T
THE SCOTTISH INVESTMENT TRUST PLC
129TH ANNUAL REPORT & ACCOUNTS
31 OCTOBER 2016
Objective of The Scottish
Investment Trust PLC
To provide investors,
over the longer term, with
above-average returns
through a diversified
portfolio of international
equities and to achieve
dividend growth ahead of
UK inflation.
Cover painting:
Blue Lake by Madeleine Gardiner,
oil on canvas, 82cm x 82cm, 2015
www.madeleinegardiner.com
The Scottish Investment Trust PLC | Annual Report 2016
Contents
2
Year at a Glance
3 Chairman’s Statement
5 Board of Directors
7 Manager’s Review
11
The Investment Team
12
Strategic Report
17
Financial Summary
18
List of Investments
20 Distribution of Assets
22
Ten Year Record
Directors’ Report
24 Responsibility Statement
25 Corporate Governance Report
30 Report of the Audit Committee
32 Directors’ Remuneration Report
Financial Statements
34
Independent Auditor’s Report
39
Income Statement
40 Balance Sheet
41 Statement of Comprehensive Income and of Changes in Equity
42 Cash Flow Statement
43 Accounting Policies
45 Notes to the Financial Statements
Additional Information
60
Investor Information
63
Financial Calendar 2017 and Useful Addresses
64 Glossary
Annual General Meeting
66 Notice of Annual General Meeting
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02 | 03
Year at a Glance
31 October 2016
30.0%
Share price total return
MSCI UK All Cap +12.3%
MSCI ACWI +29.1%
8.0%
Increase in regular dividend
per share
RPI 2%
4x
Dividend reserves
(regular dividend)
8.1%
Share price discount to NAV*
(ex-income)
31 October 2015: 8.6%
33 years
of consecutive increase in
regular dividend
1st Quartile
AIC Global peer group
(Total Return)
70
Number of
listed holdings
31 October 2015: 4x
31 October 2015: 4th Quartile
31 October 2015: 74
5%
Gearing
31 October 2015: 5%
* NAV with borrowings at market value.
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29.4%NAV total returnMSCI UK All Cap +12.3%MSCI ACWI +29.1%40.6%Increase in total dividendper share RPI 2%19%Portfolio turnover rateYear to 31 October 2015: 41%0.49%Ongoing charges figure31 October 2015: 0.52% The Scottish Investment Trust PLC | Annual Report 2016
Chairman’s Statement
The Board wishes to maintain both the long track record
of dividend increases and the aim of the Company to
provide dividend growth ahead of UK inflation over the
longer term. The Company has healthy revenue reserves
which cover in excess of four years of the regular dividend.
The Board considers it important for the Manager to
examine the merits of investments from a total return
perspective and does not wish the composition of the
portfolio to be dictated by the income requirements of
the Company. Accordingly, the Board believes that these
reserves should be utilised, if required, in the future.
As was the case for the past two years, the Board also
considers that income generated in excess of the
requirement of the regular dividend should be distributed
as a special dividend.
Board composition
I was appointed as Chairman at the AGM in January 2016,
following the retiral of Douglas McDougall. The Company
benefited greatly from his knowledge, experience and
leadership over many years. On behalf of the Board,
I should like to thank Douglas for his outstanding
contribution.
Jane Lewis and Mick Brewis were appointed as
non-executive Directors in December 2015 and elected
at the AGM in January 2016. Jane is an investment
trust specialist and Mick is an investment management
specialist and both bring the experience of long careers
in their fields.
Process of change
The Company has undergone a number of changes over
the past two years which I believe have positioned it well
for future success.
Alasdair McKinnon was appointed as the Company's
Manager in February 2015 and, since then, the
investment team has been reorganised and the majority
of our company secretarial and back office operations
have been outsourced.
An important element of the changes has been the
introduction of the high conviction, global contrarian
investment approach which, as I mention earlier,
differentiates the Company from our global growth
investment trust peers. This approach reflects the
investment team's natural style as independent thinkers
and active, long-term investors who seldom follow the
herd. It seeks opportunities created by the tendency of
markets to concentrate too much on past performance.
The Manager's view is that fashionable companies
eventually become overvalued and unfashionable
companies eventually become undervalued.
Central to the new investment approach is the Manager’s
high conviction in the Company’s underlying investments
Performance
In my first year end statement, I am delighted to report
that the Company’s performance has been strong during
the 12 months to 31 October 2016. Over that period, the
share price total return was 30.0% and the net asset value
per share (NAV) total return was 29.4% (with borrowings
at market value). While the Company’s objective is to
produce above-average returns over the longer term, it is
nevertheless pleasing that the Company’s new investment
approach has demonstrated early benefits.
At the financial year end the Company was ranked in the
first quartile of the AIC global peer group over the prior
12 months.
The high conviction, global contrarian investment
approach adopted by Alasdair McKinnon and his
team has been deployed for the full financial year. This
approach differentiates the Company from our global
growth investment trust peers. The portfolio currently
contains 68 listed equity holdings and is invested without
reference to the composition of any index.
The Company does not have a formal benchmark but,
by way of comparison, the sterling total return of the
international MSCI All Country World Index (ACWI) was
29.1%, while the UK based MSCI UK All Cap Index total
return was 12.3%.
An inflation-beating dividend
Over the financial year, earnings per share rose by 35.9%
to 21.6p (2015: 15.9p), with a higher level of income
generation from the portfolio and a boost from sterling
weakness.
The Board recommends a final dividend of 8.25p per
share which, if approved, will mean that the total regular
dividend for the year will increase by 8.0% to 13.5p
and will represent the 33rd consecutive year of regular
dividend increase.
In view of the strong income generation this year, the
Board also recommends a special dividend of 9.0p which
follows a special dividend of 3.5p in the previous financial
year. The total dividend for the year will, if approved, thus
increase by 40.6% to 22.5p.
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Chairman’s Statement (continued)
and, in reflection of this, the Board considers it
appropriate for the portfolio to contain fewer holdings
than the previous typical range of 70 to 120 listed
international equity investments. Accordingly, the
portfolio will now typically contain 50 to 100 listed
international equity investments. The number of listed
holdings as at 31 October 2015 and 31 October 2016
was 74 and 70 respectively.
Following the changes outlined above, we now have a
streamlined investment team that is focused for effective
decision-making and has a clear investment approach
which is explained more fully in the Manager’s Review.
We have also changed our approach with regard to
marketing and communications. We will seek to raise the
Company’s profile, as we believe that it is an attractive
investment vehicle which should appeal to a broad range
of potential investors when its attributes are effectively
communicated. The first steps in this are visible in our
relaunched website at www.thescottish.co.uk and a
refreshed Annual Report. This has been achieved at a
very reasonable cost and within our longstanding annual
marketing budget.
Low costs
The ongoing charges figure for the year under review
was 0.49% which compares favourably with other
actively-managed investment vehicles. As a self-managed
investment trust, this figure represents the ongoing
costs of running the Company rather than an ad valorem
charge. The process of change over the two years, most
notably the restructuring of the investment team and
outsourcing of other functions, has helped to reduce the
ongoing charges figure from 0.68% in 2014, to 0.52% in
2015 and to 0.49% in the year under review.
Gearing and partial repayment of long-term
borrowings
Gearing was largely unchanged and finished the year
at 5%.
As I mentioned in the Interim Report, the majority of
the Company’s long-term borrowings, which mature
in 2030, were arranged almost 17 years ago when a
5.75% coupon was considered attractive. The interest
rate environment has changed considerably over this
timeframe.
The original purpose of the borrowings was to invest on
the basis that the return from a portfolio of equities would
exceed the cost of borrowings on a long-term timeframe
especially if deployed at an opportune time. The Board
believes that this remains a valid assumption given that
the borrowings have more than 13 years until expiry
and, furthermore, the Board is conscious that a premium
would currently be required for early repayment of the
borrowings.
However, over recent years the proportionate size of these
borrowings has increased due to shares being bought
back and cancelled as part of the Company’s discount
control policy. Accordingly, we took the opportunity to
repurchase £21m nominal, being around 20%, of the
Company’s secured bonds in December 2015. While
this decision had a one-off negative impact on the NAV
of 0.4% (with borrowings at market value) or 1.0% (with
borrowings at par), the £1.2m reduction in the annual
interest charge going forward means that the cost will be
clawed back well within the lifetime of the bond.
Discount and share buybacks
The Company follows a policy that aims, in normal market
conditions, to maintain the discount to the ex-income
NAV (with borrowings at market value) at or below 9%.
The discount at which the share price traded to the NAV
over the period varied more than in previous years but
finished the period at 8.1%. During the year 9.2m shares
were purchased for cancellation at an average discount of
10.6% and a cost of £59.9m.
Outlook
Although the UK Brexit vote to leave the European Union
wrongfooted markets, the swift recovery, particularly in
sterling terms, benefited the Company. Since the year-
end, there has been a further challenge to the political
status quo with the election of Donald Trump as US
President. Forthcoming elections have the potential to
highlight further rancour towards the European Union.
I do not propose to add to the large volume of material
that exists on analysis of these events other than to
observe that there is a view, not only confined to the US
and the UK, that large sections of the population feel
disadvantaged by the consequences of globalisation. In
contrast, many large corporations have benefited from
these trends but it is still too early to determine what
changes, if any, will emerge under new political regimes.
Regardless, politicians and bureaucrats are likely to
remain sensitive to market movements and will not intend
to damage investor confidence.
Finally, the Board believes that the progress made over
the year stands the Company in good stead as a low-cost
investment vehicle focused on delivering both above
average returns and dividend growth over the longer
term.
James Will
Chairman
3 January 2017
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The Scottish Investment Trust PLC | Annual Report 2016
Board of Directors
James Will
Appointed to the Board in May
2013 and became Chairman in
January 2016.
Ian Hunter
Appointed to the Board in
December 2014. He is Chairman of
the Audit Committee.
He is a former Chairman of law firm Shepherd and
Wedderburn LLP where he was a senior corporate
partner, heading its financial sector practice. He has
experience of working with companies in a wide
range of industry sectors including financial services,
technology, energy and life sciences.
Other investment company directorship: Herald
Investment Trust.
Shares held: 8,000* Fees: £50,000
* In addition to the 8,000 shares held, Mr Will is a trustee of
a trust which holds 22,000 shares in the Company. Mr Will
is beneficially or potentially beneficially interested in this
holding.
Hamish Buchan
Appointed to the Board in
November 2003 and will retire at the
AGM to be held in 2018.
He is a former Chairman of the Association of
Investment Companies and was formerly Chairman of
Natwest Securities in Scotland. He has been involved in
the investment company sector for over 40 years.
Other investment company directorships: Personal
Assets Trust (Chairman) and Templeton Emerging
Markets Investment Trust.
Shares held: 22,325 Fees: £30,000
Russell Napier
Appointed to the Board in
July 2009.
He runs a course in financial history at the University
of Edinburgh Business School and is the author of
the book “Anatomy of the Bear: Lessons from Wall
Street’s Four Great Bottoms”. He has been providing
investment advice to financial institutions for more
than 20 years both as a stockbroker and latterly as an
independent analyst.
Other investment company directorship: Mid Wynd
International Investment Trust.
Shares held: 14,000 Fees: £30,000
He is a chartered accountant and a member of the
Chartered Institute of Taxation. In June 2011, he
retired from EY, having spent over 35 years in the
firm’s Edinburgh office and having been a partner
for 25 years. Throughout his career, he was heavily
involved in advising closed-ended funds (particularly
investment trusts), and their managers, on taxation and
on corporate transactions. He served as a member of
the AIC’s taxation committee.
Other investment company directorships: None.
Shares held: 22,608 Fees: £30,000
Jane Lewis
Appointed to the Board in
December 2015. She is Chairman
of the Remuneration Committee.
She is an investment trust specialist who, until August
2013, was a director of corporate finance and broking
at Winterflood Investment Trusts. Prior to this, she
worked at Henderson Global Investors and Gartmore
Investment Management Limited in investment trust
business development and at WestLB Panmure as an
investment trust broker.
Other investment company directorships: BlackRock
World Mining Trust, F&C Capital and Income Investment
Trust, Invesco Perpetual UK Smaller Companies
Investment Trust and Phaunos Timber Fund Limited.
Shares held: 1,000 Fees: £30,000
Mick Brewis
Appointed to the Board in
December 2015.
He was an investment manager at Baillie Gifford,
retiring in April 2014 after 29 years at the firm, 21 of
them as a partner. He was a stockpicker throughout
his time there, responsible for managing UK equity
portfolios before heading the North American equities
team from 1995 onwards. His broad investment
experience includes managing investment teams
and research groups, global asset allocation, working
with clients (including investment trusts), marketing,
graduate recruitment and investor development.
Other investment company directorships: None.
Shares held: 10,000 Fees: £30,000
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The Scottish Investment Trust PLC | Annual Report 2016
Manager’s Review
Our contrarian approach
Before examining the year under review, I thought it
would be useful to outline our contrarian investment
philosophy which we believe will benefit a long-term
investor in the Company.
Our contrarian approach is grounded in the simple
observation that people like to belong to a group or to
feel part of something bigger. Humans, as a species,
have evolved to feel uncomfortable outwith the
mainstream because, in more arduous times, a
coordinated group stood a better chance of survival.
However, we believe this crowding instinct works against
the best interests of an investor and that a different
stance is required to profit. Accordingly, we do not
attempt to follow investment fashions and instead seek
investments in which we can foresee long term upside.
We think it is crucial to ignore the emotions associated
with past performance and, rather, to view each
investment on its future merit. This requires lateral
thinking and the willingness to adopt a contrarian point
of view as both markets and company management
teams have a propensity for hubris in the good times
and unjustified pessimism when times are hard.
We divide the stocks in which we invest into three
categories.
near-term outlook continues to appear uninspiring.
However, we see their out-of-favour status as an
opportunity and can foresee the circumstances in which
these investments will surprise on the upside. These
stocks often have a higher than average dividend yield
which can provide an attractive income while we wait for
our investment thesis to unfold.
The second category consists of companies where
change is afoot. These companies have seen a
significant improvement in their prospects but this
progress has not yet been recognised by the market.
Often, they are disliked for historical reasons, with
investors unwilling to credit the signs of change that are
so far evident.
Thirdly, we have stocks where we see more to come.
Unlike the first two categories, these companies are
generally recognised as good businesses but we see
an opportunity as the market does not appreciate the
scope for further improvement.
In our experience, the best investments can, over time,
move along an axis from ‘ugly ducklings’ through
‘change is afoot’ and into the ‘more to come’ category
but we are happy to purchase and hold investments in
any of the categories.
First, we have those that we describe as ugly ducklings
– unloved shares that most investors shun. These
companies have endured an extended period of
poor operating performance and, for the majority, the
A key strength of our contrarian approach is that
it provides profitable opportunities in all market
environments as there are always underappreciated
areas of the market.
Categorisation of Investments
more
to come
underappreciated
prospects
change
is afoot
overlooked progress
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ugly
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positive potential
Challenged
Overlooked
Underestimated
OPERATING PERFORMANCE
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Manager’s Review (continued)
The financial year
This was a strong year for investment returns but there
were two volatile periods that favoured our contrarian
approach.
There was a sharp change in investor sentiment in
January 2016 in the aftermath of a small interest rate
increase by the US Federal Reserve. Almost overnight,
investors shunned highly valued, fashionable stocks in
favour of more attractively valued, but unfashionable,
investments.
The outcome of the Brexit vote surprised investors
who had set excessive store in the soothsaying abilities
of opinion pollsters and bookmakers. The kneejerk
plunge in markets was chaotic but the portfolio made
a swift recovery and quickly advanced to new highs for
the year. The downward movement in sterling had an
obvious beneficial impact to the value of our overseas
investments when considered in sterling terms. The
vote also triggered an awakening of interest in our UK
domiciled international companies, which stood to
benefit from the conversion of their substantial non-
sterling revenues.
Given our focus on individual stock ideas, rather than
reporting portfolio activity in terms of geography or
industry, I thought it more meaningful to discuss the
notable gains and losses, in total return terms, over the
year.
NAV Absolute Performance Attribution
Year to 31 October 2016
Equity portfolio (ungeared)
Gearing
Total equities
Other income, tax and currency
Buybacks
Expenses
Interest charges
Premium on repayment of secured bonds
Change in market value of borrowings
Change in pension liability
NAV with borrowings at market value total return
Contribution
%
+28.7
+2.3
+31.0
+0.6
+1.0
-0.5
-0.7
-0.4
-1.5
-0.1
+29.4
Contributors to Absolute Performance
Year to 31 October 2016
Performance
%
105.2
62.8
47.5
50.5
92.1
50.3
61.4
49.0
31.7
34.2
Positive
Contribution
£m
21.0
13.0
10.7
10.1
7.0
6.2
6.2
5.6
5.5
5.5
British Land
Marks & Spencer
BT
Associated British Foods*
Standard Life
Intesa Sanpaolo
Bank of Ireland
Inditex*
Panasonic*
Bank of Kyoto
Performance
%
Negative
Contribution
£m
-29.7
-24.6
-16.4
-13.4
-16.7
-11.5
-37.4
-8.4
-12.5
-7.4
-4.3
-2.3
-2.2
-1.4
-1.2
-0.9
-0.7
-0.7
-0.7
-0.6
Treasury Wine Estates
Sands China
Microsoft
Rentokil Initial
Nintendo
Standard Chartered
KDDI
Johnson & Johnson
Suncor Energy
Royal Dutch Shell
* Sold during the year.
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Manager’s Review (continued)
Treasury Wine Estates (+£21.0m), the largest holding
in our portfolio, delivered outstanding performance
and more than doubled in sterling terms over the year.
This Australian wine company has been rejuvenated
under the leadership of Michael Clarke and is being
repositioned towards a brand-led strategy. The
acquisition of Diageo’s wine assets greatly expanded
the company’s scale and scope at a very reasonable
price. On purchase, we viewed the company as an ‘ugly
duckling’ but progress to date and a more general
acceptance of the company’s strategy means that we
now believe that ‘change is afoot’.
Sands China (+£13.0m), the Macau casino operator, is
another investment we view as an ‘ugly duckling’. The
share price had suffered from the perception that the
Chinese economy was heading for a period of very
slow growth. However, a recovery in visitor spending
supported our view of the broader appeal of Macau as
a tourist destination while investor sentiment towards
China improved. This, alongside an appealing dividend
yield, helped produce a strong total return.
Microsoft (+£10.7m) appreciated meaningfully during
the year as it continued to demonstrate an ability to shift
a large user base to a more valuable subscription model.
We originally viewed the company within the ‘change
is afoot’ category but now consider the company has
‘more to come’.
Rentokil Initial (+£10.1m), the UK support services
company, is another example of where we see ‘change
is afoot’. Following a period of substantial restructuring,
the company has refocused on the pest control market
and has an opportunity to improve profit margins
further. The company performed particularly well in the
aftermath of Brexit as a high proportion of overseas
revenues proved attractive to investors.
Leading Japanese games company Nintendo (+£7.0m)
has the opportunity to bring its content to a wider
audience and this was highlighted by the enthusiastic
reception for the Pokémon Go smartphone game.
We consider that ‘change is afoot’ and the upcoming
launches of new smartphone games have the potential
to shine further light on Nintendo’s underappreciated
intellectual property.
We view Standard Chartered (+£6.2m) as an ‘ugly
duckling’ as it was shunned for high loan exposure
to weak emerging markets and commodities. The
prospects for these loans are improving which,
alongside the company’s ambitious restructuring plan,
has the potential to improve the company’s lowly
valuation.
Improving sentiment towards emerging markets, oil
and commodities in general was a common theme for
several more of our best investments, particularly in
The Scottish Investment Trust PLC | Annual Report 2016
the second half of the financial year. As reported last
year, we had increased our exposure to certain stocks
where we judged that pessimistic scenarios, related to a
slowdown in emerging markets, were overly discounted
in share prices. We saw large gains from our investments
in Suncor Energy (+£5.5m), Royal Dutch Shell (+£5.5m),
Rio Tinto (+£4.0m), Cemex (+£3.7m) and BHP Billiton
(+£2.6m).
In a strong year for markets, it is unsurprising that we
made comparatively few notable absolute losses.
British Land (-£4.3m) suffered from the perceived threat
to the UK commercial property market from Brexit but
gloomy market assumptions present an interesting
‘ugly duckling’ recovery opportunity. BT (-£2.2m) also
performed poorly in the aftermath of the Brexit vote
and this was compounded by a potential shift in the
regulatory framework. Being contrarian can require
patience and this was the case with our new holding
in Marks & Spencer (-£2.3m). We continue to think
this ‘ugly duckling’ will benefit from the meaningful
change which has commenced in earnest under the new
leadership of Steve Rowe.
An important part of our contrarian investment approach
is to sell investments where we no longer envisage a
prospect for significant further upside. Most notably,
we sold Pandora (+£4.9m), which had performed
extremely well and which we considered fully valued, as
we saw a less favourable balance of risks for this fashion
driven stock. We also sold a number of other long-
term holdings, where we judged the current valuation
fully reflected their prospects, including Ross Stores,
Associated British Foods, Persimmon, Alphabet, Svenska
Handelsbanken and Sampo.
The Brexit vote and, subsequent to the year end,
the election of Donald Trump as the forthcoming
US President indicate that there may be a shift in the
political and investment environment. Large segments
of the populations in the developed world clearly feel
that a decline in their living standards has been ignored
by the establishment.
A change in the political zeitgeist, if it actually occurs,
will undoubtedly benefit some companies more than
others. However, our contrarian investment approach is
designed to anticipate and benefit from change and we
will continue to seek opportunities which we believe will
profit a long-term investor.
Alasdair McKinnon
Manager
3 January 2017
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The Scottish Investment Trust PLC | Annual Report 2016
The Investment Team
Alasdair McKinnon
Manager
Martin Robertson
Deputy Manager
Alasdair joined the Company in 2004 and became
Manager in 2015. He has 17 years of investment
experience. He graduated MA with honours in
Economic and Social History from the University of
Edinburgh and MSc in Investment Analysis (with
distinction) from the University of Stirling. Alasdair is a
CFA charterholder and an Associate of the UK Society of
Investment Professionals.
Martin joined the Company in 2004 and became
Deputy Manager in 2015. He has 29 years of
investment experience. He is a graduate of both
Dundee and Edinburgh universities gaining a BSc with
honours in Civil Engineering and a Master of Business
Administration, respectively. Martin is a member of
the CFA Institute and the UK Society of Investment
Professionals.
Sarah Monaco
Investment Manager
Mark Dobbie
Investment Manager
Sarah joined the Company in 2000 and became
an Investment Manager in 2002. She has 14 years
of investment experience. She graduated with a
Master of Business Administration from the University
of Edinburgh. Sarah also has broader investor
relations experience and has previously gained a
BA in Commerce and Post Graduate CIM Diploma in
Marketing.
Mark joined the Company in 2000 and became
an Investment Manager in 2011. He has 6 years
of investment experience. He also has extensive
knowledge of the operation of investment trusts,
including valuation and performance analytics, from
previous roles with the Company. Mark is a CFA
charterholder.
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Strategic Report
Status
The Company is a self-managed global growth
investment trust and is an investment company
within the meaning of the Companies Act 2006. HM
Revenue & Customs has approved the Company as an
investment trust under Sections 1158 and 1159 of the
Corporation Taxes Act 2010. The Company continues
to satisfy the conditions for such approval. The
Company is registered in Scotland and its registered
office is 6 Albyn Place, Edinburgh EH2 4NL.
Investment objective and policy
The Company’s objective is to provide investors, over
the longer term, with above-average returns through
a diversified portfolio of international equities and to
achieve dividend growth ahead of UK inflation.
In order to achieve this objective, the Company invests
in an integrated global portfolio constructed through
an investment process whereby assets are primarily
allocated on the basis of the investment merits of
individual stocks rather than those of regions, sectors
or themes.
The Company’s portfolio is actively managed and
typically will contain 50 to 100 listed international
equity investments. The portfolio is widely diversified
both by industrial sector and geographic location of
investments in order to spread investment risk.
Whilst performance is compared against major global
and UK indices, the composition of indices has no
influence on investment decisions or the construction
of the portfolio. As a result, it is expected that the
Company’s investment portfolio and performance may
deviate from the comparator indices.
Since the Company’s assets are invested globally and
without regard to the composition of any index, there
are no restrictions on maximum or minimum exposures
to specific geographic regions, industry sectors or
unlisted investments. However, such exposures are
reported in detail to, and monitored by, the Board at
each board meeting in order to ensure that adequate
diversification is maintained.
Liquidity and long-term borrowings are managed
with the aim of improving returns to shareholders. In
pursuing its investment objective, from time to time
the Company will hold certain financial instruments
comprising equity and non-equity shares, fixed income
securities, interests in limited partnerships, structured
products and cash and liquid resources. The Company
may use derivatives, other than in relation to the sale
of index futures, for hedging or tactical investment
purposes. The Company may only sell index futures
for efficient portfolio management purposes. For the
avoidance of doubt, any derivative instrument may only
be used with the prior authorisation of the Board.
The Company has the ability to enter into contracts
to hedge against currency risks on both capital and
income.
The Company’s investment activities are subject to the
following limitations and restrictions:
• under the Company’s articles of association, up to
40% of the Company’s total assets on the last audited
balance sheet may be used to make investments of
up to a maximum of 8% of the value of total assets in
any one company, at the time the investment is made.
Thereafter, individual investments may not exceed 3%
of the value of total assets, at the time the investment
is made;
• the levels of gearing and gross gearing are monitored
closely by the Board and the Manager. The Board
currently limits gearing to 20%. While gearing will be
employed in a typical range of 0% to 20%, the
Company retains the ability to lower equity exposure
to a net cash position if deemed appropriate;
• the Company has a policy not to invest more than
15% of total assets in other listed closed-ended
investment funds; and
• the Company may not make investments in respect of
which there is unlimited liability except that the
Company may sell index futures for efficient portfolio
management purposes.
Investment policy – implementation
During the year under review, the assets of the
Company were invested in accordance with the
Company’s investment policy.
A full list of holdings is disclosed on pages 18 and 19
and detailed analysis of the spread of investments
by geographic region and industry sector is shown
on page 20. A further analysis of changes in asset
distribution by industry sector over the year, including
the sources of appreciation/depreciation, is shown on
page 21. Attribution of NAV performance is shown on
page 8.
At the year end, the number of listed holdings was 70.
The top ten holdings comprised 31.0% of total assets
(2015: 24.1%).
Details of the extent to which the Company’s objective
has been achieved and how the investment policy
was implemented are provided in the Chairman’s
Statement on pages 3 and 4 and the Manager’s Review
on pages 7 to 9.
Additional limitations on borrowings
Under the Company’s articles of association, the
Directors control the borrowings of the Company and
its subsidiaries to ensure that the aggregate amount of
borrowings does not, unless approved by an ordinary
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The Scottish Investment Trust PLC | Annual Report 2016
Strategic Report (continued)
resolution of shareholders, exceed the aggregate of
the reserves excluding unrealised capital profits of the
Company and its subsidiaries, as published in the latest
accounts. In addition, the Directors are authorised to
incur temporary borrowings in the ordinary course of
business of up to 10% of the Company’s issued share
capital. Such temporary borrowings are to be for no
longer than six months.
The Directors recommend a final dividend of 8.25p
and a special dividend of 9.00p per share, payable on
17 February 2017. With the interim dividend of 5.25p
already paid in July 2016, this makes a total of 22.5p
for the year. Based on 96,342,683 shares in issue at
31 October 2016, the final and special dividend will
cost £16.619m. The total dividend for the year will cost
£21.677m.
Principal risks and uncertainties
The principal risks and uncertainties facing the
business are as follows:
• investment and market price risk;
• interest rate risk;
• liquidity risk;
• foreign currency risk;
• credit risk;
• discount volatility;
• custody and depositary risk; and
• operational risk.
These and other risks facing the Company are reviewed
regularly by the Audit Committee and the Board. A
detailed risk map, which identifies significant risks
relevant to the Company, is assessed twice per year.
These risks include corporate strategy, investment
decisions, financial and regulatory activities, business
continuity and service providers. Further information on
risks is detailed in the Corporate Governance Report
on page 28 and in note 17 to the accounts on pages 53
to 58 and on internal controls in the Report of the Audit
Committee on page 30.
Performance
Management provides the Board with detailed
information on the Company’s performance at
every Board meeting. Performance is measured in
comparison with the Company’s peers and comparator
indices.
Key Performance Indicators are:
• NAV total return;
• NAV total return against comparators;
• NAV and share price total return against peers;
• discount with debt at market value;
• dividend growth against UK inflation; and
• ongoing charges figure.
Dividends
The Board may declare dividends, including interim
dividends, but no dividend is payable except out of the
Company’s revenue return and revenue reserves, or in
excess of the amount recommended by the Directors.
Neither unrealised appreciation of capital assets nor
realised profits arising from the sale of capital assets
are available for the dividend.
Share capital
General
The Company had 96,342,683 shares of 25p each in
issue on 31 October 2016 (2015: 105,587,426). Since
the year end, the Company has bought back 388,000
shares for cancellation. The rights attaching to shares
in the Company are set out in the Company’s articles
of association which may be amended by the passing
of a special resolution of shareholders, that is, by the
approval of a majority of not less than 75% of votes cast.
The Financial Conduct Authority rules in relation to
non-mainstream investment products do not apply to
the Company.
Rights to the capital of the Company on winding up
Shareholders would be entitled to the assets of the
Company in the event of a winding up (after the
Company’s other liabilities had been satisfied).
Voting
On a show of hands, every shareholder present in
person or by proxy has one vote and on a poll every
member present in person or by proxy has one vote for
each share.
Transfer
There are no restrictions concerning the holding
or transfer of shares in the Company and there are
no special rights attaching to any of the shares. The
Company is not aware of any agreements between
shareholders which might result in any restriction on
the transfer of shares or their voting rights.
Deadlines for exercising voting rights
If a shareholder wishes to appoint a proxy to attend,
speak and vote at a meeting on their behalf, a valid
appointment is made when the form of proxy (together,
where relevant, with a notarially certified copy of the
power of attorney or other authority under which the
form of proxy is signed) is received by the Company’s
registrar not less than 48 hours before the start of the
meeting or the adjourned meeting at which the proxy
is appointed to vote (or, in the case of a poll taken
more than 48 hours after it is demanded, no later than
24 hours before the time appointed for taking the poll).
In calculating these time periods, no account is taken of
any day or part thereof that is not a working day.
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14 | 15
Strategic Report (continued)
Discount control policy
The Company’s policy aims, in normal market
conditions, to maintain the discount to ex-income
NAV at or below 9%. In calculating the NAV for the
purposes of this policy, the Company’s borrowings are
taken at their market value so as to ensure that future
repurchases of shares will take into account changes
in the value of the borrowings brought about by
movements in long-term interest rates. During the year
ended 31 October 2016, the Company bought back
for cancellation a total of 9,244,743 shares of 25p each
representing 8.8% of shares in issue at 31 October
2015, at a cost of £59,944,000.
At the AGM on 29 January 2016, authority was granted
to repurchase up to 14.99% of shares in issue on that
date. The number of shares authorised for repurchase
was 15,654,570. Share buybacks from the date of
the AGM to the Company’s year end amounted to
8,090,743 shares or 7.75 percentage points of the
14.99% authority. Since the year end to 3 January 2017,
the Company has bought back 388,000 shares.
Discount to ex-income NAV*
5 Years to 31 October 2016
%
0
3
6
9
12
15
18
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
* with borrowings at market value
Holdings in listed closed-ended investment
funds
Company holdings include an investment in listed
closed-ended investment funds of £9.8m: 1.0% of total
assets (2015: £14.5m: 1.7%). This comprised solely of
an investment in British Land, a UK property fund. The
Company has a policy not to invest more than 15% of
total assets in other listed closed-ended investment funds.
Unlisted portfolio
The Company’s unlisted holdings were valued at £1.9m
(0.2% of shareholders’ funds). These comprise our
office property, subsidiaries and residual holdings from
partnership agreements signed in 2000 and 2001. No
new partnerships were entered into during the year.
Viability statement
The Directors have assessed the prospects of the
Company for a period of five years. The Board believes
this time period is appropriate having consideration
for the Company’s principal risks and uncertainties
(outlined on page 13); its portfolio of liquid listed
international equity investments and cash balances;
and its ability to achieve the stated dividend policy and
to cover interest payments on the Company’s debt.
In making this assessment, the Directors have
considered detailed information provided at Board
meetings which includes the Company’s balance sheet,
gearing level, share price discount, asset allocation,
income and operating expenses.
Based on the above, the Board confirms it has a
reasonable expectation that the Company will be able
to continue in operation and meet its liabilities as they
fall due over the five year period of this assessment.
Investment risk
The investment portfolio is diversified over a range
of industries and regions in order to spread risk. The
Company has a long-term policy of borrowing money
to invest in equities in the expectation that this will
improve returns but, should stockmarkets fall, such
borrowings would magnify losses. The Company can
buy back and cancel its own shares. All other things
being equal, this would have the effect of increasing
gearing. Investment risk is considered in more detail in
note 17 on page 54.
Performance comparators
The Company does not have a formal benchmark.
Performance is reviewed in the context of returns
achieved by a broad basket of UK equities through the
MSCI UK All Cap Index and of international equities
through the MSCI All Country World Index (ACWI).
During the year, the Company changed its comparator
indices from FTSE to the equivalent MSCI indices.
Historically, the respective indices have performed
broadly in line. The portfolio is not modelled on any
index.
Management
The Board has appointed the Company’s wholly-owned
subsidiary, S.I.T. Savings Limited, as its Alternative
Investment Fund Manager (AIFM). Day to day
management of the Company is delegated to the
Company’s executive management which reports
directly to the Board.
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Strategic Report (continued)
Investor Disclosure Document
In accordance with the Financial Conduct Authority rules
implementing the EU Alternative Investment Fund
Managers Directive (AIFMD), certain information must
be made available to investors before they invest. The
Company’s Investor Disclosure Document can be found
on the Company’s website, www.thescottish.co.uk
The Association of Investment Companies
(AIC)
The Company is a member of the AIC, the trade
organisation for the closed-ended investment company
industry.
Company’s directors and employees
The table below shows the breakdown of directors
and employees.
Directors
Manager
Employees
31 October 2016 31 October 2015
Male Female
Male Female
5
1
4
1
0
2
5
1
10
0
0
5
Substantial shareholdings
At 3 January 2017, the Company had been notified of
the following holdings in excess of 3% of its shares.
James Will
Chairman
3 January 2017
Aviva PLC
Wells Capital Management Inc.
AXA Investment Managers SA
Shares
%
held
11,544,732
12.0
4,924,836
3,450,050
5.1
3.6
Analysis of share register at 31 October 2016
Category of holder
Individuals
Insurance companies
Investment companies
Pension funds
Other
Total
Share
capital
%
63.7
16.9
8.9
4.5
6.0
Number
18,926
11
72
35
110
19,154
100.0
Socially responsible investing
When investments are made, the primary objective is
to achieve the best investment return while allowing for
an acceptable degree of risk. In pursuing this objective,
various factors that may impact on the performance are
considered and these may include socially responsible
investment issues.
142443 SIT AnReview PRINT.indd 15
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The Scottish Investment Trust PLC | Annual Report 2016
16 | 17
142443 SIT AnReview PRINT.indd 16
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Financial Summary
NAV with borrowings at market value
NAV with borrowings at par
Ex-income NAV with borrowings at market value
Ex-income NAV with borrowings at par
Share price
Discount to ex-income NAV with borrowings at market value
MSCI ACWI
MSCI UK All Cap Index
Equity investments
Net current assets
Total assets
Long-term borrowings at par
Pension liability
Shareholders’ funds
Total income
Earnings per share
Regular dividend per share (2016: proposed final 8.25p)
Special dividend per share (proposed)
Total dividend per share
UK Consumer Prices Index – annual inflation
UK Retail Prices Index – annual inflation
Year’s High & Low
NAV with borrowings at market value
Closing share price
Discount to ex-income NAV with borrowings at market value
2016
2015
Change
%
Total return
%
+26.4
+26.9
+25.9
+26.5
+26.6
+26.4
+7.9
+29.4
+29.9
+30.0
+29.1
+12.3
854.9p
881.2p
837.5p
863.9p
769.5p
8.1%
676.1p
694.3p
665.0p
683.2p
608.0p
8.6%
£’000
£’000
893,432
774,236
42,502
65,769
935,934
840,005
(83,645)
(104,399)
(3,272)
(2,550)
849,017
733,056
28,440
24,057
21.62p
13.50p
9.00p
15.91p
12.50p
3.50p
+18.2
+35.9
+8.0
22.50p
16.00p
+40.6
+0.9
+2.0
Year to
31 October 2016
Year to
31 October 2015
High
867.8p
774.0p
14.4%
Low
606.3p
544.5p
8.1%
High
744.9p
668.0p
10.4%
Low
619.8p
560.0p
6.4%
NAV* and Share Price against Comparator Indices
Total Return – 5 years to 31 October 2016
200
180
160
140
120
100
80
MSCI ACWI
Share Price
NAV
MSCI UK All Cap
200
180
160
140
120
100
80
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
*with borrowings at market value
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The Scottish Investment Trust PLC | Annual Report 2016 18 | 19
List of Investments
As at 31 October 2016
Listed Equities
Holding
Treasury Wine Estates
Sands China
Microsoft
Rentokil Initial
GlaxoSmithKline
Severn Trent
Tesco
ING
Standard Chartered
Suncor Energy
Royal Dutch Shell
Sumitomo Mitsui Financial
Rio Tinto
Kingfisher
United Utilities
SAP
Comcast
PepsiCo
Johnson & Johnson
BHP Billiton
Marks & Spencer
Sony
KDDI
Roche
BNP Paribas
Pfizer
Nintendo
General Electric
RSA Insurance
Total
National Oilwell Varco
Baker Hughes
Verizon Communications
BT
Cemex
Ambev
BASF
Toyota Motor
Vinci
Chevron
British Land
Jardine Matheson
East Japan Railway
Dürr
Telstra
Citigroup
Avery Dennison
Hess
Adecco
Aeroportuario del Sureste
Country
Australia
Hong Kong
US
UK
UK
UK
UK
Netherlands
UK
Canada
UK
Japan
UK
UK
UK
Germany
US
US
US
UK
UK
Japan
Japan
Switzerland
France
US
Japan
US
UK
France
US
US
US
UK
Mexico
Brazil
Germany
Japan
France
US
UK
Singapore
Japan
Germany
Australia
US
US
US
Switzerland
Mexico
Market
value
£’000
40,410
33,103
32,833
30,166
29,771
28,288
27,819
22,910
22,564
22,559
21,356
20,801
19,362
19,330
17,907
17,537
17,331
17,264
16,868
16,795
16,411
16,043
15,931
15,916
15,224
15,185
14,484
13,631
13,381
13,249
11,832
11,503
11,226
10,827
10,808
10,713
10,703
9,904
9,875
9,806
9,784
9,665
9,384
8,957
8,774
8,720
8,602
7,838
7,650
6,674
Cumu lative
weight
%
32.5
53.2
69.9
81.9
91.5
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List of Investments (continued)
As at 31 October 2016
Listed Equities
Holding
Bank of Kyoto
Intesa Sanpaolo
Citizens Financial
Exxon Mobil
HSBC
Micro Focus International
Bank of Ireland
Tourmaline Oil
International Business Machines
TGS-NOPEC Geophysical
ANZ Banking
BorgWarner
Sydney Airport
Freehold Royalties
Vodafone
Engie
Aberdeen Asset Management
Standard Life
Greggs
WPP
Total listed equities
Unlisted
Country
Japan
Italy
US
US
UK
UK
Ireland
Canada
US
Norway
Australia
US
Australia
Canada
UK
France
UK
UK
UK
UK
Holding
Heritable property & subsidiary
Boston Ventures V1
Apax Europe V-B
Total unlisted
Total equities
The 10 largest holdings have an aggregate market value of £290,423,000.
Country
UK
US
UK
Total Equities by Category
(Market Value Weighted)
Market
value
£’000
6,576
6,313
6,007
5,720
5,566
5,524
5,386
4,784
4,773
4,718
3,789
3,428
2,619
2,494
1,387
1,048
966
949
917
866
891,504
Market
value
£’000
1,400
491
37
1,928
893,432
Cumu lative
weight
%
97.7
99.8
Cumu lative
weight
%
0.2
100.0
more to come
17%
change is afoot
36%
ugly duckling
47%
142443 SIT AnReview PRINT.indd 19
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The Scottish Investment Trust PLC | Annual Report 2016
20 | 21
Distribution of Assets
Distribution of Total Assets
Allocation of Total Assets
by Sector
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
Real Estate
Net current assets
Total assets
by Region
UK
Europe (ex UK)
North America
Latin America
Japan
Asia Pacific (ex Japan)
Net current assets
Total assets
31 October
2016
%
12.4
7.1
10.5
12.4
10.4
8.3
15.1
8.0
5.1
5.1
1.1
4.5
100.0
31 October
2016
%
32.2
14.9
24.9
3.0
10.0
10.5
4.5
100.0
31 October
2015
%
10.1
5.3
9.6
17.7
6.2
6.2
15.0
8.1
6.2
6.1
1.7
7.8
100.0
31 October
2015
%
27.8
21.5
23.7
1.7
8.0
9.5
7.8
100.0
Net current assets
4.5%
Total equities
95.5%
%
105
5
(10)
100
5
Allocation of Shareholders’ Funds
Total equities
Net cash and equivalents
Borrowings at par
Shareholders’ funds
Gearing
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI
Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by The Scottish
Investment Trust PLC. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications
makes any express or implied warranties or representations with respect to such standard or classification (or the results to be
obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of
the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or
any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including
lost profits) even if notified of the possibility of such damages.
142443 SIT AnReview PRINT.indd 20
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Distribution of Assets (continued)
Changes in Asset Distribution
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
Real Estate
Total equities
Changes in Shareholders’ Funds
Total equities
Net current assets
Total assets
Long-term borrowings at par
Pension liability
Shareholders’ funds
31 October
2015
£m
774.2
65.8
840.0
(104.4)
(2.5)
733.1
31 October
2015
£m
84.7
44.5
81.0
148.8
51.9
51.7
126.1
67.9
52.2
50.9
14.5
774.2
Net
purchases
(sales)
£m
(58.1)
(29.7)
(87.8)
20.8
0.0
Net
purchases
(sales)
£m
8.1
7.1
(9.0)
(55.4)
18.5
14.1
(4.3)
(21.9)
(11.3)
(4.0)
0.0
(58.1)
Appreciation
(depreciation)
£m
31 October
2016
£m
23.1
14.7
26.6
23.0
26.7
11.9
19.3
29.2
7.2
0.3
(4.7)
177.3
115.9
66.3
98.6
116.4
97.1
77.7
141.1
75.2
48.1
47.2
9.8
893.4
31 October
2016
£m
Appreciation
(depreciation)
£m
Dividend
income
£m
Total
return
£m
177.3
28.3
205.6
893.4
42.5
935.9
(83.6)
(3.3)
(67.0)
849.0
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The Scottish Investment Trust PLC | Annual Report 2016 22 | 23
Ten Year Record
Earnings
per share
p
Regular
dividend
per share
p1
Total
expenses
£’000
Ongoing
charges
figure
%
Year to
31 October
Total
assets
£’000
Share-
holders’
funds
£’000
Buybacks
£’000
NAV
(debt at
par)
p
Share
price
p
Discount
to NAV
%2
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
9.39
11.02
11.00
10.62
8.72
9.10
9.50
9.60
10.26
10.05
12.43
10.40
12.01
11.25
13.41
11.60
11.51
12.00
15.91
12.50
4,481
4,709
4,440
4,139
4,284
4,443
4,632
5,110
4,887
4,900
0.57
0.63
0.64
0.78
0.72
0.71
0.79
0.75
0.68
0.52
839,641
730,594 288,8913 510.4
451.0
910,574
802,353
44,234
597.6
529.0
633,521
525,679
22,919
405.5
372.0
696,971
587,675
13,776
465.6
410.0
740,140
630,367
36,046
533.7
469.3
708,972
598,870
19,339
524.2
452.0
734,801
628,244
11,121
561.6
479.0
857,545
750,818
10,139
682.7
603.0
841,189
734,293
11,308
679.5
598.0
840,005
733,056
15,426
694.3
608.0
8.5
9.9
7.5
8.9
9.0
8.2
8.6
8.6
8.7
8.6
NAV
(debt at
par) total
return
%
21.3
19.5
(30.7)
17.6
17.0
(0.0)
9.2
23.8
1.5
3.9
2016
21.62 13.50
4,080
0.49
935,934 849,017
59,944
881.2
769.5
8.1
29.9
Ten Year Growth Record
Year to
31 October
Earnings
per share
Regular
dividend
per share1
Retail
Prices
Index
100.0
117.4
117.1
113.1
109.3
132.4
127.9
142.8
122.6
169.4
100.0
104.4
108.9
110.1
115.3
119.3
129.0
133.0
137.6
143.3
100.0
104.2
108.6
107.8
112.7
118.8
122.6
125.7
128.6
129.5
NAV
(debt at
market
value)
100.0
118.9
81.8
91.3
104.4
100.1
106.3
133.8
132.4
135.3
NAV
(debt at
par)
100.0
117.1
79.5
91.2
104.6
102.7
110.0
133.8
133.1
136.0
NAV
(debt at
par) total
return
Share
price
total
return
MSCI UK
All Cap
Index
total return
MSCI
ACWI
total return
100.0
119.5
82.8
97.4
114.0
113.9
124.4
154.0
156.4
162.6
100.0
120.0
86.4
97.7
114.4
112.5
121.9
156.7
159.0
164.8
–
–
100.0
123.6
144.3
145.9
159.9
196.4
197.2
201.6
100.0
114.0
82.7
99.5
117.0
116.4
126.6
156.5
169.4
175.4
Share
price
100.0
117.3
82.5
90.9
104.1
100.2
106.2
133.7
132.6
134.8
230.2
154.8
132.1
171.1
172.7
170.6
211.1
214.2
226.3
226.4
8.7%
4.5%
2.8%
5.5%
5.6%
5.5%
7.8%
7.9%
–
8.5%
11.7%
5.4%
2.2% 11.3% 10.9% 11.2% 13.1% 13.8%
9.2% 14.2%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Ten year
return
per annum
Five year
return
per annum
1. Excluding special dividends of 2.00p in 2006, 2.00p in 2007, 1.80p in 2013, 3.50p in 2015 and 9.00p in 2016.
2. Discount to ex-income NAV with borrowings at market value.
3. Includes buyback by way of tender offer of £254,577,000.
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The Scottish Investment Trust PLC | Annual Report 2016
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24 | 25
Responsibility Statement
b) the Strategic Report includes a fair review of the
development and performance of the business
and the position of the Company together with a
description of the principal risks and uncertainties
the Company faces; and
c) the Annual Report and Financial Statements, taken
as a whole, are fair, balanced and understandable
and provide the information necessary for
shareholders to assess the Company’s performance,
business model and strategy.
The responsibility statement was approved by the
Board of Directors and signed on its behalf by:
James Will
Chairman
3 January 2017
The Directors are responsible for preparing the Annual
Report and the Financial Statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare
Financial Statements for each financial year. Under that
law the Directors have elected to prepare the Financial
Statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law),
including FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland”. Under
company law the Directors must not approve the
accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and
of the profit or loss of the Company for that period. In
preparing these Financial Statements, the Directors are
required to:
• select suitable accounting policies and then apply
them consistently;
• make judgments and accounting estimates that are
reasonable and prudent;
• state whether applicable UK Accounting Standards
have been followed, subject to any material
departures disclosed and explained in the Financial
Statements; and
• prepare the Financial Statements on the going
concern basis unless it is inappropriate to presume
that the Company will continue in business.
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the
Financial Statements comply with the Companies
Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking
reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the Company’s website. Legislation in
the United Kingdom governing the preparation and
dissemination of Financial Statements may differ from
legislation in other jurisdictions.
The Board of Directors confirms that to the best of its
knowledge:
a) the Financial Statements, prepared in accordance
with United Kingdom Generally Accepted
Accounting Practice, give a true and fair view of the
assets, liabilities, financial position and return of the
Company;
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The Scottish Investment Trust PLC | Annual Report 2016
Corporate Governance Report
Introduction
The Board is committed to implementing high levels
of corporate governance within the Company in
order to safeguard the interests of its shareholders, to
manage the risks that the Company faces and to ensure
the efficient and effective running of the Company.
Sound governance is at the heart of the Board’s efforts
to ensure that the Company continues to meet its
investment objective. The following statement reports
on how the Board, supported by the committees that
it has established, has continued to achieve these aims
over the course of the year.
Statement of compliance
The Board has reviewed the principles set out in the
UK Corporate Governance Code (revised 2014), which
can be found at www.frc.org.uk and the Association of
Investment Companies Code of Corporate Governance
by reference to the AIC Corporate Governance Guide
for Investment Companies (published in July 2016),
both of which can be found at www.theaic.co.uk The
Company is a member of the Association of Investment
Companies.
The Board believes that the way the Company is
governed is consistent with the principles of the UK
Corporate Governance Code and that the Company
has complied with its provisions, except that:
•
•
there is no senior independent director; and
the Chairman is a member of the Audit Committee.
The Board considers that, as all Directors are
independent and non-executive, there is no
compelling case for appointing a senior independent
director. The Board further considers that the Chairman
is independent in character and judgement and,
therefore, that there is no reason for James Will not to
be a member of the Audit Committee.
Directors’ independence
The Board’s policy on tenure is that continuity and
experience are considered to add significantly to
the strength of the Board and, as such, no limit on
the overall length of service of any of the Company’s
Directors, including the Chairman, has been imposed.
The Board believes that each Director is independent
in character and judgement and that there are no
relationships with the Company or its employees which
might compromise this independence.
Board committees
The Board has established three committees: Audit,
Remuneration and Nomination. Each of the committees
has written terms of reference which are reviewed at
least annually and clearly define their responsibilities
and duties. The terms of reference for these
committees are available on the Company’s website
www.thescottish.co.uk
Audit Committee
The Audit Committee comprises the whole Board and
is chaired by Ian Hunter. It has reviewed the matters
within its terms of reference and reports as follows:
•
•
•
•
•
•
it has approved the Financial Statements for the
year to 31 October 2016;
it has reviewed the effectiveness of the Company’s
internal controls and risk management;
it has reviewed the need for a separate internal
audit function;
it has recommended to the Board that a resolution
be proposed at the AGM for the reappointment
of the external auditor and it has considered the
proposed terms of their engagement;
it has satisfied itself as to the independence of the
external auditor and agreed that any non-audit
services provided by the auditor must be approved
by the Audit Committee in advance; and
it has satisfied itself that the Strategic Report is
consistent with the Financial Statements.
Further details are set out in the Report of the Audit
Committee on pages 30 and 31. The terms of reference
are available from the Company’s website.
Remuneration Committee
The Board has appointed a Remuneration Committee
to recommend pay and conditions for the Board
and employees. It has written terms of reference
which are shown on the Company’s website. The
Committee is chaired by Jane Lewis. Further details of
Directors’ remuneration are included in the Directors’
Remuneration Report on pages 32 and 33.
The Company aims to provide levels of employee
remuneration which reward responsibility and
achievement and are comparable with other fund
management organisations operating in Scotland.
Remuneration is reviewed annually.
Every employee is entitled to a salary and other
benefits including a contributory pension scheme. In
addition, there is a discretionary performance-related
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26 | 27
Corporate Governance Report (continued)
bonus scheme. For investment staff, bonuses payable
depend, inter alia, on individual performance, the
Company’s NAV total return and the NAV total
return relative to comparator indices and peers. For
other staff, bonuses depend, inter alia, on individual
performance and share price total return. The notice
period for all members of staff is three months.
Nomination Committee
There is a Nomination Committee comprising the
whole Board. The Committee is chaired by James Will.
The Committee meets at least annually to review the
structure, size and composition of the Board. It has
written terms of reference which are available to view
on the Company’s website.
The Nomination Committee is responsible for
nominating, for the approval of the Board, candidates
to fill Board vacancies as and when they arise. The
Committee will evaluate the skills, experience,
independence, knowledge and diversity of the
Board and, subject to the aforementioned, prepare a
description of the role and capabilities required to fulfil
the appointment.
When Board positions become available as a result of
retirement or resignation, the Committee will ensure
that a diverse group of candidates is considered. In
order to recruit relevant candidates, the identification
of such candidates may be carried on in conjunction
with the Board by an independent firm of consultants. If
such a process is not used, the Committee will disclose
the reasons in the Corporate Governance Report or
the Directors’ Report in the next Annual Report and
Accounts.
The Committee will consider candidates on merit and
against objective criteria having regard to the benefits
of diversity, including gender.
Board and committee meetings
The Board has adopted a schedule of matters reserved
for the Board which includes investment strategy,
accounting and financial controls, dividends and
announcements, capital structure (including share
buybacks), gearing and major contracts.
The Board has appointed the Company’s wholly-owned
subsidiary, S.I.T. Savings Limited, as its Alternative
Investment Fund Manager (AIFM). Day-to-day
management of the Company is delegated to the
Company’s executive management, which reports
directly to the Board.
Prior to each Board meeting, Directors are provided
with a comprehensive set of papers giving detailed
information on the Company’s transactions, financial
position and performance.
The Board normally meets six times a year while the
Audit and Remuneration Committees each meet three
times and the Nomination Committee meets at least
annually. Attendance at the scheduled and additional
meetings throughout the year is shown in the table
below.
Douglas McDougall retired from the Board on
29 January 2016. He attended all Board and
Committee meetings that were held during the current
financial year prior to retirement.
Board and Directors’ performance appraisal
The performance of each Director was assessed and
appraised by the Nomination Committee during
the year. The Chairman’s performance was assessed
and appraised in his absence by the other Directors.
The review and assessment by the Nomination
Committee of each Director’s performance as well
as the performance of the Board as a whole and of
its committees followed completion by each of the
Directors of a written questionnaire. The appraisals and
assessments considered, amongst other criteria, the
balance of skills of the Board, training and development
requirements, the contribution of individual Directors
and the overall effectiveness of the Board and its
committees.
James Will
Hamish Buchan
Russell Napier
Ian Hunter
Jane Lewis
Mick Brewis
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Held Attended
Held Attended
Held Attended
Held Attended
9
9
9
9
9
9
9
9
9
9
9
9
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
1
1
1
1
1
1
1
1
1
1
1
1
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The Scottish Investment Trust PLC | Annual Report 2016
Corporate Governance Report (continued)
Following this process it was concluded that the
performance of each Director, the Chairman, the Board
and its committees continues to be effective and that
each Director and the Chairman remain committed to
the Company.
The Board currently considers that the use of external
consultants to facilitate the evaluation process is
unlikely to be of significant benefit to the process,
although the option of doing so is kept under review.
Appointment and re-election of Directors
The Company’s policy on the appointment of Directors
is shown on the Company’s website,
www.thescottish.co.uk
Jane Lewis and Mick Brewis were appointed in
December 2015 and were elected by shareholders
at the AGM on 29 January 2016. No external agency
was used in the selection process as the Nomination
Committee was itself able to identify a ‘long list’ of
high quality and diverse candidates with the skills,
knowledge and experience required.
New Directors receive an induction from the
Company’s Manager and the Company Secretary on
joining the Board, and all Directors will receive other
relevant training as necessary.
Hamish Buchan has served as a Director for more
than nine years. After formal performance evaluation,
the Board confirms that Hamish Buchan continues to
perform effectively and with great commitment. It is the
Board’s current intention that Hamish Buchan will retire
as a Director at the AGM to be held in 2018.
All Directors are appointed for initial three year terms,
renewable every three years, subject to the Company’s
policy for all Directors to stand for re-election annually.
Each of the Directors has made a valuable and effective
contribution to the Company and the Board therefore
recommends that shareholders vote in favour of their
re-election.
Directors’ letters of appointment will be available for
inspection at the AGM.
The Company’s Articles of Association provide that
any Director or other officer of the Company may be
indemnified out of the assets of the Company against
any liability incurred by him or her as a Director or
other officer of the Company to the extent permitted
by law. The Company entered into deeds of indemnity
in favour of each of its Directors on 26 August 2016.
The deeds cover any liabilities that may be incurred
by a Director in respect of any act or omission (alleged
or otherwise) in the exercise of his or her powers or in
respect of his or her duties in relation to the Company
(including any liabilities arising from negligence,
default or breach of trust or duty). The Directors are not
indemnified in respect of liabilities to the Company,
any regulatory or criminal fines, any costs incurred in
connection with criminal proceedings in which the
Director is convicted or civil proceedings brought by
the Company in which judgement is given against him/
her. In addition, the indemnity does not apply to any
liability to the extent that it is recovered from another
person (pursuant to the Directors' and officers' liability
insurance policy which is maintained by the Company
or otherwise).
The Board has direct access to the advice and services
of the Company Secretary, who is responsible for
ensuring that Board procedures are followed and
that applicable regulations are complied with. The
Company Secretary is also responsible for ensuring
timely delivery of information and reports to the Board
and for compliance with the Company’s statutory
obligations.
There is a procedure for Directors to seek independent
professional advice at the expense of the Company.
Diversity policy
The Company recognises the need to consider the
diversity of its staff and its Board of Directors. As a
general principle, the Company will show no bias for
age, gender, race, sexual orientation, marital status,
religion, nationality, ethnic or national origins, or
disability in considering the appointment of staff or
board members and will ensure appointments are
made on the basis of merit against objective criteria.
The structure, size and composition of the Board
of Directors are reviewed at least annually by the
Nomination Committee ensuring an appropriate
balance of skills, experience, independence and
knowledge. In considering new appointments to
the Board, the Committee recognises the benefits
of diversity on the Board, including gender. The
Committee will consider both male and female
candidates and ensure appointments are made on
the basis of merit against objective criteria. As all
appointments will be based on merit and in view of the
small size of the Board, the Board does not consider it
appropriate to set diversity targets.
Conflicts of interest
The Companies Act 2006 requires that a director of a
company must avoid a situation in which he or she has,
or might have, an interest that conflicts, or may conflict,
with the interests of the company. Each Director
submits a list of potential conflicts prior to each
meeting. The other Board members consider these
and recommend whether or not each potential conflict
should be authorised.
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Corporate Governance Report (continued)
Going concern
The accounts of the Company have been prepared on
a going concern basis. It is the opinion of the Directors
that, as most of the Company’s assets are readily
realisable and exceed its liabilities, it is expected that
the Company will continue in operational existence
for the foreseeable future. The viability statement,
under which the Directors assess the prospects of the
Company over a longer period, is contained on page
14.
Internal controls and risk management
The Directors acknowledge that they are responsible
for the Company’s systems of internal control and
for reviewing their effectiveness on an annual basis.
A process has been implemented for identifying,
evaluating and managing risks faced by the Company.
This process has been in place throughout the year
ended 31 October 2016 and up to the date that the
Financial Statements were approved.
The risk management process and systems of internal
control are designed to manage rather than eliminate
the risk of failure to achieve the Company’s objective.
It should be recognised that such systems can only
provide reasonable, not absolute, assurance against
material mis-statement or loss.
The principal risks and uncertainties facing the
Company are as follows:
•
•
•
•
investment and market price risk: the holding of
securities and investing activities involve certain
inherent risks. The Company holds a portfolio
which is well diversified across industrial and
geographical areas to help minimise these risks.
interest rate risk: all debenture stocks and secured
bonds are at fixed rates.
liquidity risk: most of the Company’s assets are
investments in quoted equities and are readily
realisable. Liquidity is reviewed when making
investment decisions.
foreign currency risk: the Company’s overseas
assets and income are subject to currency
movements. Management monitors the Company’s
exposure to foreign currencies on a weekly basis.
• credit risk: the failure of a counterparty could result
in a loss for the Company. The Company only
deals with approved parties to agreed limits.
• discount volatility: the discount at which the
Company’s shares trade can change. The Company
monitors the level of discount and has authority to
buy back its shares so as to aim, in normal market
conditions, to maintain a discount at or below 9% to
ex-income NAV, with borrowings at market value.
• custody and depositary risk: failures of control by
the depositary, custodian or third party service
providers may result in the compromise of the
Company’s assets.
• operational risk: failure – including breaches
of cyber security – of the Company’s or third
party service providers’ systems could result in a
misappropriation of assets, or inability to report.
The Company has a business continuity plan in
place and requires all third party service providers
to demonstrate adequate control and continuity
plans.
These and other risks facing the Company are reviewed
regularly by the Audit Committee and the Board. The
existence of assets is subject to annual external audit.
A detailed risk map, which identifies significant risks
relevant to the Company, is assessed twice per year.
These risks include corporate strategy, investment
decisions, financial and regulatory activities, business
continuity and service providers. Further information
on risks is detailed in note 17 to the accounts on pages
53 to 58 and on internal controls in the Report of the
Audit Committee on page 30.
Relations with shareholders
The Company recognises the value of good
communication with its shareholders. The management
meets regularly with private client stockbrokers, wealth
managers and the Company’s major institutional
shareholders. The Board receives regular briefings
from the Company’s broker. Newsletters are sent to
shareholders during the year and are posted on the
Company’s website.
The Annual General Meeting of the Company is the
main forum at which shareholders can ask questions
of the Board and management. All shareholders
are encouraged to attend the AGM and to vote on
the resolutions which are contained in the Notice
of Meeting on page 66 and which is posted to
shareholders at least 21 days prior to the meeting.
Shareholders who cannot attend the AGM are
encouraged to vote by proxy on the resolutions. Proxy
voting figures are given after each resolution has
been voted on and are published after the end of the
meeting.
Any shareholder who wishes to ask a question at
another time should write to the Chairman at 6 Albyn
Place, Edinburgh EH2 4NL.
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Corporate Governance Report (continued)
Voting policy
Management reviews resolutions put to general
meetings of the companies in which the Company
invests and, wherever practicable, will cast its vote,
usually by proxy.
Alternative Investment Fund Managers (AIFM)
Directive – Leverage
For the purposes of the AIFM Directive, leverage
is any method which increases the Company’s
exposure, including the borrowing of cash and the
use of derivatives. It is expressed as a percentage of
the Company’s exposure to its net asset value and is
calculated on a gross and commitment method.
Under the gross method, exposure represents the
sum of the Company’s positions after deduction of
cash balances, without taking account of any hedging
or netting arrangements. Under the commitment
method, exposure is calculated without the deduction
of cash balances and after certain hedging and netting
positions are offset against each other.
The leverage limits are set by the AIFM and approved
by the Board. The AIFM is also required to comply with
the gearing parameters set by the Board in relation to
borrowings.
The Company’s maximum limits and actual leverage
levels are shown below:
Leverage exposure
Maximum limit (AIFM)
Maximum limit (Board)
Actual at 31 October 2016
Gross
method
Commitment
method
200%
200%
20%
5%
20%
10%
Annual General Meeting
The Company’s 129th AGM will be held at The Royal
College of Physicians of Edinburgh, 9 Queen Street,
Edinburgh, EH2 1JQ on Friday 3 February 2017 at
10.30am.
The Board considers that the resolutions to be
proposed at the AGM are all in the best interests of
the Company and of the shareholders as a whole and
recommends that shareholders vote in favour of them.
Resolutions 1 to 12 are self explanatory. Resolution 13,
set out in the Notice of the Annual General Meeting on
page 66, seeks to renew the authority to repurchase
shares until 3 May 2018. The principal reasons for such
repurchases are to enhance the NAV of the shares by
repurchasing shares for cancellation at prices which,
after allowing for costs, improve the NAV for remaining
shareholders and to allow implementation of the
Company’s discount control policy. The maximum
number of shares which may be purchased pursuant
to this authority shall be 14,383,606 or, if less, 14.99%
of the aggregate issued capital of the Company on the
date of passing of the resolution.
Under the Listing Rules of the UK Listing Authority, the
maximum price that may be paid on the exercise of
the authority must not exceed the higher of (i) 105%
of the average of the middle market quotations for
the shares as derived from the Daily Official List of the
London Stock Exchange over the five business days
immediately preceding the date of purchase and (ii)
the higher price of the last independent trade and the
highest current independent bid. The minimum price
which may be paid is 25p per share.
Resolution 13 will be proposed as a special resolution
that requires to be passed by a three-quarters majority
of votes cast at the AGM.
Carbon emissions
The Company’s carbon emissions result predominantly
from its consumption of electricity at its single office.
Using Defra/DECC’s GHG conversion factors for
company reporting 2015, emissions for the year to
September 2016 were 56.3 tonnes of CO2e (2015: 55.8
tonnes CO2e). This equates to 0.13 tonnes of CO2e
(2015: 0.13 tonnes of CO2e) per square metre.
The Directors’ Report, including the Responsibility
Statement on page 24 and the going concern statement
on page 28, has been approved by the Board.
The Strategic Report on pages 12 to 15 includes
information relating to: Dividends, Share capital and
Discount control policy (including share buybacks).
By order of the Board.
R&H Fund Services Limited
Company Secretary
3 January 2017
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The Scottish Investment Trust PLC | Annual Report 2016 30 | 31
Report of the Audit Committee
The Audit Committee has written terms of reference
which are shown on the Company’s website. Its duties
include risk assessment; reviewing internal controls,
the Company’s accounting policies and Financial
Statements prior to their release; and the Company’s
procedures on whistleblowing. The Committee is
also responsible for all aspects of the Company’s
relationship with its external auditor including:
• reviewing the scope and effectiveness of the annual
audit;
the auditor’s remuneration;
the terms of engagement; and
•
•
•
course of its review of the system of internal controls,
the Committee has not identified, nor been advised
of, any material failings or weaknesses. Therefore a
confirmation in respect of necessary actions has not
been considered appropriate.
Following the outsourcing of the company secretarial,
accounting and most administration functions,
the Committee also monitors the controls and risk
management of R&H Fund Services Limited (RHFSL).
The Committee also monitors the controls and risk
management of the Company’s custodian, Northern
Trust.
the level of non-audit work, if any, carried out by the
auditor.
There are procedures in place to ensure that:
Annual Report
The Audit Committee reviews the Annual Report
and Accounts to ensure it is fair, balanced and
understandable.
Internal controls
The Company does not have an internal audit function
as the Audit Committee believes that the Company’s
straightforward structure and small number of
employees do not warrant such a function. This is
reviewed by the Committee annually.
The Committee is responsible for ensuring that
the Company has in place an effective system of
internal controls designed to maintain the integrity of
accounting records and to safeguard the Company’s
assets. The Committee has applied the UK Corporate
Governance Code by establishing a continuous
process for identifying, evaluating and managing the
significant risks the Company faces.
In compliance with the UK Corporate Governance
Code, the Committee reviews the effectiveness of the
Company’s system of internal controls at six-monthly
intervals.
The Committee’s monitoring covers all controls,
including financial, operational and compliance
controls and risk management. It is based principally
on reviewing reports from management and
considering whether significant risks are identified,
evaluated, managed and controlled, and whether
any significant weaknesses are promptly remedied
or require more extensive monitoring. During the
• all transactions are accounted for accurately and
reported fully to the Board;
• management observes the authorisation limits set
by the Board;
•
there is clear segregation of duties so that no
investment transaction can be completed by one
person;
• control activities are regularly checked; and
•
legal and regulatory obligations are met.
The Committee recognises that such systems can only
provide reasonable, but not guaranteed, assurance
against material misstatement or loss.
Significant issues
The Committee considers the risks that may have an
impact on the Company’s Financial Statements.
The valuation and ownership of the Company’s
investments are risks. Investments are valued in
accordance with the accounting policy on page 43.
The prices of all investments are agreed by RHFSL with
an independent source and the ownership of each
investment agreed through confirmation received
from the Company’s independent global custodian,
Northern Trust.
The incomplete or inaccurate recognition of income in
the Financial Statements are also risks. Internal control
systems, including frequent reconciliations, are in place
to ensure income is fully accounted for. The Board is
provided with information on the Company’s income
account at each meeting.
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The Scottish Investment Trust PLC | Annual Report 2016
Report of the Audit Committee (continued)
Auditor
Assessment
The Company’s auditor, Deloitte LLP, was appointed
in 2002. The Committee reviews annually the services
provided and the related fees. The corporate
governance provisions relating to audit tenure have
been reviewed and the Committee is of the opinion
there is no need to conduct a competitive tender at the
present time. The fees for audit and non-audit services
were £34,600 (2015: £29,100) and £19,800 (2015:
£16,850) respectively. Non-audit services include: tax
compliance £6,800; assurance services £5,000 and
pension scheme audit £8,000.
The Audit Committee reviews and approves any non-
audit services provided by the auditor and assesses
the impact of any non-audit work on the ability of the
auditor to remain independent.
Partner rotation
The audit partners responsible for the audit are rotated
every five years. Andrew Partridge, the current audit
partner, was appointed in 2015.
Independence
The Committee has satisfied itself of the continuing
independence of Deloitte LLP. The Committee confirms
the level of non-audit work undertaken does not
compromise independence.
Re-appointment of auditor
A resolution to re-appoint Deloitte LLP as
the Company’s auditor, and to authorise the
Directors to fix its remuneration, will be proposed
at the forthcoming Annual General Meeting.
Disclosure of information to auditor
It is the Company’s policy to allow the auditor
unlimited access to its records. The Directors
confirm that, so far as each of them is aware,
there is no relevant audit information of which
the Company’s auditor is unaware and they
have taken all the steps which they should have
taken as Directors in order to make themselves
aware of any relevant audit information and to
establish that the Company’s auditor is aware of
that information. This confirmation is given and
should be interpreted in accordance with the
provisions of section 418 of the Companies Act
2006.
Ian Hunter
Chairman of the Audit Committee
3 January 2017
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32 | 33
Directors’ Remuneration Report
This report has been prepared in accordance with
the requirements of section 421 of the Companies
Act 2006 incorporating The Large and Medium-
Sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013 and the
Directors’ Remuneration Report Regulations 2002. An
ordinary resolution for the approval of the Directors’
Remuneration Report will be put to shareholders at the
AGM on 3 February 2017.
Remuneration Committee
The Company has a Remuneration Committee, the
terms of reference of which include setting the fees of
the Directors. The full terms of reference are posted on
the Company’s website. The Committee is chaired by
Jane Lewis and the other members are Hamish Buchan,
Mick Brewis, Russell Napier, James Will and Ian Hunter.
Policy on Directors’ fees
On 31 October 2016, the Board consisted of six
Directors, all of whom are non-executive. Directors’
fees are set by the Remuneration Committee with
a view to attracting individuals of appropriate
calibre and experience, taking into account the time
commitment required and the level of fees paid by
similar investment trusts. Fees recommended by the
Remuneration Committee are subject to approval
by the Board. The Company’s articles of association
provide for a maximum level of total remuneration of
£250,000 in the aggregate payable to Directors in any
financial year.
The policy on Directors’ fees was approved at the AGM
held in January 2014 and this policy applied for the
period up to 31 October 2016. A resolution on Director
remuneration policy will be put to the AGM in February
2017 and it is intended that this policy will apply for the
period to 31 October 2019.
The Remuneration Committee agreed to maintain
Directors’ fees, with effect from 1 November 2016, at
£50,000 per annum for the Chairman and £30,000 per
annum for other Directors.
The Board may amend the level of remuneration paid
to Directors within the parameters of the Directors’
remuneration policy.
Directors are remunerated exclusively by fixed fees in
cash and do not receive bonuses, share options, long-
term incentives, pension or other benefits.
Proposed fees for
the year to
31 October 2017
£
Actual fees for
the year to
31 October 2016
£
Chairman
Non-executive Director
50,000
30,000
50,000
30,000
An ordinary resolution for the approval of this
Directors' remuneration policy will be put to
shareholders at the forthcoming AGM.
Following the votes on this remuneration policy,
the Remuneration Committee will take into account
shareholders' views should there be any material
change to the policy.
Annual statement
There were no changes to the level of Directors' fees
during the financial year.
Directors’ emoluments (audited)
James Will
Douglas McDougall
(retired 29 January 2016)
Hamish Buchan
Russell Napier
Ian Hunter
Jane Lewis (appointed
14 December 2015)
Mick Brewis (appointed
14 December 2015)
James MacLeod (retired
30 January 2015)
Year to
31 October
2016
£
Year to
31 October
2015
£
45,000
30,000
12,500
30,000
30,000
30,000
26,309
26,309
50,000
30,000
30,000
25,952
–
–
–
7,500
200,118
173,452
As all the Directors are non-executive and their fees are
payable quarterly with no performance-based element,
there is no correlation between the Directors’ fees and
the employees’ remuneration. The Company is of the
view, therefore, that it is not necessary to consult with
employees when drawing up the Remuneration Report.
Service contracts
The Directors do not have service contracts. All
Directors retire and seek re-election annually.
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Directors’ Remuneration Report (continued)
Directors’ interests
The interests of the Directors and their families in the
Company’s capital are as follows:
James Will
Hamish Buchan
Russell Napier
Ian Hunter
Jane Lewis
Mick Brewis
Shares of 25p
31 October 2016
31 October 2015
8,000*
22,325
14,000
22,608
1,000
10,000
8,000*
22,325
14,000
22,608
–
–
* In addition to the 8,000 shares held, Mr Will is
a trustee of a trust which holds 22,000 shares in
the Company. Mr Will is beneficially or potentially
beneficially interested in this holding.
There were no changes in the Directors’ interests
between 31 October 2016 and 3 January 2017.
Company performance
The graph below shows the Company’s eight year
share price total return compared to the notional total
return of the MSCI UK All Cap Index over the same
period.
250
200
150
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
SIT – Share Price (Total Return)
MSCI UK All Cap Index (Total Return)
This index has been chosen as it is a common
performance comparator for companies such as The
Scottish Investment Trust.
Relative importance of Directors’ fees
Directors’ fees
Expenses
Staff costs
Dividends paid and
proposed
2016
£’000
200
4,080
2,277
2015
£’000
173
4,900
3,117
21,677
16,981
Directors’ fees as a percentage of:
Expenses
Staff costs
Dividends paid and proposed
2016
%
4.9
8.8
0.9
%
Change
15.6
(16.7)
(26.9)
27.7
2015
%
3.5
5.6
1.0
Excluding discretionary performance-related bonuses,
expenses decreased by 17.7% and staff costs
decreased by 32.0%.
Further details of the Company’s expenses and staff
costs can be found in notes 2 and 3, respectively, on
page 45 and of dividends paid in note 7 on page 49.
Approval
Voting on the resolution to approve the Directors’
Remuneration Report 2015, at the Company’s AGM on
29 January 2016, was as follows:
%
For
%
Withheld
%
Against
Approve Directors’
Remuneration Report
98.8
0.9
0.3
The Directors’ Remuneration Report was approved by
the Board on 3 January 2017 and signed on its behalf
by:
Jane Lewis
Chairman of the Remuneration Committee
3 January 2017
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The Scottish Investment Trust PLC | Annual Report 2016
34 | 35
Independent Auditor’s Report
Opinion on
financial
statements of
The Scottish
Investment Trust
PLC
In our opinion the Financial Statements:
• give a true and fair view of the state of the Company’s affairs as at 31 October 2016 and
of its return for the year then ended;
• have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including FRS 102 “The Financial Reporting Standard applicable in
the UK and Republic of Ireland” and the Statement of Recommended Practice issued by
the Association of Investment Companies in November 2014 “Financial Statements of
Investment Trust Companies and Venture Capital Trusts”; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
The financial statements comprise the Income Statement, Balance Sheet, Statement of
Comprehensive Income, Statement of Changes in Equity, Cash Flow Statement, Accounting
Policies and the related notes 1 to 18.
The financial reporting framework that has been applied in their preparation is applicable
law and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice, including FRS 102 “The Financial Reporting Standard applicable in
the UK and Republic of Ireland”) and the Statement of Recommended Practice issued by
the Association of Investment Companies in November 2014 “Financial Statements of
Investment Trust Companies and Venture Capital Trusts”.
Going concern
and the Directors’
assessment of the
principal risks that
would threaten
the solvency or
liquidity of the
Company
As required by the Listing Rules we have reviewed the Directors’ statement regarding the
appropriateness of the going concern basis of accounting contained within accounting policy
(a) to the financial statements and the Directors’ statement on the longer-term viability of the
Company in the Strategic Report on page 14.
We have nothing material to add or draw attention to in relation to:
• the Directors' confirmation on page 28 that they have carried out a robust assessment of
the principal risks facing the Company, including those that would threaten its business
model, future performance, solvency or liquidity;
• the disclosures on pages 28 and 53 to 58 that describe those risks and explain how they are
being managed or mitigated;
• the Directors’ statement on page 28 about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them and their identification of any
material uncertainties to the Company’s ability to continue to do so over a period of at least
twelve months from the date of approval of the financial statements;
• the Directors’ explanation on page 14 as to how they have assessed the prospects of the
Company, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We agreed with the Directors’ adoption of the going concern basis of accounting and we
did not identify any such material uncertainties. However, because not all future events or
conditions can be predicted, this statement is not a guarantee as to the Company’s ability to
continue as a going concern.
Independence
We are required to comply with the Financial Reporting Council’s Ethical Standards for
Auditors and we confirm that we are independent of the Company and we have fulfilled our
other ethical responsibilities in accordance with those standards. We also confirm we have not
provided any of the prohibited non-audit services referred to in those standards.
Our assessment
of risks of material
misstatement
The assessed risks of material misstatement described below are those that had the greatest
effect on our audit strategy, the allocation of resources in the audit and directing the efforts of
the engagement team.
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The Scottish Investment Trust PLC | Annual Report 2016
Independent Auditor’s Report (continued)
Risk
How the scope of our audit responded to the risk
Valuation and ownership of listed investments
Listed investments of £891.5m (2015: £772.3m)
represent the most significant number on the balance
sheet and are the main driver of the Company’s
performance. Listed investments represented 95.3%
(2015: 91.9%) of total assets of the Company at 31
October 2016 (see accounting policy (b) and note 8).
There is a risk that the prices quoted in respect of the
listed investments held by the Company may not be
reflective of fair value. There is a risk over whether
listed investments recorded are the property of the
Company.
Recognition of investment income
Dividend income of £28.3m (2015: £23.8m) represents
98.8% (2015: 98.7%) of the total income of the trust
(see note 1).
Dividends from equity shares are accounted for on an
ex-dividend basis. Overseas dividends are accounted
for on an ex-dividend basis and included gross of
withholding tax.
There is a risk that revenue is incomplete.
We have performed the following procedures to
address this risk:
• critically assessed the design and implementation
of the controls over valuation and ownership of
investments;
• reviewed the Northern Trust controls report
to understand and evaluate the design and
implementation of controls around ownership of
investments;
• confirmed 100% of the bid prices of quoted
investments on the investment ledger at year end
to closing bid prices published by an independent
pricing source; and
• confirmed 100% of the Company’s investment
portfolio at the year end to confirmations received
directly from the custodian and depositary.
We have performed the following procedures to
address this risk:
• critically assessed the design and implementation
of the controls over revenue recognition including
management’s monitoring of accuracy and
completeness of revenue;
• for a sample of investments held, agreed the ex-
dividend dates and rates for dividends declared
during the year and agree the amounts recorded
within the general ledger to confirm that the
recognition policy has been applied consistently; and
• agreed a sample of dividend income receipts to bank
statements.
The description of risks above should be read in conjunction with the significant issues
considered by the Audit Committee discussed on page 30.
These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Our application of
materiality
We define materiality as the magnitude of misstatement in the financial statements that makes
it probable that the economic decisions of a reasonably knowledgeable person would be
changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
We determined materiality for the Company to be £8.5m (2015: £7.3m), which is 1% (2015:
1%) of net assets. Net assets has been chosen as a benchmark as it is considered the most
relevant benchmark for investors.
We agreed with the Audit Committee that we would report to the Committee all audit
differences in excess of £169,800 (2015: £147,000), as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of
the financial statements.
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36 | 37
Independent Auditor’s Report (continued)
An overview of
the scope of our
audit
Our audit was scoped by obtaining an understanding of the entity and its environment,
including internal control, and assessing the risks of material misstatement. Audit work
to respond to the risks of material misstatement was performed directly by the audit
engagement team.
We note that the accounting and administration for the Company has been outsourced to
R&H Fund Services Limited (“RHFSL”) as administrator. As part of our audit we evaluated the
design and implementation of relevant controls in place at RHFSL.
Opinion on
other matters
prescribed by the
Companies Act
2006
Matters on which
we are required
to report by
exception
Adequacy of
explanations
received and
accounting records
Our audit was scoped by obtaining an understanding of the entity and its environment. In our
opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in
accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors’ Report for the financial year
for which the financial statements are prepared is consistent with the financial statements.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept, or returns adequate for our audit have
not been received from branches not visited by us; or
• the financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’
Remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain
disclosures of Directors’ Remuneration have not been made or the part of the Directors’
Remuneration Report to be audited is not in agreement with the accounting records and
returns. We have nothing to report arising from these matters.
Corporate
Governance
Statement
Under the Listing Rules we are also required to review part of the Corporate Governance
Statement relating to the Company’s compliance with certain provisions of the UK Corporate
Governance Code. We have nothing to report arising from our review.
Our duty to read other
information in the
Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you
if, in our opinion, information in the Annual Report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of
the Company acquired in the course of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies
between our knowledge acquired during the audit and the Directors’ statement that they
consider the Annual Report is fair, balanced and understandable and whether the Annual
Report appropriately discloses those matters that we communicated to the Audit Committee
which we consider should have been disclosed. We confirm that we have not identified any
such inconsistencies or misleading statements.
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The Scottish Investment Trust PLC | Annual Report 2016
Independent Auditor’s Report (continued)
Respective
responsibilities
of Directors and
auditor
Scope of the audit
of the financial
statements
As explained more fully in the Responsibility Statement, the Directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and
fair view. Our responsibility is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland).
We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit
methodology and tools aim to ensure that our quality control procedures are effective,
understood and applied. Our quality controls and systems include our dedicated professional
standards review team and independent partner reviews.
This report is made solely to the Company’s members, as a body, in accordance with Chapter
3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we
might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for the opinions we have formed.
An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error. This includes an assessment
of: whether the accounting policies are appropriate to the Company’s circumstances and
have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall presentation of the financial
statements. In addition, we read all the financial and non-financial information in the Annual
Report to identify material inconsistencies with the audited financial statements and to identify
any information that is apparently materially incorrect based on, or materially inconsistent with,
the knowledge acquired by us in the course of performing the audit. If we become aware of
any apparent material misstatements or inconsistencies we consider the implications for our
report.
Andrew Partridge CA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor, Edinburgh, United Kingdom
3 January 2017
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38 | 39
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Income Statement
For the year to 31 October 2016
Notes
Revenue
£’000
2016
Capital
£’000
Total
£’000
Revenue
£’000
Net gains on investments held
at fair value through profit and loss
Net gains on currencies
Income
Expenses
Net Return before
Finance Costs and Taxation
8
1
2
2015
Capital
£’000
Total
£’000
15,778
15,778
3
–
3
24,057
–
–
177,326
177,326
6,024
6,024
–
–
28,440
–
28,440
24,057
(2,407)
(1,673)
(4,080)
(2,892)
(2,008)
(4,900)
26,033
181,677
207,710
21,165
13,773
34,938
Premium on repayment of secured bonds
–
(7,393)
(7,393)
–
–
–
Interest payable
Return on Ordinary
Activities before Tax
5
(2,529)
(2,529)
(5,058)
(3,096)
(3,095)
(6,191)
23,504
171,755
195,259
18,069
10,678
28,747
Tax on ordinary activities
6
(1,534)
–
(1,534)
(984)
–
(984)
Return attributable to Shareholders
21,970
171,755 193,725
17,085 10,678 27,763
Return per share
Weighted average number of
shares in issue during the year
21.62p 169.04p 190.66p
15.91p
9.95p 25.86p
101,606,378
107,353,426
Dividends paid and proposed
Interim 2016: 5.25p (2015: 5.00p)
Final 2016: 8.25p (2015: 7.50p)
Special 2016: 9.00p (2015: 3.50p)
Total 2016: 22.50p (2015: 16.00p)
Notes
7
2016
£’000
5,276
7,984
8,671
21,931
2015
£’000
5,366
7,864
3,670
16,900
All revenue and capital items in the above statement derive from continuing operations.
The total column of this statement is the profit and loss account of the Company.
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2016 40 | 41
Balance Sheet
As at 31 October 2016
Fixed Assets
Equity investments
Current Assets
Debtors
Cash
Cash equivalents
2016
2015
Notes
£’000
£’000
£’000
£’000
8
893,432
774,236
10
2,260
8
8
11,694
29,210
43,164
24,641
14,815
59,138
98,594
(32,825)
65,769
840,005
(104,399)
(2,550)
733,056
26,397
39,922
44,464
570,812
51,461
733,056
42,502
935,934
(83,645)
(3,272)
849,017
24,086
39,922
46,775
682,209
56,025
849,017
Creditors: liabilities falling due within one year
11
(662)
Net Current Assets
Total Assets less Current Liabilities
Creditors: liabilities falling due after more than one year
Long-term borrowings at par
Pension liability
Net Assets
Capital and Reserves
Called-up share capital
Share premium account
Other reserves
Capital redemption reserve
Capital reserve
Revenue reserve
Shareholders’ Funds
12
4
13
14
14
14
14
Net Asset Value per share with borrowings at par
881.2p
694.3p
Number of shares in issue at year end
96,342,683
105,587,426
The Financial Statements on pages 39 to 58 were approved by the Board of Directors and were signed on its behalf by:
James Will
Chairman
3 January 2017
The accompanying notes are an integral part of this statement.
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Statement of Comprehensive
Income
For the year to 31 October 2016
Notes
Revenue
£’000
2016
Capital
£’000
Total
£’000
Revenue
£’000
2015
Capital
£’000
Total
£’000
Return attributable to shareholders
21,970
171,755
193,725
17,085
10,678
27,763
Actuarial losses relating to pension scheme
4
(596)
(414)
(1,010)
(252)
(175)
(427)
Total comprehensive income for the year
21,374
171,341
192,715
16,833
10,503
27,336
Total comprehensive income per share
21.04p 168.63p 189.67p
15.68p
9.78p
25.46p
Statement of Changes in Equity
For the year to 31 October 2016
Balance at 1 November
Total recognised gains
Dividend payments
Share buybacks
Balance at 31 October
Notes
7
The accompanying notes are an integral part of this statement.
2016
£’000
733,056
192,715
(16,810)
(59,944)
849,017
2015
£’000
734,293
27,336
(13,147)
(15,426)
733,056
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The Scottish Investment Trust PLC | Annual Report 2016 42 | 43
Cash Flow Statement
As at 31 October 2016
Operating activities
Net revenue before finance costs and taxation
Expenses charged to capital
Increase in accrued income
Decrease in other payables
Decrease in other receivables
Adjustment for pension funding
Tax on investment income
2016
£’000
2015
£’000
26,033
(1,673)
(287)
(403)
81
(288)
(1,919)
21,165
(2,008)
(92)
(297)
861
(490)
(1,289)
Net cash inflow from operating activities
21,544
17,850
Investing activites
Purchases of investments
Disposals of investments
Cash flows from investing activities
Cash flows before financing activities
Financing activities
Equity dividends paid
Repayment of secured bond
Share buybacks
Interest paid
Overseas tax recovered
(162,884)
(319,796)
218,530
326,984
55,646
77,190
7,188
25,038
(16,810)
(28,241)
(60,158)
(5,030)
(13,147)
–
(15,042)
(6,075)
–
205
Cash flows from financing activities
(110,239)
(34,059)
Net movement in cash and cash equivalents
(33,049)
(9,021)
Cash and cash equivalents at the beginning of year
73,953
82,974
Cash and cash equivalents at the end of year
40,904
73,953
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2016
Accounting Policies
A summary of the principal accounting policies is set out
in paragraphs (a) to (j) below. All have been applied
consistently throughout the current and the preceding
year:
(c) Valuation of debt
The Company’s secured bonds and debentures are held
at amortised cost being the nominal value of the bonds
in issue less the unamortised costs of issue.
(a) Basis of accounting
The Financial Statements are prepared on a going
concern basis (see page 28) under the historical cost
convention, modified to include the revaluation of
investments at fair value, and in accordance with
applicable United Kingdom accounting standards. This
is the first year that the Company has presented its
Financial Statements under Financial Reporting Standard
102 (FRS 102) issued by the Financial Reporting Council
and under the AIC’s Statement of Recommended
Practice “Financial Statements of Investment Trust
Companies and Venture Capital Trusts” (SORP) issued in
2014. The last Financial Statements under previous
UK GAAP were for the year ended 31 October 2015 and
the date of transition to FRS 102 was therefore
1 November 2014. There have been no changes in
accounting policies as a consequence of adopting FRS
102. The Cash Flow Statement and details of the Pension
Scheme (note 4) for 31 October 2015, have been
re-presented to be consistent with the format of FRS
102. The Financial Statements have been prepared on a
going concern basis. The functional and presentation
currency is pounds sterling, which is the currency of the
environment in which the Company operates.
(b) Valuation of investments
Listed investments and current asset investments are
valued at fair value through profit and loss. Fair value is
the closing bid or last traded price according to the
recognised convention of the markets on which they are
quoted. Where trading in the securities of an investee
company is suspended, the investment is valued at the
Board’s estimate of its net realisable value.
Where appropriate, the Directors have adopted the
guidelines issued by the International Private Equity and
Venture Capital Association for the valuation of unlisted
investments. Heritable property is included at a
professional valuation. Depreciation is not charged on
heritable property as it is not material.
Realised surpluses or deficits on the disposal of
investments, permanent impairments in the value of
investments and unrealised surpluses and deficits on the
revaluation of investments are taken to capital reserve as
explained in note (i) below.
Year end exchange rates are used to translate the value
of investments which are denominated in foreign
currencies.
(d) Income
Dividends receivable on quoted shares are brought into
account on the ex-dividend date. Dividends receivable
on shares where no ex-dividend date is quoted are
brought into account when the Company’s right to
receive payment is established.
Interest and other income from non-equity securities,
including debt securities, are recognised on a time
apportionment basis so as to reflect the effective yield
on the securities.
Where the Company elects to receive dividends in the
form of additional shares (scrip dividends) rather than in
cash, the amount of the cash dividend is recognised as
income. Any excess in the value of the shares received
over the amount of the cash is recognised in capital
reserves.
(e) Expenses
All expenses are accounted for on an accruals basis.
Investment expenses are allocated equally between
revenue and capital reserve in line with the Directors’
expectations of the nature of long-term future returns
from the Company’s investments (2015: same).
Expenses which are incidental to the acquisition or
disposal of an investment are treated as part of the cost,
or deducted from the sales proceeds, of the investment.
(f) Finance costs
Interest payable is charged one-half to revenue reserve
and one-half to capital reserve in line with the Directors’
expectations of long-term future returns from the
Company’s investments (2015: same).
The discount on, and expenses of issue of, the secured
bonds due 2030 are included in the financing costs of
the issue which are being written off over the life of the
bonds.
(g) Taxation
Current tax is provided at amounts expected to be paid
(or recovered).
Deferred tax is provided in full on timing differences
which result in an obligation at the balance sheet date to
pay more tax, or a right to pay less tax, at a future date.
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44 | 45
Accounting Policies (continued)
Timing differences arise from the inclusion of items of
income and expenditure in taxation computations in
periods different from those in which they are included
in the Financial Statements. Deferred tax assets are
recognised to the extent that it is regarded as more
likely than not that they will be recovered. Deferred tax
assets and liabilities are not discounted. The Company
has no deferred tax asset or liability.
(h) Foreign currency
Transactions denominated in foreign currencies are
recorded in the local currency at actual exchange rates
at the date of the transaction or, where appropriate, at
the rate of exchange in a related forward contract. Assets
and liabilities denominated in foreign currencies at the
year end are reported at the rates of exchange
prevailing at the year end. Any gain or loss arising from a
change in exchange rates subsequent to the date of the
transaction is included as an exchange gain or loss in
capital reserve or in the revenue account depending on
whether the gain or loss is of a capital or revenue nature.
(i) Capital reserve
The following are accounted for in this reserve:
• gains and losses on the realisation of investments;
• realised and unrealised exchange differences of a
capital nature;
• realised and unrealised gains and losses on
transactions undertaken to hedge an exposure of a
capital nature;
• the funding of share and secured bond buybacks;
• expenses and interest charged to capital;
• increases and decreases in the valuation of
investments held at the year end; and
• increases and decreases in the valuation of the
pension fund surplus or deficit.
(j) Pensions
Employer contributions for the defined benefit scheme
are calculated by reference to the triennial actuarial
valuation. Employer contributions for the defined
contribution scheme are a predetermined percentage
of the employee’s salary.
Actuarial gains and losses are recognised in the
Statement of Comprehensive Income.
Further information on the Company’s pension scheme
is contained in note 4 to the Financial Statements on
pages 46 to 48.
Critical accounting estimates and judgements
The preparation of the financial statements necessarily
requires the exercise of judgement, both in application
of accounting policies, which are set out above, and
in the selection of assumptions used in the calculation
of estimates. These estimates and judgements are
reviewed on an ongoing basis and are continually
evaluated based on historical experience and other
factors. However, actual results may differ from these
estimates. The most significantly affected component
of the financial statements and associated critical
judgements is as follows:
Defined benefit scheme
The estimation of the expected cash flows used in the
calculation of the defined benefit scheme's liabilities
includes a number of assumptions around mortality
and inflation rates applicable to defined benefit
schemes. More detail is given in note 4 of the financial
statements. The Directors take actuarial advice when
selecting these assumptions and when selecting the
discount rate used to calculate the defined benefit
scheme deficit.
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Notes to the Financial Statements
For the year to 31 October 2016
1. Income
UK dividends including special dividends of £152,000 (2015: £374,000)
Overseas dividends including special dividends of £240,000 (2015: £462,000)
Income from unlisted investments
Deposit interest
2. Expenses
Staff costs (note 3)
Auditor’s remuneration for audit services
Auditor’s remuneration for pension scheme audit
Auditor’s remuneration for tax compliance services
Auditor’s remuneration for other assurance services
Investment and accounting services
Professional fees, marketing and scheme administration
Company secretarial and administration fee
Office expenses
Depositary, custody and bank charges
Other expenses
3. Staff costs
Remuneration
Social security costs
Pensions and post-retirement benefits
The average monthly number of persons employed during the year was:
Investment
Administration
2016
£’000
2015
£’000
7,511
7,333
20,836
16,423
–
93
86
215
28,440
24,057
2016
£’000
2015
£’000
2,277
3,117
35
8
7
5
306
422
117
247
175
481
29
6
7
4
325
417
–
296
206
493
4,080
4,900
2016
£’000
2015
£’000
1,766
2,343
223
288
268
506
2,277
3,117
2016
Number
2015
Number
4
6
10
8
8
16
142443 SIT AnReview PRINT.indd 45
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The Scottish Investment Trust PLC | Annual Report 2016 46 | 47
Notes to the Financial Statements (continued)
The Company operates a defined contribution scheme
under which the Company has agreed to pay
contributions as a percentage of salary, but has no
obligation to pay further contributions. For this scheme,
the amount charged to revenue is the contributions
payable for the year.
The following statement has been prepared for the
defined benefit scheme in accordance with the
requirements of FRS102, the purpose of which is to
ensure that:
1. the Company’s Financial Statements show the assets
of the scheme at fair value, and the liabilities arising
from its obligations to employees on their retirement,
actuarially estimated as prescribed by FRS102;
2. the operating costs of providing retirement benefits
to employees, actuarially estimated, are charged
against the profits of the years in which employees
earn those benefits; and
3. the Financial Statements adequately disclose the cost
of providing retirement benefits and the related gains,
losses, assets and liabilities.
4. Pension scheme
The Company’s defined benefit pension scheme, based
on final salary, closed to future accrual on 30 September
2015. Members of the defined benefit pension scheme
were enrolled in the Company’s defined contribution
scheme on 1 October 2015. The assets of the scheme
are held separately from those of the Company. The
scheme is under the control of trustees and is
administered by Punter Southall & Co, consulting
actuaries.
Actuarial valuations are obtained triennially and are
updated at each balance sheet date. A full actuarial
valuation was carried out in 2013 by Punter Southall &
Co which disclosed a scheme deficit of £3,406,000. The
Company agreed to meet this deficit over nine years by
equal instalments. It should be noted that this deficit
differs from that disclosed by Financial Reporting
Standard 102 (FRS102) which is set out below and which
is the liability required to be shown in the Financial
Statements. The main reason for the difference is that
FRS102 requires future liabilities to be calculated
actuarially using a rate of return based on the yield from
investment grade corporate bonds which is lower than
the expected rate of return on the equities in which the
scheme is invested. The FRS102 liability is separately
disclosed in the balance sheet.
The triennial actuarial valuation for 2016 is ongoing.
For the defined benefit scheme, the amounts charged
against revenue, as part of staff costs, are the actuarial
estimation of ‘current service costs’ (that is, the increase
in scheme liabilities arising from employee service) for
the current accounting period and gains and losses from
settlements (whereby the Company is relieved of a
pension obligation) and from curtailments (whereby the
estimated years of future service are reduced) in the
period. The cost of past service benefits which have
vested are charged against revenue as they arise. Where
such benefits have not vested, costs are accrued until
vesting occurs.
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Notes to the Financial Statements (continued)
4. Pension scheme (continued)
The major assumptions used for the actuarial
valuation of the final salary scheme were:
Rate of increase in salaries
Rate of increase in pensions in payment
Discount rate
Inflation – RPI
– CPI
Life expectancies on retirement at age 60 are:
Retiring today – males
– females
Retiring in 20 years’ time – males
– females
The fair value of the scheme assets and the
present value of the scheme liabilities were:
Equities
Bonds
With-profit policies
Cash
Total fair value of assets
2016
%
2015
%
2014
%
2013
%
2012
%
3.2
3.7
3.3
3.5
2.5
27.2
29.4
29.5
31.8
3.2
3.8
4.3
3.6
2.8
28.1
30.8
30.2
32.9
3.2
3.8
4.3
3.6
2.8
27.9
30.7
30.1
32.8
3.2
3.8
4.4
3.7
2.9
27.8
30.6
30.0
32.7
3.7
3.5
4.8
3.1
2.3
27.7
30.5
29.9
32.6
2016
£’000
7,401
6,181
264
2015
£’000
6,224
5,717
251
2014
£’000
4,996
5,922
149
2013
£’000
5,043
4,879
202
2012
£’000
4,007
3,845
192
1,976
2,343
2,243
1,646
2,294
15,822
14,535
13,310
11,770
10,338
Present value of scheme liabilities
(19,094)
(17,085)
(15,923)
(14,330)
(12,844)
Net pension liability
(3,272)
(2,550)
(2,613)
(2,560)
(2,506)
Reconciliation of the opening and closing balances of the present value of the scheme assets
Fair value of scheme assets at beginning of year
Interest income on scheme assets
Returns on assets, excluding interest income
Contributions by employer
Contributions by scheme participants
Benefits paid
Fair value of scheme assets at end of year
Reconciliation of the opening and closing balances of the present value of the scheme liabilities
Liabilities at beginning of year
Current service cost
Interest cost
Contributions by scheme participants
Actuarial losses
Benefits paid
Liabilities at end of year
2016
£’000
2015
£’000
14,535
13,310
605
1,272
389
–
585
(30)
819
31
(979)
(240)
15,822
14,535
2016
£’000
2015
£’000
17,085
15,923
–
706
–
2,282
327
687
31
357
(979)
(240)
19,094
17,085
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The Scottish Investment Trust PLC | Annual Report 2016
48 | 49
Notes to the Financial Statements (continued)
4. Pension scheme (continued)
Analysis of amount chargeable to
operating profit during the year
Current service cost
Past service cost
Total operating charge
Employee contribution to be set off
Analysis of amount credited to other finance income:
Interest income return on assets
Interest on liabilities
Net return
Movement in deficit during year:
Deficit at beginning of year
Movement in year:
Current service cost
Past service cost
Contributions for year
Net return from other finance income
Actuarial losses in Statement of
Comprehensive Income
Deficit at end of year
2016
£’000
–
–
–
–
605
(706)
(101)
2015
£’000
358
–
358
(31)
685
(687)
(2)
2014
£’000
423
–
423
(38)
643
(636)
7
2013
£’000
407
–
407
(40)
544
(623)
(79)
2012
£’000
369
41
410
(39)
503
(571)
(68)
(2,550)
(2,613)
(2,560)
(2,506)
(2,249)
–
–
389
(101)
(358)
(423)
(407)
(369)
–
850
(2)
–
858
7
–
747
(79)
(41)
782
(68)
(1,010)
(427)
(495)
(315)
(561)
(3,272)
(2,550)
(2,613)
(2,560)
(2,506)
142443 SIT AnReview PRINT.indd 48
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Notes to the Financial Statements (continued)
5. Interest payable
On secured bonds and debentures
Amortisation of secured bonds issue expenses
6. Tax on ordinary activities
Taxation
UK corporation tax at 20.00% (2015: 20.42%)
Overseas tax
Current tax
2016
£’000
4,964
94
2015
£’000
6,075
116
5,058
6,191
2016
£’000
2015
£’000
–
1,534
1,534
–
984
984
The tax charge for the year is lower than that resulting from applying the standard rate of corporation tax in the UK.
Return on ordinary activities before tax
Corporation tax at 20.00% (2015: 20.42%)
Effects of:
Non-taxable capital returns
Finance costs and expenses charged to capital
Non-taxable dividends
Unutilised expenses
Overseas tax
7. Dividends
Dividends paid on shares recognised in the year:
Previous year final of 7.50p per share (2014: 7.20p)
Previous year special of 3.50p per share (2014: nil p)
Interim of 5.25p per share (2015: 5.00p)
2016
£’000
2015
£’000
195,259
28,747
39,052
5,870
(35,191)
(2,181)
(840)
(1,042)
(5,669)
(4,868)
2,648
1,534
1,534
2,221
984
984
2016
£’000
2015
£’000
7,864
3,670
5,276
7,781
–
5,366
16,810
13,147
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The Scottish Investment Trust PLC | Annual Report 2016 50 | 51
Notes to the Financial Statements (continued)
8. Investments
Investments listed on a recognised investment exchange
Unlisted investments
Subsidiary undertakings (note 9)
Opening book cost
Opening unrealised appreciation
Opening valuation
Movements in the year:
Purchases at cost
Sales – proceeds
– realised gains/(losses) on sales
Increase in unrealised appreciation
Closing valuation
Closing book cost
Closing unrealised appreciation
Closing valuation
2016
£’000
2015
£’000
891,504
772,344
1,575
1,539
353
353
893,432
774,236
Listed
in UK
£’000
Listed
overseas
£’000
Unlisted
£’000
Total
£’000
206,261
490,195
579
697,035
25,497
50,391
1,313
77,201
231,758
540,586
1,892
774,236
87,430
47,060
–
134,490
(46,092)
(146,355)
(173)
(192,620)
20,082
41,364
(48)
61,398
6,758
108,913
257
115,928
299,936
591,568
1,928
893,432
267,681
432,264
358
700,303
32,255
159,304
1,570
193,129
299,936
591,568
1,928
893,432
Total purchases of equities amounted to £134,490,000 (2015: £337,923,000) and sales were £192,620,000 (2015:
£346,644,000). The purchases at cost and sales proceeds figures include transaction costs of £1,083,000 (2015:
£2,062,000), comprising commissions, government stamp duty and other fees.
Unlisted investments include heritable property valued at £1,050,000 (2015: £1,050,000). The property was valued on
an open market basis by Allied Surveyors Scotland PLC, chartered surveyors, on 8 October 2015.
Realised gains on sales
Increase/(decrease) in unrealised appreciation
Net gains on investments
2016
£’000
2015
£’000
61,398
96,207
115,928
(80,429)
177,326
15,778
Financial assets – cash and deposits
Sterling
US dollar
Fixed
£’000
2016
Floating
£’000
Total
£’000
10,000
11,044
21,044
19,210
650
19,860
Fixed
£’000
30,000
29,138
2015
Floating
£’000
9,972
4,843
Total
£’000
39,972
33,981
29,210
11,694
40,904
59,138
14,815
73,953
The maximum period for fixed rate deposits outstanding at the year end was 1 day (2015: 6 days). The weighted
average fixed interest rate at the year end was 0.20% (2015: 0.19%). Floating interest rates vary in relation to short-term
rates in the currencies in which deposits are held.
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Notes to the Financial Statements (continued)
9. Subsidiary undertaking
The Company has investments in the following subsidiary:
Name of undertaking
S.I.T. Savings Limited
Principal activities
Country of
incorporation
and voting
and operation
Description of
shares held
Proportion of
nominal value of
issued shares and
voting rights held
AIFM and investment products
UK
Ordinary
100%
The accounts of this subsidiary have not been consolidated with those of the parent company as, in the opinion of the
Directors, the amounts involved are not material. The Directors are satisfied that the valuation of the subsidiary reflects
and does not exceed the value of the underlying assets.
10. Debtors
Amounts due from brokers
Overseas tax recoverable
Prepayments and accrued income
11. Creditors: liabilities falling due within one year
Amounts due to brokers
Other creditors
12. Creditors: liabilities falling due after more than one year
4% Perpetual Debenture Stock
4¼% Perpetual Debenture Stock
5% Perpetual Debenture Stock
2016
£’000
2015
£’000
–
22,898
734
423
1,526
1,320
2,260
24,641
2016
£’000
170
492
662
2015
£’000
31,790
1,035
32,825
2016
2015
Book value
£’000
Fair value
£’000
Book value
£’000
Fair value
£’000
350
700
401
853
350
700
301
640
1,009
1,448
1,009
1,086
5¾% Secured Bonds due 17 April 2030
81,586
106,357
102,340
121,567
83,645
109,059
104,399 123,594
The secured bonds are secured by a floating charge over the assets of the Company and have a redemption value in
2030 of £82,827,000.
The debenture stocks and secured bonds are stated in the balance sheet at book value. Restating them at market
value of £109.0m (2015: £123.6m) has the effect of decreasing the year end NAV per share from 881.2p to 854.9p
(2015: decreasing from 694.3p to 676.1p).
Market value is the estimated fair value of the Company’s secured bonds and debenture stocks. The current estimated
fair value of the Company’s borrowings is based on the redemption yield of the relevant existing reference gilt plus a
margin derived from the spread of BBB UK corporate bond yields (15 years+) over UK gilt yields (15 years+). The
reference gilt for the secured bonds is the 6% UK Treasury Stock 2028 and the reference gilt for the perpetual
debenture stocks is the longest-dated UK Treasury stock listed in the Financial Times.
£21,188,000 nominal of the 53/4% Secured Bonds due 17 April 2030 were repurchased on 4 December 2015.
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The Scottish Investment Trust PLC | Annual Report 2016 52 | 53
Notes to the Financial Statements (continued)
13. Called-up share capital
Shares of 25p
Number of shares in issue
2016
£24,086,000
96,342,683
2015
£26,397,000
105,587,426
9,244,743 shares were repurchased in the stockmarket during the year to 31 October 2016 (2015: 2,479,500).
388,000 shares were repurchased from 1 November 2016 to 3 January 2017.
14. Reserves
At 31 October 2015
Net gains on currencies
Net gains on realisation of investments
Increase in unrealised appreciation
Share buybacks
Actuarial losses relating to pension scheme
Expenses and interest charged to capital
Premium on debenture buyback
Return attributable to shareholders
Dividends paid
At 31 October 2016
15. Analysis of changes in net debt during the year
Cash
Short-term deposits
Long-term borrowings at par
16. Contingencies, guarantees and financial commitments
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
39,922
44,464
570,812
51,461
–
–
–
–
–
–
–
–
–
–
–
–
6,024
61,398
115,928
2,311
(59,944)
–
–
–
–
–
–
–
–
–
(414)
(596)
(4,202)
(7,393)
–
–
–
–
21,970
(16,810)
39,922
46,775
682,209
56,025
31 October
2015
£’000
Cash flows
£’000
Non-cash
movements
£’000
31 October
2016
£’000
14,815
(3,121)
59,138
(29,928)
–
–
11,694
29,210
(104,399)
28,241
(7,487)
(83,645)
(30,446)
(4,808)
(7,487)
(42,741)
2016
£’000
2015
£’000
Contingencies, guarantees and financial commitments of the Company
at the year end, which have not been accrued, are as follows:
Commitments to provide additional funds to investees
950
753
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Notes to the Financial Statements (continued)
17. Financial instruments
Summary of financial assets and financial liabilities by category
The Company’s financial assets and financial liabilities at the balance sheet date are as follows. The Accounting Policies
on page 43 explain how the various categories of financial instrument are measured.
Financial assets
Financial assets at fair value through profit and loss:
Fixed asset investments – designated as such on initial recognition
893,432
774,236
2016
£’000
2015
£’000
Current assets:
Debtors
Cash and deposits
Financial liabilities
Creditors: liabilities falling due within one year
Amounts due to brokers
Other creditors
Creditors: liabilities falling due after more than one year
Long-term borrowings at par
Pension liability
2,260
24,641
40,904
73,953
43,164
98,594
936,596
872,830
(170)
(31,790)
(492)
(1,035)
(662)
(32,825)
(83,645)
(104,399)
(3,272)
(2,550)
(86,917)
(106,949)
(87,579) (139,774)
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The Scottish Investment Trust PLC | Annual Report 2016 54 | 55
Notes to the Financial Statements (continued)
17. Financial instruments (continued)
Risk management policies and procedures
As an investment trust, the Company invests in equities and other investments for the long term so as to secure its
investment objective stated on the inside front cover. In pursuing its investment objective, the Company is exposed to
a variety of risks that could result in a reduction in the Company’s net assets and a reduction in the profits available for
dividend.
The main risks include investment and market price risk (comprising foreign currency risk and interest rate risk),
liquidity risk and credit risk. The Directors’ approach to the management of these risks is set out below. The Directors
of the Company and of S.I.T. Savings Limited coordinate the Company’s risk management.
The Company’s policies and processes for managing the risks, and the methods used to measure the risks, which are
set out below, have not changed from those applied in the previous year.
a. Investment and market price risk
The holding of securities and investing activities involve certain inherent risks. Events may occur which affect the value
of investments. The Company holds a portfolio which is well diversified across industrial and geographical areas to
help minimise these risks. It may also use derivatives. From time to time, the Company may wish to use derivatives in
order to protect against a specific risk or to facilitate a change in investment strategy such as the movement of funds
from one area to another. No such transaction may take place without the prior authorisation of the Board.
b. Foreign currency risk
Approximately 70% of the Company’s assets are invested overseas which gives rise to a currency risk. From time to
time, specific hedging transactions are undertaken. The Company’s overseas income is subject to currency
movements. The currency profile of the Company’s monetary assets and liabilities is set out below.
Management of the risk
Management monitors the Company’s exposure to foreign currencies on a daily basis, and reports to the Board at
regular intervals. Management measures the risk to the Company of the foreign currency exposure by considering the
effect on the Company’s net asset value and income of a movement in the rates of exchange to which the Company’s
assets, liabilities, income and expenses are exposed.
Foreign currency borrowings and forward currency contracts may be used to limit the Company’s exposure to
anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of
investments or the income received from them. These borrowings and contracts are limited to currencies and amounts
commensurate with the asset exposure to those currencies.
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial
instruments to mitigate the currency exposure in the period between the time that income is receivable and its receipt.
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Notes to the Financial Statements (continued)
17. Financial instruments (continued)
Foreign currency exposure
The fair values of the Company’s monetary items denominated in foreign currencies at 31 October 2016 and
31 October 2015 are shown below.
2016
Debtors (amounts due from brokers, dividends receivable and accrued income)
Creditors (amounts due to brokers)
Cash
Foreign currency exposure on net monetary items
Equity investments at fair value through profit and loss
Total net foreign currency exposure
2015
US $
£’000
212
–
19,861
20,073
Euro
£’000
292
–
–
Other
£’000
1,302
–
–
292
1,302
240,916
111,239
239,941
260,989
111,531
241,243
Debtors (amounts due from brokers, dividends receivable and accrued income)
15,776
141
4,959
Creditors (amounts due to brokers)
Cash
Foreign currency exposure on net monetary items
Equity investments at fair value through profit and loss
Total net foreign currency exposure
(10,684)
33,981
39,073
–
–
(9,848)
–
141
(4,889)
198,084
110,635
232,357
237,157
110,776
227,468
The above year end amounts are not representative of the exposure to risk during the year, because the levels of
foreign currency exposure may change significantly throughout the year. The maximum and minimum net monetary
assets/(liabilities) amounts for each currency were as follows.
Year to 31 October 2016
Maximum
Minimum
Year to 31 October 2015
Maximum
Minimum
US $
£’000
34,297
18,282
Euro
£’000
Other
£’000
–
–
–
–
39,021
13,036
6,500
793
–
(7,982)
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The Scottish Investment Trust PLC | Annual Report 2016 56 | 57
Notes to the Financial Statements (continued)
17. Financial instruments (continued)
Foreign currency sensitivity
The following table illustrates the sensitivity of the total return for the year and the shareholders’ funds in regard to the
Company’s financial assets and financial liabilities. It assumes a 10% depreciation of sterling against both the US dollar
and the euro at 31 October 2016. These percentages have been determined based on the average market volatility in
exchange rates in the previous twelve months. The sensitivity analysis is based on the Company’s monetary foreign
currency financial instruments held at each balance sheet date.
2016
US $
£’000
Euro
£’000
2015
US $
£’000
Euro
£’000
If sterling had weakened by 10% against the currencies shown,
this would have had the following effect:
Income statement – return on ordinary activities after taxation:
Revenue return
Capital return
Return attributable to shareholders
557
455
580
473
26,078
11,124
23,699
11,064
26,635
11,579
24,279
11,537
A 10% strengthening of sterling against the above currencies would result in an equal and opposite effect on the
above amounts.
In the opinion of the Directors, the above sensitivity analyses are broadly representative of the whole of the current
and comparative years.
c. Interest rate risk
The Company finances its operations through a combination of investment realisations, retained revenue reserves,
debenture stocks and secured bonds. All debenture stocks and secured bonds are at fixed rates. Details of interest
rates on financial assets are included in note 8 on page 50. Details of interest rates on financial liabilities are included
in note 12 on page 51.
Management of the risk
The Company finances part of its activities through borrowings at levels which have been approved and are monitored
by the Board.
Interest rate exposure
The exposure, at the year end, of financial assets and financial liabilities to interest rate risk is shown below.
Exposure to floating interest rates
Cash
Exposure to fixed interest rates
Short-term deposits
Long-term borrowings
Total exposure
Within
one year
£’000
2016
More than
one year
£’000
Total
£’000
Within
one year
£’000
2015
More than
one year
£’000
Total
£’000
11,694
29,210
–
–
11,694
14,815
29,210
59,138
–
–
14,815
59,138
–
(83,645)
(83,645)
–
(104,399)
(104,399)
40,904
(83,645)
(42,741)
73,953
(104,399)
(30,446)
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Notes to the Financial Statements (continued)
17. Financial instruments (continued)
Interest rate sensitivity
If interest rates had decreased by 5%, with all other variables held constant, the return attributable to shareholders as
shown on the Income Statement would have decreased by the amounts shown in the table below:
Return attributable to shareholders
2016
£’000
(5)
2015
£’000
(11)
A 5% increase in interest rates would result in an equal and opposite effect on the above amounts.
d. Liquidity risk
Almost all of the Company’s assets comprise listed securities which represent a ready source of funds. In addition, the
Company has access to short-term borrowing facilities. The maturity profile of the Company’s borrowings is included
in note 12 on page 51.
Management of the risk
Liquidity risk is not as significant as the other risks as most of the Company’s assets are investments in quoted equities
and are readily realisable. The manager reviews the liquidity of the portfolio when making investment decisions.
e. Credit risk
The failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the
Company suffering a loss.
Credit risk exposure
The amounts shown in the balance sheet under debtors and cash and deposits represent the maximum exposure to
credit risk at the current and comparative year ends.
Cash comprises balances held by banks with a satisfactory credit rating (2015: same).
Management of the risk
This risk is managed as follows:
• by dealing only with brokers and banks which have been approved by the Audit Committee and which have credit
ratings assigned by international credit rating agencies; and
• by setting limits on the maximum exposure to any one counterparty at any time, which are reviewed semi-annually
at meetings of the Audit Committee.
f. Capital management policies and procedures
The Company carries on its business as a global growth investment trust. Its objective is to provide investors, over the
longer term, with above-average returns through a diversified portfolio of international equities and to achieve
dividend growth ahead of UK inflation.
The levels of gearing and gross gearing are monitored closely by the Board and the Manager. The Company applies a
ceiling on gearing of 20%. While gearing will be employed in a typical range of 0% to 20%, the Company retains the
ability to lower equity exposure to a net cash position if deemed appropriate.
The Board, with the assistance of the management, monitors and reviews the structure of the Company’s capital on an
ongoing basis. This review includes the planned level of gearing which will take into account the management’s view
on the market, the need to buy back shares for cancellation and the level of dividends.
The Company’s policies and processes for managing capital are unchanged from the previous year.
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The Scottish Investment Trust PLC | Annual Report 2016 58 | 59
Notes to the Financial Statements (continued)
17. Financial instruments (continued)
Fair value measurements recognised in the balance sheet
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
• Level 1 fair value measurements are those derived from quoted prices in active markets for identical assets or liabilities;
• Level 2 fair value measurements are those derived from information other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or indirectly; and
• Level 3 fair value measurements are those derived from valuation techniques not based on observable market data.
Financial assets at fair value through profit and loss
891,504
–
1,928
893,432
2016
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Financial assets at fair value through profit and loss
772,344
–
1,892
774,236
There were no transfers between Level 1 & 2 during the year (2015: same).
2015
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Reconciliation of Level 3 fair value measurements of financial assets
Balance at 31 October 2015
Purchase costs
Sales proceeds
Total profit: in profit and loss
Balance at 31 October 2016
Fair value
through
profit
and loss
2015
£’000
1,892
–
(173)
209
1,928
The table above only includes financial assets. There were no financial liabilities measured at fair value on Level 3 fair
value measurement bases.
18. Related party transactions
Directors’ fees are detailed in the Directors’ Remuneration Report on pages 32 and 33. There were no matters
requiring disclosure under section 412 of the Companies Act 2006.
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The Scottish Investment Trust PLC | Annual Report 2016
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60 | 61
Investor Information
Update on tax-efficient investing
ISAs
• The overall annual ISA investment limit for the
2016/17 tax year is £15,240.
• Up to the full £15,240 can be invested in a stocks
and shares ISA with one provider. Alternatively, up
to the full £15,240 can be put into a cash ISA, or into
both a stocks and shares ISA and a cash ISA, splitting
the £15,240 between the two as you wish.
• The annual ISA investment limit for the 2017/18 tax
year will be £20,000.
• If an ISA holder dies on, or after, 3 December 2014,
the surviving spouse or civil partner can now inherit
their ISA tax benefits provided they were married
to, or in a civil partnership with, and living with
their spouse/civil partner at the time of their death.
The surviving spouse/civil partner is eligible for an
allowance equal to the value of the ISA on the date
of the holder’s death. This allowance is in addition
to the surviving spouse/civil partner’s annual ISA
allowance.
Contact telephone numbers
Full contact details for the scheme administrators and
the Company’s registrar can be found in the Useful
Addresses section on page 63.
STOCKPLAN and ISA investors wishing to:
• give a change of address
• instruct a sale
• request a valuation
• make an investment using their debit card
• change the amount of their monthly investment
• obtain help with accessing their STOCKPLAN and
ISA information online
• make general queries about their account or scheme
can contact the scheme administrator, Halifax Share
Dealing Limited (HSDL), on: 0345 850 0181 or
0113 267 1063.
Shareholders who hold share certificates
can contact the registrar, Computershare Investor
Services PLC, on: 0370 703 0195.
How to invest
You can buy the Company’s shares directly on
the stockmarket through a stockbroker or a share
dealing platform. Your bank, lawyer, accountant
or other professional adviser may also be able
to help with this. The Company’s registrar,
Computershare Investor Services PLC, provides
a share dealing service which can be accessed
on its website, www.investorcentre.co.uk or by
telephoning 0370 703 0195.
The Company’s wholly-owned subsidiary, S.I.T. Savings
Ltd, provides a number of low-cost, flexible investment
products which enable investors to acquire the
Company’s shares easily.
STOCKPLAN
Our investment trust savings scheme is one of the
most cost-effective available. There is no initial plan
charge, other than stamp duty and dealing spread, and
no annual charge. It costs just £12.50 to sell some or
all of your holding. STOCKPLAN allows you to invest
regularly (minimum investment £25 per month) and/or
with a lump sum (minimum investment £250). There
is no maximum investment limit and you can stop and
restart investing at any time.
STOCKPLAN: A Flying Start
Our investing for children plan is based on the
STOCKPLAN scheme. It benefits from the same low
charges and flexibility and can be opened in one of
two ways: either as a designated plan or, more formally,
as a bare trust. STOCKPLAN: A Flying Start enables
family and friends to invest on behalf of a child to help
build savings for the future.
The SIT ISA
This is one of the lowest-charging investment trust
company stocks and shares ISAs on offer. There is no
initial plan charge, other than stamp duty and dealing
spread, nor are there closure or selling charges. The
annual management fee of 0.6% of the value of the
investment is currently capped at £30 + VAT regardless
of how much your SIT ISA investment grows or how
many years’ ISA allowances you have invested with the
Company.
The SIT ISA Transfer
SIT Savings can accept the transfer of existing stocks
and shares ISAs from other qualifying managers into
The SIT ISA at any time without losing the ISAs’ tax
status. SIT Savings can also accept the transfer of cash
ISAs into The SIT ISA. This would turn the cash ISA
being transferred into a stocks and shares ISA. SIT
Savings makes no charge for transfers in. However, the
current ISA manager may charge for administering the
transfer out.
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Investor Information (continued)
Dividends
The following dividends have been paid during
2015/16:
Dividends
Amount
Interim 2016
5.25p
Final 2015
7.50p
Special 2015
3.50p
XD date
15 June
2016
31 December
2015
31 December
2015
Record
date
17 June
2016
4 January
2016
4 January
2016
Payment
date
20 July
2016
4 February
2016
4 February
2016
SIT STOCKPLAN and ISA schemes
The STOCKPLAN and ISA schemes provide automatic
reinvestment of dividends. However, they also allow
for dividends to be taken as income, if required.
STOCKPLAN and ISA holders should contact the
scheme administrator, HSDL, on 0345 850 0181 or
0113 267 1063 if they would like to change their
dividend arrangements.
Shareholders who hold share certificates
Conversely, for shareholders who hold share
certificates (investors whose names are on the
Company’s share register and who are not in
the Company’s savings schemes), dividends are
automatically paid as income. However, it is easy to
arrange to have these dividends reinvested by joining
the Company’s Dividend Reinvestment Plan (DRIP).
Details are available from Computershare Investor
Services, the Company’s registrar, on 0370 703 0195,
or from the investor relations section on the Company’s
website, www.thescottish.co.uk
Monitoring your investment
The Company’s share price, together with performance
information and product details, can be found on the
Company’s website, www.thescottish.co.uk
A number of financial websites, such as the FT,
www.ft.com and the London Stock Exchange,
www.londonstockexchange.com carry share price
information. In addition, the share price is published
daily in most quality newspapers.
The Company publishes a daily NAV and a monthly
factsheet on its website. An Interim Report is issued in
June of each year and the Annual Report is distributed
to all investors in January. STOCKPLAN, STOCKPLAN:
A Flying Start and ISA investors receive twice yearly
statements of their holdings.
The Scottish Investment Trust PLC | Annual Report 2016
Accessing your account online
ISA, STOCKPLAN and STOCKPLAN: A Flying Start
designated scheme investors
The above scheme investors may view their accounts
online by registering with halifaxsharedealing-online.
This can be accessed through the links in the various
product sections on the Company’s website,
www.thescottish.co.uk or by visiting:
www.halifaxsharedealing.co.uk/online
Please note, you will need your Share Dealing Personal
Reference Number (PRN) to access this service. If
you do not have this, please contact the Company’s
scheme administrator, HSDL, on 0345 850 0181 or
0113 267 1063.
Shareholders who hold share certificates
Investors who hold share certificates can check their
holdings by registering on the Company’s registrar’s
website, www.investorcentre.co.uk or through the
link in the investor relations section on the Company’s
website, www.thescottish.co.uk
Please note that to access this facility, investors will
need to quote the shareholder reference number
shown on their share certificate.
By registering for the Investor Centre facility on
Computershare’s website, investors can also view
details of all their holdings for which Computershare
is registrar, as well as access additional facilities and
documentation.
Please see www.investorcentre.co.uk for further
information.
Electronic communications
Shareholders who hold share certificates
Investors who hold share certificates (i.e. who are not in
the STOCKPLAN, ISA or SIPP schemes, nor in a broker’s
nominee), may choose to receive the Company’s
interim and Annual Reports and other shareholder
communications electronically instead of in paper form.
To register, simply visit the link in the investor
relations section on the Company’s website,
www.thescottish.co.uk and provide email details.
Investors will then be advised by email when an
electronic communication is available to be accessed.
Shareholders’ meetings
Shareholders who hold share certificates
Investors who hold share certificates are entitled
to attend and vote at the AGM and other general
meetings. Notices of meetings and proxy cards are sent
to their registered addresses.
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Investor Information (continued)
STOCKPLAN, STOCKPLAN: A Flying Start, ISA, and SIPP
investors who invest in The Scottish Investment Trust
STOCKPLAN, STOCKPLAN: A Flying Start, ISA and
SIPP investors who invest in the Company are entitled
to attend the AGM and other general meetings and
vote by completing and returning the form of direction
enclosed with this report.
The AGM will be held at the Royal College of Physicians
of Edinburgh, 9 Queen Street, Edinburgh EH2 1JQ, on
3 February 2017 at 10.30am.
Electronic voting
Shareholders who hold share certificates
Shareholders who hold share certificates are able to
submit proxy votes electronically for the AGM. Please
follow the instructions on your proxy card.
Personal taxation
Dividend tax allowance
From April 2016 dividend tax credits were replaced
by an annual £5,000 tax-free allowance on dividend
income across an individual’s entire share portfolio.
Above this amount, individuals will pay tax on their
dividend income at a rate dependent on their income
tax bracket and personal circumstances. The Company
will continue to provide registered shareholders with
a confirmation of the dividends paid and this should
be included with any other dividend income received
when calculating and reporting total dividend income
received. It is the shareholder’s responsibility to include
all dividend income when calculating any tax liability.
If you have any tax queries, please contact a Financial
Advisor.
Capital Gains Tax (CGT)
When investors sell all or part of their holdings, they
may be liable to CGT. Currently, the first £11,100 per
annum of such gains from all sources is exempt.
For investors who acquired shares prior to 31 March
1982, the cost for CGT purposes may be based on the
price on that date of 41.472p.
Investors who are in any doubt as to their liability for
CGT should seek professional advice.
ISA investments remain exempt from CGT.
Please remember that we are unable to offer individual
investment or tax advice. If you require such advice,
you should consult your professional adviser.
STOCKPLAN, STOCKPLAN: A Flying Start and The
SIT ISA are provided by S.I.T. Savings Limited which
is authorised and regulated by the Financial Conduct
Authority (FCA), 25 The North Colonnade, Canary
Wharf, London E14 5HS.
The Common Reporting Standard
With effect from 1 January 2016 all new shareholders
outside of CREST will be sent a certification
form for the collection of information required for
compliance with The OECD Common Reporting
Standard for Automatic Exchange of Financial Account
Information (The Common Reporting Standard).
Further information can be found on HMRC’s website;
www.gov.uk/government/publications/exchange-of-
information-account-holders.
Retail investors advised by IFAs
The Company currently conducts its affairs so that its
shares can be recommended by Independent Financial
Advisors (IFAs) to retail private investors in accordance
with the Financial Conduct Authority’s (FCA) rules
in relation to non-mainstream pooled investment
producers.
The shares are excluded from the FCA’s restrictions
which apply to non-mainstream investment products
because they are shares in a UK-listed investment trust.
Risk warning
Past performance may not be repeated and is not
a guide to future performance. The value of shares
and the income from them can go down as well as
up as a result of market and currency fluctuations.
You may not get back the amount you invest. The
Scottish Investment Trust PLC has a long-term policy
of borrowing money to invest in equities in the
expectation that this will improve returns but should
stockmarkets fall, such borrowings would magnify
losses on these investments. The Company can buy
back and cancel its own shares. All other things
being equal, this would have the effect of increasing
gearing. Investment in The Scottish Investment Trust
is intended as a long-term investment. Tax rates and
reliefs can change in the future and the value of any tax
advantages will depend on personal circumstances.
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The Scottish Investment Trust PLC | Annual Report 2016
Financial Calendar 2017
Dividend and interest payments
Final and special for the financial year
to 31 October 2016
Interim
Secured bonds
Perpetual debenture stock
17 February 2017
July
17 April, 17 October
30 April, 31 October
Announcement of results
NAV
Interim figures
Final figures
Annual Report & Accounts
Annual General Meeting (AGM)
Daily
June
January
January
3 February 2017
Useful Addresses
Registered Office
6 Albyn Place
Edinburgh EH2 4NL
Registered no. SC001651
Telephone: 0131 225 7781
Website: www.thescottish.co.uk
info@thescottish.co.uk
Email:
Company Secretary
R&H Fund Services Limited
20 Forth Street
Edinburgh EH1 3LH
Depositary
Northern Trust Global Services Limited
50 Bank Street
Canary Wharf
London E14 5NT
Custodian
The Northern Trust Company
50 Bank Street
Canary Wharf
London E14 5NT
Auditor
Deloitte LLP
Saltire Court
20 Castle Terrace
Edinburgh EH1 2DB
Actuaries
Punter Southall & Co
7 Castle Street
Edinburgh EH2 3AH
The Association of Investment Companies
The Scottish Investment Trust is a member of The
Association of Investment Companies (AIC) which
publishes a number of useful fact sheets and email
updates for investors interested in investment trust
companies.
The AIC
9th Floor
24 Chiswell Street
London EC1Y 4YY
Telephone: 0207 282 5555
Website: www.theaic.co.uk
For valuations and other details of your investment or to
notify a change of address please contact the following:
Shareholders who hold share certificates:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Helpline: 0370 703 0195
Website: www.investorcentre.co.uk
STOCKPLAN, STOCKPLAN: A Flying Start
and The SIT ISA investors:
SIT Schemes
Halifax Share Dealing Limited
Lovell Park Road
Leeds LS1 1NS
Helpline: 0345 850 0181 or 0113 267 1063
Website:
www.halifaxsharedealing.co.uk/online
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64 | 65
Glossary
Borrowings at par is the nominal value of the Company’s
borrowings less any unamortised issue expenses.
Borrowings at market value is the Company’s estimate
of the ‘fair value’ of its borrowings. The current estimated
fair value of the Company’s borrowings is based on the
redemption yield of the relevant existing reference gilt
plus a margin derived from the spread of BBB UK
corporate bond yields (15 years+) over UK gilt yields
(15 years+). The reference gilt for the secured bonds is
the 6% UK Treasury Stock 2028 and the reference gilt for
the perpetual debenture stocks is the longest-dated UK
Treasury stock listed in the Financial Times.
Discount is the difference between the market price of a
share and the NAV, expressed as a percentage of the
NAV.
Ex-income NAV is the NAV excluding current year
revenue.
Gross gearing is the geared position if all the
borrowings were invested in equities: borrowings
expressed as a percentage of shareholders’ funds.
Gearing is the true geared position of the Company:
borrowings less cash and equivalents expressed as a
percentage of shareholders’ funds.
NAV is net asset value per share after deducting
borrowings at par or market value, as stated.
Total assets means total assets less current liabilities.
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The Scottish Investment Trust PLC | Annual Report 2016 66 | 67
Notice of Annual General Meeting
c) the maximum price (exclusive of expenses) which
may be paid for a share shall be the higher of:
(i) 105% of the average of the middle market
quotations (as derived from the Daily Official
List of the London Stock Exchange) for the five
business days immediately preceding the date
of purchase; and
(ii) the higher of the price of the last independent
trade and the highest current independent bid
on the trading venue where the purchase is
carried out;
d) unless previously varied, revoked or renewed, the
authority hereby conferred shall expire on 3 May
2018, save that the Company may, prior to such
expiry, enter into a contract to purchase shares
under such authority which will or might be
executed wholly or partly after the expiration of
such authority and may make a purchase of shares
pursuant to any such contract.
All resolutions are ordinary resolutions except number
13 which is a special resolution.
R&H Fund Services Limited
Company Secretary
3 January 2017
Map image required
Notice is hereby given that the one hundred and
twenty-ninth annual general meeting of The Scottish
Investment Trust PLC will be held at The Royal College of
Physicians of Edinburgh, 9 Queen Street, Edinburgh
EH2 1JQ, on 3 February 2017 at 10.30am, for the
purpose of transacting the following:
1. To receive and consider the Directors’ Report and
statement of accounts for the year to 31 October
2016.
2. To approve the Directors' remuneration policy.
3. To approve the Directors’ Remuneration Report for
the year to 31 October 2016.
4. To declare a final dividend of 8.25p per share.
5. To declare a special dividend of 9.00p per share.
6. To re-elect James Will as a Director.
7. To re-elect Hamish Buchan as a Director.
8. To re-elect Russell Napier as a Director.
9. To re-elect Ian Hunter as a Director.
10. To re-elect Jane Lewis as a Director.
11. To re-elect Mick Brewis as a Director.
12. To re-appoint Deloitte LLP as auditor and to
authorise the Directors to fix their remuneration.
13. To authorise the Company, in accordance with
section 701 of the Companies Act 2006 (the ‘Act’)
and in substitution for any pre-existing such
authority, to make market purchases (within the
meaning of section 693 of the Act) of shares of 25p
each for cancellation, provided that:
a) the maximum number of shares hereby
authorised to be purchased shall be 14,383,606
or, if less, 14.99% of the aggregate issued shares
on the date this resolution is passed;
b) the minimum price which may be paid for a share
shall be 25p;
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The Scottish Investment Trust PLC | Annual Report 2016
Notice of Annual General Meeting (continued)
Notes
Arrangements have been made to enable all investors
to attend, speak and vote at the annual general meeting.
Registered shareholders whose names appear on the
Company’s register of members no later than 48 hours
(excluding non-working days) prior to the
commencement of the AGM or any adjourned meeting
shall be entitled to attend, speak and vote or be
represented at the meeting in respect of the shares
registered in their name at that time. Changes to the
register of members after the relevant deadline shall be
disregarded in determining the rights of any person to
attend and vote at the meeting.
A member entitled to attend, speak and vote at the
meeting is entitled to appoint one or more proxies to
attend, speak and vote on his or her behalf. If a
shareholder wishes to appoint more than one proxy,
each proxy must be appointed to exercise rights
attaching to a different share (or shares) held by the
shareholder. A proxy need not be a member of the
Company but must attend the AGM to represent the
relevant shareholder. Shareholders may not use any
electronic address provided either in this notice or any
related documents, including the proxy form, to
communicate with the Company for any purpose other
than those expressly stated.
A proxy may only be appointed using the procedure set
out in these notes and the notes to the proxy form. Proxy
forms and the original or duly certified copy of the
power of attorney or other authority, if any, under which
it is signed or authenticated, must be lodged with the
Company’s registrar not less than 48 hours (excluding
non-working days) before the meeting or, in the case of
a poll taken more than 48 hours after it was demanded,
not less than 24 hours, excluding non-working days,
before the time appointed for the taking of the poll.
Completion of the proxy form will not prevent a member
from attending the meeting and voting in person.
CREST members who wish to appoint a proxy
or proxies through the CREST electronic
proxy appointment service may do so by
using the procedures described in the CREST Manual
and by logging on to the website
www.euroclear.com/CREST. CREST personal members
or other CREST-sponsored members and those CREST
members who have appointed a voting service provider,
should refer to their CREST sponsor or voting service
provider who will be able to take the appropriate action
on their behalf.
For a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST
message (a ‘CREST Proxy Instruction’) must be properly
authenticated in accordance with Euroclear UK and
Ireland Limited’s specifications, and must contain the
information required for such instruction, as described in
the CREST manual. The message, regardless of whether
it constitutes the appointment of a proxy or is an
amendment to the instruction given to a previously
appointed proxy must, in order to be valid, be
transmitted so as to be received by the Company’s
registrar (Computershare Investor Services PLC) (CREST
ID number 3RA50) no later than 48 hours (excluding
non-working days) before the time of the meeting or any
adjournment. For this purpose, the time of receipt will
be taken to be the time (as determined by the time
stamp applied to the message by the CREST Application
Host) from which the Company’s registrar is able to
retrieve the message by enquiry to CREST in the manner
prescribed by CREST. After this time, any change of
instructions to proxies appointed through CREST should
be communicated to the appointee by other means.
CREST members and, where applicable, their CREST
sponsors or voting service provider(s) should note that
Euroclear UK and Ireland Limited does not make
available special procedures in CREST for any particular
message. Normal system timings and limitations will,
therefore, apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member
concerned to take (or, if the CREST member is a CREST
personal member, or sponsored member, or has
appointed a voting service provider(s), to procure that
his CREST sponsor or voting service provider(s) take(s))
such action as shall be necessary to ensure that a
message is transmitted by means of the CREST system
by any particular time. In this connection, CREST
members and, where applicable, their CREST sponsors
or voting system providers are referred, in particular, to
those sections of the CREST Manual concerning practical
limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy
Instruction in the circumstances set out in Regulation
35(5)(a) of the Uncertificated Securities Regulations
2001.
Any person holding 3% or more of the total voting rights
in the Company who appoints a person other than the
Chairman as his proxy will need to ensure that both he
and such third party comply with their respective
disclosure obligations under the Disclosure and
Transparency Rules. On 3 January 2017, the Company’s
issued share capital comprised 95,954,683 shares (none
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68 | 69
Notice of Annual General Meeting (continued)
The Directors’ letters of appointment are available for
inspection at the registered office of the Company
during normal business hours on any weekday. The
register of Directors’ interests maintained by the
Company together with copies of Directors’
appointment letters will be available at the place of the
Annual General Meeting from 15 minutes prior to the
commencement of the annual general meeting until the
conclusion thereof. No Director has any service contract
with the Company.
STOCKPLAN, STOCKPLAN: A Flying Start, ISA and SIPP
investors who invest in the Scottish Investment Trust are
welcome to attend and may vote by completing the
Form of Direction enclosed with this report. This must be
returned to the Company’s registrar no later than
10.30am on 25 January 2017. Other investors whose
holdings are in nominee names and who wish to attend
and vote are advised to contact their nominee before
25 January 2017.
The final and special dividends, if approved,
will be paid on 17 February 2017 to shareholders
registered at the close of business on 13 January 2017.
This report was sent to the address at present registered
for communications. Any change of address should be
notified to the Company’s registrar or the savings
scheme administrator as appropriate.
of which is held in treasury). Each share carries the right
to one vote at a general meeting of the Company.
Accordingly, as at 3 January 2017, the total number of
voting rights exercisable at the AGM was 95,954,683.
Shareholders may require the Company to publish, on
its website, without payment, a statement, which is also
passed to the auditor, setting out any matter relating to
the audit of the Company’s accounts, including the
auditor’s report and the conduct of the audit, which they
intend to raise at the meeting. The Company will be
required to do so once it has received such requests
from either (i) members representing at least 5% of the
total voting rights of the Company or (ii) at least 100
members who have rights to vote and hold shares in the
Company on which there has been paid up an average
sum per member of at least £100. Such requests must
be made in writing and must state the member’s full
name and address and be sent to the Company’s
registered office at 6 Albyn Place, Edinburgh, EH2 4NL.
The Company may not require the members requesting
any such website publication to pay its expenses in
complying with sections 527 or 528 of the Companies
Act 2006.
Further information regarding the AGM, including the
information required by section 311A of the Companies
Act 2006 is available from www.thescottish.co.uk
Under section 319A of the Companies Act 2006, the
Company must answer any question relating to the
business being dealt with at the meeting put by a
member attending the meeting unless:
a) answering the question would interfere unduly with
the preparation for the meeting or involve the
disclosure of confidential information;
b) the answer has already been given on a website in the
form of an answer to a question; or
c) it is undesirable in the interests of the Company or the
good order of the meeting that the question be
answered.
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6 ALBYN PLACE | EDINBURGH | EH2 4NL
T: 0131 225 7781 | E: info@thescottish.co.uk
www.thescottish.co.uk