REG - Scot.Mort Inv Tst - Scottish Mortgage Inv Trst Final Results
17/05/2023 07:17
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RNS Number : 7038Z Scottish Mortgage Inv Tst PLC 17 May 2023
RNS Announcement: Preliminary Results
Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Results for the year to 31 March 2023
NAV (borrowings at fair value) * (17.8%)
NAV (borrowings at book value) * (19.7%)
Share Price* (33.5%)
Benchmark† (0.9%)
Source: Refinitiv / Baillie Gifford. All figures are total return(*). See
disclaimer at the end of this announcement.
* Alternative Performance Measure - see Glossary of Terms and
Alternative Performance Measures at the end of this announcement.
† Benchmark: FTSE All-World index (in sterling terms)
The following is the Preliminary Results Announcement for the year to 31 March
2023 which was approved by the Board on 16 May 2023.
Statement from the Chair
Introduction
Scottish Mortgage was founded after the market crash of 1909 to provide
capital to businesses that had huge potential but limited access to funding.
Over the course of our 114-year history, we've seen many market highs and
lows. Each time we have faced challenge, we have emerged in strong shape with
a renewed determination to deliver value to our shareholders.
Today is no different. This has been a year of continued economic, political,
and social disruption in many parts of the world. Whilst there were good signs
of recovery from COVID-19, the war in Ukraine led to significant uncertainty
and contributed to soaring inflation and rising interest rates, creating
challenging conditions for many companies. The current headwinds are not a new
economic phenomenon, and we are confident in our ability to navigate through
to calmer waters.
However, we recognise that - notwithstanding the macro-economic headwinds -
performance in recent years has been disappointing. The Board shares this
disappointment but remains confident that Scottish Mortgage is a strong
long-term investment. We firmly believe in the fundamentals of our investment
portfolio, which has delivered so much value over many decades.
The challenges we have faced have not been unique to Scottish Mortgage. Market
turbulence has impacted all companies, and it would be wrong to allow
short-term market volatility to influence our long-term investment decisions.
That is why the Managers have continued to do what they do best - engaging
with portfolio companies through the cycle, as well as selecting and patiently
investing in new growth businesses with extraordinary potential from around
the world.
Portfolio update
Your capital has benefitted hundreds of businesses over many decades,
providing much needed equity to high-potential, high-growth companies. The
Managers have identified some truly ground-breaking businesses that are
building the future of the global economy. These companies have the potential
to be category winners, and their visions for the future need long-term
capital to become a reality.
Our investments span a wide range of companies in technology and healthcare,
decarbonisation, and digitalisation, as well as entrepreneurs pioneering brand
new frontiers.
A significant proportion of the Company is invested in publicly listed
equities, including Moderna, whose vaccines played a critical role in
addressing the pandemic, and which remains our largest holding. Other
significant listed holdings include ASML, an innovation leader in the
semiconductor industry; Tesla which continues to transform battery energy
storage solutions for the automotive and clean energy industries; and
MercadoLibre, Latin America's most popular ecommerce site.
Increasingly often, high-growth companies are found in private markets.
Investing in private companies has formed part of the Company's investment
strategy since 2012. Scottish Mortgage does not invest in start-ups, and as
such, we are not venture capitalists. We invest in large, late-stage
companies, with an average size of US$10 billion and a global footprint. There
are some very exciting companies in the private company investment portfolio,
including Zipline, a drone company which began by delivering blood supplies in
Rwanda and is scaling up its operations in the United States. UPSIDE Foods
which is revolutionising food as one of the leading cultivated meat companies
in the United States; and Denali Therapeutics, a biotechnology company focused
on finding a cure for neurodegenerative diseases such as Alzheimer's and
Parkinson's.
Five companies make up nearly half of the Company's overall exposure to
private firms, and they have generally performed better than their publicly
listed peers, raising money at higher valuations than last year, despite the
market turmoil. We employ a rigorous valuation process, which is described in
the Managers' Report below; in summary it involves a dedicated team at Baillie
Gifford, independent of the fund managers, plus valuation reports prepared by
an independent third party, S&P Global.
At the 2020 AGM shareholders approved a limit on private investments of 30% of
the total assets of the Company, measured at the time of purchase, and we
continue to believe that this provides the Company with the appropriate
flexibility to invest in some of the world's most exceptional growth companies
that have chosen to remain private. The exposure at 31 March 2023 was 28.6%
and the Board and the Manager will continue to monitor this closely.
Performance
Total return* (%) 12 months to
31 March 2023
NAV (17.8%)
Share price (33.5%)
FTSE All-World Index (0.9%)
Global Sector Average - NAV (8.2%)
Global Sector Average - share price (13.6%)
Source: AIC/Refinitiv/Baillie Gifford. NAV after deducting borrowings at fair
value*.
* Alternative Performance Measure - see Glossary of Terms and Alternative
Performance Measures at the end of this announcement.
The Company posted a negative return in the year to 31 March 2023. Whilst this
is a disappointing result, our view is that this represents too short a time
frame on which to judge returns given the long-term nature of the investment
strategy.
Over the last 10 years, Scottish Mortgage's net asset value (NAV) per share
has increased by 432% compared to a 181% increase in the FTSE All-World index.
This track record of delivering strong returns and our reputation for
identifying high-growth companies that will transform society means that we
continue to be regarded as one of the UK's leading investment trusts. We are a
long-term investment, and investors who share our belief in the underlying
strengths of the portfolio expect to benefit from future out-performance.
Total return*(%) Five years to 31 March 2023 Ten years to 31 March 2023
NAV 96.3% 431.5%
Share price 57.1% 347.0%
FTSE All-World Index 62.0% 180.8%
Global Sector Average - NAV 70.2% 277.7%
Global Sector Average - share price 49.4% 244.0%
Source: AIC/Refinitiv/Baillie Gifford. NAV after deducting borrowings at fair
value*.
* Alternative Performance Measure - see Glossary of Terms and Alternative
Performance Measures at the end of this announcement.
Value for money
We strive to keep the cost of investing low for shareholders to retain as much
of the return on their investment as possible. Ongoing charges for the year
were 0.34%, representing a small rise on the previous financial year (0.32%).
This is due to reduction in the proportion of total assets above £4 billion,
which attracts the lowest management fee rate of 0.25%. The ongoing charge
figure remains less than most actively managed funds in public funds, and
significantly less than private equity funds. Notwithstanding recent
performance, the Board and Managers continue to believe that Scottish Mortgage
offers shareholders excellent value for money.
Financial position
The Board remains committed to the strategic use of borrowing, which is one of
the principal advantages of the investment trust structure. The extent and
range of gearing is discussed by the Board and Managers at each Board meeting.
With a backdrop of falling equity markets, the absolute level of borrowing was
actively gradually reduced over the period to remain within an appropriate
range with net asset value. The Board and Managers repaid US$396 million
(£322.2 million) of revolving variable-rate bank facilities. The weighted
average cost of debt, based on drawn down borrowings is 2.98% as at 31 March
2023 (2.58% as at 31 March 2022). Additionally, the £75 million 6.875%
debenture was redeemed on maturity on 31 January 2023 and not refinanced.
At the end of the year gearing was 14%, a small increase from 13% at 31 March
2022.
Earnings and dividend
The Managers seek to maximise total return by providing growth capital to a
global portfolio of public and private companies. One common characteristic
across these companies is that many choose to retain and reinvest most of
their earnings to support future growth. This results in a relatively low
level of dividend income for your Company.
However, over the year income received by the Company more than doubled in
value to £49.0 million. This can be accounted for by increased income from
the portfolio companies - most notably Ant Group, Kering and ASML, which
raised dividends following good operational performance. Additionally, the
rising interest rate environment increased the level of deposit income
received.
As a Board we acknowledge the importance of providing a predictable and
growing level of dividend income, to help shareholders plan for their own
overall portfolio income needs. The requirement for investment trusts to
retain no more than 15% of income has necessitated a significantly larger
increase, in percentage terms, in the dividend than would otherwise have been
proposed. Accordingly, the Directors are recommending that this year the total
dividend be increased by 14.2% to 4.10 pence per share (2022 - 3.59 pence per
share). Future increases to the dividend are however, expected to be
consistent with the more modest uplifts in recent years unless higher levels
are required to maintain investment trust status.
Liquidity
With a backdrop of heightened market anxiety, particularly around growth and
private company investing - the share price moved from a discount to net asset
value of 0.5% to 19.6%. The Board is acutely aware that such moves can be
discomfiting for shareholders. Over the year, we sought to address the excess
supply of shares by buying back 36.5 million shares at a total cost of £283.3
million, which represented 2.5% of the share capital in issue at the start of
the year.
The Board remains committed to facilitating trading around net asset value
over the long term and under normal market conditions, but it is important to
note that the Liquidity Policy does not imply any guarantees. The Board and
the Managers take a pragmatic approach in making capital allocation calls
between buying back shares and other uses of capital such as making new
investments and reducing debt. All of this with an aim of enhancing
shareholder returns over the long term.
Environmental, Social and Governance (ESG)
The Board recognises the importance of considering ESG factors when making
investments and has asked the Managers to take these issues into account.
The Managers' approach to sustainable investing is underpinned by five core
beliefs that are detailed in 'Our Approach to Governance'. We recommend this
as a valuable reading to all shareholders, and it can be found on the website
scottishmortgage.com.
Some examples of the Managers' engagement with portfolio holdings on
governance matters are provided in the Stewardship and Governance Engagement
report on page 18 of the Annual Report and Financial Statements.
It is the Board's responsibility to monitor activity and progress in areas
such as voting and engagement, and the Company's voting record can also be
found on the website.
Shareholder engagement
The Annual General Meeting will be held at 4.30pm on Tuesday 27 June 2023 at
The Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2
1JQ.
As always, I would invite shareholders to attend, raise any questions they may
have and exercise their votes. Shareholders are also able to submit proxy
voting forms before the applicable deadline and to direct any comments or
questions for the Board in advance of the meeting through the Company's
Managers, Baillie Gifford. Alternatively, they may also get in touch via
either of the Corporate Brokers, Jefferies International and Numis Securities.
Contact details for all three firms are included in the Annual Report and are
available on their respective websites.
I would also encourage shareholders to maintain an active dialogue with the
Company throughout the year. The Company's Managers hold multiple shareholder
meetings and events around the country throughout the year, as well as via
webinars and 'Insight' pieces published on the Company's website.
Board update
As announced in March, I will be retiring from the Board at this year's AGM. I
first signalled my intention to step down in 2020 but remained as Chair at the
request of my fellow Board members to provide continuity given the
extraordinary circumstances of the pandemic and a period of transition with
the Board and Managers.
This has allowed us to plan for succession, and following a process led by the
Nomination Committee, the Board was unanimous in supporting Justin Dowley, our
current Senior Independent Director, as the Company's new Chair. Subject to
his re-election by shareholders, Justin will take over as Chair following the
AGM on 27 June.
Professor Paola Subacchi will also step down at the AGM after nine years on
the Board. I extend my sincere thanks to Paola for her dedication to Scottish
Mortgage during her tenure. On behalf of the Board, I would like to wish her
every success in her future non-executive roles and distinguished executive
career.
Professor Amar Bhidé left the Board in March following a fundamental
difference in view on the ongoing suitability of the Company's investment
policy as it relates to the Company's ability to invest in companies not
listed on a public market (see 'Investment policy' on page 40 of the Annual
Report and Financial Statements), and on whether the Board should maintain its
stance on managing the discount/premium (see 'Liquidity policy' on page 40 of
the Annual Report and Financial Statements). The Directors discussed these
matters on a number of occasions during Professor Bhidé's tenure and the
Board does not currently intend to change its stance or to recommend to
shareholders any proposed changes to the Company's investment policy, although
it continues to keep the ongoing suitability of the investment policy under
regular review. The Board welcomes two new Non-Executive Directors, Sharon
Flood and Vikram Kumaraswamy. Sharon's and Vikram's appointments are subject
to shareholder ratification at the forthcoming AGM.
Sharon is a Non-Executive Director of Getlink SE, where she is Chair of Safety
and Security, and Pets at Home PLC, where she is Chair of the Remuneration
Committee and formerly Chair of the Audit Committee. Sharon previously served
as Chair of Seraphine Group PLC and S T Dupont SA, and as non-executive
director and Chair of the Audit Committees at Crest Nicolson PLC, and Network
Rail. A Fellow of the Chartered Institute of Management Accountants, Sharon
has also held leadership roles at Sun European Partners and the John Lewis
Partnership. She is currently a Trustee of the University of Cambridge and
formerly a Trustee of both the Science Museum Group and Shelter. On
appointment, Sharon will join the Audit Committee and Nomination Committee.
Vikram Kumaraswamy is the Head of Strategy and Corporate Development at
Unilever. He leads portfolio development and capital allocation for the group,
with responsibility for strategy, M&A sourcing and execution, competitor
intelligence and corporate venturing. A chartered accountant, Vikram was
responsible for significant changes to Unilever's portfolio, positioning the
company for superior long-term growth and involved in other strategic
transformation initiatives. Vikram was previously CFO of PT Unilever Indonesia
Tbk, based in Jakarta. On appointment, Vikram will join the Audit Committee
and Nomination Committee.
I am delighted to welcome Sharon and Vikram and subject to their election at
the AGM, I am sure that the Board will greatly benefit from their
contributions.
Outlook
We remain confident that Scottish Mortgage merits a place in all portfolios
and that shareholders benefit from the patient, long-term approach taken by
your Managers. The Company has a clearly defined investment philosophy and
process, owning and supporting the world's most exceptional growth companies.
The Company will continue to pursue its unconstrained approach to investing in
the broadest opportunity set, spanning both public and private companies
across the globe. We are resolute in our duty to maximise total returns and
limit fees so that shareholders enjoy the maximum benefit of their investment.
Whilst there is no doubt that the year ahead will present challenges, we have
plenty of reasons for optimism as we continue to invest in companies that are
building a better future.
It has been my very great privilege to serve on the Board. As I step down as
your Chair, I would like to thank my fellow Directors for their commitment and
dedication to Scottish Mortgage. I would also like to thank Tom Slater,
Lawrence Burns, and each of the teams at Baillie Gifford. We refer to 'The
Managers', but in truth, there are many people behind the scenes working
tirelessly to deliver for our shareholders.
The Board will continue to act in the interest of shareholders to ensure an
appropriate balance of opportunity and risk. We are grateful to you for the
trust you place in us and for your ongoing and consistent support of the
Company. I am confident that Scottish Mortgage will continue to create
long-term sustainable value for shareholders in 2023 and beyond.
Fiona McBain
Chair
16 May 2023
For a definition of terms see Glossary of Terms and Alternative Performance
Measures at the end of this document
Total return information sourced from Refinitiv/StatPro/Baillie Gifford.
See disclaimer at end of this document.
Past performance is not a guide to future performance.
Managers' Review - Tom Slater
Geopolitical tensions have escalated this year, most notably with Russia's
invasion of Ukraine, which marked the return of major war to Europe and had
significant global repercussions. The invasion exposed the fault lines between
nations and created economic challenges such as price shocks, supply
disruptions and food shortages. Inflation emerged as a global concern,
affecting both developed and developing nations alike. Meanwhile, the great
power competition between the United States and China intensified, with both
countries adopting increasingly adversarial stances and actions, further
straining their relationship. On a more positive note, many countries
abandoned lockdowns, travel restrictions, and other pandemic-related measures
due to the success of vaccines and therapeutic treatments.
Having initially been slow to respond to rising inflation, central banks
raised interest rates aggressively. The US Federal Reserve was holding the
federal funds rate at around zero as recently as the first quarter of 2022 and
buying billions of dollars of bonds every month to stimulate the economy. This
started to change in March 2022 with the first of a series of rate increases
that summed close to five percentage points over the company's financial year,
one of the steepest increases on record. This has led to strain in the banking
sector and the collapse of several US regional banks. The impact of tighter
financial conditions on consumers, inflation and the broader economy will be
felt over the coming year, given the delays in the system.
In this environment, investors have flocked to assets that are already proven
and profitable. Predictability can have a deep allure as uncertainty grows and
people are fearful. Investing in such assets may be appropriate for others,
but we are sceptical that our shareholders will benefit in the long run if we
too resort to following the crowd. Buying predictability may provide temporary
comfort, but it is by embracing discomfort that we can entertain the
possibility of outsized returns from exceptional companies. The universe of
businesses with bounded opportunities and well-analysed competitive positions
is unlikely to yield extraordinary outcomes.
The sharp increase in interest rates and associated collapse in the supply of
capital has led to a fearful mood in financial markets. This negative
disposition ignores the exciting progress in several key technologies and
companies. The deterioration in markets has a greater impact in the near term,
both through the immediate prospects for corporate profitability and the
decline in our stock price relative to the value of our assets. However, over
the longer term, the more profound consequences will come from developments in
areas such as mRNA-based medicines or artificial intelligence.
Progress
Growth and innovation are not dependent on the direction of macro-economic
developments. Instead, we pay close attention to exponential trends such as
Moore's Law in semiconductors, Carlson's curve in genomic sequencing or
Wright's Law in manufacturing. These predictable trajectories of progress are
a valuable way to understand what is happening in the world. A feature of
these laws is that progress each year can underwhelm but cumulative progress
over a decade or more is remarkable. The past year was an exception because
there were breakthroughs across various industries and technologies.
One striking example came from healthcare and our largest holding, Moderna.
The company has demonstrated that mRNA technology can be used to create
effective personalised cancer vaccines. Phase 2 trials in advanced melanoma
showed a 44% increase in survival for those taking the therapy in addition to
the current standard of care. Pharmaceutical giant Merck paid US$250 million
to co-develop the technology with Moderna, and we expect Phase 3 trials in
various cancer types to launch this year. Moderna now has 30 vaccines in
clinical trials for infectious diseases and with the addition of therapies for
cancer, liver disease and lung disease, the number of potential applications
for Moderna's technology is multiplying.
While the focus of energy markets was on the immediate impact of the crisis in
Ukraine, the long-term trajectory away from carbon remains. The Inflation
Reduction Act in the United States has created a framework for significant
investment in electrification, aiming to prevent Chinese companies from
dominating the supply chain. Europe must respond with an equivalent strategy
to avoid all the industrial capacity being built elsewhere.
Our holding Northvolt, the European battery manufacturer, made its first
commercial deliveries in 2022 as its production facilities in Northern Sweden
ramped up. It is tapping into enormous latent demand for electrification and
has announced US$55 billion of contracts to supply major automotive
manufacturers. It is expanding its manufacturing footprint outside Sweden as
it scales up rapidly to meet the industry's needs.
Solar generating capacity doubled in the three years to 2022 although it
remains less than 5% of the global energy mix. In December, there was the
first confirmed example of net power production from a nuclear fusion
reaction. This result has proven elusive for several decades and is an
important milestone on the path to harnessing the technology. The price
deflation that will eventually flow from renewable generation makes
identifying direct investments challenging, but it is crucial to consider how
abundant clean energy will impact society's ability to innovate.
The Henry Adams curve describes the 7% annual growth in energy available to
civilisation since the invention of the steam engine 300 years ago. However,
since the 1970s oil price shocks, we have fallen off the curve and energy
consumption in Western economies has stagnated. As a result, we have seen
significant innovation in areas where we can do more with less. Semiconductors
have turned some science fiction predictions into reality, but advances in
other areas have lagged. We have few space stations, no lunar landings or
bases, no interplanetary travel or colonies and no supersonic aircraft or
flying cars. Amidst the many challenges, a missing ingredient for all these
endeavours has been abundant, low-cost, clean energy.
Our largest private holding, Space Exploration Technologies (SpaceX) made 60
launches in 2022, more than one per week and twice the number it achieved the
previous year. The commercial space market has finally become a reality thanks
to SpaceX's reusable rockets, which have reduced launch costs by 95% from
those of the space shuttle. This is even more striking when you consider that
Moore's law and associated software have made each kilogram of payload much
more productive. The first iterations of extra-terrestrial services have been
focused on sectors such as agriculture and mining. Consumer applications are
now appearing, including T-Mobile and SpaceX's collaboration to eliminate the
mobile-reception dead zones that still cover 20% of the US landmass. Over
time, R&D, manufacturing, tourism, and other space-based applications will
become more common.
We have been commenting on progress in Artificial Intelligence (AI) for some
time, and we saw some meaningful breakthroughs this year. At the risk of
hyperbole, this could be the start of another computing paradigm akin to the
personal computer or smartphone. Most noteworthy was the success of OpenAI in
making AI technology available to non-technical users with the release of
ChatGPT. The service signed up a hundred million users in just two months as
engineers and entrepreneurs recognised the potential offered by this approach
to computation. AI can already augment human software programmers and enhance
productivity, and AI services will likely write most computer code in the
future. The implications of AI-generated student essays are less encouraging
and only a minor example of the governance challenges these systems will
create.
AI will likely transform many parts of the economy, but it would be foolhardy
to make specific predictions. We can, however, say with some certainty that AI
systems will require a lot of silicon. OpenAI has suggested that the computing
power needed to run the latest models doubles every 14 weeks. Our holding
NVIDIA is a key supplier and enjoys formidable advantages, as the chip
technology it has built over decades for computer games has proven ideally
suited for AI computation. The semiconductor industry depends on ASML's
exceptional engineering skills to produce cutting-edge chips, and AI is just
one driver of the strong demand we anticipate over the next decade.
One of the largest AI companies in the world, Tesla, rolled out initial access
to its full self-driving software in the US this year. It has now driven 150
million autonomous miles, providing it with a vast data advantage over the
rest of the automotive industry. The system's capability is already
impressive, but the pace of improvement will be most important over time. In
the short run, new vehicle sales will face headwinds from higher interest
rates, but electric vehicles continue to gain share and Tesla, as the market
leader, has the scale and profitability to invest and grow in challenging
conditions. In the long run, its software and AI capabilities will be deployed
to a much larger fleet of vehicles, and others will struggle to compete.
Portfolio
Turnover in the portfolio remains low, reflecting our belief in the companies
we own. The lone sale from last year's top thirty was Alibaba. We reduced
other Chinese holdings and sold two smaller positions, KE Holdings and Full
Truck Alliance. These sales were driven by concerns about the growth of big
online platform companies in China after several regulatory interventions, as
well as reflecting disquiet about deteriorating Sino-US relations. China
remains an important market for stockpickers. It is one of the world's largest
economies and home to some of the most innovative management teams we know
(our best-performing stock last year was the Chinese ecommerce company PDD).
However, we will continue to manage the overall exposure of the Company in
light of the geopolitical environment.
We have substantially reduced our holding in Illumina, the sequencing machine
company. We still believe gene-sequencing is a fundamental building-block for
advances in healthcare, but the company's execution has been disappointing,
which has been reflected in a weak stock price. We have retained positions in
other companies where valuation declines have hurt us in the short run.
Ginkgo, the synthetic biology company, has struggled to explain its story to
public market investors since listing in 2021 but has delivered operationally
and is well placed to consolidate its nascent market. Blockchain.com, the
crypto banking business, has been hit by the weak digital asset market and the
bankruptcy of a large customer but ought to have a much stronger competitive
position in the next up-cycle given the larger problems experienced by its
peers. We are confident that Affirm, the US point-of-sale lender, will be able
to navigate the interest rate cycle while maintaining credit quality and
growing its loan book.
We purchased a new holding in the gaming company Roblox. Its audience use it
as an entertainment platform initially and the conversion of those players
into creators and paid users will underpin substantial growth over the next
decade. We also took a position in Cloud networking-provider Cloudflare which
will be an essential enabler of the next generation of software systems. We
added to Latin American ecommerce and finance company, MercadoLibre, which is
still in the early stages of market penetration and is adept at creating the
products its users need. As with many of our established holdings, it benefits
from a more benign competitive environment as capital is withdrawn. It is now
a top-five holding.
Conclusion
Despite recent stock market declines, significant operational progress
continues, reflecting the accelerating pace of change throughout the economy.
While this progress has not translated into our investment results lately, we
need to remain disciplined and patient. We know this has been painful for
shareholders, but history shows that periods of poor performance are
inevitable. Our approach will never be consistently in favour, and we should
not deviate from it to avoid short-term headwinds. If patient ownership of
growth companies was easy, there would be far more competition.
We cannot know when stock markets will reflect the progress we see, but in the
long run, share prices follow company fundamentals. In the meantime, we will
focus on the bigger picture and avoid impulsive decisions based on market
movements. Previous downturns have drawn attention to companies solving
important problems and we remain vigilant for new opportunities.
There is no going back to a world of static and unchanging industries. The
retreat to perceived safety can only be temporary, as safety is ephemeral
amidst such upheaval. It is by investing in the agents of change and
partnering to develop big new opportunities, that exceptional returns for
shareholders will be generated.
Tom Slater
Managers' Review - Lawrence Burns
Reflecting on a decade of private company investing
Scottish Mortgage has now been investing in private companies for over a
decade. We began this journey in 2012 when Yahoo! was looking to off-load its
stake in the Chinese ecommerce behemoth Alibaba. It was a fortuitous start to
private company investing. The Company's £30 million holding became worth
more than £150 million just two years later when Alibaba launched what at the
time was the world's largest-ever stock market flotation.
The Company's private company exposure has expanded over the decade since,
giving our shareholders access to a range of differentiated businesses, many
of which have no public market equivalent. From SpaceX radically lowering the
cost to access space; to Northvolt providing crucial homegrown battery
production for the European market; to Tempus Labs developing personalised
cancer diagnoses powered by artificial intelligence. Our private company
exposure is concentrated in a small number of these very large private
businesses. The five largest private holdings alone account for nearly half of
our private company exposure with the ten largest accounting for nearly
two-thirds:
Private Exposure at 31 March 2023
http://www.rns-pdf.londonstockexchange.com/rns/7038Z_2-2023-5-17.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/7038Z_2-2023-5-17.pdf)
There are four main reasons we invest in private companies:
• Companies are staying private longer
We have never aspired to become early-stage venture capitalists. We merely
adapted to the type of companies we invested in choosing to stay private
longer. The Facebook IPO was an important datapoint. When it listed in 2012
and finally became available for the Company to invest in, it was already
valued at over US$100 billion. Alibaba listed at nearly US$ 200 billion two
years later. The implication of this trend was that ever greater value
creation was occurring before companies went public. Exceptional businesses
and the returns they generated were staying out of the reach of public market
investors and thus Scottish Mortgage shareholders. In the technology sector,
the average age of a new public company in 1999 was 4 years. By 2020 that
extended to more than 12 years according to research from the University of
Florida.
Companies are staying private longer and building more value while unlisted
http://www.rns-pdf.londonstockexchange.com/rns/7038Z_3-2023-5-17.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/7038Z_3-2023-5-17.pdf)
The companies that make up the bulk of our private company exposure are
consequently neither small nor early-stage. We have several private holdings
that already have many thousands of employees and billions in annual revenue.
The majority of our assets invested in private companies are in businesses
which would be large enough in scale to join the FTSE 100 Index, if they were
based in the UK and listed.
Total equity value (USD) Company count Portfolio %
Micro (<$300m) 7 0.9
Small ($300m-$2bn) 14 5.0
Medium ($2bn-$10bn) 14 10.1
Large (>$10bn) 7 12.6
Grand total 42 28.6
As at 31 March 2023. There are ten limited partnership investments not
included in the table above.
• Access is an advantage
The second reason we invest in private companies is that we believe we should
have an edge in doing so.
Public companies can choose whom they speak to and we are privileged in terms
of the access we get. However, private companies do not just choose who they
talk to but also take great care in picking who is allowed to own their
shares. For the most exceptional private companies supply of capital often
dwarfs the amount they wish to raise. It is usually a good signal when a
meeting with a new private company resembles a two-way interview process.
Our reputation as long-term owners of businesses and our closed-ended
structure make us stable shareowners which is attractive to private companies.
The good access we consequently receive is evidenced by over 90% of our
investments in private companies coming from proprietary sources in recent
years. That means coming from a company approaching us directly or an
introduction from another founder or investor as opposed to a bank-sponsored
funding round.
• Insights without boundaries
Investing in private companies has also provided us with an entirely new world
of insights to leverage over the last decade. Understanding how the world is
changing solely through public companies now feels akin to trying to construct
a puzzle with half the pieces missing.
Ant Group helped us to better understand the potential of MercadoLibre's
payment arm earlier than would otherwise have been the case. While a tour of
private AI chip companies in the Bay area back in 2018 helped us to better
understand the threat of those trying to disrupt NVIDIA. Meituan helped us
understand the potential of food delivery across the globe. Private company
investing has continually provided us with a lens into the future. Today it is
allowing us to better understand emerging areas such as synthetic biology,
artificial intelligence and climate solutions.
It has also allowed us to get to know companies well before they go public. We
have now had 35 of our private holdings transition to listed companies.
Getting to know Spotify, Meituan, HelloFresh and many more before they went
public gave us a far more informed perspective than meeting them for the first
time on a highly choreographed IPO roadshow with a team of investment bankers
in tow. Over 40% of Scottish Mortgage's assets are invested in companies that
were first purchased as private companies. Private company investing has
become an important funnel for the public part of our portfolio.
• Low-cost access
The ability to invest in world-leading private companies has traditionally
been neither accessible nor cheap.
Scottish Mortgage is able to offer access to both the world's leading private
and public companies for an annual fee of 0.34%. In doing so we believe
Scottish Mortgage plays a role in democratising access to private companies at
low cost.
A decade of learning and building
When we began investing a decade ago there was much we did not know. The
infrastructure we would need to do this at scale did not exist and took time
to build. Nevertheless, we sensed an opportunity and proceeded cautiously but
deliberately allowing us to learn and build the internal capabilities
required.
Today we work alongside a team of seven dedicated private company investors as
well as 30 investors who work on both public and private companies. In
addition, we have an in-house Private Companies Legal Team to manage aspects
such as non-disclosure agreements, term sheets and legal due diligence.
Private company valuations
We also have a Private Company Valuations Team whose work has attracted far
greater attention than ever before over the last year given the volatile
conditions.
As Scottish Mortgage has a daily reported NAV (net asset value), it requires a
robust valuations process to ensure our valuations are kept as up-to-date as
possible. The aim of the valuations process is to hold private companies at
'fair value'. In other words, the price we believe we would get were we to try
to sell our shares.
This process is carried out by Baillie Gifford's Private Company Valuations
Team which takes advice from an independent third party, S&P Global.
Valuations are then approved by Baillie Gifford's Valuations Group which
comprises five voting members all independent of those making investment
decisions. Scottish Mortgage's investment managers, Tom Slater and I are
informed via email after any valuation changes have been applied.
The fair value assessment itself is carried out on a rolling three-month
cycle. This means that a third of the private component of the portfolio is
valued each month. However, this frequency is only the bare minimum. In
practice, the pricing of private companies is monitored continually with
'trigger events' such as a funding round or change in fundamentals prompting
revaluations, outside the three-monthly cycle.
The two most common triggers over the last year have been changes in the value
of publicly listed comparator companies or comparator indices. A 5% movement
in either was sufficient to trigger a re-assessment. In total 532 revaluations
were made with 84% of the private instruments held re-valued five times or
more:
Revaluations performed 532
Instruments held 87
Valued up to four times 16%
Valued five times or more 84%
The result of these re-valuations in aggregate was that the private company
valuations were written down by 28% which compares to the fall in the NASDAQ
of 14%. The write-downs would have been materially greater if it were not for
the upward revaluations of seven companies during the period.
The private company valuations also receive external checks in three key ways.
First, the Audit Committee of Scottish Mortgage meets twice a year
specifically to review the valuations. Second, the valuations are subject to
the annual scrutiny of our auditors PwC. Finally, because Scottish Mortgage's
largest private holdings are also held by other Baillie Gifford funds, this
subjects them to checks by different auditors. Moreover, these checks occur at
different points throughout the year due to these trusts having different
financial year-ends.
Private company allocation
When we started private company investing there was no limit in place. As the
proportion invested in this area grew, the Directors felt it appropriate to
provide shareholders with more clarity. At the annual general meeting in 2016,
shareholders approved an update to the investment policy to include a limit
for private companies of 25% of the total assets, measured at the time of
purchase. In 2020, this limit was raised to 30%, where it remains.
That limit only applies at the time of purchase. This means that when the
level is exceeded no further private company purchases can be made. However,
it also protects Scottish Mortgage from being forced sellers of private
companies purely due to relative or absolute movements in the value ascribed
to either private or public assets.
Over the course of the financial year we were able to deploy £281m into
private companies during the financial year. This included follow-on
investments as well as two new private investments in UPSIDE Foods and
Climeworks. The proportion invested in private companies stood at 28.6% as of
31 March 2023.
This figure is primarily influenced by the value of our public market
investments and the valuation changes in our private companies. However, it is
also impacted by buybacks and gearing. An important influence over the last
year has been the closing of the IPO market. We had fourteen companies go
public in 2021 but as the IPO market closed in 2022 companies postponed their
plans with no private holdings going public. We will continue to closely
monitor the proportion of the Company invested in private companies throughout
the year recognising that the proportion can be volatile. Should the Company
experience material, prolonged and disadvantageous impact stemming from this
or any other facet of our investment policy we would naturally seek to sound
out the views of our shareholders to understand their perspective.
Looking forward
Tom Slater has helpfully provided examples of private companies that have made
encouraging progress over the course of the last year. However, we are also
cognisant that there has been a material change in the funding environment. We
have transitioned from a period of capital abundance to one of capital
scarcity.
We have seen several of our companies successfully raise further capital in
this environment while a number of our private holdings are already generating
positive cashflow. Moreover, we are seeing companies bring down their cash
burn materially. Nevertheless, it is likely that a few of our smaller private
company holdings may find themselves casualties of this new environment.
Should this happen we expect the impact to represent only a small percentage
of the portfolio's assets. As ever, our performance will be primarily driven
by those companies that succeed rather than those that fail.
Over the past decade our private exposure has grown to become an integral part
of Scottish Mortgage. It has expanded our opportunity set from which to
identify outliers. It has provided insights that would have otherwise been out
of reach and we believe it offers our shareholders exposure to exceptional
hard to access growth companies at a low fee level.
As we look to the future perhaps it is only right to let one of our private
holdings have the final word. The founders of payment processing giant Stripe
write in their shareholder letter that the propensity to start new businesses
has increased significantly and persistently. The US Census data supports this
showing that the rate of business formation has increased by 44% since 2019.
As they reflect:
"Entrepreneurship is the lifeblood of a dynamic economy. For all the gloomy
economic headlines, it's important to contextualise with the fact that more
new ventures are being started today than during the market boom of 2021"
The role of Scottish Mortgage will continue to be to support that growth in
entrepreneurship in good times and bad, whether public or private and through
doing so generate long-term returns for our shareholders. We are intensely
grateful for the continued trust our shareholders place in us and for their
patience particularly over the last year.
Lawrence Burns
Portfolio executive summary, thirty largest holding and list of investments at
31 March 2023
http://www.rns-pdf.londonstockexchange.com/rns/7038Z_1-2023-5-17.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/7038Z_1-2023-5-17.pdf)
Income statement
The following is the preliminary statement for the year to 31 March 2023 which
was approved by the Board on 16 May 2023.
For the year ended 31 March
Notes 2023 2023 2023 2022 2022 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments - (2,790,255) (2,790,255) - (2,421,025) (2,421,025)
Currency losses on investments - (68,748) (68,748) - (41,559) (41,559)
Income 2 49,035 - 49,035 23,262 - 23,262
Investment management fee - (35,953) (35,953) - (51,647) (51,647)
Other administrative expenses (5,861) - (5,861) (6,818) - (6,818)
Net return before finance costs and taxation 43,174 (2,894,956) (2,851,782) 16,444 (2,514,231) (2,497,787)
Finance costs of borrowings - (66,612) (66,612) - (44,651) (44,651)
Net return before taxation 43,174 (2,961,568) (2,918,394) 16,444 (2,558,882) (2,542,438)
Tax (1,803) (1,941 ) (3,744) 137 (2,048) (1,911)
Net return after taxation 41,371 (2,963,509) (2,922,138) 16,581 (2,560,930) (2,544,349)
Net return per ordinary share 4 2.90p (207.49p) (204.59p) 1.16p (179.48p) (178.32p)
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital return columns are prepared
under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing
operations.
A Statement of Comprehensive Income is not required as all gains and losses of
the Company have been reflected in the above statement.
Balance Sheet
As at 31 March
Notes 2023 2023 2022 2022
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 6 13,149,592 16,669,469
Current assets
Debtors 12,037 13,142
Cash and cash equivalents 184,945 229,962
196,982 243,104
Creditors
Amounts falling due within one year: 7
Bank loans (376,076) (502,032)
Other creditors and accruals (22,055) (23,814)
(398,131) (525,846)
Net current liabilities (201,149) (282,742)
Total assets less current liabilities 12,948,443 16,386,727
Creditors
Amounts falling due after more than one year: 7
Bank loans (388,149) (516,384)
Loan notes (1,006,857) (985,613)
Debenture stock (52,212) (127,559)
Provision for deferred tax liability (3,225) (1,172)
(1,450,443) (1,630,728)
11,498,000 14,755,999
Capital and reserves
Called up share capital 9 74,239 74,239
Share premium account 928,400 928,400
Capital redemption reserve 19,094 19,094
Capital reserve 10,434,896 13,717,685
Revenue reserve 41,371 16,581
Total shareholders' funds 11,498,000 14,755,999
Net asset value per ordinary share
(after deducting borrowings at book)* 816.8p 1,021.8p
* See Glossary of Terms and Alternative Performance Measures at the
end of this announcement.
Statement of changes in equity
For the year ended 31 March 2023
Notes Called up share Share premium account Capital Capital Revenue Total shareholders'
£'000
capital redemption reserve* reserve* funds
£'000 reserve £'000 £'000 £'000
£'000
Shareholders' funds at 1 April 2022 74,239 928,400 19,094 13,717,685 16,581 14,755,999
Net return after taxation - - - (2,963,509) 41,371 (2,922,138)
Ordinary shares bought back into treasury - - - (283,276) - (283,276)
Ordinary shares sold from treasury - - - - - -
Dividends paid during the year 5 - - - (36,004) (16,581) (52,585)
Shareholders' funds at 31 March 2023 74,239 928,400 19,094 10,434,896 41,371 11,498,000
For the year ended 31 March 2022
Notes Called up share Share premium account Capital Capital Revenue Total shareholders'
£'000
capital redemption reserve reserve funds
£'000 reserve £'000 £'000 £'000
£'000
Shareholders' funds at 1 April 2021 74,239 781,771 19,094 16,105,297 9,069 16,989,470
Net return after taxation - - - (2,560,930) 16,581 (2,544,349)
Ordinary shares bought back into treasury - - - (157,597) - (157,597)
Ordinary shares sold from treasury - 146,629 - 371,617 - 518,246
Dividends paid during the year 5 - - - (40,702) (9,069) (49,771)
Shareholders' funds at 31 March 2022 74,239 928,400 19,094 13,717,685 16,581 14,755,999
The capital reserve balance at 31 March 2023 includes investment holding gains
of £3,312,623,000 (31 March 2022 - gains of £6,560,689,000).
* The Revenue Reserve and Capital Reserve (to the extent it
constitutes realised profits) are distributable.
Cash Flow Statement
For the year ended 31 March
Notes 2023 2023 2022 2022
£'000 £'000 £'000 £'000
Cash flows from operating activities
Net return before taxation (2,918,394) (2,542,438)
Losses on investments 2,790,255 2,421,025
Currency losses 68,748 41,559
Finance costs of borrowings 66,612 44,651
Overseas withholding tax incurred (1,927) (5,104)
Changes in debtors and creditors (2,449) (4,054)
Cash from operations 2,845 (44,361)
Interest paid (66,322) (41,545)
Net cash outflow from operating activities (63,477) (85,906)
Cash flows from investing activities
Acquisitions of investments (868,191) (2,687,415)
Disposals of investments 1,599,218 1,652,769
Net cash inflow/(outflow) from investing activities 731,027 (1,034,646)
Cash flows from financing activities
Equity dividends paid 5 (52,585) (49,771)
Ordinary shares bought back into treasury and stamp duty thereon (283,213) (183,015)
Ordinary shares sold from treasury - 518,246
Debenture repaid (75,000) -
Bank loans repaid (1,913,150) (265,727)
Bank loans drawn down and loan notes issued 1,591,000 1,109,394
Net cash (outflow)/inflow from financing activities (732,948) 1,129,127
(Decrease)/increase in cash and cash equivalents (65,398) 8,575
Exchange movements 20,381 9,259
Cash and cash equivalents at start of period 229,962 212,128
Cash and cash equivalents at end of period* 184,945 229,962
* Cash and cash equivalents represent cash at bank and short term
money market deposits repayable on demand.
( )
Notes to the financial statements
1. The Financial Statements for the year to 31 March 2023 have been
prepared in accordance with FRS 102, 'The Financial Reporting Standard
applicable in the UK and Republic of Ireland' and on the basis of the
accounting policies set out in the Annual Report and Financial Statements
which are unchanged from the prior year and have been applied consistently.
2. Income
2023 2022
£'000 £'000
Income from investments
UK dividend income - -
Overseas dividends* 38,578 22,244
Overseas interest 4,576 995
43,154 23,239
Other income
Deposit interest 5,881 23
Total income 49,035 23,262
Total income comprises:
Dividends from financial assets designated at fair value through profit or 38,578 22,244
loss
Interest from financial assets designated at fair value through profit or loss 4,576 995
Interest from financial assets not at fair value through profit or loss 5,881 23
49,035 23,262
* Overseas dividend income represents income from equity holdings. There was
no income from preference share (non-equity) holdings during the year (2022 -
nil).
3. Baillie Gifford & Co Limited, a wholly owned subsidiary of
Baillie Gifford & Co, has been appointed as the Company's Alternative
Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford
& Co Limited has delegated portfolio management services to Baillie
Gifford & Co. Dealing activity and transaction reporting has been further
sub-delegated to Baillie Gifford Overseas Limited and Baillie Gifford Asia
(Hong Kong) Limited.
The Investment Management Agreement is terminable on not less than six months'
notice. The annual management fee for the year to 31 March 2023 was 0.30% on
the first £4 billion of total assets less current liabilities (excluding
short term borrowings for investment purposes) and 0.25% on the remaining
assets.
4. Net return per ordinary share
2023 2023 2023 2022 2022 2022
Revenue Capital Total Revenue Capital Total
Net return per ordinary share 2.90p (207.49p) (204.59p) 1.16p (179.48p) (178.32p)
Revenue return per ordinary share is based on the net revenue after taxation
of £41,371,000 (2022 - £16,581,000), and on 1,428,245,353 (2022 -
1,426,897,806) ordinary shares, being the weighted average number of ordinary
shares (excluding treasury shares) during the year.
Capital return per ordinary share is based on the net capital return for the
financial year of (£2,963,509,000) (2022 - net capital return of
(£2,560,930,000)), and on 1,428,245,353 (2022 - 1,426,897,806) ordinary
shares, being the weighted average number of ordinary shares (excluding
treasury shares) during the year.
There are no dilutive or potentially dilutive shares in issue.
5. Ordinary dividends
2023 2022 2023 2022
£'000 £'000
Amounts recognised as distributions in the year:
Previous year's final (paid 1 July 2022) 2.07p 1.97p 29,864 27,984
Interim (paid 16 December 2022) 1.60p 1.52p 22,721 21,787
3.67p 3.49p 52,585 49,771
Also set out below are the total dividends paid and proposed in respect of the
financial year, which is the basis on which the requirements of section 1158
of the Corporation Tax Act 2010 are considered. The revenue available for
distribution by way of dividend for the year is £41,371,000 (2022 -
£16,581,000).
2023 2022 2023 2022
£'000 £'000
Dividends paid and payable in respect of the year:
Interim dividend per ordinary share (paid 16 December 2022) 1.60p 1.52p 22,721 21,787
Proposed final dividend per ordinary share (payable 4 July 2023) 2.50p 2.07p 35,190 29,894
4.10p 3.59p 57,911 51,681
If approved, the recommended final dividend on the ordinary shares will be
paid on 4 July 2023 to shareholders on the register at the close of business
on 2 June 2023. The ex-dividend date is 1 June 2023. The Company's Registrars
offer a Dividend Reinvestment Plan and the final date for elections for this
dividend is 13 June 2023.
6. Fair Value Hierarchy
As at 31 March 2023 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Equities/funds 9,347,981 - - 9,347,981
Private company ordinary shares - - 838,482 838,482
Private company preference shares* - - 2,723,897 2,723,897
Private company convertible notes - - 113,692 113,692
Limited Partnership Investments - - 113,330 113,330
Contingent value rights - - 12,210 12,210
Total financial asset investments 9,347,981 - 3,801,611 13,149,592
As at 31 March 2022 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Equities/funds 12,473,650 - - 12,473,650
Private company ordinary shares - - 609,779 609,779
Private company preference shares* - - 3,470,105 3,470,105
Private company convertible notes - - 38,853 38,853
Limited Partnership Investments - - 77,082 77,082
Total financial asset investments 12,473,650 - 4,195,819 16,669,469
During the period, no investments were transferred from Level 3 to Level 1 on
becoming listed. The fair value of listed investments is bid value or, in the
case of holdings on certain recognised overseas exchanges, last traded price.
Listed Investments are categorised as Level 1 if they are valued using
unadjusted quoted prices for identical instruments in an active market and as
Level 2 if they do not meet all these criteria but are, nonetheless, valued
using market data.
* The investments in preference shares are not classified as equity holdings
as they include liquidation preference rights that determine the repayment (or
multiple thereof) of the original investment in the event of a liquidation
event such as a take-over.
Investments in securities are financial assets designated at fair value
through profit or loss on initial recognition. In accordance with Financial
Reporting Standard 102, the preceding tables provide an analysis of these
investments based on the fair value hierarchy described below, which reflects
the reliability and significance of the information used to measure their fair
value.
The fair value hierarchy used to analyse the fair values of financial assets
is described below. The levels are determined by the lowest (that is the least
reliable or least independently observable) level of input that is significant
to the fair value measurement for the individual investment in its entirety as
follows:
Level 1 - using unadjusted quoted prices for identical instruments in an
active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
Private Company Investments
Private company investments are valued at fair value by the Directors
following a detailed review and appropriate challenge of the valuations
proposed by the Managers. The Managers' private company investment policy
applies techniques consistent with the International Private Equity and
Venture Capital Valuation Guidelines 2018 ('IPEV'). The techniques applied are
predominantly market- based approaches. The market-based approaches available
under IPEV are set out below and are followed by an explanation of how they
are applied to the Company's private company portfolio:
- Multiples;
- Industry Valuation Benchmarks; and
- Available Market Prices.
The nature of the private company portfolio currently will influence the
valuation technique applied. The valuation approach recognises that, as stated
in the IPEV Guidelines, the price of a recent investment, if resulting from an
orderly transaction, generally represents fair value as at the transaction
date and may be an appropriate starting point for estimating fair value at
subsequent measurement dates. However, consideration is given to the facts and
circumstances as at the subsequent measurement date, including changes in the
market or performance of the investee company. Milestone analysis is used
where appropriate to incorporate the operational progress of the investee
company into the valuation. Additionally, the background to the transaction
must be considered. As a result, various multiples-based techniques are
employed to assess the valuations particularly in those companies with
established revenues. Discounted cashflows are used where appropriate. An
absence of relevant industry peers may preclude the application of the
Industry Valuation Benchmarks technique and an absence of observable prices
may preclude the Available Market Prices approach. Valuations are typically
cross-checked for reasonableness by employing relevant alternative techniques.
The private company investments are valued according to a three monthly cycle
of measurement dates. The fair value of the private company investments will
be reviewed before the next scheduled three monthly measurement date on the
following occasions:
- at the year end and half year end of the Company; and
- where there is an indication of a change in fair value as defined
in the IPEV guidelines (commonly referred to as 'trigger' events).
7.
2023 2022
£'000 £'000
The Royal Bank of Scotland International Limited 3 year fixed rate loan 2024 161,753 -
The Royal Bank of Scotland International Limited 5 year loan - 37,975
National Australia Bank Limited 3 year loan 133,447 296,966
Scotiabank 3 year loan 80,876 75,950
Industrial and Commercial Bank of China 3 year loan - 91,141
Other creditors and accruals 22,055 23,814
398,131 525,846
Included in other creditors is £8,828,000 (2022 - £11,055,000) in respect of
the investment management fee.
Borrowing facilities at 31 March 2023
A US$200 million fixed rate loan has been arranged with The Royal Bank of
Scotland International Limited (repayable on 8 January 2024)
A 3 year US$350 million revolving loan facility has been arranged with
National Australia Bank.
A 3 year US$100 million revolving loan facility has been arranged with
Scotiabank.
A 5 year US$25 million revolving loan facility has been arranged with The
Royal Bank of Scotland International Limited.
A 3 year US$120 million revolving loan facility has been arranged with
Industrial and Commercial Bank of China Limited.
The revolving loan facilities are classified as due within one year due to the
revolving nature of the facilities and the short draw down periods. The
facilities are available until their termination dates which are in more than
one year. The maturity table on page 90 of the Annual Report and Financial
Statements reflects the termination dates of the revolving facilities.
At 31 March 2023 drawings were as follows:
National Australia Bank Limited US$165 million (revolving facility expiring 20 September 2024) at an interest
rate (at 31 March 2023) of 6.027% per annum
Scotiabank US$100 million (revolving facility expiring 17 December 2024) at an
interest rate (at 31 March 2023) of 6.215% per annum
The Royal Bank of Scotland International Limited US$200 million (fixed rate loan repayable 8 January 2024 at an interest rate
of 1.491% per annum)
At 31 March 2022 drawings were as follows:
The Royal Bank of Scotland International Limited US$50 million (revolving facility expiring 27 August 2026) at an interest rate
(at 31 March 2022) of 2.108% per annum
National Australia Bank Limited US$391 million (revolving facility expiring 20 September 2024) at an interest
rate (at 31 March 2022) of 2.184% per annum
Scotiabank US$100 million (revolving facility expiring 17 December 2024) at an interest
rate (at 31 March 2022) of 1.401% per annum
Industrial and Commercial Bank of China US$120 million loan (revolving facility expiring 12 October 2024) at an
interest rate (at 31 March 2022) of 1.588% per annum
During the period, the US$391 million revolving 3 year loan with NAB was
reduced to a facility of US$350 million and US$185 million was repaid. The
ICBC US$120 million revolving 3 year loan was repaid in full. The RBSI US$50
million revolving 5 year loan facility was repaid in full and subsequently
reduced to a facility of US$25 million.
The main covenants which are tested monthly are:
(i) Total borrowings shall not exceed 35% of the Company's adjusted net asset
value.
(ii) Total borrowings shall not exceed 35% of the Company's adjusted total
assets.
(iii) The Company's minimum net asset value shall be £2,500 million.
(iv) The Company shall not change the investment manager without prior written
consent of the lenders.
Nominal rate % Effective rate % 2023 2022
£'000 £'000
Debenture stocks:
£75 million 6.875% debenture stock 2023 - 74,969
£50 million 6-12% stepped interest debenture stock 2026 12.0 10.8 51,537 51,915
£675,000 4½% irredeemable debenture stock 675 675
Unsecured loan notes:
£30 million 2.91% 2038 2.91 2.91 29,969 29,967
£150 million 2.30% 2040 2.3 2.3 149,831 149,821
£50 million 2.94% 2041 2.94 2.94 49,945 49,942
£45 million 3.05% 2042 3.05 3.05 44,913 44,908
£30 million 3.30% 2044 3.30 3.30 29,941 29,938
£20 million 3.65% 2044 3.65 3.65 19,972 19,970
€18 million 1.65% 2045 1.65 1.65 15,797 15,192
£30 million 3.12% 2047 3.12 3.12 29,939 29,936
£90 million 2.96% 2048 2.96 2.96 89,896 89,892
€27 million 1.77% 2050 1.77 1.77 23,695 22,788
£100 million 2.03% 2036 2.03 2.03 99,927 99,922
£100 million 2.30% 2046 2.30 2.30 99,923 99,920
US$175 million 2.99% 2052 2.99 2.99 141,361 132,745
US$110 million 3.04% 2057 3.04 3.04 88,855 83,440
US$115 million 3.09% 2062 3.09 3.09 92,893 87,232
Long term bank loans:
US$180 million RBSI 2.60% fixed rate loan 2026 2.60% 2.60% 145,579 136,712
US$200 million RBSI 1.49% fixed rate loan 2024 1.49% 1.49% - 151,901
US$300 million Scotiabank 2.23% fixed rate loan 2026 2.23% 2.23% 242,570 227,771
Provision for deferred tax liability (see note below) 3,225 1,172
1,450,443 1,630,728
Debenture Stocks
The debenture stocks are stated at the cumulative amount of net proceeds after
issue, plus accrued finance costs attributable to the stepped interest
debentures. The cumulative effect is to increase the carrying amount of
borrowings by £1,537,000 (2022 - £1,884,000) over nominal value. The
debenture stocks are secured by a floating charge over the assets of the
Company.
Unsecured Loan Notes
The unsecured loan notes are stated at the cumulative amount of net proceeds
after issue. The cumulative effect is to reduce the carrying amount of
borrowing by £1,152,000 (2022 - £829,000).
Long Term Bank Loans
The long term bank loans are stated at the cumulative amount of net proceeds
after issue. The cumulative effect is to reduce the carrying amount of
borrowing by £60,000 (2022 - £76,000). The main covenants are detailed in
note 11 of the Annual Report and Financial Statements.
Provision for Deferred Tax Liability
The deferred tax liability provision at 31 March 2022 of £1,172,000 (31 March
2021 - £2,459,000) relates to a potential liability for Indian capital gains
tax that may arise on the Company's Indian investment should it be sold in the
future, based on the net unrealised taxable capital gain at the period end and
on enacted Indian tax rates. The amount of any future tax amounts payable may
differ from this provision, depending on the value and timing of any future
sales of such investments and future Indian tax rates.
Provision for deferred tax liability
The deferred tax liability provision at 31 March 2023 of £3,225,000 (31 March
2022 - £1,172,000) relates to a potential liability for Indian capital gains
tax that may arise on the Company's Indian investment should it be sold in the
future, based on the net unrealised taxable capital gain at the period end and
on enacted Indian tax rates. The amount of any future tax amounts payable may
differ from this provision, depending on the value and timing of any future
sales of such investments and future Indian tax rates.
Borrowing limits
Under the terms of the Articles of Association and the Debenture Trust Deeds,
total borrowings should not exceed a sum equal to one half of the adjusted
total of capital and reserves at the Company's year end.
8. The fair value of borrowings at 31 March 2023 was £1,442,809,000
(2022 - £2,001,685,000). Net asset value per share (after deducting
borrowings at fair value) was 843.9p (2022 - 1,030.8p).
9. Share Capital: Ordinary Shares of 5p Each
2023 2023 2022 2022
Number £'000 Number £'000
Allotted, called up and fully paid ordinary shares of 5p each 1,407,618,528 70,381 1,444,131,650 72,207
Treasury shares of 5p each 77,162,352 3,858 40,649,230 2,032
Total 1,484,780,880 74,239 1,484,780,880 74,239
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 2023, 36,513,122 shares with a nominal value of £1,825,000 were
bought back at a total cost of £283,276,000 and held in treasury (2022 -
12,437,319 shares with a nominal value of £621,000 were bought back at a
total cost of £157,597,000 and held in treasury). At 31 March 2023 the
Company had authority to buy back 184,322,175 ordinary shares.
Under the provisions of the Company's Articles, the share buy-backs are funded
from the capital reserve.
In the year to 31 March 2023, the Company sold no treasury ordinary shares (31
March 2022 - 34,950,000 ordinary shares at a premium to net asset value, with
a nominal value of £1,747,500 raising net proceeds of £518,246,000). At 31
March 2023 the Company had authority to issue or sell from treasury a further
144,405,056 ordinary shares (77,162,352 shares were held in treasury at 31
March 2023).
10. Transaction costs on purchases amounted to £413,000 (2022 -
£576,000) and transaction costs on sales amounted to £1,651,000 (2022 -
£209,000).
11. The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 March 2023 or 2022 but is
derived from those accounts. Statutory accounts for 2022 have been delivered
to the Registrar of Companies, and those for 2023 will be delivered in due
course. The auditor has reported on those accounts; the reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
12. Related Party Transactions
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 section 412 of the Companies Act 2006.
The management fee payable for the year end and details of the management fee
arrangements are included on note 3 above.
The Annual Report and Financial Statements will be available on the Managers'
website www.scottishmortgage.com (http://www.scottishmortgage.com) ‡ on or
around 25 May 2023.
Glossary of terms and alternative performance measures ('APM')
An Alternative Performance Measure ('APM') is a financial measure of
historical or future financial performance, financial position, or cashflows,
other than a financial measured defined or specified in the applicable
financial reporting framework. The APMs noted below are commonly used measures
within the investment trust industry and served to improve comparability
between investment trusts.
Total Assets
This is the Company's definition of Adjusted Total Assets, being the total
value of all assets held less all liabilities (other than liabilities in the
form of borrowings).
Net Asset Value
Also described as shareholders' funds. Net Asset Value (NAV) is the value of
total assets less liabilities (including borrowings). The Net Asset Value can
be calculated on the basis of borrowings stated at book value, fair value and
par value. An explanation of each basis is provided below. The NAV per share
is calculated by dividing this amount by the number of ordinary shares in
issue (excluding treasury shares).
Net Asset Value (Borrowings at Book)/Shareholders' Funds
Borrowings are valued at adjusted net issue proceeds.
Net Asset Value (Borrowings at Fair Value) (APM)
Borrowings are valued at an estimate of their market worth. A reconciliation
to Net Asset Value with borrowings at book value is provided below.
31 March 2023 31 March 2022
Net Asset Value per ordinary share (borrowings at book value) 816.8p 1,021.8p
Shareholders' funds (borrowings at book value) £11,498,000k £14,755,999k
Add: book value of borrowings £1,823,294k £2,131,588k
Less: fair value of borrowings (£1,442,809k) (£2,001,685k)
Net Asset Value (borrowings at fair value) £11,878,485k £14,885,902k
Shares in issue at year end (excluding treasury shares) 1,407,618,528 1,444,131,650
Net Asset Value per ordinary share (borrowings at fair value) 843.9p 1,030.8p
Net Asset Value (Borrowings at Par) (APM)
Borrowings are valued at their nominal par value. A reconciliation to Net
Asset Value with borrowings at book value is provided below.
31 March 2023 31 March 2022
Net Asset Value per ordinary share (borrowings at book value) 816.8p 1,021.8p
Shareholders' funds (borrowings at book value) £11,498,000k £14,755,999k
Add: allocation of interest on borrowings £1,716k £2,207k
Less: expenses of debenture/loan note issue (£1,429k) (£1,228k)
Net Asset Value (borrowings at par value) £11,498,332k £14,756,978k
Shares in issue at year end (excluding treasury shares) 1,407,618,528 1,444,131,650
Net Asset Value per ordinary share (borrowings at par value) 816.9p 1,021.9p
Net Liquid Assets
Net liquid assets comprise current assets less current liabilities, excluding
borrowings.
Discount/Premium (APM)
As stockmarkets and share prices vary, an investment trust's share price is
rarely the same as its NAV. When the share price is lower than the NAV per
share it is said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is
usually expressed as a percentage of the NAV per share. If the share price is
higher than the NAV per share, it is said to be trading at a premium.
2023 2023 2022 2022
NAV (book) NAV (fair) NAV (book) NAV (fair)
Closing NAV per share (a) 816.8p 843.9p 1,021.8p 1,030.8p
Closing share price (b) 678.6p 678.6p 1,026p 1,026p
(Discount)/premium ((b) - (a)) ÷ (a) (16.9%) (19.6%) 0.4% (0.5%)
Ongoing Charges Ratio (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a
percentage of the average net asset value (with debt at fair value). The
ongoing charges have been calculated on the basis prescribed by the
Association of Investment Companies.
A reconciliation from the expenses detailed in the Income Statement is
provided below.
2023 2022
Investment management fee £35,953k £51,647k
Other administrative expenses £5,861k £6,818k
Total expenses (a) £41,814k £58,465k
Average net asset value (with borrowings deducted at fair value) (b) £12,458,941k £18,094,508k
Ongoing charges ((a) ÷ (b) expressed as a percentage) 0.34% 0.32%
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an
investment trust can borrow money to invest in additional investments for its
portfolio. The effect of the borrowing on the shareholders' assets is called
'gearing'. If the Company's assets grow, the shareholders' assets grow
proportionately more because the debt remains the same. But if the value of
the Company's assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in
falling markets.
Invested gearing represents borrowings at book value less cash and cash
equivalents (including any outstanding trade settlements) expressed as a
percentage of shareholders' funds.
31 March 2023 31 March 2022
Borrowings (at book value) £1,823,294k £2,131,588k
Less: cash and cash equivalents (£184,945) (£229,962k)
Less: sales for subsequent settlement (£5,044k) (£6,450k)
Add: purchases for subsequent settlement - -
Adjusted borrowings (a) £1,633,305k £1,895,176k
Shareholders' funds (b) £11,498,000k £14,755,999k
Gearing: (a) as a percentage of (b) 14% 13%
Potential gearing is the Company's borrowings expressed as a percentage of
shareholders' funds.
31 March 2023 31 March 2022
Borrowings (at book value) £1,823,294k £2,131,588k
Shareholders' funds £11,498,000k £14,755,999k
Potential gearing: (a) as a percentage of (b) 16% 14%
Leverage (APM)
For the purposes of the UK Alternative Investment Fund Managers (AIFM)
Regulations, leverage is any method which increases the Company's exposure,
including the borrowing of cash and the use of derivatives. It is expressed as
a ratio between the Company's exposure and its net asset value and can be
calculated on a gross and a commitment method. Under the gross method,
exposure represents the sum of the Company's positions after the deduction of
sterling cash balances, without taking into account any hedging and netting
arrangements. Under the commitment method, exposure is calculated without the
deduction of sterling cash balances and after certain hedging and netting
positions are offset against each other.
Turnover (APM)
Annual turnover is calculated on a rolling 12 month basis. The lower of
purchases and sales for the 12 months is divided by the average assets, with
average assets being calculated on assets as at each month's end.
Active Share (APM)
Active share, a measure of how actively a portfolio is managed, is the
percentage of the portfolio that differs from its comparative index. It is
calculated by deducting from 100 the percentage of the portfolio that overlaps
with the comparative index. An active share of 100 indicates no overlap with
the index and an active share of zero indicates a portfolio that tracks the
index.
Total Return (APM)
The total return is the return to shareholders after reinvesting the net
dividend on the date that the share price goes ex-dividend.
2023 2023 2023 2022 2022 2022
NAV NAV Share NAV NAV Share
(book) (fair) price (book) (fair) price
Closing NAV per share/share price (a) 816.8p 843.9p 678.6p 1,021.8p 1,030.8p 1,026.0p
Dividend adjustment factor* (b) 1.0045 1.0045 1.0047 1.0026 1.0026 1.0029
Adjusted closing NAV per share/share price (c = a x b) 820.5 847.7 681.8 1,024.2p 1,033.5p 1,029.0p
Opening NAV per share/share price (d) 1,021.8p 1,030.8p 1,026.0p 1,195.1p 1,190.0p 1,137.0p
Total return (c ÷ d)-1 (19.7%) (17.8%) (33.5%) (14.3%) (13.1%) (9.5%)
* The dividend adjustment factor is calculated on the assumption
that the dividends of 3.67p (2022 - 3.49p) paid by the Company during the year
were reinvested into shares of the Company at the cum income NAV per
share/share price, as appropriate, at the ex-dividend date.
Compound Annual Return (APM)
The compound annual return converts the return over a period of longer than
one year to a constant annual rate of return applied to the compound value at
the start of each year.
Private (Unlisted) Company
An unlisted or private company means a company whose shares are not available
to the general public for trading and are not listed on a stock exchange.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
Scottish Mortgage is a low cost investment trust that aims to maximise total
return over the long term from a high conviction and actively managed
portfolio. It invests globally, looking for strong businesses with
above-average returns.
You can find up to date performance information about Scottish Mortgage on the
Scottish Mortgage page of the Managers' website at scottishmortgageit.com‡
Scottish Mortgage is managed by Baillie Gifford, the Edinburgh based fund
management group with around £226 billion under management and advice in
active equity and bond portfolios for clients in the UK and throughout the
world (as at 12 May 2023).
Investment Trusts are UK public limited companies and are not authorised or
regulated by the Financial Conduct Authority.
‡ Neither the contents of the Managers' website nor the contents of
any website accessible from hyperlinks on the Managers' website (or any other
website) is incorporated into, or forms part of, this announcement.
Past performance is not a guide to 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. This is because the
share price is determined by the changing conditions in the relevant stock
markets in which the Company invests and by the supply and demand for the
Company's shares.
16 May 2023
For further information please contact:
Stewart Heggie, Baillie Gifford & Co
Tel: 0131 275 5117
Jonathan Atkins, Four Communications
Tel: 0203 920 0555 or 07872 495396
Nick Cosgrove / Eilis Murphy, Brunswick Group
Tel: 020 7404 5959
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Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a
direct impact in the UK due to Brexit, however, it applies to third-country
products marketed in the EU. As Scottish Mortgage Investment Trust PLC is
marketed in the EU by the AIFM, BG & Co Limited, via the National Private
Placement Regime ('NPPR') the following disclosures have been provided to
comply with the high-level requirements of SFDR.
The AIFM has adopted Baillie Gifford & Co's Governance and Sustainable
Principles and Guidelines as its policy on integration of sustainability risks
in investment decisions.
Baillie Gifford & Co's approach to investment is based on identifying and
holding high quality growth businesses that enjoy sustainable competitive
advantages in their marketplace. To do this it looks beyond current financial
performance, undertaking proprietary research to build an in-depth knowledge
of an individual company and a view on its long-term prospects. This includes
the consideration of sustainability factors (environmental, social and/or
governance matters) which it believes will positively or negatively influence
the financial returns of an investment.
More detail on the Managers' approach to sustainability can be found in the
Governance and Sustainability Principles and Guidelines document, available
publicly on the Baillie Gifford website bailliegifford.com.
Taxonomy Regulation
The Taxonomy Regulation establishes an EU-wide framework of criteria for
environmentally sustainable economic activities in respect of six
environmental objectives. It builds on the disclosure requirements under SFDR
by introducing additional disclosure obligations in respect of Alternative
Investment Funds that invest in an economic activity that contributes to an
environmental objective. The Company does not commit to make sustainable
investments as defined under SFDR. As such, the underlying investments do not
take into account the EU criteria for environmentally sustainable economic
activities.
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. END FR ZZGMKKNNGFZGRecent news on Scottish Mortgage Investment Trust
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