THE SCOTTISH INVESTMENT TRUST PLC
130TH ANNUAL REPORT & ACCOUNTS
31 OCTOBER 2017
ii
The Scottish Investment Trust PLC | Annual Report 2017
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.
Our High Conviction,
Global Contrarian Investment
Approach
We are contrarian investors.
We believe markets are driven by cycles of
emotion rather than dispassionate calculation. This
creates profitable investment opportunities.
We take a different view from the crowd. We seek
undervalued, unfashionable companies that are
ripe for improvement. We are prepared to be
patient.
We back our judgement and run a portfolio of our
best ideas, selected on a global basis.
Our portfolio is unlike any benchmark or index and
we fully expect to have differentiated performance.
Our approach will not always be in fashion but we
believe it delivers above-average returns over the
longer term, by which we mean at least five years.
Cover painting:
High Sierra by Madeleine Gardiner
The Scottish Investment Trust PLC | Annual Report 2017
iii
01
Contents
2
Year at a Glance
3 Chairman’s Statement
7 Board of Directors
9 Manager’s Review
13
The Investment Team
14
Strategic Report
19
Financial Summary
20
List of Investments
22 Distribution of Assets
24
Ten Year Record
Directors’ Report
26 Responsibility Statement
27 Corporate Governance Report
34 Report of the Audit Committee
36 Directors’ Remuneration Report
Financial Statements
38
Independent Auditor’s Report
45
Income Statement
46 Balance Sheet
47 Statement of Comprehensive Income and Statement of Changes in Equity
48 Cash Flow Statement
49 Accounting Policies
51 Notes to the Financial Statements
Additional Information
66
Investor Information
69
Financial Calendar and Useful Addresses
70 Glossary
Annual General Meeting
72 Notice of Annual General Meeting
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The Scottish Investment Trust PLC | Annual Report 2017
Year at a Glance
31 October 2017
12.8%
Share price total return†
MSCI UK All Cap 13.5%
MSCI ACWI 13.3%
48.1%
Increase in regular dividend
per share
CPI 3.0%
3x
Dividend reserves
(regular dividend)
31 October 2016: 4x
8.8%
Share price discount to NAV*
(cum-income)
31 October 2016: 10.0%
4th Quartile
AIC Global peer group
(one year total return)
31 October 2016: 1st quartile
34 years
of consecutive increase in
regular dividend
54
Number of
listed holdings
31 October 2016: 70
5%
Gearing
31 October 2016: 5%
* NAV with borrowings at market value.
† 2016: Share price total return +30.0%; NAV total return +29.4%; MSCI UK All Cap +12.3%; MSCI ACWI +29.1%
Please refer to the Glossary for definitions of the metrics on this page.
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11.0%NAV* total return†MSCI UK All Cap 13.5%MSCI ACWI 13.3%11.1%Increase in total dividendper share CPI 3.0%22%Portfolio turnover rateYear to 31 October 2016: 19%0.49%Ongoing charges figure31 October 2016: 0.49% The Scottish Investment Trust PLC | Annual Report 2017
03
Chairman’s Statement
In the last year, we have reinvigorated our approach to
marketing and communications, within our longstanding
marketing budget. It is important that we raise the
Company’s profile, as we believe that our investment
approach should appeal to a broad range of investors.
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 as a proportion
of net assets. We have reduced our costs in recent years,
most notably by restructuring the investment team and
by outsourcing a number of functions.
The ongoing charges figure has remained the same as
last year, despite the reduction in net assets following the
repurchase of Aviva’s shareholding.
High conviction, global contrarians
The high conviction, global contrarian investment
approach adopted by Alasdair McKinnon and his team
clearly differentiates the Company from our global
investment trust peers and from the vast array of passive
investment products through which investors can ‘track’
stockmarket indices.
The approach reflects the investment team’s natural style
as independent thinkers and active, long-term investors
who seldom follow the herd. The Manager believes that
opportunities are created by the natural human tendency
to focus on past performance as a predictor of future
performance. Our approach aims to profit by investing
in carefully selected, but unfashionable, companies
which are undervalued as they are overlooked by other
investors who prefer the comfort of investing with the
crowd.
The portfolio reflects this contrarian philosophy and
is constructed without reference to any benchmark or
stockmarket index. Accordingly, we do not expect the
portfolio return to be similar to a particular index return
in any given year and we expect that the contrarian style
will work differently depending on market conditions.
For example, the Manager expects that the Company
might not fully participate in more speculative market
conditions as the investment team seeks to avoid
investments that are sustained by overly enthusiastic
positive sentiment. Likewise, we might expect better
than average performance when market spirits are more
tempered, as our holdings typically have less positive
sentiment priced in.
During the year, the number of portfolio holdings was
further reduced as the Manager believes that the best
long-term returns will be generated by having the
Performance
I am pleased to report that during the 12 months to 31
October 2017 a combination of capital appreciation
and strong dividend income meant that the Company
delivered another year of robust total returns. Over that
period, the share price total return was 12.8% and the net
asset value per share (NAV) total return (with borrowings
at market value) was 11.0%.
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
13.3% while the UK based MSCI UK All Cap Index total
return was 13.5%. As noted in previous communications,
elsewhere in this statement and in the Manager’s review,
we do not expect the Company’s portfolio return to
match any particular index return over any defined
period due to the contrarian nature of the portfolio’s
composition. Our contrarian approach aims to achieve
above average long-term performance. Given this focus
and the fact that we expect to make more of our gains in
particular market conditions, we believe that a period of
at least five years is required to evaluate the Company’s
returns.
With the Company’s portfolio rebalanced towards the
high conviction, global contrarian approach described
below, the Board now believes that the Company will
generate a higher level of dividend income through an
investment cycle than has previously been the case. The
Board wishes to ensure that shareholders have greater
clarity about their future dividend expectations and
therefore recommends a positive step change increase in
the regular dividend. I explain this later in this statement.
Low cost active management
Over the last three years, the Company has undertaken
a significant process of change with our goal to continue
to provide an attractive, low cost investment vehicle
for our shareholders, who are mainly, and increasingly,
individuals.
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The Scottish Investment Trust PLC | Annual Report 2017
Chairman’s Statement (continued)
conviction to back the team’s best investment ideas. The
portfolio currently contains 54 listed equity holdings,
which compares with 70 at the previous year end. The
number of holdings will vary as the investment team
unearths new opportunities.
Contrarian style boosts income generation
Over the past year earnings per share rose by 6.7% to
23.1p (2016: 21.6p).
In previous reports, I have noted that 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. In recent years, this has been achieved by
appropriate increases to the regular dividend, with any
excess being distributed as a special dividend.
Since the adoption of the contrarian investment
approach, income generated has been considerably
more than that required to pay the regular dividend.
The Board has discussed this extensively with the
Manager and, despite the approach not explicitly
targeting high yielding investments, we expect the
contrarian investment style to generate a higher level
of investment income through an investment cycle
than was previously the case. A higher than average
level of dividend income is often, but not always, a
consequence of an investment in an unfashionable
company.
Step change increase in the regular dividend
Given the above, the Board considers it is appropriate
to make a significant step change increase in the
regular dividend to make it clear to shareholders
and prospective investors that the Company expects
to generate a higher level of income through an
investment cycle. A consequence of such a change will
be that the Company is less likely to pay discretionary
special dividends in future years and will not necessarily
distribute income generated in excess of the
requirements of the regular dividend.
One particular advantage of such a significant step
change increase in the regular dividend is that it will
give shareholders and potential investors a clearer
indication of the income that they can expect to receive.
This is because, when calculating the yield on ordinary
shares, many investors ignore special dividends as
they consider them non-recurring. The proposed
step change increase in the regular dividend will,
going forward, materially increase the stated yield of
the Company’s shares, which the Board believes will
enhance their attraction to investors. Following the
change, the Company will have one of the highest stated
dividend yields among its global investment trust peers.
The Board recommends a final dividend of 14.5p per
share which, if approved, will mean that the total regular
dividend for the year will increase by 48.1% to 20.0p
and will represent the 34th consecutive year of regular
dividend increase.
The Board also recommends a special dividend
of 5.0p per share in order to distribute the income
generated in the year to 31 October 2017 in excess of
the requirements of the proposed regular dividend.
This recommendation reflects past indications made as
to how the Board would likely deal with such balance
of income generated in respect of the financial year.
As mentioned previously, the Company is less likely to
pay discretionary special dividends in future years. If
approved, the total dividend for the year will increase by
11.1%.
It is worth clarifying that the Board has not changed its
future intentions for regular dividend increases. The
Board wishes, from this higher level, to continue the
Company’s long track record of dividend increases and
its aim to provide dividend growth ahead of UK inflation
over the longer term.
Importantly, the Board remains of the view that the
composition of the portfolio should not be dictated by
this change to dividend policy and recognises that there
may be occasions when the portfolio will generate a
lower level of income that does not necessarily cover
the requirements of the regular dividend. This dividend
policy is supported by the Company’s healthy revenue
reserves of 70.6p per share, which would currently cover
more than three years of the proposed new higher
regular dividend. The Board considers that it would be
appropriate to utilise such revenue reserves as required
to support such a policy, drawing from revenue reserves
in some years to supplement earnings for that year and
adding to revenue reserves in other years.
Move to quarterly dividend payments
I announced in the interim report that the Company
intended to adopt a quarterly schedule of dividend
payments starting in the 2017/18 financial year. The
Board recognises that predictable, regular distribution of
income is desirable for the majority of our shareholders.
The proposed final and special dividends, which, if
approved, will be paid to shareholders in February 2018
will mark the last dividends of the current distribution
schedule before we move to quarterly payments. The
Board’s target is to declare three quarterly interim
dividends of 5.0p in the year to 31 October 2018 and
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The Scottish Investment Trust PLC | Annual Report 2017
05
Chairman’s Statement (continued)
recommend a final dividend of at least 5.0p for approval
by Shareholders at the Annual General Meeting in 2019.
It is intended that the first quarterly dividend will be paid
in May 2018. The second and third quarterly dividends
are expected to be paid no later than August and
November 2018. The final dividend will be reviewed in
accordance with the Board’s desire to continue the long
track record of annual dividend increases and the aim of
the Company to provide dividend growth ahead of UK
inflation over the longer term.
Aviva share repurchase
As I noted in the interim report, in March the Company
completed the repurchase and cancellation of the
shareholding of Aviva, representing 11.9% of the
Company’s issued share capital at that time. Aviva
had gained control of this substantial shareholding in
November 2015 through its purchase of Friends Life.
Aviva had not previously been a long-term investor
in the Company, did not have a history of holding
investment trusts and had indicated that it did not plan
to retain this shareholding.
At a specially convened General Meeting, shareholders
approved the repurchase for cancellation of 11.4m
shares from Aviva at a 10.75% discount to the cum-
income NAV (with borrowings at market value). The
Board considered this transaction to be in the best
interests of the Company and shareholders as it
removed a known seller of a large block of shares and
enhanced this NAV for the ongoing shareholders by
1.4%.
Gearing
Gearing ended the year largely unchanged at 5%.
During the year, the Company briefly moved to a net
cash position to facilitate the transaction with Aviva.
Buybacks and updated policy
During the year, 16.9m shares were purchased for
cancellation (2016: 9.2m) at an average discount of
10.5% to the cum-income NAV with borrowings at
market value (9.5% to the ex-income NAV) and a cost of
£135.2m. Excluding the repurchase for cancellation of
the Aviva shares, 5.5m shares were repurchased at an
average discount of 9.7% to the cum-income NAV (8.1%
to the ex-income NAV) with borrowings at market value
and a cost of £44.9m.
As announced in the interim results, the Company’s
buyback policy has been adjusted to aim, in normal
market conditions, to maintain the discount to the
cum-income NAV (with borrowings at market value) at
or below 9%. This is a change from the previous policy
which aimed to control the discount to the ex-income
NAV (with borrowings at market value). The Company was
an early adopter of a buyback policy in 2006 and, since
then, it has become more normal industry practice to use
the cum-income NAV rather than the ex-income NAV.
Successful migration of savings schemes
The savings schemes previously offered by the Company
have now been closed but scheme holders were
offered an attractive alternative arrangement for their
shareholding. I would like to thank those shareholders
affected for their understanding throughout the transition.
The schemes were set up in an era when it was expensive
and complicated, particularly for a smaller shareholder,
to buy shares directly in a single company. However, in
recent years, a number of ways to buy the Company’s
shares in a simple and cost effective manner have been
developed and very few providers offer the infrastructure
to support single company savings schemes.
Accordingly, when the savings schemes’ administrator
informed us that they intended to withdraw from
this business area, we were, despite an extensive
search, unable to identify a viable alternative scheme
administrator.
The majority of scheme holders have now transferred to
AJ Bell Youinvest. We look forward to working with AJ
Bell Youinvest in continuing to communicate with our
shareholders.
Board composition
I would like to welcome Karyn Lamont to the Board. Karyn
was appointed as a non-executive director and Chair
of the Audit Committee in October 2017. Karyn brings
a wealth of specialist audit experience from her long
career in the field and will stand for election at the Annual
General Meeting.
Karyn replaced Ian Hunter who retired after three years of
valuable service to the Company. The Board and I would
like to extend our gratitude to Ian for his considerable
contribution, particularly over the last eighteen months
as the Company reorganised a number of its key
administrative functions.
Hamish Buchan will retire at the AGM. The Company
has benefited greatly from Hamish’s knowledge and
experience over the last fourteen years. On behalf of the
Board, I should like to thank Hamish for his outstanding
contribution. There is no current intention to replace
Hamish as the Board considers that its membership
will continue to ensure that the appropriate balance of
skills, experience, independence and knowledge will be
achieved.
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The Scottish Investment Trust PLC | Annual Report 2017
As ever, there are a number of events which could
potentially destabilise markets if the worst fears come to
pass, or potentially boost markets if they are successfully
resolved. Of the prominent events, tension in the Korean
peninsula remains confined to sabre-rattling while some
modest progress seems to have been made in the Brexit
negotiations.
The Board is pleased with the progress made to
transform the investment approach, to increase the
regular dividend, to reduce the cost base and to improve
the profile of the Company. It now believes that the
Company is differentiated, competitive in costs and
an attractive investment vehicle focused on delivering
above-average returns and dividend growth over the
longer term.
James Will
Chairman
8 December 2017
Chairman’s Statement (continued)
Outlook
I have previously discussed the anti-establishment
mood that seems to have characterised recent voting on
both sides of the Atlantic. The most obvious examples
are the Brexit vote, the election of Donald Trump and
the unexpected result in the UK ‘snap’ election.
President Clinton’s victory in the 1992 US Presidential
election has often been attributed to the slogan “It’s the
economy, stupid” and this catchphrase remains highly
relevant today. Large sections of the population, in a
number of countries, feel disadvantaged in the current
economic environment. Government policies have
favoured asset prices with unintended consequences
for the cost of living.
Markets do not operate in a vacuum and, to date, have
generally interpreted this shift in the political climate as
a positive development. This is justified, to some extent,
as stimulatory measures to boost the ‘real economy’
may well improve the prospects of sections of the
corporate sector. On the other hand, some of the more
radical measures occasionally mooted, no doubt with
the best of intentions, have potential to harm sections
of the corporate sector and will not necessarily achieve
their end purpose.
The US Federal Reserve, which sets the tone for global
monetary policy, has continued to increase interest
rates from a very low base and has started tentatively
to reduce the stockpile of bonds purchased to lower
long-term interest rates. Other central banks have
taken this cue and have started either to reduce, or at
least slow, the rate of increase in stimulatory measures.
This is evidenced by the recent interest rate increase
by the Bank of England and the planned reduction in
European Central Bank bond purchases. Markets have
undoubtedly benefited from low long-term interest
rates and it remains to be seen how dependent these
low rates are on central bank largesse.
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The Scottish Investment Trust PLC | Annual Report 2017
07
Board of Directors
James Will
Appointed to the Board in May
2013 and became Chairman in
January 2016.
Jane Lewis
Appointed to the Board in
December 2015. Chair of the
Remuneration 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.
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 and Invesco Perpetual UK Smaller Companies
Investment Trust.
Shares held: 1,000 Fees: £30,000
Hamish Buchan
Appointed to the Board in
November 2003 and will retire at the
AGM.
Mick Brewis
Appointed to the Board in
December 2015.
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 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
Karyn Lamont
Appointed to the Board in October
2017. Chair of the Audit
Committee.
She is a chartered accountant and former audit partner
at PwC. She has over 25 years of experience and
provided audit and other services to a range of clients
across the UK’s financial services sector including a
number of investment trusts. Her specialist knowledge
includes financial reporting, audit and controls, risk
management, regulatory compliance and governance.
Other investment company directorships: None.
Shares held: 2,500 Fees: £30,000
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The Scottish Investment Trust PLC | Annual Report 2017
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The Scottish Investment Trust PLC | Annual Report 2017
09
Manager’s Review
Our contrarian approach
Shareholders who have read my previous Manager’s
Reviews will be aware that a simple philosophy
underpins our approach to investment. At the core of this
philosophy is a recognition that investors, in aggregate,
are not dispassionate calculating machines but, in fact,
retain human emotions.
While this may not seem a particularly radical
observation, it nonetheless flies in the face of a large
body of scholarly research into finance and economics.
Theory would argue that, while any individual can
behave irrationally this is averaged out within a group so
that a rational decision is reached. In contrast, we do not
think that groups always make rational investment
decisions and, to evidence this, would merely point to
the numerous bubbles which have bedevilled markets
over the years. Over the last 20 years, we have witnessed
bubbles in emerging markets, euro convergence
beneficiaries, dotcom stocks, house builders, property
stocks, oil stocks, miners and emerging markets (again).
The reason for this difference of opinion perhaps arises
because, in many human endeavours, the group does
indeed reach a rational solution. In more arduous times,
our very survival depended on working as a group and
the crucial skill to develop as an individual was
cooperation as part of this group. An isolated individual
was vulnerable and, even if the group was pursuing an
endeavour in a suboptimal manner, it was safer to remain
part of the group.
Society as we know it today, which has built a great
civilisation, continues to depend on this cohesive group
approach. Most individuals subconsciously understand
that they need to recognise the written and unwritten
rules of society and therefore feel uncomfortable outwith
the mainstream.
However, we believe that this crowding instinct does not
usefully translate into financial markets. This is because
the view of the crowd naturally gravitates towards what
has recently been successful and shuns what has recently
been unsuccessful. The challenge posed by financial
markets is that, by the time an investment has performed
sufficiently well (or badly) for it to become an accepted
wisdom, conditions are ripe for the trend to change.
Business and investment cycles have operated
throughout recorded human history. The specifics are
always different but the principles remain the same.
Initially, a conducive environment and opportunity
attracts investment to a ‘good thing’ and initial and
subsequent success attracts further and further
investment, with later investors increasingly willing to
suspend disbelief about the durability of future
prospects. The ‘upcycle’ is hypnotic but it always ends.
Excess investment destroys the scarcity of the ‘good
thing’ while those propagating it become heady on their
Categorisation of Investments
more
to come
underappreciated
prospects
change
is afoot
overlooked progress
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i
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i
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i
s
s
e
P
ugly
ducklings
positive potential
Challenged
Overlooked
Underestimated
OPERATING PERFORMANCE
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The Scottish Investment Trust PLC | Annual Report 2017
Manager’s Review (continued)
success and throw caution to the winds. The downcycle
occurs when the bubble bursts and this process goes
into reverse, eventually creating an opportunity again.
We think that to profit, an investor has to take a different
stance and that the biggest challenge for an investor is to
recognise when the voice of the crowd no longer
suggests a sensible balance between risk and reward.
We seek to avoid speculation, which we define as
investing largely on the basis that somebody else will pay
more for an already fully priced, popular asset.
We are, of course, stockmarket investors and even if we
are very skilful with our stock picking, we are likely to be
affected by wider market movements. However, we think
that one of the most prudent ways to make money in the
stockmarket is to invest when others are reluctant to do
so. We actively seek unpopular areas because this is
where the balance between risk and reward can be most
favourable. We believe in cycles rather than perpetual
trends and wish to purchase at depressed prices to
improve our margin of safety.
Our style is distinct and we would expect other investors
to ebb and flow in their support for the types of stocks
we favour. We aim to achieve above-average long-term
performance, although we do not expect this to be
achieved in a linear manner. We are less likely to
participate in the exhilarating latter stages of a bull
market because we think it is vitally important to survive
the down leg of an investment cycle.
NAV Absolute Performance Attribution
Year to 31 October 2017
Equity portfolio (ungeared)
Gearing
Total equities
Other income and currency
Buybacks
Expenses
Interest charges
Change in market value of borrowings
Change in pension liability
NAV with borrowings at market value total return
Contribution
%
+9.5
+0.8
+10.3
-0.2
+1.7
-0.5
-0.6
+0.0
+0.3
+11.0
Gains and Losses
Year to 31 October 2017
Performance
%
39.6
49.1
51.5
34.4
22.7
29.4
38.8
25.6
20.6
20.4
Gains
£m
15.4
14.7
8.3
7.8
4.6
4.4
4.1
3.6
3.6
3.5
General Electric
Tesco
GlaxoSmithKline
BT
KDDI
Baker Hughes
Macy's
Cemex
Kingfisher*
Tourmaline Oil
Performance
%
Losses
£m
-34.3
-13.5
-12.1
-27.3
-17.2
-26.1
-22.3
-13.6
-13.2
-35.8
-4.6
-3.7
-3.1
-2.9
-2.7
-2.5
-2.2
-2.1
-2.0
-1.7
Treasury Wine Estates
Rentokil Initial
Nintendo
ING
Royal Dutch Shell
BNP Paribas
Citigroup
Microsoft*
SAP
Comcast*
* Sold during the year.
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The Scottish Investment Trust PLC | Annual Report 2017
11
Manager’s Review (continued)
To apply our approach, we divide the stocks in which we
invest into three 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 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.
The second category consists of companies where
change is afoot. These companies have also endured a
long period of poor operating performance but have
recently demonstrated that their prospects have
significantly improved. However, other investors continue
to overlook this change for historical reasons.
In our third category, more to come, we have investments
that are more generally recognised as good businesses
with decent prospects. However, we see an opportunity
as we believe there is scope for further improvement that
is not yet fully recognised.
The Financial Year
Investment returns were again strong during the year. In
contrast with last year, markets showed less favour
towards a margin of safety based investment approach
such as our own.
The election of President Trump represented a blow to
the establishment but investors interpreted this
positively, as it provided the theoretical basis for a new
round of stimulatory policies. The slight conundrum is
that Donald Trump was elected to improve the living
standards of the mass of population, rather than boost
asset prices. There is a risk that investors may discover
that populist policies do not necessarily coincide with
their interests.
Investors in general seem enthusiastic about the
prospects for asset markets and exhibit a low level of
scepticism about some of the most popular investment
themes. Confidence has returned and there is now a lot
of money seeking a return driven by low cash interest
rates and the commensurate low cost of debt.
Central banks, led by the US Federal Reserve, have taken
the first steps to unwind this era of ultra cheap money.
Central banks clearly do not wish to unduly upset
investors but this assumes that they have perfect control
and, as suggested above, the political backdrop is
shifting.
The most obvious sign of overly confident cheap money
is the current boom in cryptocurrencies such as Bitcoin.
We have concerns because, although the core
technology has potential, there appears an unlimited
supply of these currencies and governance appears very
poor. Likewise, it is noteworthy that some of the largest
US stocks have gained the moniker ‘FANG’ (an acronym
of Facebook, Amazon/Apple, Netflix, Google). It is
probably fair to say that by the time an investment theme
gains an acronym it is so well established that a
reasonable opportunity for a risk-adjusted return may no
longer exist. The last ‘acronym investment theme’ you
may recall was the ‘BRICs’ (Brazil, Russia, India, China),
which did very well for the early entrants but less so for
later participants who probably lost money.
The Portfolio
Portfolio turnover was elevated by the need to raise funds
for the buyback transaction with Aviva. Rather than apply
a pro-rata reduction across the portfolio, we took the
opportunity to selectively reduce the number of holdings.
Given our focus on individual stock ideas, I thought it
most useful to discuss the notable gains and losses, in
total return terms, over the year.
Treasury Wine Estates (+£15.4m), the Australian wine
producer continued to refocus on premium brands to
drive higher profit margins. Having delivered outstanding
performance since it was bought as an ‘ugly duckling’ in
2015, the company has now graduated through each of
our three categories. We now see Treasury Wine Estates
as one with ‘more to come’.
Rentokil Initial (+£14.7m) also moved into the ‘more to
come’ category after another year of excellent
performance. Its transformation from an unloved and
underperforming conglomerate to a business focused
chiefly on the attractive market for pest control helped
the group to deliver strong results.
We added to our holding in Nintendo (+£8.3m), as we
were surprised by the muted investor reaction towards
the new ‘Switch’ games console. The Switch is an
excellent product but, later in the year, as other investors
became more enthusiastic and as expectations of future
success increased, we reduced our holding. We have also
moved this company into the ‘more to come’ category.
Our bank holdings performed strongly, as they had
previously been inexpensively valued and stood to
benefit from the prospect of higher interest rates and
stimulus policies designed to help the mainstream
economy. Our biggest gain was from Dutch lender ING
(+£7.8m), while we also saw strong gains from BNP
Paribas (+£4.4m), Citigroup (+£4.1m), Intesa Sanpaolo
(+£2.6m), Bank of Kyoto (+£2.1m), Citizens Financial
(+£2.1m), Sumitomo Mitsui Financial Group (+£1.7m)
and Standard Chartered (+£1.2m).
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The Scottish Investment Trust PLC | Annual Report 2017
Manager’s Review (continued)
The continued rebound in commodities prices helped a
number of our investments, with energy holdings a
notable beneficiary later in the period. Royal Dutch Shell
(+£4.6m), produced the biggest gain, as well as BHP
Billiton (+£2.6m), BASF (+£1.8m), Total (+£1.7m), Suncor
Energy (+£1.5m) and Diamond Offshore Drilling
(+£1.4m). However, we lost money in Hess (-£1.1m) and
Tourmaline Oil (-£1.7m).
German software provider, SAP (+£3.6m) gained credit
for an encouraging transition to a recurring subscription-
based model. Vinci (+£2.7m) did well on an improved
outlook for the European construction market. RSA
Insurance (+£2.3m), was buoyed by the continued
progress of a turnaround strategy. Good results from
Johnson & Johnson’s (+£2.2m) pharmaceuticals business
helped the business to deliver a solid performance, while
Adecco (+£2.0m) gained on the prospect of better
conditions in the temporary staffing market.
We consider Tesco (-£3.7m), one of our ‘ugly ducklings’,
an excellent turnaround opportunity but this was
obscured by the proposed acquisition of wholesaler
Booker. However, we think that other investors will pay
more attention now that this transaction has been
approved. Our holding in Marks & Spencer (+£1.2m)
endured fluctuating fortunes but showed some signs of
progress and has a senior management team committed
to change. We sold our entire holding in Kingfisher
(-£2.0m), prompted by a need to raise funds for the Aviva
transaction but also because we preferred the outlook
for Marks & Spencer.
General Electric (-£4.6m) performed poorly in
anticipation of a strategy review update at which new
leadership reset profit and dividend expectations.
GlaxoSmithKline (-£3.1m), also delivered a negative
return as the new CEO unnerved investors as to where
the dividend lay on her list of priorities.
Our telecom holdings in BT (-£2.9m), KDDI (-£2.7m) and
China Mobile (-£1.1m) did not prove fruitful over the
year. BT depressed investors with a disappointing trading
update but, in general, we think that these telecom
stocks have suffered from a rotation away from the more
defensive areas of the market.
We sold our entire holding in Microsoft (+£3.6m) as we
thought that the turnaround in the company’s fortunes
was adequately reflected in the share price. We also
completely sold Comcast (+£3.5m) as, although the
company is likely to continue to benefit from greater
demand for high-speed internet we judged that the
valuation already reflected this.
Outlook
The late Andy Grove, founder and former CEO of Intel,
distilled his thoughts about management into a book
called “Only the Paranoid Survive”. However, I’ve always
thought this would make a good title for a book about
investing.
The reason for this is that a successful investor has to
continually question their every assumption because
things can, and do, change. The political environment is
never static, new competition can emerge, advances in
technology can drive structural change, management
can remove their focus on the core business and
apparently successful business models can mask hidden
flaws while apparently unsuccessful business models can
evolve positively.
The views of the crowd are a particularly poor predictor
of future investment performance because the crowd
extrapolates recent history and assumes it is a constant.
We could debate whether particular asset classes are
overly elevated but perhaps less in question is that there
have been a number of years of good returns and there
are now signs of complacency in investors’ attitude to
risk. To some extent this is understandable as the world is
awash with cheap money and the curators of this capital
are desperate for a return. Symptoms of this excess are
the appearance of get-rich-quick schemes such as
cryptocurrency investments and the fact that an acronym
(FANG) has been attributed to a narrow group of stocks
which are all viewed as sure-fire winners.
This is not to say that the wider market will fall but more
to observe that the risks currently being taken in some
areas may not be justified by the future returns. The
spread of valuations across the market is wide and,
accordingly, we continue to identify opportunities which
we believe will generate good long-term returns for
shareholders.
We are contrarian investors and, as such, we seek
unfashionable and unpopular investments that we think
can recover. We invest, but with our guard up, as hot
money has less tendency to inhabit the areas we favour.
As I have noted in previous Manager’s Reviews, our
investment approach is designed to anticipate and
benefit from change and we will continue to seek out
opportunities with potential to profit the long-term
investor.
Alasdair McKinnon
Manager
8 December 2017
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The Scottish Investment Trust PLC | Annual Report 2017
13
The Investment Team
Alasdair McKinnon
Manager
Martin Robertson
Deputy Manager
Alasdair joined the Company in 2003 and became
Manager in 2015. He has 18 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 30 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 15 years of
investment experience. She graduated with a Master
of Business Administration from the University of
Edinburgh. She also has broader investor relations
experience and has previously gained a BA in
Commerce and Post Graduate CIM Diploma in
Marketing. Sarah is a member of the CFA Institute.
Mark joined the Company in 2000 and became
an Investment Manager in 2011. He has 7 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.
Igor Malewicz
Investment Analyst
Igor joined the Company in 2017. He graduated MA
with Honours in Economics and Finance and MSc in
Petroleum, Energy Economics and Finance both from
the University of Aberdeen.
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The Scottish Investment Trust PLC | Annual Report 2017
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 Tax 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 20 and 21
and detailed analysis of the spread of investments
by geographic region and industry sector is shown
on page 22. A further analysis of changes in asset
distribution by industry sector over the year, including
the sources of appreciation/depreciation, is shown on
page 23. Attribution of NAV performance is shown on
page 10.
At the year end, the number of listed holdings was 54.
The top ten holdings comprised 35.1% of total assets
(2016: 31.0%).
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 to 6 and the Manager’s Review
on pages 9 to 12.
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 2017
15
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.
Principal risks and uncertainties
The principal risks and uncertainties facing the
business are as follows:
• strategic – the ongoing attractiveness and
sustainability of the Company’s corporate objective;
• investment portfolio and performance – investment
approach, stock selection and overall investment
performance;
• financial – covering market risk, liquidity risk, credit
risk and counterparty risk;
• operational – specific focus on potential failure of the
Company’s or third party service providers’ systems,
including vulnerability to cyber attack; and
• tax, legal and regulatory – compliance with existing
requirements and the ability to identify and respond
to change.
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.
Further information on risks is detailed in the Corporate
Governance Report on pages 30 to 31 and in note 17 to
the accounts on pages 59 to 64 and on internal controls
in the Report of the Audit Committee on page 34.
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.
The Directors recommend a final dividend of 14.5p
and a special dividend of 5.0p per share, payable on
9 February 2018. With the interim dividend of 5.50p
already paid in July 2017, this makes a total of 20.0p
for the year. Based on 79,468,458 shares in issue at
31 October 2017, the final and special dividend will
cost £15.496m. The total dividend for the year will cost
£20.039m.
Share capital
General
The Company had 79,468,458 shares of 25p each in
issue on 31 October 2017 (2016: 96,342,683). Since
the year end, the Company has bought back 845,389
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
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The Scottish Investment Trust PLC | Annual Report 2017
Strategic Report (continued)
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.
Unlisted portfolio
The Company’s unlisted holdings were valued at £1.4m
(0.2% of shareholders’ funds). These comprise our office
property, subsidiary and Apax Europe V-B partnership. No
new partnerships were entered into during the year.
Discount control policy
The Company’s policy aims, in normal market
conditions, to maintain the discount to cum-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 2017, the Company bought
back for cancellation a total of 16,874,225 shares
of 25p each representing 17.5% of shares in issue
at 31 October 2016, at a cost of £135,188,000. This
included 11,402,090 shares bought from Aviva.
At the AGM on 3 February 2017, authority was granted
to repurchase up to 14.99% of shares in issue on that
date. The number of shares authorised for repurchase
was 14,358,873. Share buybacks from the date of
the AGM to the Company’s year end, excluding the
Aviva buyback, amounted to 4,919,135 shares or 5.14
percentage points of the 14.99% authority.
Discount to NAV*
5 Years to 31 October 2017
%
0
3
6
9
12
15
18
%
0
3
6
9
12
15
18
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
* with borrowings at market value
Discount to Cum-Income NAV
Discount to Ex-Income NAV
Holding in listed closed-ended investment
fund
Company holdings include one investment in a listed
closed-ended investment fund of £12.7m: 1.5% of total
assets (2016: £9.8m: 1.0%). 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.
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 15); 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
the Corporate Governance Report on page 30 and in
note 17 on page 60.
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). 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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The Scottish Investment Trust PLC | Annual Report 2017
17
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.
Company’s directors and employees
The table below shows the breakdown of directors
and employees.
Directors
Manager
Employees
31 October 2017 31 October 2016
Male Female
Male Female
4
1
6
2
0
2
5
1
4
1
0
2
James Will
Chairman
8 December 2017
Strategic Report (continued)
The Board has also appointed Maitland Administration
Services (Scotland) Limited (Maitland) to provide
company secretarial, administration and accounting
services to the Company. Maitland purchased the
previous administrators, R&H Fund Sevices Limited, in
May 2017.
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
Key Information Document
With effect from 3 January 2018, in accordance with the
EU Packaged Retail and Insurance-based Investment
Products (PRIIP) Regulation, the Company’s Key
Information Document will also be available on the
website.
The Association of Investment Companies
(AIC)
The Company is a member of the AIC, the trade
organisation for the closed-ended investment company
industry.
Substantial shareholdings
At 8 December 2017, the Company had been notified
of the following holdings in excess of 3% of its shares.
Wells Capital Management Inc.
AXA Investment Managers SA
Shares
4,924,826
3,450,050
%
held
6.3
4.4
Analysis of share register at 31 October 2017
Category of holder
Individuals
Insurance companies
Investment companies
Pension funds
Other
Total
Share
capital
%
Number
17,566
77.8
12
52
22
66
2.4
7.9
8.3
3.6
17,718
100.0
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The Scottish Investment Trust PLC | Annual Report 2017
19
Financial Summary
NAV with borrowings at market value
NAV with borrowings at amortised cost
Ex-income NAV with borrowings at market value
Ex-income NAV with borrowings at amortised cost
Share price
Discount to cum-income NAV with borrowings at market value
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 amortised cost
Pension liability
Shareholders’ funds
Earnings per share
Regular dividend per share (2017: proposed final 14.50p)
Special dividend per share (proposed)
Total dividend per share
UK Consumer Prices Index – annual inflation
2017
2016
Change
%
Total return
%
924.4p
956.8p
904.8p
937.2p
843.0p
8.8%
6.8%
854.9p
881.2p
837.5p
863.9p
769.5p
10.0%
8.1%
£’000
£’000
801,302
893,432
43,897
42,502
845,199
935,934
(83,737)
(83,645)
(1,091)
(3,272)
760,371
849,017
23.06p
20.00p
5.00p
21.62p
13.50p
9.00p
25.00p
22.50p
+8.1
+8.6
+8.0
+8.5
+9.6
+11.0
+11.4
+12.8
+11.1
+9.2
+13.3
+13.5
+6.7
+48.1
+11.1
+3.0
Year’s High & Low
NAV with borrowings at market value
Closing share price
Discount to cum-income NAV with borrowings at market value
Discount to ex-income NAV with borrowings at market value
Year to
31 October 2017
Year to
31 October 2016
High
938.2p
850.0p
12.2%
10.6%
Low
817.1p
739.0p
7.1%
6.6%
High
867.8p
774.0p
15.8%
14.4%
Low
606.3p
544.5p
9.3%
8.1%
NAV* and Share Price against Comparator Indices
Total Return – 5 years to 31 October 2017
220
200
180
160
140
120
100
MSCI ACWI
Share Price
NAV
MSCI UK All Cap
220
200
180
160
140
120
100
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
*with borrowings at market value
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The Scottish Investment Trust PLC | Annual Report 2017
List of Investments
As at 31 October 2017
Listed Equities
Holding
Treasury Wine Estates
Rentokil Initial
ING
Standard Chartered
Marks & Spencer
Newcrest Mining
Royal Dutch Shell
Tesco
Suncor Energy
GlaxoSmithKline
Sumitomo Mitsui Financial
SAP
Gap
BNP Paribas
Johnson & Johnson
BHP Billiton
Citigroup
Pepsico
United Utilities
Exxon Mobil
China Mobile
Pfizer
RSA Insurance
Cemex
Roche
Total
British Land
Vinci
BASF
Macy's
National Oilwell Varco
KDDI
Ambev
Verizon Communications
Chevron
East Japan Railway
Adecco
Sony
Nintendo
General Electric
Bank of Kyoto
Intesa Sanpaolo
Citizens Financial
International Business Machines
BT
Hess
Bank of Ireland
Baker Hughes
Diamond Offshore Drilling
TGS Nopec Geophysical
Country
Australia
UK
Netherlands
UK
UK
Australia
UK
UK
Canada
UK
Japan
Germany
US
France
US
UK
US
US
UK
US
Hong Kong
US
UK
Mexico
Switzerland
France
UK
France
Germany
US
US
Japan
Brazil
US
US
Japan
Switzerland
Japan
Japan
US
Japan
Italy
US
US
UK
US
Ireland
US
US
Norway
Market
value
£’000
Cumu lative
weight
%
48,511
44,389
29,626
27,787
25,508
25,301
24,452
23,945
23,517
23,218
21,867
20,919
20,627
18,891
18,674
18,537
16,574
16,352
15,869
15,691
15,554
15,466
15,223
14,894
14,744
14,187
12,677
12,302
12,191
11,860
11,609
10,918
10,589
10,291
9,991
9,447
9,403
9,298
9,114
8,694
8,592
8,450
7,986
7,657
7,500
6,649
6,056
6,008
5,414
4,916
37.0
59.9
77.3
89.7
98.3
151044 SIT AnRept PRINT.indd 20
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The Scottish Investment Trust PLC | Annual Report 2017
21
List of Investments (continued)
As at 31 October 2017
Listed Equities
Holding
BorgWarner
Tourmaline Oil
Freehold Royalties
Greggs
Total listed equities
Unlisted
Holding
Country
US
Canada
Canada
UK
Country
Heritable property & subsidiary
Apax Europe V-B
Total unlisted
Total equities
The 10 largest holdings have an aggregate market value of £296,254,000.
UK
UK
Total Equities by Category
(Market Value Weighted)
more to come
20%
change is afoot
23%
Market
value
£’000
4,645
3,074
2,990
1,223
799,867
Market
value
£’000
1,400
35
1,435
801,302
Cumu lative
weight
%
99.8
Cumu lative
weight
%
0.2
100.0
ugly ducklings
57%
151044 SIT AnRept PRINT.indd 21
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22
The Scottish Investment Trust PLC | Annual Report 2017
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
2017
%
31 October
2016
%
Net current assets
5.2%
15.2
8.4
10.0
8.6
11.8
8.5
19.2
4.5
5.2
1.9
1.5
5.2
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
100.0
31 October
2017
%
31 October
2016
%
Allocation of Shareholders’ Funds
Total equities
Net current assets
Borrowings at amortised cost
Pension liability
Shareholders’ funds
28.6
17.9
26.5
3.0
8.2
10.6
5.2
32.2
14.9
24.9
3.0
10.0
10.5
4.5
100.0
100.0
Total equities
94.8%
%
105.4
5.8
(11.0)
(0.2)
100.0
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The Scottish Investment Trust PLC | Annual Report 2017
23
Distribution of Assets (continued)
Changes in Asset Distribution
by Sector
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
Real Estate
Total equities
31 October
2016
£m
Net
purchases
(sales)
£m
115.9
66.3
98.6
116.4
97.1
77.7
141.1
75.2
48.1
47.2
9.8
25.2
2.8
(27.6)
(60.0)
(6.4)
(2.0)
(1.5)
(50.9)
5.6
(28.1)
–
893.4
(142.9)
Appreciation
(depreciation)
£m
(12.6)
31 October
2017
£m
128.5
1.8
13.2
16.7
8.7
(3.6)
22.9
13.4
(9.4)
(3.2)
2.9
50.8
70.9
84.2
73.1
99.4
72.1
162.5
37.7
44.3
15.9
12.7
801.3
Changes in Shareholders’ Funds
Total equities
Net current assets
Total assets
Borrowings at amortised cost
Pension liability
Shareholders’ funds
31 October
2016
£m
893.4
42.5
935.9
(83.6)
(3.3)
Net
purchases
(sales)
£m
(142.9)
2.6
(140.3)
(0.1)
–
31 October
2017
£m
Appreciation
(depreciation)
£m
50.8
801.3
43.9
845.2
(83.7)
(1.1)
849.0
(140.4)
760.4
Dividend
income
£m
25.7
Total
return
£m
76.5
151044 SIT AnRept PRINT.indd 23
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24
The Scottish Investment Trust PLC | Annual Report 2017
Ten Year Record
Earnings
per
share
p
Regular
dividend
per share
p1
Total
expenses
£’000
Ongoing
charges
figure
%
Total
assets
£’000
Share-
holders’
funds
£’000
Year to
31 October
Buybacks
£’000
NAV
(debt at
par)
p
Share
price
p
Discount to NAV2
ex-
cum-
income
income
%
%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
11.02
11.00
10.62
9.10
9.50
9.60
4,709
0.63
910,574
802,353
44,234
597.6
529.0
4,440
0.64
633,521
525,679
22,919
405.5
372.0
4,139
0.78
696,971
587,675
13,776
465.6
410.0
10.26
10.05
4,284
0.72
740,140
630,367
36,046
533.7
469.3
12.43
10.40
4,443
0.71
708,972
598,870
19,339
524.2
452.0
12.01
11.25
4,632
0.79
734,801
628,244
11,121
561.6
479.0
13.41
11.60
5,110
0.75
857,545
750,818
10,139
682.7
603.0
11.51
12.00
4,887
0.68
841,189
734,293
11,308
679.5
598.0
15.91
12.50
4,900
0.52
840,005
733,056
15,426
694.3
608.0
21.62
13.50
4,080
0.49
935,934
849,017
59,944
881.2
769.5
2017
23.06 20.00
3,517
0.49 845,199 760,371 135,1883
956.8
843.0
10.9
9.0
10.1
10.0
9.6
9.8
9.8
9.6
10.1
10.0
8.8
9.9
7.5
8.9
9.0
8.2
8.6
8.6
8.7
8.6
8.1
6.8
NAV
(debt at
par) total
return
%
19.5
(30.7)
17.6
17.0
(0.0)
9.2
23.8
1.5
3.9
29.9
11.4
Ten Year Growth Record
Regular
dividend
per share1
Consumer
Prices
Index
Share
price
Share
price
total
return
NAV
(debt at
par) total
return
NAV
(debt at
market
value)
total return
MSCI UK
All Cap
Index
total return
MSCI
ACWI4
total return
100.0
104.4
105.5
110.4
114.3
123.6
127.5
131.9
137.4
148.4
100.0
104.4
106.0
109.4
114.8
117.9
120.4
122.0
121.9
123.0
100.0
100.0
100.0
100.0
-
100.0
70.3
77.5
88.7
85.4
90.5
114.0
113.0
114.9
145.5
72.0
81.5
95.4
93.8
101.6
130.7
132.5
137.4
178.6
69.3
81.5
95.4
95.4
104.2
128.9
130.9
136.1
176.7
70.3
80.4
93.9
91.6
99.3
127.3
128.6
133.8
173.2
100.0
123.6
144.3
145.9
159.9
196.4
197.2
201.6
226.3
72.6
87.2
102.6
102.1
111.0
137.3
148.5
153.8
198.6
Earnings
per share
100.0
99.8
96.4
93.1
112.8
109.0
121.7
104.4
144.4
196.2
209.3
219.8
126.6
159.4
201.5
196.9
192.2
257.0
224.9
7.7%
8.2%
2.4%
4.8%
7.3%
7.0%
6.8%
–
8.4%
13.9%
12.2%
1.4% 12.0% 14.7% 13.6% 14.1%
9.9% 15.2%
Year to
31 October
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Ten year
return
per annum
Five year
return
per annum
1. Excluding special dividends of 2.00p in 2007, 1.80p in 2013, 3.50p in 2015, 9.00p in 2016 and 5.00p in 2017.
2. Discount to NAV with borrowings at market value.
3. Includes Aviva repurchase of £90,255,000.
4. MSCI ACWI is the MSCI All Countries World Index.
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25
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26
The Scottish Investment Trust PLC | Annual Report 2017
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 position,
performance, business model and strategy.
The responsibility statement was approved by the
Board of Directors and signed on its behalf by:
James Will
Chairman
8 December 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 2017
27
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;
•
the Chairman is a member of the Audit Committee;
•
and
• evaluation of the Board has not been externally
facilitated.
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. The Board
currently considers that the use of external consultants
to facilitate the Board evaluation process is unlikely to
be of significant benefit to the process, although the
option of doing so is kept under review.
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 Karyn Lamont. 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 2017;
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;
it has satisfied itself that the Strategic Report is
consistent with the Financial Statements; and
it has reviewed the Company’s procedures for
handling allegations from whistleblowers.
•
•
•
Further details are set out in the Report of the Audit
Committee on pages 34 and 35. 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 36 and 37.
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
bonus scheme. For all staff, bonuses payable
depend, inter alia, on individual performance and the
Company’s short and medium term performance in
both absolute and relative terms. Any other metrics that
are considered appropriate may be taken into account.
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28
The Scottish Investment Trust PLC | Annual Report 2017
Corporate Governance Report (continued)
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.
On 30 September 2017, Ian Hunter resigned from the
Board as a director and Chair of the Audit Committee.
Having reviewed the skills, composition and structure
of the Board, the Company engaged Trust Associates,
a specialist recruitment company with no connection
to the Company, to draw up a list of candidates for
consideration as a replacement Director. A number
of of strong candidates were interviewed by the
Nomination Committee, whereafter a recommendation
was made to the Board to appoint Karyn Lamont as a
director and Chair of the Audit Committee. Karyn was
appointed on 1 October 2017 and shareholders will be
asked to elect her at the AGM.
Hamish Buchan will retire from the Board at the AGM.
There is no current intention to replace him as the
Board considers that its membership will continue
to ensure that the appropriate balance of skills,
experience, independence and knowledge will be
achieved.
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.
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Held Attended
Held Attended
Held Attended
Held Attended
James Will
Hamish Buchan
(retiring at AGM 2 February 2018)
Russell Napier
Ian Hunter (resigned 30 September 2017)
Jane Lewis
Mick Brewis
Karyn Lamont (appointed 1 October 2017)
9
9
9
8
9
9
1
9
9
9
8
9
9
1
4
4
4
4
4
4
–
4
4
4
4
4
4
–
5
5
5
5
5
5
–
5
5
4
5
5
5
–
4
4
4
3
4
4
1
4
4
4
3
4
4
1
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The Scottish Investment Trust PLC | Annual Report 2017
29
Corporate Governance Report (continued)
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.
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.
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
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.
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 and election in the case of Karyn Lamont.
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
and in favour of Karyn Lamont on her appointment.
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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The Scottish Investment Trust PLC | Annual Report 2017
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 16.
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 2017
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 Board considers the following as the principal risks and uncertainties faced by the Company:
Principal risks
Mitigation
Strategic
Risks in relation to the ongoing attractiveness and
sustainability of the Company’s investment objective
placing pressure on the share price discount to net
asset value per share.
Investment portfolio and performance
The holding of securities and investing activities
involve certain inherent risks, principally in relation to
market risk.
A contrarian investment approach is a distinctive style
that may deviate from comparator indices and peer
group performance over discrete periods.
Financial
The Company’s normal business activities are exposed
to market risk (including market price risk, foreign
currency risk and interest rate risk), liquidity risk, credit
risk and counterparty risk.
Operational
Failure of the Company’s or third party service
providers’ systems could result in a misappropriation
of assets or an inability to report to shareholders. There
could be a possible impact on reputation if any such
events were to occur. The Company is also exposed
to the operational risk that one or more of its service
providers may not provide the required level of service.
The threat of cyber attack has become more prevalent
across all sectors.
The Board considers strategy and the business model
on a periodic basis, including the discount levels and
the marketing plans for the business.
Company performance is monitored at each Board
meeting, including investment performance.
The Manager seeks to maintain a diversified portfolio.
The contrarian investment approach is explained in our
marketing content and through meetings with media
and the investor community.
The Company holds a portfolio which is well diversified
across industrial and geographical areas. Most assets
are held in listed securities and are therefore readily
realisable. All debenture stocks and secured bonds are
at fixed rates. Only approved counterparties are used
and within agreed limits.
The Company monitors the performance of its service
providers, whether internal (S.I.T Savings Limited is the
Company’s AIFM) or external (custody and depositary,
company secretarial, administration and accounting
services) through regular meetings and review of
available internal control reports.
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The Scottish Investment Trust PLC | Annual Report 2017
31
Corporate Governance Report (continued)
Principal risks
Mitigation
Tax, legal and regulatory
The Company is required to comply with a range of
legislation and regulation and may be impacted by
changes in the external environment.
The Company employs internal and external resource
to ensure compliance with relevant legislation and
regulation and the Board receives periodic reports on
any issues and potential changes.
These and other risks facing the Company are reviewed regularly by the Audit Committee and the Board. Risk
maps are considered every six months.
Further information on risks is detailed in note 17 to the accounts on page 60.
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 72 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.
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 2017
Gross
method
Commitment
method
200%
200%
20%
5%
20%
11%
Annual General Meeting
The Company’s 130th AGM will be held at The Royal
College of Physicians of Edinburgh, 9 Queen Street,
Edinburgh, EH2 1JQ on Friday 2 February 2018 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 11 are self-explanatory. Resolution 12,
set out in the Notice of the Annual General Meeting on
page 72, seeks to renew the authority to repurchase
shares until 2 May 2019. 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
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The Scottish Investment Trust PLC | Annual Report 2017
Corporate Governance Report (continued)
Company’s discount control policy. The maximum
number of shares which may be purchased pursuant
to this authority shall be 11,785,598 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 12 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
October 2017 were 28.1 tonnes of CO2e (2016: 56.3
tonnes CO2e). This equates to 0.07 tonnes of CO2e
(2016: 0.13 tonnes of CO2e) per square metre.
The Directors’ Report on pages 26 to 37, which
includes the Responsibility Statement, the Corporate
Governance Statement, the Report of the Audit
Committee and the Directors’ Remuneration Report,
and the Going concern statement on page 30, have
been approved by the Board.
The Strategic Report on pages 14 to 17 includes
information relating to: Dividends, Share capital and
Discount control policy (including share buybacks).
By order of the Board.
Maitland Administration Services (Scotland) Limited
Company Secretary
8 December 2017
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33
Overset Text Page . . .
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The Scottish Investment Trust PLC | Annual Report 2017
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
•
•
•
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 Maitland Administration Services
(Scotland) Limited (“Maitland”).
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
course of its review of the system of internal controls,
• 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 49.
The prices of all investments are agreed by Maitland
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 2017
35
Report of the Audit Committee (continued)
Auditor
Assessment
The Company’s auditor, Deloitte LLP, was appointed
in 2002. The Committee reviews annually the
appointment of the auditor, the services provided
and the related fees. The Committee is aware that
EU regulations in relation to statutory audits of EU
listed companies will require the Company to change
its audit firm by 2023. 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 £34,000 (2016: £34,600) and £21,950 (2016:
£19,800), respectively. Non-audit services include: tax
compliance £9,850; assurance services £5,400 and
pension scheme audit £6,700.
All costs for non-audit services are considered to be
appropriate relative to fees paid for audit services. An
engagement letter is issued for all non-audit work and
subsequently reviewed by the Audit Committee to
ensure that the independence and objectivity of the
auditor is not compromised by the provision of non-
audit services.
The Company has complied with the provisions of the
Statutory Audit Services for Larger Companies Market
Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilites) Order
2014.
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.
Karyn Lamont
Chair of the Audit Committee
8 December 2017
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The Scottish Investment Trust PLC | Annual Report 2017
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 2 February 2018.
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 Karyn
Lamont.
Policy on Directors’ fees
On 31 October 2017, 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 and retaining individuals, taking into
account the skills and experience necessary for the
effective stewarding of the Company and the expected
contribution of the Board as a whole in continuing to
achieve the Company’s investment objective. It aims to
be fair and reasonable in relation to similar investment
trusts and other similar sized financial companies.
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 aggregate payable
to Directors in any financial year.
The policy on Directors’ fees was approved at the AGM
held in February 2017 and this policy applied for the
period up to 31 October 2017. This approval is valid
for three years but, because of the proposal to increase
Directors’ fees, detailed below, the Board has decided
that an ordinary resolution on Director remuneration
policy will be put to the AGM in February 2018 and it is
intended that this policy will apply for the period to 31
October 2020.
The Remuneration Committee recommended
an increase in Directors’ fees, with effect from
1 November 2017, to £60,000 per annum for the
Chairman, £37,500 per annum for the Chair of the
Audit Committee and £32,500 per annum for other
Directors. Directors’ fees were last increased in 2013.
Over the period between 2013 and now there has
been a significant increase in the level of work required
of both the Board in general and the Chairman and the
Audit Committee Chair in particular. The Remuneration
Committee believes it is appropriate to review the
level of fees paid to Directors taking account of their
expected workload and to recognise the additional
responsibilities undertaken by the Chairman and the
Chair of the Audit Committee.
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 2018
£
Actual fees for
the year to
31 October 2017
£
Chairman
Audit Committee Chair
Non-executive Director
60,000
37,500
32,500
50,000
30,000
30,000
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 1
Douglas McDougall 2
(retired 29 January 2016)
Hamish Buchan
Russell Napier
Ian Hunter 3 (resigned
30 September 2017)
Jane Lewis (appointed
14 December 2015)
Mick Brewis (appointed
14 December 2015)
Karyn Lamont 4 (appointed
1 October 2017)
Year to
31 October
2017
£
Year to
31 October
2016
£
50,000
45,000
–
30,000
30,000
27,500
12,500
30,000
30,000
30,000
30,000
26,309
30,000
26,309
2,500
nil
200,000
200,118
1 Chairman (with effect from 29 January 2016)
2 Chairman (retired 29 January 2016)
3 Audit Committee Chair (resigned 30 September 2017)
4 Audit Committee Chair (with effect from 1 October
2017)
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The Scottish Investment Trust PLC | Annual Report 2017
37
Directors’ Remuneration Report (continued)
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.
Relative importance of Directors’ fees
Directors’ fees
Expenses
Staff costs
Dividends paid and
proposed
2017
£’000
200
3,517
1,612
2016
£’000
200
4,080
2,277
20,039
21,828
Directors’ interests
The interests of the Directors and their families in the
Company’s capital are as follows:
Directors’ fees as a percentage of:
Expenses
Staff costs
Shares of 25p
31 October 2017
31 October 2016
Dividends paid and proposed
2017
%
5.7
12.4
1.0
%
Change
–
(13.8)
(29.2)
(8.2)
2016
%
4.9
8.8
0.9
James Will
Hamish Buchan
Russell Napier
Jane Lewis
Mick Brewis
Karyn Lamont
8,000*
22,325
14,000
1,000
10,000
2,500
8,000*
22,325
14,000
1,000
10,000
n/a
* 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 and 8 December 2017.
Company performance
The graph below shows the Company’s share price
total return compared to the notional total return of the
MSCI UK All Cap Index (assuming all dividends were
reinvested for both the Company and the Index) over a
9 year period.
Excluding discretionary performance-related bonuses,
expenses decreased by 16.6% and staff costs
decreased by 34.8%.
Further details of the Company’s expenses and staff
costs can be found in notes 2 and 3, respectively, on
page 51 and of dividends paid in note 7 on page 55.
Approval
Voting on the resolution to approve the Directors’
Remuneration Report 2016, at the Company’s AGM on
3 February 2017, was as follows:
%
For
%
Withheld
%
Against
Approve Directors’
Remuneration Report
99.1
0.6
0.3
The Directors’ Remuneration Report was approved
by the Board on 8 December 2017 and signed on its
behalf by:
300
250
200
150
100
300
250
200
150
100
Jane Lewis
Chair of the Remuneration Committee
8 December 2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
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.
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The Scottish Investment Trust PLC | Annual Report 2017
Independent Auditor’s Report
Opinion
In our opinion the Financial Statements:
• give a true and fair view of the state of the Company’s affairs as at 31 October 2017 and of its profit for the year
then ended;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice,
including Financial Reporting Standard 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 and updated in January 2017 “Financial Statements of Investment Trust Companies and Venture
Capital Trusts”; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of The Scottish Investment Trust PLC (the ‘Company’) which comprise:
•
•
•
•
•
•
the Income Statement;
the Balance Sheet;
the Statement of Comprehensive Income;
the Statement of Changes in Equity;
the Cash Flow Statement; and
the related notes 1 to 19.
The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom
Accounting Standards, including Financial Reporting Standard 102 “The Financial Reporting Standard applicable
in the UK and Republic of Ireland”) (United Kingdom Generally Accepted Accounting Practice) and the Statement
of Recommended Practice issued by the Association of Investment Companies in November 2014 and updated in
January 2017 “Financial Statements of Investment Trust Companies and Venture Capital Trusts”.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the
financial statements section of our report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of
the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities,
and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the
non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
Materiality
Scoping
The key audit matters that we identified in the current year were:
• Valuation and existence of listed investments
• Recognition of investment income
Within this report any key audit matters which are the same as the prior year are identified
with .
The materiality that we used in the current year was £7.5m which was determined on the
basis of 1% of net assets at 31 October 2017.
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.
Significant changes
in our approach
There were no significant changes in our approach from the prior year.
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39
Independent Auditor’s Report (continued)
Conclusions relating to principal risks, going concern and viability statement
We have reviewed the Directors’ statement regarding the appropriateness of the
going concern basis of accounting contained within the Accounting Policies section
of the financial statements and the Directors’ statement on the longer-term viability
of the Company contained within the strategic report on page 16.
We confirm that we have
nothing material to add or
draw attention to in respect
of these matters.
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.
We are required to state whether we have anything material to add or draw
attention to in relation to:
•
•
•
•
the disclosures on pages 30 to 31 that describe the principal risks and explain
how they are being managed or mitigated;
the Directors' confirmation on page 30 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 Directors’ statement in the Accounting Policies section of the financial
statements 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 16 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; or
• whether the Directors’ statements relating to going concern and the prospects
of the Company required in accordance with Listing Rule 9.8.6R(3) are materially
inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the
overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
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.
Valuation and existence of listed investments
Key audit matter description
Listed investments of £799.9m (2016: £891.5m) represent the most significant
number on the balance sheet and are the main driver of the Company’s
performance. Listed investments represented 94.6% (2016: 95.3%) of total assets
of the Company at 31 October 2017 (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 the recording
and custody of listed investments, and whether listed investments recorded are
the property of the Company.
The description of the key audit matter above should be read in conjunction with
the significant issues considered by the Audit Committee discussed on page 34.
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The Scottish Investment Trust PLC | Annual Report 2017
Independent Auditor’s Report (continued)
Valuation and existence of listed investments
How the scope of our audit
responded to the key audit
matter
We have performed the following procedures to address this key audit matter:
• critically asssessed the design and implementation of the controls over
valuation and 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.
Key observations
Based on the audit procedures performed, we have not identified any material
errors which required reporting to those charged with governance.
Recognition of investment income
Key audit matter description
How the scope of our audit
responded to the key audit
matter
Dividend income of £25.7m (2016: £28.3m) represented 99.2% (2016: 98.8%
of the total income of the Company (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 investment income is incomplete which could have a
material impact on the Company’s net asset value. We also identified this key
audit matter as a potential fraud risk.
The description of the key audit matter above should be read in conjunction
with the significant issues considered by the Audit Committee discussed on
page 34.
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 the 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 agreed 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.
Key observations
Based on the audit procedures performed, we have not identified any material
errors which required reporting to those charged with governance.
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The Scottish Investment Trust PLC | Annual Report 2017
41
Independent Auditor’s Report (continued)
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.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
£7.5m (2016: £8.5m)
Basis for
determining
materiality
1% (2016: 1%) of net assets.
Rationale for the
benchmark applied
Net assets has been chosen as a benchmark as it is considered the most relevant benchmark
for investors and is the key driver of shareholder value.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of
£150,000 (2016: £169,800), 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.
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 misstatements was
performed directly by the audit engagement team.
As part of our risk assessment, we assessed the control environment in place at the administrator to the extent
relevant to our audit.
We have nothing to report
in respect of these matters.
Other information
The Directors are responsible for the other information. The other information
comprises the information included in the Annual Report including the Strategic
Report and the Directors’ Report, other than the financial statements and our
auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and,
except to the extent otherwise explicitly stated in our report, we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read
the other information and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in
the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we
are required to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based on the
work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact.
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The Scottish Investment Trust PLC | Annual Report 2017
Independent Auditor’s Report (continued)
Other information
In this context, matters that we are specifically required to report to you as
uncorrected material misstatements of the other information include where we
conclude that:
• Fair, balanced and understandable – the statement given by the Directors that
they consider the Annual Report and financial statements taken as a whole is
fair, balanced and understandable and provides the information necessary
for shareholders to assess the Company’s performance, business model and
strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work of the Audit
Committee does not appropriately address matters communicated by us to the
Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the
parts of the Directors’ statement required under the Listing Rules relating to the
Company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a departure from a relevant provision of the
UK Corporate Governance Code.
Responsibilities of Directors
As explained more fully in the Directors’ 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, and for such internal control as
the Directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s
report.
Use of our report
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.
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The Scottish Investment Trust PLC | Annual Report 2017
43
Independent Auditor’s Report (continued)
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
•
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; and
the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal
requirements.
In the light of the knowledge and understanding of the Company and its environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
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
We have nothing to report
in respect of these matters.
audit; or
• adequate accounting records have not been kept by the Company, or returns
adequate for our audit have not been received from branches not visited by us; or
• the Company’s financial statements are not in agreement with the accounting
records and returns.
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
in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 1 August
2002 to audit the financial statements for the year ending 31 October 2002 and subsequent financial periods. The
period of total uninterrupted engagement including previous renewals and reappointments of the firm is 16 years,
covering the years ending 31 October 2002 to 31 October 2017.
Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in
accordance with ISAs (UK).
Andrew Partridge CA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
8 December 2017
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The Scottish Investment Trust PLC | Annual Report 2017
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The Scottish Investment Trust PLC | Annual Report 2017
45
Income Statement
For the year to 31 October 2017
Notes
Revenue
£’000
2017
Capital
£’000
Total
£’000
Revenue
£’000
Net gains on investments held
at fair value through profit and loss
Net (losses)/gains on currencies
Income
Expenses
Net Return before
Finance Costs and Taxation
8
1
2
2016
Capital
£’000
Total
£’000
177,326
177,326
6,024
6,024
–
–
50,816
50,816
(1,185)
(1,185)
–
–
25,898
–
25,898
28,440
–
28,440
(2,075)
(1,442)
(3,517)
(2,407)
(1,673)
(4,080)
23,823
48,189
72,012
26,033
181,677
207,710
Premium on repayment of secured bonds
–
–
–
–
(7,393)
(7,393)
Interest payable
Return on Ordinary
Activities before Tax
5
(2,474)
(2,475)
(4,949)
(2,529)
(2,529)
(5,058)
21,349
45,714
67,063
23,504
171,755
195,259
Tax on ordinary activities
6
(1,252)
–
(1,252)
(1,534)
–
(1,534)
Return attributable to Shareholders
20,097
45,714
65,811
21,970 171,755 193,725
Return per share (basic and fully diluted)
23.06p
52.46p
75.52p
21.62p 169.04p 190.66p
Weighted average number of
shares in issue during the year
87,144,760
101,606,378
Dividends paid and proposed
Interim 2017: 5.50p (2016: 5.25p)
Final 2017: 14.50p (2016: 8.25p)
Special 2017: 5.00p (2016: 9.00p)
Total 2017: 25.00p (2016: 22.50p)
Notes
7
2017
£’000
4,543
11,523
3,973
20,039
2016
£’000
5,276
7,916
8,636
21,828
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 2017
Balance Sheet
As at 31 October 2017
Fixed Assets
Investments
Current Assets
Debtors
Cash
Cash equivalents
2017
2016
Notes
£’000
£’000
£’000
£’000
8
10
8
8
2,113
5,240
37,696
45,049
801,302
893,432
2,260
11,694
29,210
43,164
(662)
43,897
845,199
42,502
935,934
(83,737)
(83,645)
(1,091)
760,371
19,867
39,922
50,994
593,484
56,104
760,371
(3,272)
849,017
24,086
39,922
46,775
682,209
56,025
849,017
Creditors: liabilities falling due within one year
11
(1,152)
Net Current Assets
Total Assets less Current Liabilities
Creditors: liabilities falling due after more than one year
Long-term borrowings at amortised cost
Provisions for liabilities
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 amortised
cost (basic and fully diluted)
956.8p
881.2p
Number of shares in issue at year end
79,468,458
96,342,683
The Financial Statements on pages 45 to 64 were approved by the Board of Directors and were signed on its behalf by:
James Will
Chairman
8 December 2017
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2017
47
Statement of Comprehensive
Income
For the year to 31 October 2017
Notes
Revenue
£’000
2017
Capital
£’000
Total
£’000
Revenue
£’000
2016
Capital
£’000
Total
£’000
Return attributable to shareholders
20,097
45,714
65,811
21,970
171,755
193,725
Actuarial gains/(losses) relating to pension
scheme
4
1,077
749
1,826
(596)
(414)
(1,010)
Total comprehensive income for the year
21,174
46,463
67,637
21,374
171,341
192,715
Total comprehensive income per share
24.30p
53.31p
77.61p
21.04p 168.63p
189.67p
Statement of Changes in Equity
For the year to 31 October 2017
Opening balance
Total comprehensive income
Dividend payments
Aviva share buyback
Regular share buybacks
Closing balance
Notes
7
The accompanying notes are an integral part of this statement.
2017
£’000
849,017
67,637
(21,095)
(90,255)
(44,933)
760,371
2016
£’000
733,056
192,715
(16,810)
–
(59,944)
849,017
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The Scottish Investment Trust PLC | Annual Report 2017
Cash Flow Statement
For the year to 31 October 2017
Operating activities
Net revenue before finance costs and taxation
Expenses charged to capital
Decrease/(increase) in accrued income
Increase/(decrease) in other payables
(Increase)/decrease in other receivables
Adjustment for pension funding
Tax on investment income
2017
£’000
2016
£’000
23,823
(1,442)
226
47
(3)
(355)
(1,327)
26,033
(1,673)
(287)
(403)
81
(288)
(1,919)
Cash flows from operating activities
20,969
21,544
Investing activites
Purchases of investments
Disposals of investments
Cash flows from investing activities
Cash flows before financing activities
Financing activities
Dividends paid
Repayment of secured bond
Aviva share buyback
Regular share buybacks
Interest paid
(131,714)
(162,884)
273,474
218,530
141,760
162,729
55,646
77,190
(21,095)
–
(90,255)
(44,490)
(4,857)
(16,810)
(28,241)
–
(60,158)
(5,030)
Cash flows from financing activities
(160,697)
(110,239)
Net movement in cash and cash equivalents
2,032
(33,049)
Cash and cash equivalents at the beginning of year
40,904
73,953
Cash and cash equivalents at the end of year
42,936
40,904
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2017
49
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:
(a) Basis of accounting
The Financial Statements have been prepared in
accordance with Financial Reporting Standard 102 and
with the AIC ’s Statement of Recommended Practice
“Financial Statements of Investment Trust Companies
and Venture Capital Trusts” (SORP) issued in 2014 and
updated in January 2017. They are also prepared on a
going concern basis (see page 30) under the historical
cost convention, modified to include the revaluation of
investments at fair value. 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.
(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.
(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.
Expenses are allocated equally between revenue and
capital reserve (after allocating 18% to revenue) in line
with the Directors’ expectations of the nature of long-
term future returns from the Company’s investments
(2016: 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 (2016: 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.
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.
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The Scottish Investment Trust PLC | Annual Report 2017
Accounting Policies (continued)
(h) Foreign currency
Transactions denominated in foreign currencies are
recorded in the local currency at actual exchange rates
at the date of the transaction. 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
(i) Share Premium Account – the surplus of net
proceeds received from the issue of new ordinary
shares over the nominal value of such shares is
credited to this account. The nominal value of the
shares issued is recognised in share capital. This
reserve is non-distributable.
(ii) Capital Redemption Reserve – the nominal value of
the Ordinary Shares bought back for cancellation
was added to this reserve. This reserve is non-
distributable.
(iii) 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;
(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 52 to 54.
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 Directors do not believe any accounting
judgements or estimates have been applied to this set
of financial statements that have a significant risk of
causing a material adjustment to the carrying amount
of assets and liabilities within the next financial year.
• 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.
•
Dividends paid may be deducted from accumulated
realised capital profits recognised within this reserve.
(iv) Revenue Reserve – the net profit/loss arising in the
revenue column of the Statement of Comprehensive
Income is added to this reserve. Dividends paid
during the year may be deducted from this reserve.
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The Scottish Investment Trust PLC | Annual Report 2017
51
Notes to the Financial Statements
For the year to 31 October 2017
1. Income
UK dividends including special dividends of £nil (2016: £152,000)
Overseas dividends including special dividends of £429,000 (2016: £240,000)
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
Details of the Directors’ remuneration are noted on pages 36 and 37.
2017
£’000
2016
£’000
8,337
7,511
17,368
20,836
193
93
25,898
28,440
2017
£’000
2016
£’000
1,612
2,277
34
7
10
5
290
392
182
336
180
469
35
8
7
5
306
422
117
247
175
481
3,517
4,080
2017
£’000
2016
£’000
1,127
1,766
144
341
223
288
1,612
2,277
2017
Number
2016
Number
5
4
9
4
6
10
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The Scottish Investment Trust PLC | Annual Report 2017
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 as at 31 July 2016 by Punter
Southall & Co which disclosed a scheme deficit of
£6,942,000. The Company agreed to meet this deficit
over fifteen years and seven months. 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.
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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The Scottish Investment Trust PLC | Annual Report 2017
53
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
2017
%
2016
%
2015
%
2014
%
2013
%
3.2
3.5
3.2
3.2
2.2
26.7
28.6
28.2
30.3
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
2017
£’000
7,913
4,992
288
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
1,180
1,976
2,343
2,243
1,646
14,373
15,822
14,535
13,310
11,770
Present value of scheme liabilities
(15,464)
(19,094)
(17,085)
(15,923)
(14,330)
Net pension liability
(1,091)
(3,272)
(2,550)
(2,613)
(2,560)
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
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
Interest cost
Actuarial (gains)/losses
Benefits paid
Liabilities at end of year
2017
£’000
2016
£’000
15,822
14,535
476
906
455
(3,286)
605
1,272
389
(979)
14,373
15,822
2017
£’000
2016
£’000
19,094
17,085
576
(920)
706
2,282
(3,286)
(979)
15,464
19,094
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The Scottish Investment Trust PLC | Annual Report 2017
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 gains/(losses) in Statement of
Comprehensive Income
2017
£’000
2016
£’000
–
–
–
–
–
–
–
–
476
(576)
(100)
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)
(3,272)
(2,550)
(2,613)
(2,560)
(2,506)
–
–
455
(100)
–
–
389
(101)
(358)
(423)
(407)
–
850
(2)
–
858
7
–
747
(79)
1,826
(1,010)
(427)
(495)
(315)
Deficit at end of year
(1,091)
(3,272)
(2,550)
(2,613)
(2,560)
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55
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 19.41% (2016: 20.00%)
Overseas tax
Current tax
2017
£’000
4,857
92
2016
£’000
4,964
94
4,949
5,058
2017
£’000
2016
£’000
–
1,252
1,252
–
1,534
1,534
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 19.41%* (2016: 20.00%)
Effects of:
Non-taxable capital returns
Finance costs and expenses charged to capital
Non-taxable dividends
Unutilised expenses
Overseas tax
2017
£’000
2016
£’000
67,063
195,259
13,017
39,052
(9,633)
(35,191)
(760)
(840)
(4,989)
(5,669)
2,365
1,252
1,252
2,648
1,534
1,534
* The rate of corporation tax was lowered from 20% to 19% from 1 April 2017 in accordance with the Finance Act 2015.
7. Dividends
Dividends paid on shares recognised in the year:
Previous year final of 8.25p per share (2015: 7.50p)
Previous year special of 9.00p per share (2015: 3.50p)
Interim of 5.50p per share (2016: 5.25p)
2017
£’000
2016
£’000
7,916
8,636
4,543
7,864
3,670
5,276
21,095
16,810
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The Scottish Investment Trust PLC | Annual Report 2017
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 on sales
Decrease in unrealised appreciation
Closing valuation
Closing book cost
Closing unrealised appreciation
Closing valuation
2017
£’000
2016
£’000
799,867
891,504
1,082
1,575
353
353
801,302
893,432
Listed
in UK
£’000
Listed
overseas
£’000
Unlisted
£’000
Total
£’000
267,681
432,264
358
700,303
32,255
159,304
1,570
193,129
299,936
591,568
1,928
893,432
15,991
115,129
–
131,120
(81,864)
(191,685)
(517)
(274,066)
8,748
83,621
517
92,886
(2,481)
(39,096)
(493)
(42,070)
240,330
559,537
1,435
801,302
210,556
439,329
358
650,243
29,774
120,208
1,077
151,059
240,330
559,537
1,435
801,302
Total purchases of equities amounted to £131,120,000 (2016: £134,490,000) and sales were £274,066,000 (2016:
£192,620,000). The purchases at cost and sales proceeds figures include transaction costs of £937,000 (2016:
£1,083,000), comprising commissions, government stamp duty and other fees.
Unlisted investments include heritable property valued at £1,050,000 (2016: £1,050,000). The property was valued on
an open market basis by Allied Surveyors Scotland PLC, chartered surveyors, on 8 October 2015 and the Directors still
consider this to be an appropriate value as at 31 October 2017.
Realised gains on sales
(Decrease)/increase in unrealised appreciation
Net gains on investments
Financial assets – cash and deposits
Sterling
US dollar
Fixed
£’000
20,000
17,696
2017
Floating
£’000
3,034
2,206
Total
£’000
23,034
19,902
Fixed
£’000
10,000
19,210
2017
£’000
2016
£’000
92,886
61,398
(42,070) 115,928
50,816
177,326
2016
Floating
£’000
Total
£’000
11,044
21,044
650
19,860
37,696
5,240
42,936
29,210
11,694
40,904
The maximum maturity period for fixed rate deposits outstanding at the year end was 3 days (2016: 1 day). The
weighted average fixed interest rate at the year end was 0.55% (2016: 0.20%). 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.
The registered office of the subsidiary is 6 Albyn Place, Edinburgh, EH2 4NL.
10. Debtors
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
2017
£’000
809
1,304
2,113
2017
£’000
613
539
1,152
2016
£’000
734
1,526
2,260
2016
£’000
170
492
662
2017
2016
Book value
£’000
Fair value
£’000
Book value
£’000
Fair value
£’000
350
700
426
906
350
700
401
853
1,009
1,538
1,009
1,448
5¾% Secured Bonds due 17 April 2030
81,678
106,652
81,586
106,357
83,737
109,522
83,645
109,059
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 amortised cost. Restating them at market
value of £109.5m (2016: £109.0m) has the effect of decreasing the year end NAV per share from 956.8p to 924.4p
(2016: decreasing from 881.2p to 854.9p).
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 2017
Notes to the Financial Statements (continued)
13. Called-up share capital
Shares of 25p
Number of shares in issue
2017
£19,867,000
79,468,458
2016
£24,086,000
96,342,683
16,874,225 shares were repurchased in the stockmarket during the year to 31 October 2017 (2016: 9,244,743).
845,389 shares were repurchased from 1 November to 7 December 2017.
14. Reserves
At 31 October 2016
Net losses on currencies
Net gains on realisation of investments
Decrease in unrealised appreciation
Share buybacks
Actuarial gains relating to pension scheme
Expenses and interest charged to capital
Return attributable to shareholders
Dividends paid
At 31 October 2017
15. Analysis of changes in net debt during the year
Cash
Short-term deposits
Long-term borrowings at amortised cost
16. Contingencies, guarantees and financial commitments
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
39,922
46,775
682,209
56,025
–
–
–
–
–
–
–
–
–
–
–
(1,185)
92,886
(42,070)
4,219 (135,188)
–
–
–
–
–
–
–
–
749
1,077
(3,917)
–
–
–
20,097
(21,095)
39,922
50,994
593,484
56,104
31 October
2016
£’000
11,694
29,210
(83,645)
Cash flows
£’000
(6,454)
8,486
Non-cash
movements
£’000
31 October
2017
£’000
–
–
5,240
37,696
–
(92)
(83,737)
(42,741)
2,032
(92)
(40,801)
2017
£’000
2016
£’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
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59
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 49 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
801,302
893,432
2017
£’000
2016
£’000
Current assets:
Debtors
Cash and short-term 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 amortised cost
Provisions for liabilities
Pension liability
2,113
2,260
42,936
40,904
45,049
43,164
846,351
936,596
(613)
(539)
(1,152)
(170)
(492)
(662)
(83,737)
(83,645)
(1,091)
(3,272)
(84,828)
(86,917)
(85,980)
(87,579)
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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. 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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61
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 2017 and
31 October 2016 are shown below.
2017
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
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
US $
£’000
165
–
19,902
20,067
Euro
£’000
238
–
–
Other
£’000
1,331
–
–
238
1,331
219,670
122,660
217,244
239,737
122,898
218,575
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
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 2017
Maximum
Minimum
Year to 31 October 2016
Maximum
Minimum
US $
£’000
28,381
10,788
34,297
18,282
Euro
£’000
Other
£’000
–
–
–
–
–
–
–
–
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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 2017. 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.
2017
US $
£’000
Euro
£’000
2016
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
604
417
557
455
23,957
12,266
26,078
11,124
24,561
12,683
26,635
11,579
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 56. Details of interest rates on financial liabilities are included
in note 12 on page 57.
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
2017
More than
one year
£’000
Total
£’000
Within
one year
£’000
2016
More than
one year
£’000
Total
£’000
5,240
37,696
–
–
5,240
11,694
37,696
29,210
–
–
11,694
29,210
–
(83,737)
(83,737)
–
(83,645)
(83,645)
42,936
(83,737)
(40,801)
40,904
(83,645)
(42,741)
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63
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
2017
£’000
(10)
2016
£’000
(5)
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. The maturity
profile of the Company’s borrowings is included in note 12 on page 57.
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 (2016: 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 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 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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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.
Further details on the valuation techniques used for level 3 investments are included in the Company’s accounting
policies on page 49.
Financial assets at fair value through profit and loss
799,867
–
1,435
801,302
2017
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Financial assets at fair value through profit and loss
891,504
–
1,928
893,432
There were no transfers between Level 1 & 2 during the year (2016: same).
2016
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 2016
Purchase costs
Sales proceeds
Total profit: in profit and loss
Balance at 31 October 2017
Fair value
through
profit
and loss
2016
£’000
1,928
–
(517)
24
1,435
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 36 and 37. There were no matters
requiring disclosure under section 412 of the Companies Act 2006.
19. Subsequent events
Since the year end the Board has declared a final dividend of 14.50p per ordinary share and a special dividend of
5.00p per ordinary share in respect of the year ended 31 October 2017.
Details of shares repurchased since the year end are disclosed in note 13 on page 58.
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Investor Information
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.
Dividends
The following dividends have been paid during
2016/17:
Dividends
Amount
Interim 2017
5.50p
Final 2016
8.25p
Special 2016
9.00p
XD date
29 June
2017
Record
date
30 June
2017
Payment
date
28 July
2017
31 December
2016
13 January 17 February
2017
2017
31 December
2016
13 January 17 February
2017
2017
Shareholders who hold share certificates
For shareholders who hold share certificates (investors
whose names are on the Company’s share register),
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 literature section on the
Company’s website, www.thescottish.co.uk
Monitoring your investment
The Company’s share price, together with performance
information can be found on the Company’s website,
www.thescottish.co.uk
A number of financial websites, such as the Financial
Times, 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 December.
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 shareholder information 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 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 shareholder
information 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.
Other publications
If you would like to receive electronic versions of our
newsletter, monthly factsheet and alerts when we
publish information on the company please register
your email address at www.thescottish.co.uk/subscribe
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.
The AGM will be held at the Royal College of Physicians
of Edinburgh, 9 Queen Street, Edinburgh EH2 1JQ, on
Friday 2 February 2018 at 10.30am.
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Investor Information (continued)
Attendance at AGM
All investors are welcome to attend our AGM.
If your shares are held on the main register please
return your proxy card to Computershare, the
Company’s Registrar.
If your shares are held by your stockbroker or other
platform nominee please email info@thescottish.co.uk
to reserve your place.
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.
Voting
If you hold your shares through AJ Bell Youinvest you
can ask them to vote your shares. To do this you will
need to log into your account and send them a secure
message (not email) with your instructions for each
resolution.
If you hold your shares through a stockbroker or other
platform nominee you should contact them to make
arrangements to vote.
You will not be able to vote at the meeting if your
shares are held in a nominee.
Personal taxation
Dividend tax allowance
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 £11,300
per annum of such gains from all sources is exempt
(£11,700 for 2018/19 tax year).
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.
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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Financial Calendar 2018
Dividend and interest payments
Final and special for the financial year
to 31 October 2017
First Interim
Second Interim
Third Interim
Final
9 February 2018
11 May 2018
3 August 2018
2 November 2018
8 February 2019
Secured bonds
Perpetual debenture stock
17 April, 17 October
30 April, 31 October
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:
Announcement of results
NAV
Interim figures
Final figures
Annual Report & Accounts
Annual General Meeting (AGM)
Daily
June
December
December
2 February 2018
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.
Company Secretary
Maitland Administration Services (Scotland) Limited
20 Forth Street
Edinburgh EH1 3LH
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
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
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Glossary
Borrowings at amortised cost 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.
Gearing is the true geared position of the Company:
borrowings less cash and equivalents expressed as a
percentage of shareholders’ funds.
Gross gearing is the geared position if all the
borrowings were invested in equities: borrowings
expressed as a percentage of shareholders’ funds.
NAV is net asset value per share after deducting
borrowings at amortised cost or market value, as stated.
NAV total return is the measure of how the Company’s
NAV has performed over a period of time, taking into
account both capital returns and entitlement to
dividends declared by the Company.
Ongoing charges figure is the measure of the regular,
recurring costs of the Company expressed as a
percentage of the average daily shareholders’ funds
with borrowings at market value.
Portfolio turnover rate is the average of investment
purchases and sales expressed as a percentage of
opening total assets.
Share price total return is the measure of how the
Company’s share price has performed over a period of
time, taking into account both capital returns and
entitlement to dividends declared by the Company.
Total assets means total assets less current liabilities.
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Notice of Annual General Meeting
Notice is hereby given that the one hundred and
thirtieth Annual General Meeting (AGM) of The Scottish
Investment Trust PLC will be held at The Royal College of
Physicians of Edinburgh, 9 Queen Street, Edinburgh
EH2 1JQ, on Friday 2 February 2018 at 10.30am, for the
purpose of transacting the following:
1. To receive and consider the Directors’ Report and
Accounts for the year to 31 October 2017.
2. To approve the Directors' remuneration policy.
3. To approve the Directors’ Remuneration Report for
the year to 31 October 2017.
4. To declare a final dividend of 14.50p per share.
5. To declare a special dividend of 5.00p per share.
6. To elect Karyn Lamont as a Director.
7. To re-elect James Will as a Director.
8. To re-elect Russell Napier as a Director.
9. To re-elect Jane Lewis as a Director.
10. To re-elect Mick Brewis as a Director.
11. To re-appoint Deloitte LLP as auditor and to
authorise the Directors to fix their remuneration.
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 2 May
2019, 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
12 which is a special resolution.
Maitland Administration Services (Scotland) Limited
Company Secretary
8 December 2017
12. To authorise the Company, in accordance with
Map showing location of AGM venue
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 11,785,598
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;
Map image required
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Notice of Annual General Meeting (continued)
Notes
Arrangements have been made to enable all investors
to attend, speak and vote at the AGM)
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 7 December 2017, the
Company’s issued share capital comprised 78,623,069.
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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
AGM from 15 minutes prior to the commencement of
the AGM until the conclusion thereof. No Director has
any service contract with the Company.
Investors whose holdings are in nominee names and
who wish to attend and vote are advised to contact their
nominee before 26 January 2018.
The final and special dividends, if approved,
will be paid on 9 February 2018 to shareholders
registered at the close of business on 12 January 2018.
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.
shares (none of which is held in treasury). Each share
carries the right to one vote at a general meeting of the
Company.
Accordingly, as at 7 December 2017, the total number
of voting rights exercisable at the AGM was 78,623,069.
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