Interim Results

RNS Number : 1013H

Scottish Mortgage Inv Tst PLC

31 October 2008

 



SCOTTISH MORTGAGE INVESTMENT TRUST PLC

Half-Yearly Management Report to 30 September 2008

The six months to 30 September 2008 have been extremely challenging for financial markets. This is reflected in the Company's results: in the six month period the net asset value per share fell by 20.1% and the share price by 23.5%. The FTSE All World Index, in sterling terms, fell by 9.6%.  

Scottish Mortgage's strategy is to invest with a long term view, in carefully chosen companies, on a global basis. The portfolio does not mirror the benchmark and performance is assessed on a five year rolling basis. Over five years to 30 September 2008 the share price has increased by 84% and the NAV per share by 69% in total return terms. By comparison, the FTSE All World Index is 43% higher on the same basis. 

The financial crisis that has savaged world markets has been extraordinary. The scale of the impact and its translation to the real economy has surprised us. The share prices of many of the holdings in the portfolio have been hard hit, notably in the industrials, resources and commodities sectors where prices have been driven down by a combination of forced selling and fears of slowing rates of global growth.  

Gearing

The presence of gearing at a time of falling markets has exacerbated the poor performance in the half year. At the 30 September equity gearing was 18.6% as a proportion of total assets. Subsequent to this date markets continued to plunge and some sales of equities were made with the proceeds used to pay down borrowings. As at 29 October 2008 the level of equity gearing remains steady at around 18.6% and will continue to be managed attentively while markets remain volatile.  

 Earnings and dividend

Earnings per share were 9.08p compared to 5.49p in the corresponding period and were boosted by 1.5p per share from the recovery of previous years' VAT and associated interest from HM Revenue and Customs. This follows the European Court of Justice ruling that management fees charged on investment trusts should be exempt from VAT.   

The Board proposes an increased interim dividend of 6.8p per share (5.0p) but shareholders should bear in mind that this figure includes the non-recurring element of 1.5p.   

In the period, the immediate outlook for corporate earnings and dividends deteriorated notably in some sectors.  However, the Board remains committed to generating real dividend growth and has built up revenue reserves to meet occasions when there is a shortfall in income.  In this respect, Scottish Mortgage is in a strong position with accumulated revenue reserves in excess of 20p per share. 

Outlook

It is clear that the effects of the financial and banking crisis will be felt on a global basis and that there will be some severe knock on effects on growth rates at both company and country level.  However, a very positive factor to take into account is that governments and monetary authorities have taken swift, concerted and radical corrective action. The freezing of banking operations and credit markets will not persist for ever and at current levels many share prices, including those of holdings in Scottish Mortgage's portfolio, appear almost absurdly low even after discounting slowing global growth and the possibility of recession in some countries.  Ironically, given share price movements over the period, recent events can be seen as endorsing the thesis that China is likely to become even more influential in world economic terms over coming years.  

The more extreme downward reaction of emerging market valuations to world events, compared with the less severe but still substantial falls in developed markets, mirrors historic behaviour in times of stress. The other side of this coin is the expectation that emerging market valuations should enjoy a proportionately greater recovery. The portfolio is well placed to benefit from this normal cyclical behaviour.

The Board has confidence in the investment strategy which remains determinedly focussed on individual companies and an assessment of their long term prospects.  Work in this area continues as usual amidst markets gripped by extreme nervousness, fear and panic.  Volatility driven by short term market reaction is likely to persist in the second half and it will take some time before a degree of poise is recovered amongst global equity investors. It is worth remembering that while markets may continue on a very erratic course, volatility can also provide opportunities.  

30 October 2008

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

Scottish Mortgage is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £38 billion under management and advice as at 30 October 2008. 

Past performance is no guarantee of 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. You can find up to date performance information about Scottish Mortgage on the Baillie Gifford website at www.scottishmortgageit.com.

- ends -

For further information please contact:

Robert O'Riordan,      

Baillie Gifford & Co                                                                                                                    0131 275 3181

Roland Cross, Director,

Broadgate                                                                                                                                  0207 726 6111

The following is the unaudited Half-Yearly Financial Report for the six months 

to 30 September 2008.

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

Half-Yearly Financial Report 30 September 2008

Responsibility Statement

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

• the Half-Yearly Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties (note 13) for the remaining six months of the year); and

• the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

Sir Donald MacKay

Chairman

30 October 2008

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

INCOME STATEMENT 

(unaudited)

	For the six months ended 30 September 2008				For the six months ended 30 September 2007			For the year ended 31 March 2008
	Revenue £'000	Capital £'000		Total £'000	Revenue £'000	Capital  £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains and (losses) on investments	-	(355,443)		(355,443)	-	288,744	288,744	-	159,406	159,406
Currency losses	-	(8,818)		(8,818)	-	(2,223)	(2,223)	-	(36,613)	(36,613)
Income from investments and interest  receivable	37,603	-		37,603	27,457	-	27,457	49,505	-	49,505
Other income	355	-		355	25	-	25	70	-	70
Investment management fee (note 3)	(1,672)	(1,672)		(3,344)	(1,985)	(1,985)	(3,970)	(3,875)	(3,875)	(7,750)
Recovered VAT (note 4)	3,850	1,816		5,666	-	-	-	-	-	-
Other administrative expenses	(839)	-		(839)	(958)	-	(958)	(2,068)	-	(2,068)
Net return before finance costs and  taxation	39,297	(364,117)		(324,820)	24,539	284,536	309,075	43,632	118,918	162,550
Finance costs of borrowings	(5,785)	(5,785)		(11,570)	(4,680)	(4,680)	(9,360)	(10,025)	(10,025)	(20,050)
Net return on ordinary activities before taxation	33,512	(369,902)		(336,390)	19,859	279,856	299,715	33,607	108,893	142,500
Tax on ordinary activities	(8,709)	6,202		(2,507)	(4,595)	2,914	(1,681)	(6,564)	3,908	(2,656)
Net return on ordinary activities after taxation	24,803	(363,700)		(338,897)	15,264	282,770	298,034	27,043	112,801	139,844
Net return per ordinary share (note 5)	9.08p‡		(133.12p)	(124.04p)	5.49p	101.64p	107.13p	9.79p	40.82p	50.61p
Dividends paid and proposed per ordinary share (note 6)	6.80p‡				5.00p			10.30p

‡ Both revenue earnings and the interim dividend include a non-recurring 1.5p per share from the reimbursement of previous years' VAT and associated interest thereon.

 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.

 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.

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

BALANCE SHEET

 (unaudited)

	At  30 September 2008	At  30 September 2007	At  31 March 2008
	£'000	£'000	£'000
FIXED ASSETS
Investments held at fair value through profit or loss	1,911,846	2,349,345	2,259,474
CURRENT ASSETS
Debtors	5,708	8,593	20,026
Cash and short term deposits	10,933	22,305	13,030
	16,641	30,898	33,056
CREDITORS
Amounts falling due within one year
Bank loans (note 7)	(174,319)	(48,374)	(109,976)
Other creditors	(6,429)	(9,301)	(16,459)
	(180,748)	(57,675)	(126,435)
NET CURRENT LIABILITIES	(164,107)	(26,777)	(93,379)
TOTAL ASSETS LESS CURRENT LIABILITIES	1,747,739	2,322,568	2,166,095
CREDITORS
Amounts falling due after more than one year
Bank loans (note 7)	(122,288)	(152,796)	(177,813)
Debenture stocks	(151,771)	(151,895)	(151,838)
	(274,059)	(304,691)	(329,651)
	1,473,680	2,017,877	1,836,444
CAPITAL AND RESERVES
Called-up share capital	68,122	68,860	68,497
Capital redemption reserve	22,058	21,320	21,683
Capital reserves - realised	1,349,568	1,146,850	1,712,759
Capital reserves - unrealised	(46,285)	708,949	(36,430)
Revenue reserve	80,217	71,898	69,935
EQUITY SHAREHOLDERS' FUNDS	1,473,680	2,017,877	1,836,444

NET ASSET VALUE PER ORDINARY SHARE  (after deducting borrowings at fair value) (note 8)	520.3p	712.5p	651.4p
NET ASSET VALUE PER ORDINARY SHARE (after deducting borrowings at par)	543.1p	734.9p	672.5p
ORDINARY SHARES IN ISSUE (note 9)	272,489,897	275,440,243	273,989,897

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 30 September 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 2008	68,497	21,683	1,712,759	(36,430)	69,935	1,836,444
Net return on ordinary activities after taxation	-	-	(353,845)	(9,855)	24,803	(338,897)
Shares bought back (note 9)	(375)	375	(9,346)	-	-	(9,346)
Dividends paid during the period (note 6)	-	-	-	-	(14,521)	(14,521)
Shareholders' funds at  30 September 2008	68,122	22,058	1,349,568	(46,285)	80,217	1,473,680

For the six months ended 30 September 2007

	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
Net return on ordinary activities after taxation	-	-	115,000	167,770	15,264	298,034
Shares bought back	(1,505)	1,505	(36,038)	-	-	(36,038)
Dividends paid during the period (note 6)	-	-	-	-	(13,984)	(13,984)
Shareholders' funds at  30 September 2007	68,860	21,320	1,146,850	708,949	71,898	2,017,877

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 (note 6)	-	-	-	-	(27,726)	(27,726)
Shareholders' funds at  31 March 2008	68,497	21,683	1,712,759	(36,430)	69,935	1,836,444

• With effect from 1 April 2007, 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. At 31 March 2008 the balance on both reserves were amended by a transfer as at 1 April 2007 to reflect this change.

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months to 30 September 2008 £'000	Six months to 30 September 2007 £'000	Year to 31 March 2008 £'000
Net cash inflow from operating activities	43,056	24,187	36,358
Net cash outflow from servicing of finance	(11,018)	(8,446)	(18,708)
Total tax suffered	(2,480)	(1,719)	(2,570)
Net cash outflow from financial investment	(6,859)	(36,724)	(76,480)
Equity dividends paid (note 6)	(14,521)	(13,984)	(27,726)
NET CASH INFLOW/(OUTFLOW) BEFORE USE OF LIQUID RESOURCES AND FINANCING	8,178	(36,686)	(89,126)
Shares bought back (note 9)	(9,346)	(36,038)	(45,539)
Net cash (outflow)/inflow from bank loans (note 7)	(929)	75,864	128,530
(DECREASE)/INCREASE IN CASH	(2,097)	3,140	(6,135)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash in the period	(2,097)	3,140	(6,135)
Decrease/(increase) in bank loans (note 7)	929	(75,864)	(128,530)
Exchange movement on bank loans	(9,747)	(1,609)	(35,562)
Other non-cash changes	67	58	115
MOVEMENT IN NET DEBT IN THE PERIOD	(10,848)	(74,275)	(170,112)
NET DEBT AT START OF THE PERIOD	(426,597)	(256,485)	(256,485)
NET DEBT AT END OF THE PERIOD	(437,445)	(330,760)	(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	(324,820)	309,075	162,550
Net losses/(gains) on investments - securities	355,443	(288,744)	(159,406)
Currency losses	8,818	2,223	36,613
Amortisation of fixed income book cost	28	13	43
Changes in debtors and creditors	3,587	1,620	(3,442)
NET CASH INFLOW FROM OPERATING ACTIVITIES	43,056	24,187	36,358

  SCOTTISH MORTGAGE INVESTMENT TRUST PLC

THIRTY LARGEST EQUITY HOLDINGS AND EQUITY PERFORMANCE (unaudited)
Name	Business	Fair value at 30 Sept 2008 £'000	% of total assets	Performance†
				Absolute %	Relative %
Petrobras	Oil producer	104,695	5.5	(0.8)	7.8
Atlas Copco	Engineering	71,910	3.7	(25.6)	(19.0)
Amazon.com	Online retailer	70,202	3.7	13.8	23.8
Gazprom	Gas producer	63,598	3.3	(31.8)	(25.9)
Porsche	Automobiles	58,058	3.0	(35.3)	(29.6)
Sandvik	Engineering	54,016	2.8	(31.1)	(25.1)
CVRD (or Vale)	Iron ore and nickel mining	50,826	2.6	(31.6)	(25.6)
Vestas Windsystems	Wind power systems	49,071	2.6	(13.7)	(6.2)
Canon	Printers, copiers and cameras	45,596	2.4	(12.2)	(4.5)
EOG Resources	Oil and gas producer	44,366	2.3	(16.7)	(9.4)
Schlumberger	Oil services	43,742	2.3	0.5	9.3
Google	Online search engine	41,501	2.2	1.0	9.8
Monsanto	Seed and agricultural chemicals	41,087	2.1	(0.7)	8.0
China Mobile	Mobile telecommunications	40,642	2.1	(23.9)	(17.3)
Nintendo	Leisure, amusement, motion  pictures and entertainment	40,319	2.1	(10.5)	(2.6)
Berkshire Hathaway	Insurance	34,464	1.8	9.6	19.2
Banco Santander	Banking	33,060	1.7	(15.8)	(8.4)
Deere	Farm machinery	30,780	1.6	(30.9)	(24.8)
Q-cells	Solar energy production	28,742	1.5	(8.0)	0.1
Norilsk Nickel	Diversified mining	27,629	1.4	(44.0)	(39.1)
Reed Elsevier	Publisher	27,278	1.4	(11.1)	(3.3)
Standard Chartered	Banking	26,773	1.4	(21.2)	(14.3)
eBay	Internet trading company	26,499	1.4	(16.3)	(8.9)
Tesco	Food retailer	25,713	1.3	4.2	13.3
UBS	Banking	24,495	1.3	(29.3)	(23.1)
Richemont	Luxury goods	24,466	1.3	(11.8)	(4.1)
Brown-Forman	Wine and spirits producer	24,044	1.3	21.9	32.6
First Solar	Solar energy technology	23,814	1.2	(8.9)	(0.9)
Teva Pharmaceuticals	Generic drugs manufacturer	23,718	1.2	11.1	20.8
Taiwan Semiconductor     Manufacturing	Semiconductor manufacturer	23,106	1.2	6.5	15.8
		1,224,210	63.7

† Absolute and relative performance has been calculated on a total return basis over the period 1 April 2008 to 30 September 2008. Absolute performance is in sterling terms; relative performance is against the benchmark: FTSE All World Index (in sterling terms).

Source: Baillie Gifford & Co/StatPro.

Past performance is no guarantee of future performance.

DISTRIBUTION OF ASSETS 

(unaudited)

			At  30 September 2008 %	At 30 September 2007 %	At  31 March 2008 %
Equities:	United Kingdom		10.9	16.3	11.0
	Continental Europe		25.3	23.9	28.5
	North America		27.4	22.1	24.4
	Japan		5.1	3.6	3.9
	Asia Pacific		8.8	11.0	8.8
	Emerging Markets		17.8	18.6	18.8
Total equities			95.3	95.5	95.4
Sterling denominated bonds			0.7	0.6	0.8
Euro denominated bonds			0.2	0.3	0.2
US$ denominated bonds			0.1	0.2	0.1
Brazilian real denominated bonds			3.2	2.5	2.8
Net liquid assets			0.5	0.9	0.7
Total assets (before deduction of loans and debentures)			100.0	100.0	100.0

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

Notes to the condensed set of financial statements (unaudited)

1.	The condensed financial statements for the six months to 30 September 2008 comprise the statements set out in the previous pages together with the related notes below. They have been prepared on the basis of the same accounting policies as set out in the Company's Annual Financial Statements at 31 March 2008 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the year ended 31 March 2008 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain statements under the sections 237(2) or (3) of the Companies Act 1985.
3.	Baillie Gifford & Co are employed by the Company as investment managers and secretaries under a management agreement which can be terminated 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).
4.	Recovered VAT In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then, HMRC has accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. During the period 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 interest thereon.
		Six months to  30 September 2008 £'000		Six months to 30 September  2007 £'000	Year to 31 March 2008 £'000
5.	Net return per ordinary share
	Revenue return	24,803		15,264	27,043
	Capital return	(363,700)		282,770	112,801
	Total return	(338,897)		298,034	139,844
	Weighted average number of ordinary shares in issue	273,212,424		278,197,516	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 in issue during each period. There are no dilutive or potentially dilutive shares in issue.
		Six months to  30 September 2008 £'000	Six months to 30 September  2007 £'000			Year to 31 March 2008 £'000
6.	Dividends
	Amounts recognised as distributions in the period:
	Previous year's final dividend of 5.30p (2007 - 5.00p), paid 2 July 2008	14,521	13,984			13,984
	Interim dividend for the year ended 31 March 2008 of 5.00p, paid 23 November 2007	-	-			13,742
		14,521	13,984			27,726

  SCOTTISH MORTGAGE INVESTMENT TRUST PLC

Notes to the condensed set of financial statements (unaudited) (Ctd)

		Six months to  30 September 2008 £'000	Six months to 30 September  2007 £'000	Year to 31 March 2008 £'000
6.	Dividends (Ctd)
	Dividends paid and proposed in the period:
	Interim dividend for the year ending 31 March 2009 of 6.80p† (2008 - 5.00p)	18,529	13,772	13,742
	Final dividend for the year ended 31 March 2008	-	-	14,521
	Adjustment to provision for previous year's final dividend re shares bought back	-	(89)	(89)
		18,529	13,683	28,174
	The interim dividend was declared after the period end date and has therefore not been included as a liability in the balance sheet. It is payable on 28 November 2008 to shareholders on the register at the close of business on 14 November 2008. The ex dividend date is 12 November 2008. † The interim dividend includes a non-recurring 1.5p per share.
7.	The bank loans falling due within one year comprise ¥8,230 million, US$99 million, €73 million and CHF35.5 million (30 September 2007 - ¥7,840 million and CHF35.5 million; 31 March 2008 - ¥8,230 million, US$100 million and CHF35.5 million).  The bank loans falling due in more than one year comprise ¥8,500 million, US$30 million and CHF121 million drawn down under facilities which are repayable June 2010 (30 September 2007 and 31 March 2008 - €73 million, ¥8,500 million, US$30 million and CHF121 million).  During the period a bank loan of US$100 million was repaid and a loan of US$99 million was drawn down.
8.	The fair value of borrowings at 30 September 2008 was £504,236,000 (30 September 2007 - £408,369,000; 31 March 2008 - £491,372,000).
		Six months to  30 September 2008 £'000	Six months to 30 September  2007 £'000	Year to 31 March 2008 £'000
9.	Share capital: Ordinary shares of 25p each
	Allotted, called-up and fully paid	272,489,897	275,440,243	273,989,897
	Treasury shares	11,856,279	8,905,933	10,356,279
	In the six months to 30 September 2008 a total of 1,500,000 ordinary shares with a nominal value of £375,000 were bought back at a total cost of £9,346,000 and held in treasury. At 30 September 2008 the Company had authority to buy back a further 40,421,185 ordinary shares.
10.	Transaction costs on purchases amounted to £393,000 (30 September 2007 - £733,000; 31 March 2008 - £1,443,000) and transaction costs on sales amounted to £424,000 (30 September 2007 - £543,000; 31 March 2008 -£923,000).
11.	None of the view expressed in this document should be construed as advice to buy or sell a particular investment.

SCOTTISH MORTGAGE INVESTMENT TRUST PLC

Notes to the condensed set of financial statements (unaudited) (Ctd)

12.

Shareholders will be notified on or around 10 November 2008 that the Half-Yearly Financial Report has been published and will be available on the Scottish Mortgage page of the Managers' website www.scottishmortgageit.com.

13.

Principal Risks and Uncertainties The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 23 of the Company's full Annual Report and Accounts for the year to 31 March 2008. Since when the volatility of the Company's net asset value has increased with rising gearing levels and the volatility of share prices. The Annual Report can be obtained free of charge from Baillie Gifford & Co and is available on the Scottish Mortgage page of the Managers' website: www.scottishmortgageit.com.

 

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