Scottish Mortgage Investment Trust PLC (LON:SMT) has today provided its results for the year to 31 March 2020.
| NAV (borrowings at fair value) * | 13.7% |
| NAV (borrowings at book value) * | 13.3% |
| Share Price* | 12.7% |
| Benchmark† | (6.2%) |
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 2020 which was approved by the Board on 14 May 2020.
Chairman’s Statement
Memories of the twelve months ending 31 March 2020 will almost certainly be dominated by the start of the spread of COVID-19. The resulting global pandemic is creating testing times for everyone and I wish to acknowledge the immediate challenges many face, far beyond the world of investment. I hope all of Scottish Mortgage’s shareholders and their families are managing through this difficult period and I recognise that the immediate focus of many may well not be on investment matters.
Corporate Strategy
Scottish Mortgage is in a very fortunate and stable position. Its scale, low cost base and corporate structure are all important long run competitive advantages, and never more so than in the current environment. As it is an externally managed investment trust, it has no employees or offices of its own and is therefore not facing the same responsibilities and immediate difficulties that many other companies are having to address. Its Managers, Baillie Gifford, and other services providers have all navigated the challenges of recent months admirably and have continued with business as ‘unusual’ but very much fully functioning. In each case, their operational resilience has proven to be robust and flexible, in particular in moving to homeworking and video conference calls, many facilitated by a Scottish Mortgage investment – Zoom.
The portfolio Managers, James Anderson and Tom Slater, have remained focused on their task of patient investment on behalf of Scottish Mortgage shareholders. They continue to concentrate on the long term prospects for the companies they hold but are also mindful that these businesses must also be able to endure to reach that point. Those that do will likely emerge stronger. Consistent with a long term approach, there have been no significant changes to the portfolio in recent months in response to the current pandemic.
It is important for the Board to support the Managers amidst the current tumult and for them in turn to offer that same constructive support as responsible owners to those running the companies in the portfolio. This may be strikingly different to the behaviour of many in markets who feel entitled to pass comment from afar, but remembering the importance of relationships through times like these matters. This approach has enabled the Managers to develop mature long term relationships with those at some of the world’s most innovative companies, providing valuable insights. The Managers’ reputation for doing so has underpinned Scottish Mortgage’s access to a number of great investment opportunities, particularly in private companies. Both of these have been to the clear benefit of Scottish Mortgage shareholders.
Performance
For the financial year to 31 March 2020, shareholders once again saw a strong return, particularly when compared with the FTSE All-World Index. Following on from the year end, Scottish Mortgage’s share price increased by 23 per cent. from the end of March to close of day on 12 May 2020, driven by the strength of the portfolio’s performance. As a result, the Company reached a new milestone of over £10 billion in market capitalisation.
| Total Return*(%) | 12 Months to 31 March 2020 |
| NAV | 13.7 |
| Share Price | 12.7 |
| FTSE All-World Index | (6.2) |
| Global Sector Average – NAV | 0.1 |
| Global Sector Average – share price | (4.5) |
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.
Despite that, I would urge all investors to focus on the long term returns, over rolling five and ten year periods, when judging Scottish Mortgage. I am delighted to say that these continue to provide compelling support for the Managers’ straightforward investment philosophy and discipline in patiently investing in outstanding growth businesses across the globe.
| Total Return*(%) | Five Years to 31 March 2020 | Ten Years to 31 March 2020 |
| NAV | 124.6 | 360.8 |
| Share Price | 123.5 | 434.2 |
| FTSE All-World Index | 41.5 | 128.1 |
| Global Sector Average – NAV | 69.1 | 203.6 |
| Global Sector Average – share price | 68.4 | 237.9 |
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.
Ongoing Costs
I am also pleased to report that this continued growth in Scottish Mortgage’s assets has meant that costs have also continued to fall for shareholders. This was in large part due to the tiered fee scale for the annual management charge (AMC). There is only a very tiny level of fixed costs for the Company, relative to its size. The ongoing charges for the year were a market leading 0.36%. This is particularly exceptional given the access to unlisted investments in the portfolio.
The long run compounding benefit from this uniquely low cost level for an actively managed portfolio can often be overlooked, specially when compared for example with the impact that charges of, say, 1.5% per annum would have had on the long run returns achieved for Scottish Mortgage shareholders.
Financial Position
Scottish Mortgage is in a robust financial position. It has a modest amount of borrowings in place, supported by a much larger pool of liquid assets. There is considerable flexibility to adjust the level of indebtedness at relatively minimal cost, if that were to become appropriate.
The level of the gearing during the year remained well within an appropriate range around the long run strategic level set by the Board, notwithstanding the impact of the pandemic elsewhere, and the overall value of the borrowings of the Company represented approximately 11% of its total assets at the year end. This included the £188 million in new long term borrowings raised in the private placement debt market in January 2020, at highly attractive rates of interest. All covenants remain well covered.
The absolute level of the borrowings has risen in recent years to keep pace with the rise in the value of the assets. The Board remains committed to the strategic use of borrowings for the Company, in the belief that this will enhance returns to shareholders over the long term, especially given the funding rates achieved in the private placement market over the last few years.
Earnings and dividend
The portfolio continues to yield a very modest level of earnings, consistent with the investment approach focused on growth companies. The earnings per share for Scottish Mortgage over the period were 1.55p, slightly down on the previous year (1.64p in 2019). As is to be expected, income only forms a very minor part of the total return generated.
While no shareholder could reasonably invest in Scottish Mortgage for the prospect of its dividend yield alone, one of the benefits of its investment trust structure is the ability to distribute a portion of the Company’s overall returns as income in a predictable manner year on year. This allows shareholders to plan for their own overall portfolio’s income needs accordingly. The Board also recognises that at the current time many other UK companies are having to cut or postpone their dividends to retain more cash to help support their businesses and so the income upon which many UK investors rely from other FTSE100 companies may not be available in the coming months. Fortunately, Scottish Mortgage does not face the same challenges. In such difficult times, the small income yielded by holding the shares of this Company may therefore be of greater importance for many individuals than might ordinarily be expected to be the case.
The Board believes that the level of the long run total return generated for Scottish Mortgage continues to justify supporting those of its shareholders who do value the Company’s modest but progressive distribution policy. The Board is therefore recommending that this year, the total dividend be increased by 4% on the level of the previous year to a total of 3.25p (3.13p in 2019). Just under half of the dividend will be funded from the portfolio’s earnings, with the rest to be paid from the Company’s significant distributable capital reserves which have built up as a result of realised gains achieved over the long term in the portfolio. The Board encourages all those who do not require the income to consider reinvesting it in the Company.
Liquidity
Over the period, the Company has continued to operate its liquidity policy of meeting imbalances in supply and demand in its shares over short run periods in normal market conditions. In total, the Company issued 10.5 million shares and bought back 31.5 million, resulting in a net buyback of around £112 million, or just over 1% of the total assets of the Company at the start of the period. As such share issuance is conducted at a premium to the prevailing NAV and share buy backs at a discount, these operations are of incremental benefit to the NAV for ongoing shareholders.
The liquidity policy is designed for the benefit of long term shareholders. It is not intended to smooth short term returns or facilitate other market factors. The Board does not believe it to be in the interests of long term shareholders to step into the market when all share prices, including the Company’s own, are moving rapidly intraday, or when short term factors are disproportionately weighing on the markets.
Board Update
Professor John Kay has decided not to stand for re-election at this year’s AGM and will retire from the Board in June after twelve years’ service as a Director. John’s career has spanned academic work, think tanks, business schools and consultancies. Scottish Mortgage has been extremely fortunate to have had the benefit of his input over the past twelve years. He joined the Board just before the start of the Global Financial Crisis and served the Company through the subsequent fall out, as he has done over the course of the current Global crisis and all the intervening years. His great intellect and wit are known and appreciated by many, through his writing as well as his presence at Scottish Mortgage events. I know I speak for all of my colleagues when I say it has been a real privilege to sit alongside John, to benefit from his great expertise always delivered with a quiet, unassuming style that never fails to hit the mark. He will be sorely missed and we wish him well in all future endeavours.
I am delighted to announce the appointment of a new Non-Executive Director, Professor Amar Bhidé who is standing for election at the forthcoming AGM. Amar is a distinguished professor of business, and is currently professor at Tufts University, Massachusetts. A particular focus in his work over the past thirty years has been economic innovation and entrepreneurship, areas I am sure you will agree resonate strongly with Scottish Mortgage. We very much look forward to his contribution on a wide range of topics in the Board.
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 on page (41).
Shareholder Engagement
This year, the Annual General Meeting (AGM) of Scottish Mortgage is scheduled for 25 June 2020. As ever I encourage shareholders to participate, raising any questions they may have and exercising their votes. Unfortunately, this year it is looking most unlikely that this will be allowed in person as we must of course ensure that everyone involved is kept safe by abiding by the UK and Scottish Governments’ COVID-19 prevailing guidance on social distancing and other applicable measures, such as restrictions on public gatherings.
I would remind shareholders that they are able to submit proxy voting forms before the applicable deadline and also to direct any questions or comments 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.
As the Governments’ guidelines are necessarily continually evolving, the Board will keep the position under review and any changes will be advised to shareholders by post and details will be updated on the Company’s website. As always the details of the conclusions of the AGM’s business, together with films of the reports on the portfolio from the two Managers, will also subsequently be available on the website.
Further, I would encourage shareholders to engage with Scottish Mortgage throughout the year, not solely via the AGM. Investors have a number of options for this. The primary means is through the Company’s Managers, who hold multiple shareholder meetings and events around the country throughout the year (circumstances permitting), as well as providing a wealth of information and ‘Insight’ pieces on the portfolio on the Company’s website www.scottishmortgageit.com. Now more than ever these digital resources allow shareholders to stay well informed, by hearing directly from those managing their money. The Managers are currently considering digital alternatives for the Scottish Mortgage events that have had to be postponed or cancelled. Details will be put on the website.
It is hoped that the Managers will be able to proceed with the various Scottish Mortgage Forums planned for later in the year. If such events are able to take place, Board members will look to attend a number of these to provide opportunities for face to face engagement with shareholders.
Update to the Investment Policy
The Notice of the AGM will include a shareholder resolution proposing an update to the Company’s Investment Policy. There is only one proposed change, which is to raise the current limit on all assets not listed on a public exchange by 5 per cent. to 30 per cent. at time of purchase of the next such asset.
This flexibility to invest in the best companies which the Managers find, regardless of the capital structure, has been an important driver of the returns generated for shareholders over the last decade. As an increasing number of the best growth companies have remained private until much later in their development, it has enabled the Managers to maintain the quality and depth of their opportunity set and to invest simply in any company which met their investment philosophy and criteria. This capacity utilises the benefits of Scottish Mortgage’s closed-end structure and low-cost proposition to its shareholders’ advantage.
The updated policy retains not only a limit on the ability of the Managers to invest in unlisted assets to provide shareholders with clarity, but also crucially the pragmatic “at time of purchase” caveat. The latter ensures that the Company would not become a forced seller of such assets due to rises in the fair valuations of the private businesses or falls in the share prices of individual public companies in the portfolio alone, as this would clearly not be in the interests of shareholders. The Managers recently reminded shareholders of the fair valuation process for the unlisted assets, as part of their wider Insight piece “Staying the Course for Scottish Mortgage” available on the website. It is also summarised in every Annual Report. The policy was consistently applied throughout the year and, as a result, additional valuation meetings were held in relation to a significant number of these holdings in March, in swift response to the large swings in public markets’ prices. The policy therefore helps to ensure that the published NAVs for Scottish Mortgage remain reflective of the prices one might expect to achieve for all the assets in the portfolio at that point.
The forthcoming Annual Report includes a paper from the Managers focused on this area of the portfolio which I encourage all to read when considering their vote. The proposed change will give the Managers more capacity to invest simply in the best opportunities which they find, without changing the core investment proposition for shareholders. The Board accordingly will be urging all shareholders to vote in favour of this resolution.
Brexit
This year the Company is once again required to provide guidance on any potential material impacts on it from ‘Brexit‘. Little has changed in this regard over the period. The largest potential related exposure remains to significant changes in the relative value of sterling around the exit process. Scottish Mortgage holds a global portfolio of companies, the vast majority of which are denominated in foreign currencies, particularly the US dollar. If sterling were to strengthen relative to these other currencies, it would have a negative impact on the sterling value of such assets, while the converse would be true. There is a natural long term structural hedge in place for the largest such exposure, as the Company has both US dollar denominated assets and liabilities and changes in this exchange rate have opposing impacts on these, thereby reducing the net impact. There is also now a similar but more modest hedge in place related to the euro denominated assets, as the Company raised EUR45 million in long term borrowings in January 2020. I would remind investors that the long-run impact of currency fluctuations is further diversified by the nature of this portfolio, including as it does many global companies, listed in a wide range of countries.
Outlook
In the current difficult environment, I wish to conclude with the positive reminder that, ‘this too will pass’. While humans are generally poor at understanding and dealing with sudden change in the moment, as a group we excel at innovation and adaptation over the longer term. Collectively, we will find ways to move forward.
This is not a halcyon view. At this early stage I would also observe that no one can predict with any reasonable confidence when that will be. It will take time and the road is likely to be bumpy. I highlighted last year that the ability to accept and deal with such radical uncertainty is a vital skill. That seems even more apposite today, and is considered in Professor Kay’s recent book with Mervyn King, ‘Radical Uncertainty: Decision-making for an unknowable future’. Scottish Mortgage represents the attempt to do that in terms of investment. The Managers’ investment philosophy and processes have evolved in this area over the last two decades and I would direct shareholders to read the Managers’ Statement of Core Beliefs in the Annual Report.
Together, the members of the Board and the Managers have many decades of experience. The combined lesson from all would be the importance of enduring through difficult periods. In long term investment, often the best course is to remain steadfast. Scottish Mortgage remains best suited to those who share its long term and patient approach.
I thank everyone who has continued to work on and support this Company throughout this year and look forward to the future.
Fiona McBain
Chair – Scottish Mortgage Investment Trust
14 May 2020
Past performance is not a guide to future performance.
