Scot.Mort Inv Tst - Half-year Report

Interim management report

 

           

 Investment Approach

The Managers have not changed their investment approach. If a company, public or private, has the potential to grow substantially over the next 5 to 10 years, then it is a good place to start looking for long term value creation for shareholders. Over this timeframe and beyond, equity investment returns are primarily driven by just a very few, extraordinary companies. There is a real asymmetry to the possible returns from investing in such businesses, as the potential upside is significantly larger than the possible risk to the capital invested. The Managers are focused on trying to find and own these outliers on behalf of Scottish Mortgage's shareholders.

The discipline to focus on your core skill set where you might be able to have a competitive advantage matters in investment, just as it does for the portfolio's businesses. The Managers believe it is much easier to search for the potential for value creation within companies which are capitalising on relatively predictable long run structural trends, than to divine the movement of equity markets in the near term. For these reasons, they focus on their task and do not also try to decipher the intervening path of their portfolio companies' share prices. The value of Scottish Mortgage's shares will therefore be subject to the same vagaries of short term markets as those of the portfolio's own companies. This means that Scottish Mortgage is best suited to those who share the Managers' long term approach to investing.

Performance

The six months results are set out in the table below, but once again the Managers provide them only with the caution that this is too short a time over which to judge the success or otherwise of this investment approach. The value of the portfolio can and will fluctuate over such short periods. We are inclined to view such times more as an opportunity than a cause for serious concern

 

Results for 6 months to 30 September 2018

%

Net Asset Value per share

19.0

Share price

22.4

FTSE All-World Index

11.3

The Managers are proud to say that they have continued to deliver good long term returns for shareholders. The total return from investing in Scottish Mortgage over the last 5 years to the end of September was 206%, with a corresponding performance in the underlying net asset value (NAV) of 188%. For comparison, the return from simply passively investing in the broader global equity market as a whole over the same time period was considerably lower. The FTSE All-World Index's total return over the last 5 years was just under 94%. The five year and ten year performance records are illustrated in the graphs attached (see link below).

http://www.rns-pdf.londonstockexchange.com/rns/1112G_1-2018-11-1.pdf

Outlook

The Managers believe in the benefits of listening to and learning from those who are cleverer than they are. Jack Ma, in his last letter to shareholders as Chairman of Alibaba, made the following observations:  "Recently, the global economy has found itself in a state of turmoil. Uncertainties abound in trade relations, consumer trends, stock markets and the manufacturing industry. US-China trade tensions create increased risk of instability.…our past experience tells us there are huge opportunities behind the anxiety and friction. The only question is how we should pivot. Monumental challenges give rise to monumental opportunities..."  The Managers agree. In the long run, only businesses which retain this flexibility to change direction thrive.

Balance sheet (unaudited)

 

 

At 30 September 2018

 

£'000

At 31 March 2018

(audited)

£'000

Fixed assets

 

 

Investments held at fair value through profit or loss (note 6)

8,308,747 

6,646,015 

Current assets

 

 

Debtors

8,376 

2,764 

Cash and cash equivalents

68,801 

34,974 

 

77,177

37,738 

Creditors

 

 

Amounts falling due within one year:

 

 

Bank loans (note 7)

(279,897)

(231,679)

Other creditors

(30,194)

(10,282)

 

(310,091)

(241,961)

Net current liabilities

(232,914)

(204,223)

Total assets less current liabilities

8,075,833 

6,441,792 

Creditors

 

 

Amounts falling due after more than one year:

 

 

Loan notes (note 7)

(274,517)

(104,743)

Debenture stocks

(149,058)

(149,293)

 

(423,575)

(254,036)

 

7,652,258 

6,187,756 

Capital and reserves

 

 

Share capital

72,502 

71,086 

Share premium account

595,702 

352,375 

Capital redemption reserve

19,094 

19,094 

Capital reserve

6,945,753 

5,741,352 

Revenue reserve

19,207 

3,849 

Shareholders' funds

7,652,258 

6,187,756 

Net asset value per ordinary share

(after deducting borrowings at book)*

527.7p

443.5p

Ordinary shares in issue (note 9)

1,450,055,880 

1,395,363,209 

Statement of Changes in Equity (unaudited)

 

For the six months ended 30 September 2018

 

Share
capital

£'000

Share premium account

£'000

Capital redemption reserve

£'000

Capital

reserve*

£'000

Revenue reserve

£'000

Shareholders'
funds

£'000

Shareholders' funds at 1 April 2018

71,086

352,375

19,094

5,741,352 

3,849 

6,187,756 

Net return on ordinary activities after taxation

-

-

-

1,182,249 

19,207 

1,201,456 

Shares sold from treasury (note 9)

-

91,044 

-

42,069 

133,113 

Shares issued (note 9)

1,416

152,283 

-

153,699 

Dividends paid during the period (note 5)

-

-

-

(19,917)

(3,849)

(23,766)

Shareholders' funds at 30 September 2018

72,502

595,702

19,094

6,945,753 

19,207 

7,652,258 

 

 

For the six months ended 30 September 2017

 

Share
capital

£'000

Share premium account

£'000

Capital redemption reserve

£'000

Capital

reserve*

£'000

Revenue reserve

£'000

Shareholders'
funds

£'000

Shareholders' funds at 1 April 2017

71,086

216,808

19,094

4,537,789

28,814 

4,873,591 

Net return on ordinary activities after taxation

-

-

-

856,607

11,374 

867,981 

Shares sold from treasury (note 9)

-

98,487

-

54,609

153,096 

Dividends paid during the period (note 5)

-

-

-

-

(22,264)

(22,264)

Shareholders' funds at 30 September 2017

71,086

315,295

19,094

5,449,005

17,924 

5,872,404