REG - Scot.Mort Inv Tst - Annual Financial Report

Scottish Mortgage Investment TrustAnnouncement

25/05/2023 14:15

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RNS Number : 6956A  Scottish Mortgage Inv Tst PLC  25 May 2023

Scottish Mortgage Investment Trust PLC (SMT)

 

Legal Entity Identifier: 213800G37DCS3Q9IJM38

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 17 May 2023, Scottish Mortgage Investment Trust PLC
("the Company") announces that the Company's Annual Report and Financial
Statements for the year ended 31 March 2023, 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:
www.scottishmortgage.com (http://www.scottishmortgage.com/) (as is the
preliminary statement of audited annual results announced by the Company on 17
May 2023).

 

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

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

¾  the Company Financial Statements set out in the Annual Report and
Financial Statements, which have been prepared in accordance with United
Kingdom Accounting Standards, comprising FRS 102, give a true and fair view of
the net return of the Company; and

¾  the Strategic Report set out in the Annual Report and Financial
Statements 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.

In the case of each Director in office at the date the Directors' Report is
approved:

¾  so far as the Director is aware, there is no relevant audit information
of which the Company's Auditors are unaware; and

¾  they have taken all the steps that they ought to have taken as a Director
in order to make themselves aware of any relevant audit information and to
establish that the Company's Auditors are aware of that information.

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

Principal and Emerging Risks relating to the Company

 

 

As explained on page 55 of the Annual Report and Financial Statements, there
is a process for identifying, evaluating and managing the risks faced by the
Company on a regular basis. The Directors have carried out a robust assessment
of the principal and emerging risks facing the Company, including those that
would threaten its business model, future performance, solvency or liquidity.
A description of these risks and how they are being managed or mitigated is
set out below.

 

The Board considers heightened macroeconomic and geopolitical concerns to be
factors which exacerbate

existing risks, rather than being new emerging risks. Their impact is
considered within the relevant risks. There have been no significant changes
to the principal risks during the year other than cyber security risk having
moved from emerging to principal risks.

 

Changes in risk level over the year are indicated as follows:

Increasing risk ↑ Decreasing risk ↓ No change ↔

 

 

↑ Financial Risk - the Company's assets consist mainly of listed securities
and its principal risks are therefore market-related and include market risk
(comprising currency risk, interest rate risk and other price risk), liquidity
risk and credit risk. An explanation of those risks and how they are managed
is contained in note 19 to the Financial Statements on pages 87 to 95 of the
Annual Report and Financial Statements. The Board has, in particular,
considered the impact of heightened market volatility during the Covid-19
pandemic and over recent months due to macroeconomic factors such as higher
inflation and interest rates, and geopolitical concerns, including the
Russia-Ukraine war and heightened tensions between China and both the US and
Taiwan. The Board also considers the commercial impact of changes in
regulatory posture in local market jurisdictions. To mitigate these risks, the
Board considers at each meeting various metrics including portfolio
concentration, regional and industrial sector weightings, top and bottom stock
contributors to performance and contribution to performance by industrial
sector. The Managers provide the rationale for stock selection decisions and
both the investment strategy and portfolio risk are formally considered in
detail at least annually.

 

↑ Private Company Investments - the Company's risk could be increased by its
investment in private company investments. These assets may be more difficult
to buy or sell, so changes in their valuations may be greater than for listed
investments. To mitigate this risk, the Board considers the private company
investments in the context of the overall investment strategy and provides
guidance to the Managers on the maximum exposure to private company
investments. The investment policy limits the amount which may be invested in
private companies to 30 per cent. of the total assets of the Company, measured
at time of purchase. See page 40 of the Annual Report and Financial
Statements.

 

↑ Investment Strategy Risk - pursuing an investment strategy to fulfil the
Company's objective which the market perceives to be unattractive or
inappropriate, or the ineffective implementation of an attractive or
appropriate strategy, may lead to reduced returns for shareholders and, as a
result, a decreased demand for the Company's shares. This may lead to the
Company's shares trading at a widening discount to their net asset value. To
mitigate this risk, the Board regularly reviews and monitors the Company's
objective and investment policy and strategy; the investment portfolio and its
performance, the level of premium/discount to net asset value at which the
shares trade and movements in the share register.

 

↔ Climate and Governance Risk - as investors place increased emphasis on
Environmental, Social and Governance (ESG) issues, perceived problems on ESG
matters in an investee company could lead to that company's shares being less
attractive to investors, adversely affecting its share price, in addition to
potential valuation issues arising from any direct impact of the failure to
address the ESG weakness on the operations or management of the investee
company (for example in the event of an industrial accident or spillage).
Repeated failure by the Managers to identify ESG weaknesses in investee
companies could lead to the Company's own shares being less attractive to
investors, adversely affecting its own share price. This is mitigated by the
Investment Manager's strong ESG stewardship and engagement policies which are
available to view on the Managers' website, bailliegifford.com, and have been
reviewed and endorsed by the Company, and have been fully integrated into the
investment process as well as the extensive up-front and ongoing due diligence
which the Investment Manager undertakes on each investee company. This due
diligence includes assessment of the risks inherent in climate change. See
page 46 of the Annual Report and Financial Statements. An explanation of how
these policies are applied in the context of Scottish Mortgage's long term
investment approach is available at scottishmortgage.com
(http://www.scottishmortgageit.com) .

 

18 companies, within the Scottish Mortgage portfolio, are currently involved
in tackling the climate crisis. An external provider was engaged to map the
carbon footprint of the portfolio. This analysis estimates that the carbon
intensity of Scottish Mortgage is 95.1% less than the index and is based on
67.2% of the value of the Company's equity portfolio which reports on carbon
emissions and other carbon related characteristics. See page 46 of the Annual
Report and Financial Statements.

 

↑ Discount Risk - the discount/premium at which the Company's shares trade
relative to its net asset value can change. The risk of a widening discount is
that it may undermine investor confidence in the Company. To manage this risk,
the Board monitors the level of discount/premium at which the shares trade and
the Company has authority to buy back its existing shares when deemed by the
Board to be in the best interests of the Company and its shareholders.

 

↔ Regulatory Risk - failure to comply with applicable legal and regulatory
requirements such as the tax rules for investment trust companies, the UKLA
Listing Rules and the Companies Act could lead to suspension of the Company's
Stock Exchange listing, financial penalties, a qualified audit report or the
Company being subject to tax on capital gains. To mitigate this risk, Baillie
Gifford's Business Risk, Internal Audit and Compliance Departments provide
regular reports to the Audit Committee on Baillie Gifford's monitoring
programmes. Major regulatory change could impose disproportionate compliance
burdens on the Company. In such circumstances representation is made to ensure
that the special circumstances of investment trusts are recognised.
Shareholder documents and announcements, including the Company's published
Interim and Annual Report and Financial Statements, are subject to stringent
review processes and procedures are in place to ensure adherence to the
Transparency Directive and the Market Abuse Directive with reference to inside
information.

 

↔ Custody and Depositary Risk - safe custody of the Company's assets may be
compromised through control failures by the Depositary, including cyber
security incidents. To mitigate this risk, the Board receives six monthly
reports from the Depositary confirming safe custody of the Company's assets
held by the Custodian. Cash and portfolio holdings are independently
reconciled to the Custodian's records by the Managers. The Custodian's 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.

 

↓ Operational Risk - failure of Baillie Gifford's systems or those of other
third party service providers could lead to an inability to provide accurate
reporting and monitoring or a misappropriation of assets. To mitigate this
risk, Baillie Gifford has a comprehensive business continuity plan which
facilitates continued operation of the business in the event of a service
disruption. 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. 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.

 

↑ Cyber security risk - a cyber attack on Baillie Gifford's network or that
of a third party service provider could

impact the confidentiality, integrity or availability of data and systems. To
mitigate this risk, the Audit Committee

reviews Reports on Internal Controls published by Baillie Gifford and other
third party service providers. Baillie

Gifford's Business Risk Department report to the Audit Committee on the
effectiveness of information security

controls in place at Baillie Gifford and its business continuity framework.
Cyber security due diligence is performed

by Baillie Gifford on third party service providers which includes a review of
crisis management and business continuity frameworks.

 

↔ Leverage Risk - the Company may borrow money for investment purposes
sometimes known as 'gearing' or

'leverage'. If the investments fall in value, any borrowings will magnify the
impact of this loss. If borrowing facilities are not renewed, the Company may
have to sell investments to repay borrowings. To mitigate this risk, all
borrowings require the prior approval of the Board and leverage levels are
discussed by the Board and Managers at every meeting. Covenant levels are
monitored regularly. The majority of the Company's investments are in quoted
securities that are readily realisable. Further information on leverage can be
found on page 101 and in the Glossary of Terms and Alternative Performance
Measures on pages 106 to 108 of the Annual Report and Financial Statements.

 

↑ Political Risk - political developments are closely monitored and
considered by the Board. The Board continues to assess the potential
consequences for the Company's future activities including those that may
arise from geopolitical tensions and constitutional change. The Board believes
that the Company's global portfolio positions the Company to be suitably
insulated from such political risks.

 

↔ Emerging Risks - the Board has regular discussions on principal risks and
uncertainties, including any risks which are not an immediate threat but could
arise in the longer term. The Board considers that the key emerging risks
arise from the interconnectedness of the global economy (including factors
such as supply chain constraints and economic sanctions) and the related
exposure of the investment portfolio to societal and financial implications of
an escalation of geopolitical tensions, cyber risk and coronavirus variants or
similar public health threat. These are 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 impact the
pace of growth rather than to invalidate the investment rationale over the
long term.

 

Baillie Gifford & Co Limited

Company Secretaries

25 May 2023

 

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