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 to31 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.