REG - Baillie GiffordChina - Annual Financial Report
10/04/2025 17:15
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RNS Number : 5847E Baillie Gifford China Grwth TrstPLC 10 April 2025
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 1 April 2025, Baillie Gifford China Growth Trust ("the
Company") announces that the Company's Annual Report and Financial Statements
for the year ended 31 January 2025, 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 1 April 2025).
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 74 and 75 of the Annual Report 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, an assessment of the risk level and how they are
being managed or mitigated together with the change in assessment of any
increase or decrease in risk during the year is set out below:
What is the risk? How is it managed? Change Current assessment of risk
Financial risk The Board has, in particular, considered the impact of heightened market Risk Level: High
volatility due to macroeconomic factors such as higher inflation and continued
The Company's assets consist mainly of listed securities (90.8% of the high interest rates and geopolitical concerns. In order to oversee this risk,
investment portfolio) and its principal and emerging financial risks are the Board considers at each meeting various metrics including industrial
therefore market related and include market risk (comprising currency risk, sector weightings, top and bottom stock contributors to performance along with This risk is considered to have increased as market volatility remains due to
interest rate risk and other price risk), liquidity risk and credit risk. An sales and purchases of investments. Individual investments are discussed with continuing macroeconomic and geopolitical concerns.
explanation of those risks and how they are managed is contained in note 18 to the portfolio manager together with general views on the investment markets
the Financial Statements on pages 109 to 114 of the Annual Report. and sectors. A strategy session is held annually.
What is the risk? How is it managed? Change Current assessment of risk
Investment strategy risk The Board reviews its strategy at an annual strategy meeting. It considers Risk Level: High
investor feedback, consults with its broker and reviews its marketing
Inappropriate business strategy and/or changes in the financial services strategy. It regularly reviews its discount/premium policy. The strategy is
market leads to lack of demand for the Company's shares and its shares trading considered in the context of developments in the wider financial services
at a persistent and anomalous discount to the NAV. industry. During the year the NAV total return was 35.4% compared to the benchmark
return of 32.4%. Market conditions for growth stocks typically held by the
Poor investment performance, including through inappropriate The performance of the Managers is reviewed at each Board meeting Company are improving.
asset allocation, leads to value loss for shareholders in comparison to the and compared against the benchmark and peer group. Exposures are reviewed
benchmark or the peer group. against benchmark exposures to identify the highest risk exposures. The Board
regularly reviews and monitors the Company's objective and investment policy
and strategy.
What is the risk? How is it managed? Change Current assessment of risk
Discount risk To manage this risk, the Board monitors the level of discount/premium at Risk Level: High
which the shares trade and the Company has authority to buy back its existing
The discount/premium at which the Company's shares trade relative to its net shares, when deemed by the Board to be in the best interests of the Company
asset value can change. The risk of a widening discount is that it may and its shareholders.
undermine investor confidence in the Company. The Company's discount widened during the year (see chart on page 28 of the
Annual Report). The Company has been buying back shares during the year to 31
January 2025. On 13 November 2024, the Board announced a conditional tender
offer, see page 10 of the Annual Report.
What is the risk? How is it managed? Change Current assessment of risk
Regulatory risk To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Risk Level: Low
Compliance Departments provide regular reports to the Audit Committee on
Failure to comply with applicable legal and regulatory requirements such as Baillie Gifford's monitoring programmes. Major regulatory change could impose
the tax rules for investment trust companies, the FCA Listing Rules and the disproportionate compliance burdens on the Company. In such circumstances
Companies Act could lead to suspension of the Company's Stock Exchange representation is made to ensure that the special circumstances of investment All control processes are working effectively. There have been no material
listing, financial penalties, a qualified audit report or the Company being trusts are recognised. Shareholder documents and announcements, including the regulatory changes that have impacted the Company during the year.
subject to tax on capital gains. Changes to the regulatory environment could Company's published Interim and Annual Report and Financial Statements, are
negatively impact the Company. 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.
What is the risk? How is it managed? Change Current assessment of risk
Custody and Depositary risk To mitigate this risk, the Audit Committee receives six-monthly reports from Risk Level: Low
the Depositary confirming safe custody of the Company's assets held by the
Safe custody of the Company's assets may be compromised through control Custodian. Cash and portfolio holdings are independently reconciled to the
failures by the Depositary, including breaches of cyber security. Custodian's records by the Managers who also agree uncertificated private
portfolio holdings to confirmations from investee companies. The Custodian's All control procedures are working effectively.
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.
What is the risk? How is it managed? Change Current assessment of risk
Operational risk To mitigate this risk, Baillie Gifford has a comprehensive business Risk Level: Low
continuity plan which facilitates continued operation of the business in the
Failure of Baillie Gifford's systems or those of other third party service event of a service disruption or major disaster. The Audit Committee reviews
providers could lead to an inability to provide accurate reporting and Baillie Gifford's Report on Internal Controls and the reports by other key
monitoring or a misappropriation of assets. third party providers are reviewed by Baillie Gifford on behalf of the Board All control procedures are working effectively.
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.
What is the risk? How is it managed? Change Current assessment of risk
Leverage risk Under the Investment Policy, the maximum gearing is 25% of gross assets, Risk Level: Low
though the Company does not expect borrowing to be in excess of 20% of gross
The Company may utilise borrowings in order to increase its investment assets. All borrowing facilities are approved by the Board and gearing levels
exposure. While such leverage* presents opportunities for increasing total are discussed by the Board and the Managers at every meeting. Covenant levels
returns, it can also have the opposite effect of increasing losses. If income are monitored regularly by the Board and the Managers. No significant change in risk level. The Company continues to deploy gearing
and capital appreciation on investments acquired with borrowed funds are less and has a revolving credit facility in place which expires in April 2026.
than the costs of the leverage, the Company's net asset value will decrease.
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.
What is the risk? How is it managed? Change Current assessment of risk
Climate and governance risk As described on page 76 of the Risk Level: Low
As investors place increased emphasis on climate change and other Annual Report the consideration of ESG (including climate change) is a core
Environmental, Social and Governance ('ESG') issues, perceived problems with component of Baillie Gifford's investment process, with the Board overseeing
these matters in an investee company could lead to that company's shares being and challenging Baillie Gifford on ESG matters. The Board meet with the The Investment Manager continues to employ strong ESG stewardship and
less attractive to investors, adversely affecting its share price. In Investment Manager and discuss the investment portfolio, including the engagement policies.
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.
What is the risk? How is it managed? Change Current assessment of risk
Cyber security risk The Audit Committee reviews Reports on Internal Controls published by Risk Level: High
Baillie Gifford and other third party service providers. Baillie Gifford's
A cyber-attack on Baillie Gifford's network or that of a third party service Business Risk Department report to the Audit Committee on the effectiveness of
provider could impact the confidentiality, integrity or availability of data information security controls in place at Baillie Gifford and its business
and systems. continuity framework. Cyber security due diligence is performed by This risk is considered to be increasing due to ongoing geopolitical tensions
Baillie Gifford on third party service providers which includes a review of and an observed increase in malign cyber activity. Emerging technologies,
crisis management and business continuity frameworks. 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.
What is the risk? How is it managed? Change Current assessment of risk
Single country risk The Company's exposure to a single country, China, is an integral part of its Risk Level: High
investment strategy. Risk is mitigated to a degree by appropriate portfolio
The Company invests predominantly in equities of companies which are diversification and careful analysis of investment opportunities.
incorporated or domiciled, or which conduct a significant portion of their
business, in China. Investing in a single country is generally considered a
higher risk investment strategy than investing more widely, as it exposes the
investor to the fluctuations of a single geographical market, in this case This risk is seen as increasing due to concerns over geopolitical risks.
the Chinese market.
What is the risk? How is it managed? Change Current assessment of risk
Emerging market risk The Managers are cognisant of the risks associated with investing in emerging Risk Level: High
markets such as China, and they shape their investment strategy and due
Investing in an emerging market such as China subjects the Company to a higher diligence accordingly. The Board is kept informed of political and regulatory
level of market risk than investment in a more developed market. This is due, issues impacting China and the portfolio. The Board monitors the risks
among other things, to the existence of greater market volatility, lower associated with any complex investment structures, including the proportion of Rising concerns over geopolitical risk.
trading volumes, the risk of political and economic instability, legal and investments held in VIEs (estimated to be 32% as at 31 January 2025). The
regulatory risks, risks relating to accounting practices, disclosure and Board evaluate sanctions risk with the Manager and where appropriate with
settlement, a greater risk of market shut down, standards of corporate input from external advisers.
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 131 of the
Annual Report) that are complex and could be open to challenge.
What is the risk? How is it managed? Change Current assessment of risk
Unlisted securities risk Baillie Gifford conducts appropriate due diligence in respect of all unlisted Risk Level: Moderate
investments, and has an established valuation approach
The Company may invest in unlisted securities, which are not readily
realisable and are more difficult to value given the absence of a quoted (as described on page 55 of the Annual Report), which is carefully reviewed
price. There may be less available information and there will be less by the Board.
regulation in respect of disclosures and corporate governance
No change in assessment of risk.
Emerging risk
As explained on pages 74 to 76 of the Annual Report, 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 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. The Company also monitors its service providers to
ensure there is adequate business continuity.
Increasing risk Decreasing risk No change
Baillie Gifford & Co Limited
Company Secretaries
10 April 2025
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