Scottish Mortgage Investment Trust PLC
Legal Entity Identifier: 213800G37DCS3Q9IJM38
Results for the year to 31 March 2018
|
NAV (borrowings at fair value) * |
25.0% |
|
NAV (borrowings at book value) * |
24.5% |
|
Share Price* |
21.6% |
|
Benchmark*† |
2.9% |
* Source: Morningstar / Baillie Gifford, total return. See disclaimer at the end of this announcement.
† Benchmark: FTSE All-World index (in sterling terms)
The following is the Annual Results Statement for the year to 31 March 2018 which was approved by the Board on
11 May 2018.
Chairman's Statement
It is my great privilege to write to you for the first time as Chairman of Scottish Mortgage having taken up the role on 29 June 2017. I joined the Board in 2009 in the fall out of the Global Financial Crisis, when the share price stood at a discount of some 12%. 'Challenging' but valuable experience that has informed my contribution over the years.
My experience at Scottish Mortgage has also included serving under two Chairmen – the late Sir Donald MacKay and John Scott; that too has been valuable experience for which I am very grateful. I hope that the current Board and the Managers can do justice to the legacy we have inherited for the continuing benefit of all shareholders.
Long term performance continues to be the yardstick by which the Board measures the results of the Managers' endeavours for Scottish Mortgage. I would encourage all shareholders to focus on these figures and it is a pleasure to report that Scottish Mortgage's long term performance record, measured over the last five and ten years, remains very strong and amongst the best in the investment trust sector and beyond. This is true both of the share price and net asset value (NAV) returns.
For more than a decade now, the Managers have remained steadfast in their approach. Their consistency and clarity of purpose has proved its value to shareholders over time, despite some exceptionally challenging phases in global financial markets over that same period.
The table below shows the five and ten year total returns for the Company to 31 March 2018, alongside the Association of Investment Companies (AIC) Global Sector average for comparison.
|
Total Return % |
Five Years |
Ten Years |
|
NAV |
171.6 |
287.8 |
|
Share Price |
184.5 |
334.7 |
|
FTSE All-World Index |
73.3 |
159.4 |
|
Global Sector Average – NAV |
94.1 |
178.1 |
|
Global Sector Average – share price |
111.6 |
218.1 |
Source: AIC/Morningstar. NAV after deducting borrowings at fair value for Five Years. NAV after deducting borrowings at par for Ten Years.
Earnings and Dividends
The Board firmly supports the Managers in the single-minded pursuit of the investment philosophy to maximise total return from a portfolio of long term investments chosen on a global basis, enabling the Company to provide capital and dividend growth. They have created a portfolio of the very best long term growth companies from around the world, both listed and unlisted. One common characteristic of many of these businesses is the retention and investment of most if not all of their earnings to support future growth. This tends to result in a relatively low level of dividend income for your Company. Whilst for this financial year our income has seen a rise compared with the previous one, it remains low overall; this year's earnings per share were 1.20 pence, up just over 12% on last year (1.07 pence).
The portfolio's earnings would be insufficient to pay a dividend equivalent to last year's 3.00 pence per share, even taken together with our remaining revenue reserves (0.47 pence per share). Scottish Mortgage's aim is defined in terms of total return. Shareholders have granted the Company the power to supplement the dividend from its distributable capital reserves. These reserves are predominantly the realised investment gains.
The Board understands that many shareholders value the income from Scottish Mortgage's dividend and it has set out its policy and intentions in this area very clearly in recent years. The Board has highlighted that, while returns for Scottish Mortgage's shareholders will predominantly come through capital appreciation, a modest and growing dividend will also be paid. The Board will continue to keep the position under review. The 2017 Interim Report made clear that the Board would use the power to supplement the Company's earnings from capital once the revenue reserve was exhausted, in order to do this.
Given the strength of the long run capital returns and the Company's investment objective, together with the clear guidance given in the past, the Board has decided that a modestly increased dividend would be appropriate this year. This will be paid from a combination of earnings, the remainder of the revenue reserve and the capital reserve. The Board is therefore recommending a final dividend of 1.68 pence per share, providing a total distribution for the year of 3.07 pence per share, a year-on-year increase of just over 2%.
Low Cost
Put simply, lower charges directly translate into shareholders keeping more of the returns generated from the investment of their capital. Ensuring that Scottish Mortgage has one of the lowest cost ratios in the sector remains an important objective of the Board, supported by the Managers. In addition to using its growing scale to progressively reduce costs for shareholders for many years now, the management fee has also been revised – most recently at the start of this accounting period. The introduction of a new tiered annual management charge (AMC) from 1 April 2017 helps to ensure that shareholders will continue to reap additional benefits from the Company's growth. The previous AMC of 0.3% only applies on the first £4 billion of assets under management and thereafter it falls to 0.25%. I am delighted to report that as a result, for the financial year to 31 March 2018, Scottish Mortgage's 'Ongoing Charges Ratio' (OCR) fell to 0.37%, down from 0.44% the previous year. This is an almost 16% reduction on what was already one of the lowest cost ratios in the sector.
The Board has also decided that it would be appropriate to revise the allocation of the management and borrowing costs to reflect better the split of returns between capital and income. From 1 April 2018, all of these costs will be allocated to capital. This is a change from the current allocation of 75 per cent to capital and 25 per cent to revenue. The total costs will not be affected by this change in accounting treatment and the distinction is somewhat arbitrary given the changing nature of investment returns, as discussed in recent years and above.
Investment Strategy
As I highlighted at the start, two distinctive aspects of Scottish Mortgage are the clarity of its investment proposition and the consistency with which it has been applied. The Board continues to believe that these clearly differentiate Scottish Mortgage in a crowded field, where many 'talk a good game' but where far fewer have consistently lived up to the inherent challenges of long term investment. The statement of the Managers' Core Investment Beliefs has been included within the Annual Report and Financial Statements for the last 5 years. This year, Tom Slater has also reviewed this in his section of the report. I would urge all shareholders and those considering making an investment to read both these pieces and James Anderson's report.
Opportunities to learn more about Scottish Mortgage
The Board and Managers believe it is important that all shareholders and prospective investors are able to develop a clear understanding of the investment approach taken for the Company.
One of the best ways to do this is to hear directly from those responsible for the management of your investment. The Company's Annual General Meeting (AGM) is held in Edinburgh and this year it will be at the Merchants' Hall, at 4.30pm on 28 June 2018. As is always the case, not only will shareholders be able to vote on the resolutions for the management of the Company and question the Directors, but the joint managers will present on the portfolio and also take shareholders' questions. I hope as many of you as possible will be able to attend.
Recognising that not everyone will be able to attend the AGM, the Managers have invested considerable resources in developing other opportunities for investors to hear their views and learn about the investment approach taken. There is a large amount of information on the Company and the portfolio available through the Company's website: www.scottishmortgageit.com.
More recently, the Managers have created an additional site, www.resoluteoptimism.com which looks at the broader context around the portfolio companies and explores issues around the responsible use of investment capital and the financial industry. There is a related Resolute Optimism twitter feed (@SMTOptimism) which flags new articles on the Resolute Optimism site and also highlights interesting external pieces of news and information, thought-provoking commentaries and events.
Further, in recent years the Managers have hosted a series of Scottish Mortgage Investor Forums around the country to ensure that more investors have the opportunity to hear from them directly. The 2017 Forums in Birmingham, York and London were all very well attended. The first Forum of 2018 has already been held in Brighton and there are two more to come, in London in June and in Manchester in October. Further details can be found on the Company's website: www.scottishmortgageit.com
Gearing and Borrowing Policy
The Board of Scottish Mortgage remains committed to the strategic use of borrowings for the Company, in the belief that gearing the portfolio in this way will enhance the long term returns for shareholders. The Board views this as a significant advantage of the investment trust structure.
As previously announced, in April 2017 the Board took the opportunity to lock in borrowings of £125 million in long term, fixed rate, senior, unsecured private placement notes, denominated in sterling through the private placement debt market. This was achieved at a blended rate of a little over 3 per cent.
As a result of the continued strength of the portfolio's performance, particularly of the publicly listed companies, the gearing level continued to fall over this financial year. The impact of growth on the level of gearing is clearly illustrated in the table on the ten year record of Capital in the Annual Report and Financial Statements. The level of debt has increased by only 10% as compared to a three-fold increase in assets. Given current market costs of borrowing, the Board is of the view that the appropriate level of gearing is higher than the current level (as at the end of March 2018). The Board has therefore taken steps to increase the Company's borrowings. These have included organising to borrow further funds in the private placement market, once again to lock in attractive long term borrowing rates. Further announcements will be made when arrangements have been finalised.
Liquidity
The Company's shares continue to benefit from a good level of liquidity on the London Stock Exchange. In addition, the Company has continued to support this liquidity in normal market conditions through the operation of its long standing liquidity policy, which is set out in the Annual Report and Financial Statements.
Over the twelve months to 31 March 2018, the company issued 50.8 million shares from Treasury and bought back 14.0 million shares resulting in a net inflow of £145 million. The level of net issuance was illustrative of the strength of demand for Scottish Mortgage over the period.
Corporate Brokers
The corporate brokers are instrumental in applying the liquidity policy, and the new arrangements which took effect from the start of this financial year have been very effective, which is testimony to Cenkos Securities plc and Jefferies Hoare Govett operating well as joint brokers.
Outlook
In considering the outlook at the start of this financial year, my predecessor John Scott noted, “a number of political risks, from President Trump's unpredictable approach to policy making, to questions over North Korea's true intentions, to the escalation of the troubles in the Middle East..”. Sadly those political risks remain the same today. However the task of the Board also remains the same, as John noted: “to consider the outlook in the context of the portfolio of Scottish Mortgage…”
To have been unduly focused on the headline topics 12 months ago might have led an investor to miss the importance of the extraordinary operational growth which was taking place at a number of the world's largest companies.
The Board believes the following areas to be amongst the most relevant considerations for the long term prospects for Scottish Mortgage:
1. The continual rise and development of China, in particular of its world leading digital economy.
2. The spread across all industries of the gathering and computer-facilitated use of data.
3. The structural shifts in the global healthcare industry and the industrialisation of biology.
4. The long run shift in much of the transportation infrastructure to electric and autonomous vehicles.
5. Shifts in energy generation to renewable sources and the proliferation of energy storage solutions for domestic and commercial use.
6. Greater social, political and regulatory scrutiny of large corporations.
The approach of the Managers, focused on the long term fundamental characteristics of businesses, favours the selection of companies which are adopting the advances in technology to enable them to provide what their customers want or need. This should offer the potential for durable growth in the long run. However, the above should not be taken to suggest that the path to any success will be smooth. Progress is almost always bumpy and stock markets tend to exacerbate these swings. There will be times when share prices diverge from company fundamentals and during such periods the companies in Scottish Mortgage's portfolio may fall out of favour. No attempt will be made to mitigate short-term volatility and the Board will continue to stand resolutely behind the Managers during such times.
Whatever the precise trajectory of stock markets turns out to be over the coming years, the Board and the Managers strongly believe that attractive long term returns continue to be available to those who can turn time to their advantage. Scottish Mortgage offers investors the potential to share in the value created by some of the best growth businesses in the world over the coming decade, in new or old industries and whether they be public or private companies.
Finally, in addition to thanking my Board colleagues for their diligence over the year and James Anderson and Tom Slater for their insight and continuing success for shareholders, I would like to thank our professional advisers and the teams at Baillie Gifford that provide the support necessary to best look after your interests, and you, the shareholders, for your continued support.
Fiona McBain
Chairman
11 May 2018