	4.3	(37.8)	(21.9)	(1.0)	99,392
Nintendo	Games consoles and    software	49,315	3.5	(19.8)	0.7	(0.8)	15,589
China Mobile	Mobile telecommunications	47,424	3.4	(17.1)	4.1	0.1	46,371
Google	Online search engine	44,751	3.2	9.1	37.0	0.2	14,958
Vale (CVRD)	Iron ore and nickel mining	41,632	3.0	(44.6)	(30.4)	(1.0)	101,078
Sandvik	Engineering	37,111	2.7	(52.8)	(40.7)	(2.3)	81,970
Banco Santander	Banking	34,179	2.4	(46.8)	(33.2)	(2.2)	11,913
Gazprom	Gas production and    distribution	32,089	2.3	(59.7)	(49.4)	(2.9)	85,750
Porsche	Automobiles	31,918	2.3	(62.6)	(53.0)	(2.9)	90,222
Walgreen	Pharmacy chain	31,826	2.3	(4.8)	19.6	0.2	24,116
Vestas   Windsystems	Wind power	31,423	2.3	(44.6)	(30.4)	(2.6)	77,204
Schlumberger	Oil services	28,276	2.0	(34.3)	(17.5)	(1.3)	43,723
Progressive Ohio	Property and casualty    insurance	27,640	2.0	15.6	45.2	0.2	16,969
Berkshire    Hathaway	Insurance	27,523	2.0	(12.6)	9.8	(0.4)	31,437
Deere	Farm machinery	27,478	2.0	(42.3)	(27.5)	(0.6)	44,777
First Solar	Solar energy technology	25,693	1.8	(20.6)	(0.2)	(0.1)	26,061
Canon	Printers, copiers and cameras	24,990	1.8	(12.8)	9.5	(0.8)	52,407
Taiwan    Semiconductor     Manufacturing	Semiconductor     manufacturer	22,523	1.6	25.7	57.8	0.7	22,746
Standard    Chartered	Banking	20,617	1.5	(38.7)	(23.0)	(0.6)	44,238
Brown-Forman	Wine and spirits producer	20,254	1.4	3.6	30.1	(0.1)	19,949
BASF	Chemicals	18,777	1.3	(35.6)	(19.1)	(0.4)	22,994
PPR	Luxury goods producer and    retailer	18,132	1.3	(38.3)	(22.5)	(0.2)	17,283
ABB	Electronic and electrical equipment	18,094	1.3	(27.5)	(8.9)	(0.2)	12,976
Reed Elsevier	Publisher	17,171	1.2	(19.5)	1.1	(0.3)	31,629
SAP	Business software	16,876	1.2	(0.3)	25.2	(0.1)	17,138
Kroger	Food retailer	15,943	1.1	0.5*	1.6*	-	-
UBS	Banking	15,402	1.1	(49.6)	(36.8)	(1.6)	27,449
Novozymes	Enzyme manufacturer	14,992	1.1	7.4	34.9	0.1	10,856
		951,661	68.1				1,249,308

†  Absolute and relative performance has been calculated on a total return basis over the period 1 April 2008 to
  31 March 2009. Absolute performance is in sterling terms; relative performance is against the benchmark: FTSE 

  All World Index (in sterling terms).

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

Source: Baillie Gifford & Co/StatPro

Past performance is not a guide to future performance.

  DISTRIBUTION OF ASSETS

		At 31 March 2009 %			At 31 March 2008 %
Equities:	United Kingdom	9.0			11.0
	Continental Europe	23.6			28.5
	North America	28.1			24.4
	Japan	5.7			3.9
	Asia Pacific	11.0			8.8
	Emerging Markets	14.4			18.8
Total equities		91.8			95.4
Sterling denominated bonds		0.3			0.8
Euro denominated bonds		0.2			0.2
US$ denominated bonds		-			0.1
Brazilian real denominated bonds		5.1			2.8
Net liquid assets		2.6			0.7
Total assets (before deduction of loans and debentures)		100.0			100.0

  RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under the Companies Act. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 12 months' notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.08% of total assets less current liabilities (excluding short term borrowings for investment purposes). The management fee is levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co; however the OEICs' share class held by the Company does not itself attract a management fee. 

PRINCIPAL RISKS AND UNCERTAINTIES

As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of maximising total return, whilst also generating real dividend growth, from a focused and actively managed global portfolio. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility. Risk provides the potential for both loss and gains and in assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.

The risk management policies and procedures outlined have not changed substantially from the previous accounting period.

An explanation of these risks and how they are managed is contained in the Annual Report.

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

Operational/Financial Risk - failure of the Managers' accounting 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. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Gearing Risk - The Company may borrow money for investment purposes known as 'gearing'. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

  STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. 

In preparing those financial statements, the Directors are required to: 

•    select suitable accounting policies and then apply them consistently; 

•    make judgements and estimates that are reasonable and prudent; 

•    state whether applicable UK accounting standards have been followed, subject to any material departures 
     disclosed and explained in the financial statements; and 

•    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the 
     Company will continue in business (in which case there should be supporting assumptions or qualifications as 
      necessary). 

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. 

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

We confirm that to the best of our knowledge:

•    the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair 
      view of the assets, liabilities, financial position and profit or loss of the Company; and

•    the Annual Report includes a fair view of the development and performance of the business and the position 
     of the Company, together with a description of the principal risks and uncertainties that the Company faces.

By order of the Board 
SIR DONALD MACKAY 
14 May 2009

  INCOME STATEMENT

	For the year ended 31 March 2009				For the year ended 31 March 2008
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total  £'000
(Losses)/gains on investments	-	(691,354)	(691,354)		-	159,406	159,406
Currency losses	-	(50,819)	(50,819)		-	(36,613)	(36,613)
Income (note 2)	57,470	-	57,470		49,575	-	49,575
Investment management fee	(2,821)	(2,821)	(5,642)		(3,875)	(3,875)	(7,750)
Recovered VAT (note 3)	3,850	1,816	5,666		-	-	-
Other administrative expenses	(1,885)	-	(1,885)		(2,068)	-	(2,068)
Net return before finance costs and taxation	56,614	(743,178)	(686,564)		43,632	118,918	162,550
Finance costs of borrowings	(10,786)	(11,548)	(22,334)		(10,025)	(10,025)	(20,050)
Net return on ordinary activities before taxation	45,828	(754,726)	(708,898)		33,607	108,893	142,500
Tax on ordinary activities	(11,257)	7,860	(3,397)		(6,564)	3,908	(2,656)
Net return on ordinary activities after taxation	34,571	(746,866)	(712,295)		27,043	112,801	139,844
Net return per ordinary share (note 4)	12.67p	(273.74p)	(261.07p)		9.79p	40.82p	50.61p

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

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. 

  BALANCE SHEET

	At 31 March  2009	At 31 March 2008
	£'000	£'000
FIXED ASSETS
Investments held at fair value through profit or loss	1,361,987	2,259,474
CURRENT ASSETS
Debtors	9,073	20,026
Cash and short term deposits	35,774	13,030
	44,847	33,056
CREDITORS
Amounts falling due within one year (note 6)	(77,631)	(126,435)
NET CURRENT LIABILITIES	(32,784)	(93,379)
TOTAL ASSETS LESS CURRENT LIABILITIES	1,329,203	2,166,095
CREDITORS
Amounts falling due after more than one year (note 6)	(248,866)	(329,651)
	1,080,337	1,836,444
CAPITAL AND RESERVES
Called-up share capital	71,086	68,497
Capital redemption reserve	19,094	21,683
Capital reserve - realised	974,657	1,712,759
Capital reserve - unrealised	(55,955)	(36,430)
Revenue reserve	71,455	69,935
EQUITY SHAREHOLDERS' FUNDS	1,080,337	1,836,444

NET ASSET VALUE PER ORDINARY SHARE	383.8p	651.4p
(After deducting borrowings at fair value) (note 7)
NET ASSET VALUE PER ORDINARY SHARE	399.3p	672.5p
(After deducting borrowings at par)
ORDINARY SHARES (note 8)	272,089,897	273,989,897

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 March 2009

	Share capital £'000	Capital redemption reserve £'000	Capital reserve -  realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 April 2008	68,497	21,683	1,712,759	(36,430)	69,935	1,836,444
Adjustment to reserves*	2,589	(2,589)	-	-	-	-
Net return on ordinary activities after taxation	-	-	(727,341)	(19,525)	34,571	(712,295)
Shares bought back †	-	-	(10,761)	-	-	(10,761)
Dividends paid during the year#	-	-	-	-	(33,051)	(33,051)
Shareholders' funds at 31 March 2009	71,086	19,094	974,657	(55,955)	71,455	1,080,337

For the year ended 31 March 2008

	Share capital £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 April 2007	70,365	19,815	1,067,888	541,179	70,618	1,769,865
Transfer between reserves**	-	-	535,237	(535,237)	-	-
Net return on ordinary activities after taxation	-	-	155,173	(42,372)	27,043	139,844
Shares bought back †	(1,868)	1,868	(45,539)	-	-	(45,539)
Dividends paid during the year#	-	-	-	-	(27,726)	(27,726)
Shareholders' funds at 31 March 2008	68,497	21,683	1,712,759	(36,430)	69,935	1,836,444

*    The adjustment to the share capital and capital redemption reserve is to reflect that when shares have been bought back in prior years and held in treasury they should not have been treated as cancelled.

**    Changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the balance sheet date are included in realised, rather than unrealised, capital reserves. The balances on both reserves at 1 April 2007 have been amended by a reserve transfer to reflect this change.

†  See note 8

#  See note 5

CASH FLOW STATEMENT
	For the year ended 31 March 2009		For the year ended 31 March 2008
	£'000	£'000	£'000	£'000
Net cash inflow from operating Activities		56,685		36,358
SERVICING OF FINANCE
Interest paid	(21,862)		(18,708)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(21,862)		(18,708)
TAXATION
Income tax paid	(20)		(10)
Overseas tax incurred	(3,381)		(2,560)
TOTAL TAX PAID		(3,401)		(2,570)
FINANCIAL INVESTMENT
Acquisitions of investments	(387,778)		(783,355)
Disposals of investments	595,292		707,926
Realised currency profit/(loss)	5,132		(1,051)
Net cash INFLOW/(outflow) from financial investment		212,646		(76,480)
EQUITY DIVIDENDS PAID (note 5)		(33,051)		(27,726)
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING		211,017		(89,126)
FINANCING
Shares bought back	(10,761)		(45,539)
Bank loans repaid	(227,492)		(72,480)
Bank loans drawn down	49,980		201,010
NET CASH (OUTFLOW)/INFLOW FROM FINANCING		(188,273)		82,991
INCREASE/(DECREASE) IN CASH		22,744		(6,135)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash in the period		22,744		(6,135)
Decrease/(increase) in bank loans		177,512		(128,530)
Exchange movement on bank loans		(55,951)		(35,562)
Other non-cash changes		133		115
MOVEMENT IN NET DEBT IN THE YEAR		144,438		(170,112)
NET DEBT AT 1 APRIL		(426,597)		(256,485)
NET DEBT AT 31 MARCH		(282,159)		(426,597)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return on ordinary activities before finance costs and taxation		(686,564)		162,550
Losses/(gains) on investments - securities		691,354		(159,406)
Currency losses		50,819		36,613
Amortisation of fixed income book cost		(103)		43
Decrease in accrued income		1,058		635
(Increase) in debtors		(491)		(113)
Increase /(decrease) in creditors		612		(3,964)
NET CASH INFLOW FROM OPERATING ACTIVITIES		56,685		36,358

  NOTES

1.	The financial statements for the year to 31 March 2009 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 March 2008. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
								2009											2008
								£'000											£'000
2.	Income
	Income from investments and interest receivable							56,890											49,505
	Other income							580											70
								57,470											49,575
3.	Recovered VAT
	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. During the period, in respect of the periods 1990 to 1996 and from 2000 to 2007 the Company received a reimbursement of £5,666,000 which has been allocated to revenue and capital in the manner in which it had originally been charged, plus £1,910,000 of interest thereon.
							2009 £'000									2008 £'000
4.	Net return per ordinary share
	Revenue return						34,571									27,043
	Capital return						(746,866)									112,801
	Total return						(712,295)									139,844
	Weighted average number of ordinary shares						272,833,733									276,364,832
	Net return per ordinary share figures are based on the above totals of revenue and capital and the weighted average number of ordinary shares during each period. There are no dilutive or potentially dilutive shares.
		2009				2008					2009 £'000							2008 £'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 2 July 2008)	5.30p				5.00p					14,521							13,984
	Interim (paid 28 November 2008)	6.80p				5.00p					18,530							13,742
		12.10p				10.00p					33,051							27,726
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £34,571,000 (2008- £27,043,000).

  NOTES (Ctd)

		2009			2008					2009 £'000						2008 £'000
5.	Ordinary Dividends (Ctd)
	Dividends paid and proposed in the period:
	Interim dividend per ordinary share (paid 28 November 2008) †	6.80p			5.00p					18,530						13,742
	Proposed final dividend per ordinary share (payable 1 July 2009)	5.50p			5.30p					14,965						14,521
	Adjustment to the previous year's final dividend re shares bought back									-						(89)
		12.30p			10.30p					33,495						28,174
	† The interim dividend includes a non-recurring 1.5p per share.
	The final dividend was declared after the period end date and has therefore not been included as a liability in the balance sheet. If approved the final dividend will be paid on 1 July 2009 to all shareholders on the register at the close of business on 5 June 2009. The ex-dividend date is 3 June 2009.
6.	The bank loans falling due within one year comprise US$99 million (2008 - ¥8,230 million, CHF35.5 million and US$100 million).  The bank loans falling due in more than one year comprise ¥8,500 million and CHF60.5 million drawn down under a facility which is repayable June 2010 (2008 - €73 million, ¥8,500 million, US$30 million and CHF121 million repayable June 2009 and June 2010).  During the year bank loans of ¥8,230 million, CHF35.5million, CHF60.5million, US$100 million, US$30 million and €73 million were repaid and a bank loan of US$99 million drawn down. Subsequent to the year end the U$99 million loan with Lloyds TSB was repaid on 20 April 2009 and replaced with a U$99 million facility from The Bank of New York Mellon
7.	The fair value of borrowings at 31 March 2009 was £353,959,000 (2008 - £491,372,000). Net asset value per share (after deducting borrowings at fair value) was 383.8p (2008 - 651.4p).
								2009 Number									2008 Number
8.	Share capital: Ordinary shares of 25p each
	Allotted, called-up and fully paid					272,089,897									273,989,897
	Treasury shares					12,256,279									10,356,279
	Total					284,346,176									284,346,176
	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 2009 a total of 1,900,000 (2008 - 7,471,279) ordinary shares with a nominal value of £475,000 (2008 - £1,868,000) were bought back at a total cost of £10,761,000 (2008 - £45,539,000) and held in treasury. At 31 March 2009 the Company had authority to buy back a further 40,021,185 ordinary shares.
9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 March 2009 under section 240 of the Companies Act 1985. The financial information for 2008 is derived from the statutory accounts for 2008, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2008 and 2009 accounts, their reports were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2009 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 25 June 2009.
10.	The Report and Accounts will be available on the Managers' website www.scottishmortgageit.com on or around 22 May 2009.
11.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

FR ATMLTMMMTMIL