REG - Baillie GiffordChina - Annual Financial Report
15/04/2024 14:15
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RNS Number : 6664K Baillie Gifford China Grwth TrstPLC 15 April 2024
Baillie Gifford China Growth Trust plc (BGCG)
Legal Entity Identifier: 213800KOK5G3XYI7ZX18
Regulated Information Classification: Annual Financial and Audit Reports
Annual Report and Financial Statements
Further to the preliminary statement of audited annual results announced to
the Stock Exchange on 3 April 2024, Baillie Gifford China Growth Trust ("the
Company") announces that the Company's Annual Report and Financial Statements
for the year ended 31 January 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
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
It is also available on the Company page of the Baillie Gifford website at:
bailliegiffordchinagrowthtrust.com (as is the preliminary statement of audited
annual results announced by the Company on 3 April 2024).
Responsibility Statement of the Directors in respect of the Annual Financial
Report
The Directors confirm that, to the best of their knowledge:
¾ 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;
¾ the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties it faces; and
¾ 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 Risks relating to the Company
As explained on pages 72 and 73 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 undertaken a
robust assessment of the principal and emerging risks facing the Company,
including those that would threaten the business model, future performance,
solvency or liquidity. There have been no significant changes to the principal
risks during the year. A description of these risks and how they are being
managed or mitigated is set out below:
What is the risk? How is it managed? Current assessment of risk
Financial risk The Company's assets consist mainly of listed securities (91.5% of the The Board has, in particular, considered the impact of increasing market This risk is increasing due to increased market volatility as a result of
investment portfolio) and its principal and emerging financial risks are volatility due to macroeconomic factors such as higher inflation and interest increasing macroeconomic and geopolitical concerns.
therefore market related and include market risk (comprising currency risk, rates and geopolitical concerns. In order to oversee this risk, the Board
interest rate risk and other price risk), liquidity risk and credit risk. An considers at each meeting various metrics including industrial sector
explanation of those risks and how they are managed is contained in note 18 to weightings, top and bottom stock contributors to performance along with sales
the Financial Statements on pages 107 to 112. and purchases of investments. Individual investments are discussed with the
portfolio manager together with general views on the investment markets and
sectors. A strategy session is held annually.
Investment strategy risk Inappropriate business strategy and/or changes in the financial services The Board reviews its strategy at an annual strategy meeting. It considers This risk is increasing as the market's appetite for growth stocks, typically
market leads to lack of demand for the Company's shares and its shares trading investor feedback, consults with its broker and reviews its marketing held by the Company, has decreased during the recent period of increasing
at a persistent and anomalous discount to the NAV. Poor investment strategy. It regularly reviews its liquidity policy. The strategy is macroeconomic and geopolitical concern.
performance, including through inappropriate asset allocation, leads to value considered in the context of developments in the wider financial services
loss for shareholders in comparison to the benchmark or the peer group industry. The performance of the Managers is reviewed at each Board meeting
and compared against the benchmark and peer group. Exposures are reviewed
against benchmark exposures to identify the highest risk exposures. The Board
regularly reviews and monitors the Company's objective and investment policy
and strategy.
Discount risk The discount/premium at which the Company's shares trade relative to its net To manage this risk, the Board monitors the level of discount/premium at which The Company's discount widened during the year (see chart on page 2). The
asset value can change. The risk of a widening discount is that it may the shares trade and the Company has authority to buy back its existing Company has been buying back shares during the year to 31 January 2024.
undermine investor confidence in the Company. shares, when deemed by the Board to be in the best interests of the Company
and its shareholders.
Regulatory risk Failure to comply with applicable legal and regulatory requirements such as To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and All control processes are working effectively. There have been no material
the tax rules for investment trust companies, the FCA Listing Rules and the Compliance Departments provide regular reports to the Audit Committee on regulatory changes that have impacted the Company during the year.
Companies Act could lead to suspension of the Company's Stock Exchange Baillie Gifford's monitoring programmes. Major regulatory change could impose
listing, financial penalties, a qualified audit report or the Company being disproportionate compliance burdens on the Company. In such circumstances
subject to tax on capital gains. Changes to the regulatory environment could representation is made to ensure that the special circumstances of investment
negatively impact the Company. 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.
Custody and Depositary risk Safe custody of the Company's assets may be compromised through control To mitigate this risk, the Audit Committee receives six-monthly reports from All control procedures are working effectively.
failures by the Depositary, including breaches of cyber security. 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 who also agree uncertificated private
portfolio holdings to confirmations from investee companies. The Custodian's
audited 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.
Operational risk Failure of Baillie Gifford's systems or those of other third party service To mitigate this risk, Baillie Gifford has a comprehensive business continuity All control procedures are working effectively.
providers could lead to an inability to provide accurate reporting and plan which facilitates continued operation of the business in the event of a
monitoring or a misappropriation of assets. 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 and a summary
of the key points is reported to the Audit Committee and any concerns
investigated. In the year under review, the other key third party service
providers have not experienced significant operational difficulties affecting
their respective services to the Company.
Leverage risk The Company may utilise borrowings in order to increase its investment Under the Investment Policy, the maximum gearing is 25% of gross assets, No significant change in risk level. The Company continues to deploy gearing
exposure. While such leverage presents opportunities for increasing total though the Company does not expect borrowing to be in excess of 20% of gross and has a revolving credit facility in place which expires in April 2024. The
returns, it can also have the opposite effect of increasing losses. If income assets. All borrowing facilities are approved by the Board and gearing levels board are seeking to renew the loan facility.
and capital appreciation on investments acquired with borrowed funds are less are discussed by the Board and the Managers at every meeting. Covenant levels
than the costs of the leverage, the Company's net asset value will decrease. are monitored regularly by the Board and the Managers.
The use of leverage also increases the investment exposure, which means that
if the market moves adversely, the resulting loss to capital would be greater
than if leverage were not used.
Climate and Governance risk As investors place increased emphasis on climate change and other As described on page 74, the consideration of ESG (including climate change) The Investment Manager continues to employ strong ESG stewardship and
Environmental, Social and Governance ('ESG') issues, perceived problems with is a core component of Baillie Gifford's investment process, with the Board engagement policies.
these matters in an investee company could lead to that company's shares being overseeing and challenging Baillie Gifford on ESG matters. The Board meet with
less attractive to investors, adversely affecting its share price. In the Investment Manager and discuss the investment portfolio, including the
addition, potential valuation issues could arise from any direct impact of the application of Baillie Gifford's ESG framework. Baillie Gifford's Governance
failure to address the ESG weakness on the operations or management of the and Sustainability team undertake specific ESG reviews on investment
investee company (for example in the event of an industrial accident or portfolios.
spillage). Repeated failure by the Investment Manager to identify climate/ESG
weaknesses in investee companies could lead to the Company's own shares being
less attractive to investors, adversely affecting its own share price.
Cyber security risk A cyber-attack on Baillie Gifford's network or that of a third party service The Audit Committee reviews Reports on Internal Controls published by Baillie This risk is seen as increasing due to recent indications that the
provider could impact the confidentiality, integrity or availability of data Gifford and other third party service providers. Baillie Gifford's Business continuation of geopolitical tensions could lead to cyber attacks. Emerging
and systems. Risk Department report to the Audit Committee on the effectiveness of technologies, including AI, could potentially increase information security
information security controls in place at Baillie Gifford and its business risks. In addition, service providers operate a hybrid approach of remote and
continuity framework. Cyber security due diligence is performed by Baillie office working, thereby increasing the potential of a cyber security threat.
Gifford on third party service providers which includes a review of crisis
management and business continuity frameworks.
Single country risk The Company invests predominantly in equities of companies which are The Company's exposure to a single country, China, is an integral part of its This risk is seen as increasing due to concerns over geopolitical risks.
incorporated or domiciled, or which conduct a significant portion of their investment strategy. Risk is mitigated to a degree by appropriate portfolio
business, in China. Investing in a single country is generally considered a diversification and careful analysis of investment opportunities.
higher risk investment strategy than investing more widely, as it exposes the
investor to the fluctuations of a single geographical market, in this case the
Chinese market.
Emerging market risk Investing in an emerging market such as China subjects the Company to a higher The Managers are cognisant of the risks associated with investing in emerging Rising concerns over geopolitical risk.
level of market risk than investment in a more developed market. This is due, markets such as China, and they shape their investment strategy and due
among other things, to the existence of greater market volatility, lower diligence accordingly. The Board is kept informed of political and regulatory
trading volumes, the risk of political and economic instability, legal and issues impacting China and the portfolio. The Board monitors the risks
regulatory risks, risks relating to accounting practices, disclosure and associated with any complex investment structures, including the proportion of
settlement, a greater risk of market shut down, standards of corporate investments held in VIEs (estimated to be 28% as at 31 January 2024).
governance and more governmental limitations on foreign investment than are
typically found in developed markets. Geopolitical tensions between the US and
China, in particular relating to Taiwan, remain heightened with the potential
for further sanctions to be imposed. Investing in China is often through
contractual structures, such as Variable Interest Entities ('VIEs', see
Glossary of terms and alternative performance measures on page 128) that are
complex and could be open to challenge.
Unlisted securities The Company may invest in unlisted securities, which are not readily Baillie Gifford conducts appropriate due diligence in respect of all unlisted No change in assessment of risk.
realisable and are more difficult to value given the absence of a quoted investments, and has an established valuation approach (as described on page
price. There may be less available information and there will be less 52), which is carefully reviewed by the Board.
regulation in respect of disclosures and corporate governance.
Emerging risk As explained on pages 72 to 74, 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 global economies and the related
exposure of the investment portfolio to external and emerging threats such as
escalating geopolitical tensions, cyber security risks including developing AI
and quantum computing capabilities, and new coronavirus variants or similar
public health threats.
This is mitigated by the Board discussing at each Board meeting the impact of
such threats on both markets globally and also more specifically on the
Chinese market. This is mitigated by the Managers' close links to the investee
companies and their ability to ask questions on contingency plans. The
Managers believe the impact of such events may be to slow growth rather than
to invalidate the investment rationale over the long term. The Company also
monitors its service providers to ensure there is adequate business
continuity.
Baillie Gifford & Co Limited
Company Secretaries
15 April 2024
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