Scottish Mortgage Investment Trust Final Results

Scottish Mortgage Investment Trust PLC

Regulated Information Classification: Additional regulated information required to be disclosed under applicable laws

Legal Entity Identifier: 213800G37DCS3Q9IJM38

Results for the year to 31 March 2022

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 2022 which was approved by the Board on18May 2022.

Statement from the Chair

For many, the twelve months to 31 March 2022 marked the second year of living with the Covid-19 pandemic. There was cause for optimism as the global economy reopened following the initial period of lockdown. However, it did so in a stuttering fashion that brought with it the spectre of higher inflation and rising interest rates. These factors, together with concerns about Chinese regulation and Russia's assault on Ukraine, spread fear amongst markets and significantly reduced the valuations of many growth companies.

After the past few years of relatively benign market conditions, it is easy to forget how bumpy the ride can become when storms roll in. Scottish Mortgage has weathered more than most: the Great Depression; two World Wars; the Global Financial Crisis, to name but a few. Over time, experience has shown that it is not the ferocity of any market storm that matters, it is what one does during it that will most influence outcomes for shareholders. In such times, one must not let the stress induced by such volatility shorten time horizons or prompt decisions taken to reduce discomfort, to the potential detriment of maximising long term shareholder value.

In recent months, your Managers have remained calm and focused on what they have been entrusted to do – to invest patiently in outstanding growth businesses from across the globe. They have not been blind to market gyrations but claim no insight over short-term reactions. They have continued to explore central assumptions on the multiple drivers of change including the continuing digitisation of our economy, the intersection of information technology and biology and the much-needed energy transition. Market weakness and fresh borrowings have been utilised to add to higher conviction holdings. And as travel restrictions eased, the Managers took the opportunity to make research trips, visiting companies to gain insights and build stronger relationships with management teams. Supportive ownership during difficult times is important, as it is when the skies are their darkest that companies discover which investors will stay the course.

For Scottish Mortgage, our time horizons reach far beyond most others but a sunny long-term forecast is of little value if companies themselves cannot navigate the current storms. It has been pleasing, therefore, to note that, whilst many portfolio companies possess the potential to shape the future, they have also continued to deliver strong operational performance and maintained a robust financial position. As such, competition for capital within the portfolio has remained strong.

Performance

Source: AIC/Refinitiv/Baillie Gifford. NAV after deducting borrowings at fair value^*.

*  Alternative Performance Measure – see Alternative Performance Measures and Glossary of Terms at the end of this announcement.

Following the strongest ever return produced by the Company in the previous year, the Company posted a negative return in the year to 31 March 2022. However, these last couple of years have been extraordinary and do not offer a suitable timeframe over which to judge investment returns.

Some shareholders' minds may have been focussed on the drop in the share price that occurred during the year. I would reiterate my annual caution against drawing any meaningful conclusions from this datapoint, other than this time round to see it as an expected shorter-term cost when the longer-term rewards on offer are potentially so high. Over five and ten years, respectively, the share price has increased on an annualised, total return basis by 23.5% and 23.1%.

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.

Low Cost

Put simply, lower charges directly translate into shareholders keeping more of the returns generated from their investment. Ensuring that Scottish Mortgage has one of the lowest cost ratios available amongst active strategies remains central to the proposition for shareholders.

It is difficult to draw fair comparison with other investment funds, as so few provide access to both public and private companies in one portfolio, but the Company's ongoing charges of 0.32% are less than most actively managed funds and significantly less than private equity funds. As such, the Board and the Managers believe Scottish Mortgage offers shareholders excellent value for money.

Financial Position

The Board 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, the Company has raised, in aggregate, a further £504 million in long-term, fixed rate, senior, unsecured private placement notes, denominated in a combination of sterling and US Dollars. These transactions provided further long-term financing at very attractive rates. Two sterling denominated notes of £100 million each were issued in August 2021: a 15 year note with a fixed coupon of 2.03% and a 25 year note with a fixed coupon of 2.30%. In January 2022, three US Dollar notes were issued: one 30 year note for US$175 million with a fixed coupon of 2.99%, one 35 year note for US$110 million with a fixed coupon of 3.04% and a 40 year note for US$115 million with a fixed coupon of 3.09%. Additionally, further short-term bank borrowing was secured at competitive rates, full details of which are provided at the end of this document.

At the end of the year the overall value of the borrowing represented approximately 14% of the Company's net asset value. That marked a higher level than has been reported in recent years and was largely borne out of share price volatility, rather than a change in approach with regards to the level of gearing employed.

Earnings and Dividends

For several years the Board has encouraged the Managers to pursue a total return policy, without regard to the split between dividends and capital gains, believing this to be the best way of delivering value to shareholders. The Managers have created a portfolio of some of the best growth companies from around the world, both public and private. One common characteristic of these businesses is the retention and investment of most of their earnings to support R&D and future growth. This tends to result in a relatively low level of dividend income for the Company.

While we believe that Scottish Mortgage is held by investors for what it can offer in terms of capital growth, the Board acknowledges the importance to some shareholders of providing a predictable and growing level of dividend income to help plan their income needs.

After careful discussion, taking into consideration several factors such as the income generated from the portfolio, capital appreciation in recent years and the recent increase in inflation, we are recommending that this year the total dividend be increased by 5% to 3.59 pence.

The Company's revenue earnings for the year are insufficient to cover the dividend and the majority will be paid from realised capital reserves. Collectively, we believe this to be appropriate, given the relatively immaterial size of the element paid from capital compared with the scale of the distributable capital gains achieved over the long term.

Liquidity

Over the period, the Company continued to operate its liquidity policy to meet, in normal market conditions, imbalances in supply and demand of its own shares over the short term. In total, the Company issued 35.0 million shares and bought back 12.4 million, resulting in a net issuance totalling around £361 million

Portfolio Manager Transition

In March last year we announced that James Anderson would stand down as joint manager on 30 April 2022. It is difficult to find words to adequately thank James on behalf of shareholders. The investment returns during his tenure as manager, then joint manager, speak for themselves: from 30 April 2000 to 31 March 2022, the Company produced returns of 1,155% in NAV terms and 1,483% in share price terms against a FTSE All-World Index return of 354%.

Fortunately, James has said that there is a John Maynard Keynes quote for every situation, so in this case I will opt for, “words ought to be a little wild, for they are the assaults of thoughts on the unthinking”. As manager, James has been both a devoted investor for shareholders and a visionary who has challenged convention, revolutionised the investment approach and entertained shareholders along the way. The current high conviction style with its large stakes in global private companies is a far cry from the trust he inherited. He invested in what are now household names years before peers and held on long after other investors had headed for the exit. As manager of one the UK's most widely held investment funds, his approach has also attracted its fair share of critics. James has never been shy of meeting his critics head on, often in illuminating fashion. In fact, I believe he secretly rather enjoyed it.

In his final Manager's Review last year, he invited Tom Slater and Lawrence Burns to, “please help Scottish Mortgage become more unreasonable and more distinctive as the pressures of the investment world continue to pull at us”. A hallmark of James and Tom's tenure was the constant drive to observe, learn, and improve which resulted in an investment philosophy that continued to evolve. The Board has full confidence that it will continue to do so under the excellent partnership that has already been established between Tom and Lawrence. Meantime, the Board would like to wish James the very best for the future and thank him for his 22 years of loyal service.

Environmental and Social Governance (ESG)

The Board recognises the importance of considering ESG factors when making investments. We believe it is the Board's responsibility to monitor activity and progress in areas such as voting and engagement. Please note that the Company's voting record is displayed on the website.

The Managers' approach to sustainable investing is underpinned by five core beliefs that are detailed in 'Our Approach to Governance'. We recommend this as valuable reading to all shareholders and it can be accessed on the Company's website at: scottishmortgageit.com.

Climate change is rising up the agenda for many shareholders and its importance was highlighted by the COP 26 summit in November 2021. One hopes that we may reflect on this year as one in which momentum shifted and the need for significant action to limit global warming was widely recognised.

Over the next few years, the climate-related regulatory and policy environment will be turbulent. Against this backdrop, the Managers' purpose and philosophy will remain clear. They are resolutely long term and look for companies that will grow for many years to come. Just as they believe that only a small number of companies deliver outstanding returns, so they suspect a small group of innovators and industry leaders will prove to have an outsized influence on a timely energy transition. With this in mind, they continue to deploy capital in companies that can deliver returns for shareholders and have a meaningful impact in tackling the climate crisis. Further details of these companies can be found in 'Our Approach to Governance' noted above.

Board Update

I am delighted to report the appointment of a new Non-Executive Director, Mark FitzPatrick, who joined the Board on 5 October 2021 and became Chair of the Audit Committee from 1 April 2022. Mark brings with him a wealth of knowledge having held a range of executive leadership roles. He is currently interim group chief executive & chief operating officer of Prudential plc, a provider of life and health insurance and asset management exclusively focused on Asia and Africa. His fellow Board members and attendees have already benefited from his contribution on a wide range of topics in the Board. Mark's appointment is subject to shareholder ratification at the forthcoming AGM.

Maintaining the knowledge base and diversity of thought on the Board is critical towards helping to guide the Company's future. The Company's policy on this and Board tenure is set out in the Annual Report and Financial Statements.