Baillie Gifford China Growth Trust plc (BGCG)
Legal Entity Identifier: 213800KOK5G3XYI7ZX18
Regulated Information Classification: Annual Financial and Audit Reports
Annual Report and Financial Statements
Further to the preliminary statement of audited annual results announced to the Stock Exchange on 6 April 2022, Baillie Gifford China Growth Trust (“the Company”) announces that the Company's Annual Report and Financial Statements for the year ended 31 January 2022, 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
It is also available on the Company page of the Baillie Gifford website at: bailliegiffordchinagrowthtrust.com (as is the preliminary statement of audited annual results announced by the Company on 6 April 2022).
Responsibility Statement of the Directors in respect of the Annual Financial Report
The Directors confirm that, to the best of their knowledge:
¾ the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company;
¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces; and
¾ the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Principal Risks relating to the Company
As explained on pages 31 and 32 of the Annual Report and Financial Statements, there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Directors have undertaken a robust assessment of the principal and emerging risks facing the Company, including those that would threaten the business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below:
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Risk |
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Mitigation |
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Inappropriate business strategy and/or changes in the financial services market leads to lack of demand for the Company's shares and its shares trading at a persistent and anomalous discount to the NAV . |
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The Board reviews its strategy at an annual strategy meeting. It considers investor feedback, consults with its broker and reviews its marketing strategy. It regularly reviews its buy back and issuance policy. The strategy is considered in the context of developments in the wider financial services industry.
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Adverse market conditions , particularly in equities and currencies, lead to a fall in NAV. |
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The Company's exposure to equity market risk and foreign currency risk is an integral part of its investment strategy. Adverse markets may be caused by a range of factors including economic conditions, political change, geo-political events, natural disasters and health epidemics. Volatility in markets from such factors can be higher in less developed markets including China. Market risk is mitigated to a degree by appropriate portfolio diversification .
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Poor investment performance , including through inappropriate asset allocation, leads to value loss for shareholders in comparison to the benchmark or the peer group. |
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The performance of the Manager is reviewed at each Board meeting and compared against the benchmark and peer group. Exposures are reviewed against benchmark exposures to identify the highest risk exposures. The Board regularly reviews and monitors the Company's objective and investment policy and strategy. |
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Operational failure leads to reputational damage and potential shareholder loss. Operational issues could include: errors, control failures, cyber attack or business discontinuity at service providers.
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The Audit Committee reviews the controls including business continuity procedures at the service providers. Separate records of investments are maintained by the Manager and custodian and are reconciled. The Manager also reviews the performance and controls of other key third party providers on behalf of the Board. |
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Tax and regulatory change or breach leads to the loss of investment trust status and, as a consequence, the loss of the exemption from taxation of capital gains. Change in tax, regulation or laws could make the activities of the Company more complicated, more costly or even not possible. Other regulatory breaches (including breaching the listing rules, market abuse regulations and UK AIFM Regulations) could result in reputational damage and costs. Regulatory change can also increase the costs of operating the Company.
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Compliance with investment trust status regulations is regularly reviewed by the Board. The Board reviews compliance with other regulatory, tax and legal requirements and is kept informed of forthcoming regulatory changes. |
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Single country risk . The Company invests predominantly in equities of companies which are incorporated or domiciled, or which conduct a significant portion of their business, in China. Investing in a single country is generally considered a higher risk investment strategy than investing more widely, as it exposes the investor to the fluctuations of a single geographical market, in this case the Chinese market.
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The Company's exposure to a single country, China, is an integral part of its investment strategy. Risk is mitigated to a degree by appropriate portfolio diversification and careful analysis of investment opportunities. |
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Emerging market risk . Investing in an emerging market such as China subjects the Company to a higher level of market risk than investment in a more developed market. This is due, among other things, to the existence of greater market volatility, lower trading volumes, the risk of political and economic instability (such as the ongoing geo-political tensions between China and the US) legal and regulatory risks, risks relating to accounting practices, disclosure and settlement, a greater risk of market shut down, standards of corporate governance and more governmental limitations on foreign investment than are typically found in developed markets. Investing in China is often through contractual structures, such as Variable Interest Entities ('VIEs', see Glossary of Terms and Alternative Performance Measures on page 75 of the Annual Report and Financial Statements) that are complex and could be open to challenge.
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The Managers are cognisant of the risks associated with investing in emerging markets such as China, and they shape their investment strategy and due diligence accordingly. The Board is kept informed of political and regulatory issues impacting China and the portfolio. The Board monitors the risks associated with any complex investment structures, including the proportion of investments held in VIEs (estimated to be 35% as at 31 January 2022). |
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Unlisted securities The Company may invest in unlisted securities, which are not readily realisable and are more difficult to value given the absence of a quoted price. There may be less available information and there will be less regulation in respect of disclosures and corporate governance.
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Baillie Gifford conducts appropriate due diligence in respect of all unlisted investments, and has an established valuation approach (as described on page 50 of the Annual Report and Financial Statements ), which is carefully reviewed by the Board. |
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Gearing . The Company may utilise borrowings in order to increase its investment exposure. While such leverage presents opportunities for increasing total returns, it can also have the opposite effect of increasing losses. If income and capital appreciation on investments acquired with borrowed funds are less than the costs of the leverage, the Company's net asset value will decrease. The use of leverage also increases the investment exposure, which means that if the market moves adversely, the resulting loss to capital would be greater than if leverage were not used .
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Under the Investment Policy, the maximum gearing is 25% of gross assets, though the Company does not expect borrowing to be in excess of 20% of gross assets. All borrowing facilities are approved by the Board and gearing levels are discussed by the Board and the Managers at every meeting. Covenant levels are monitored regularly. |
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Climate and Governance risk . As investors place increased emphasis on climate change and other Environmental, Social and Governance (ESG) issues, perceived problems with these matters in an investee company could lead to that company's shares being less attractive to investors, adversely affecting its share price. In addition, potential valuation issues could arise 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 Investment Manager to identify climate/ESG weaknesses in investee companies could lead to the Company's own shares being less attractive to investors, adversely affecting its own share price.
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As described on pages 7 to 12 of the Annual Report and Financial Statements, the consideration of ESG (including climate change) is a core component of Baillie Gifford's investment process, with the Board overseeing and challenging Baillie Gifford on ESG matters. The Board meet with the Investment Manager and discuss the investment portfolio, including the application of Baillie Gifford's ESG framework. Baillie Gifford's Governance and Sustainability team undertake specific ESG reviews on investment portfolios. |
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Emerging Risks – The Audit Committee has regular discussions
on principal risks and uncertainties, including any risks which are
not an immediate threat but could arise in the longer term.
The Board considers that the key emerging risks arise from
the interconnectedness of global economies and the related
exposure of the investment portfolio to emerging threats such
as the societal and financial implications of escalation of the
Russia-Ukraine military conflict, cyber risk and pandemic or
similar public health threats. The Board considers the impact of
such threats on both markets globally and also more specifically
on the Chinese market. These risks are mitigated by the
Investment Manager's close links to the investee companies
and their ability to ask questions on contingency plans. The
Investment Manager believes the impact of such events may be
to impact growth rather than to invalidate the investment rationale
over the long term.
The Company also monitors its service providers to ensure there
is adequate business continuity.