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6 ALBYN PLACE | EDINBURGH | EH2 4NL
T: 0131 225 7781 | E: info@thescottish.co.uk
www.thescottish.co.uk
@ScotInvTrust
The Scottish Investment Trust PLC
THE SCOTTISH INVESTMENT TRUST PLC
131ST ANNUAL REPORT & ACCOUNTS
31 OCTOBER 2018
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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:
Looming Skies over West Coast Waters by Linda Park
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The Scottish Investment Trust PLC | Annual Report 2018
iii
01
Contents
2
Year at a Glance
3 Chairman’s Statement
6 Board of Directors
8 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
47
Income Statement
48 Balance Sheet
49 Statement of Comprehensive Income and Statement of Changes in Equity
50 Cash Flow Statement
51 Accounting Policies
53 Notes to the Financial Statements
Additional Information
68
Investor Information
71
Financial Calendar and Useful Addresses
72 Glossary
Annual General Meeting
74 Notice of Annual General Meeting
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02
The Scottish Investment Trust PLC | Annual Report 2018
Year at a Glance
31 October 2018
1.9%
Share price total return†§
MSCI UK All Cap -1.3%
MSCI ACWI 3.4%
6.0%
Increase in regular dividend
per share
CPI 2.4%
3x
Dividend reserves
(regular dividend)
31 October 2017: 3x
8.3%
Share price discount to
NAV*§ (cum-income)
31 October 2017: 8.8%
2nd Quartile
AIC Global peer group
(one year share price total return)
31 October 2017: 4th quartile
35 years
of consecutive increase in
regular dividend
50
Number of
listed holdings
31 October 2017: 54
0%
Gearing§
31 October 2017: 5%
† 2017: Share price total return +12.8%; NAV total return +11.0%; MSCI UK All Cap +13.5%; MSCI ACWI +13.3%
§ Alternative Performance Measures (please refer to Glossary on page 72).
* NAV with borrowings at market value.
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1.1%NAV* total return†§MSCI UK All Cap -1.3%MSCI ACWI 3.4%0.8%Increase in total dividendper share CPI 2.4%18%Portfolio turnover rateYear to 31 October 2017: 22%0.52%Ongoing charges figure§31 October 2017: 0.49% The Scottish Investment Trust PLC | Annual Report 2018
03
Chairman’s Statement
who prefer the comfort of investing with the crowd. As
an independent investment trust, The Scottish is able to
take this differentiated view in the long-term interest of
shareholders.
This contrarian philosophy is reflected in the portfolio
which is constructed without reference to any benchmark
or stockmarket index. 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 participate fully in more speculative market
conditions as the investment team seeks to avoid
investments that are sustained by overly enthusiastic
sentiment.
Growing our following
The Scottish has made many important changes in recent
years, which I have discussed in previous Chairman’s
Statements. The aim of these changes was to continue
to provide an attractive, low cost investment vehicle
for our shareholders who are mainly individuals. We
aim to grow our loyal following as the merits of our
approach are increasingly recognised. In this regard, it
is pleasing to note that we were voted Best Investment
Trust in the 2018 Shares Awards, received the award for
Best PR Campaign from The Association of Investment
Companies and were awarded Best Investment Trust for
Income at the Online Personal Wealth Awards.
A very visible change has been our reinvigorated
approach to marketing and investor communications.
By communicating our distinct investment style in
an engaging manner, we aim to stimulate additional
demand for the Company’s shares to seek to ensure
that the discount to NAV remains at or below 9% with
a reduced recourse to share buybacks. The team has
produced a wealth of thought-provoking content which
is shared on our website and social media. I would
encourage you to follow us on Twitter and LinkedIn.
News and articles can be found on our website and you
can also subscribe to our monthly email.
Dividend policy
The year to 31 October 2018 was the first year of our
higher and more frequent dividend. A full rationale for
these changes was outlined in last year’s annual report
but, as a reminder, the key elements are summarised
below.
Performance
I am pleased to report that the Company delivered
another year of positive total returns during the twelve
months to 31 October 2018. The share price total return
was +1.9% and the net asset value per share (NAV) total
return (with borrowings at market value) was +1.1%.
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
+3.4% while the UK based MSCI UK All Cap Index total
return was -1.3%.
As noted in previous communications, we do not expect
the Company’s portfolio 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 returns over
the longer term.
Investment approach
The investment management industry continues to
undergo rapid change. A clearer distinction is now made
between passive and active investment management.
Increasingly, investors wish to either track a stockmarket
index or, instead, seek a genuinely active and
differentiated approach.
Passive products, by design, take no account of
valuations or future prospects. We think this creates an
opportunity for an active, long-term investor.
The high conviction, global contrarian investment
approach adopted by Alasdair McKinnon and his team
clearly distinguishes the Company from our global
investment trust peers and from passive investment
products.
The approach aims to profit by investing in carefully
selected, but unfashionable, companies which appear
undervalued as they are overlooked by other investors
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04
The Scottish Investment Trust PLC | Annual Report 2018
Chairman’s Statement (continued)
Last year there was a step change increase in the
regular dividend, lifting it by nearly half, as well as a shift
to quarterly dividend payments. The contrarian style
does not explicitly target higher yielding investments
but is expected to generate a higher than average
level of income through an investment cycle. If there
are occasions when the portfolio does not generate a
sufficient level of income to cover the requirements of
the regular dividend, the Board considers that it would
be appropriate to utilise the Company’s healthy revenue
reserve.
Shareholders now have a clearer indication of the
income that they can expect to receive from their
investment while gaining a more regular income stream.
Following this step change increase, the Company has
one of the highest stated dividend yields among its
global investment trust peers.
Income and dividend
Over the past year, earnings per share rose by 12.8% to
26.0p (2017: 23.1p).
The Board recommends a final dividend of 6.2p which,
if approved, will mean that the total regular dividend for
the year will increase by 6.0% to 21.2p and will be the
35th consecutive year of regular dividend increase.
The Board’s target is to declare three quarterly interim
dividends of 5.3p for the year to 31 October 2019 and
recommend a final dividend of at least 5.3p for approval
by shareholders at the Annual General Meeting in 2020.
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.
As outlined in my statement last year, the Company is
less likely to pay discretionary special dividends in future
years but, as the income generated for the year to 31
October 2018 is substantial, the Board recommends a
special dividend of 4.0p.
Amendments to the Articles of Association
As part of the business to be proposed at the Annual
General Meeting, the Board is seeking shareholder
approval for the adoption of new Articles of Association,
primarily to take account of legislative changes and
developments in market practice. Certain statutory
rules governing investment trusts and companies
were amended in 2012. In particular, the rule which
prohibited an investment trust from distributing any
surplus arising from the realisation of its investments
was repealed. In compliance with the previous statutory
regime, the Company has a provision in its current
Articles which expressly prohibits the distribution of any
surplus arising from the realisation of any investment.
In the light of the amended statutory rules, the Board
no longer considers it appropriate for the Articles to
contain such a prohibition and therefore proposes that
it is removed. The Board believes that the removal of
this restriction will give the Company greater flexibility
in the long-term as it will enable the Company to make
distributions from any surplus arising from the realisation
of any investment. However, the Board has no intention
of exercising this authority at the current time.
The Board is also taking the opportunity to propose some
additional amendments to the Articles to increase the
aggregate limit of Directors' remuneration in each year
from £250,000 to £300,000 and to reflect other recent
regulatory changes including, for example, in relation to
the Company's international tax reporting obligations and
the Alternative Investment Fund Managers Directive. The
increase in the aggregate limit of Directors’ remuneration
provides additional flexibility over the number of
Directors on the Board and ensures that the Company
continues to have the ability to pay Directors’ fees in line
with the market in the future. Further details in relation
to the amendments to the Articles are set out in the
Directors’ Report.
Discount, share buybacks and ongoing
charges
The Company follows a policy that aims, in normal
market conditions, to maintain the discount to NAV (with
borrowings at market value) at or below 9%. The average
discount over the year was 8.6%.
During the year, 2.3m shares were purchased for
cancellation at an average discount of 9.3% and a cost
of £19.5m. In the previous year, 16.9m shares were
purchased, although this included the exit of Aviva from
the share register who were generally selling investment
trust holdings inherited through its purchase of Friends
Life. Excluding the Aviva transaction, 5.5m shares were
purchased in the previous year.
The ongoing charges figure (OCF) for the year under
review of 0.52% (2017: 0.49%) remains favourable
compared with other actively-managed investment
vehicles. All else being equal, a lower share count
from buying back shares increases the OCF. As a
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The Scottish Investment Trust PLC | Annual Report 2018
05
Chairman’s Statement (continued)
self-managed investment trust, the OCF represents the
ongoing costs of running the Company as a proportion
of net assets. We have substantially reduced our costs in
recent years.
The larger than usual number of risks, combined with
the strong performance of equities in recent years, mean
that the Company currently has a cautious view about the
short-term outlook for markets.
The Board is pleased with the progress made to
transform the investment approach, the increase in
the regular dividend and the improvement in the
profile of the Company. It believes that the Company
is differentiated, cost competitive and an attractive
investment vehicle focused on delivering above-average
returns and dividend growth over the longer term.
James Will
Chairman
7 December 2018
Gearing
After a period of strong performance from markets,
when combined with a seemingly greater than
usual number of potentially destabilising events, the
Company reduced gearing to 0% in August. Prior to
this, gearing had been maintained at around 5% for a
number of years. This proved a timely change in light of
the subsequent correction in markets, but we continue
to review opportunities to deploy gearing for the
long-term benefit of shareholders.
Outlook
Politics has changed in recent years. The consensual
politician, driven by focus groups, is a species on the
wane. Meanwhile, politicians with a greater tendency to
shoot from the hip and to challenge established norms
have been in the ascendancy.
The drivers of this trend are complicated but very
important must be the fact that, economically, it has
been a poor decade for large sections of the population
in a number of countries. Politicians now seem to have
adopted a mantra that the benefits of economic growth
must be spread more equally within their own borders
whilst eroding their commitments to balance budgets.
Central banks continue a creep towards the
‘normalisation’ of monetary policy following a long
period of crisis measures. The US Federal Reserve is
most advanced in this strategy, but the difficulty of this
challenge when debt levels are high is best highlighted
by the fact that President Trump has launched hostile
tweets criticising its endeavours.
Brexit negotiations remain what best can be described
as complex. We expect any perceived progress to be
reflected in the value of sterling.
There are a number of other geopolitical issues that
could move markets in either direction, depending on
how they develop. The most obvious concerns are the
apparent slowdown in the Chinese economy, the state
of relations between the US and China, a debt crisis in
Turkey, the actions of the new Italian government and
US relations with Iran.
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06
The Scottish Investment Trust PLC | Annual Report 2018
Board of Directors
James Will
Appointed to the Board in May
2013 and became Chairman
in January 2016. Chair of the
Nomination Committee.
Mick Brewis
Appointed to the Board in
December 2015.
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 directorships: Herald
Investment Trust and Edinburgh Dragon Trust.
Shares held: 8,000* Fees: £60,000
* In addition to the 8,000 shares held, Mr Will is a trustee of
a trust which holds 11,000 shares in the Company. Mr Will
is beneficially or potentially beneficially interested in this
holding.
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: £32,500
Russell Napier
Appointed to the Board in
July 2009.
Karyn Lamont
Appointed to the Board in
October 2017. Chair of the Audit
Committee.
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: £32,500
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: The North
American Income Trust and The Scottish American
Investment Trust (with effect from April 2019).
Shares held: 2,500 Fees: £37,500
Jane Lewis
Appointed to the Board in
December 2015. Chair of the
Remuneration Committee.
She is an investment trust specialist who, until August
2013, was a director of corporate finance and broking
at Winterflood Investment Trusts. Prior to this, she
worked at Henderson Global Investors and Gartmore
Investment Management Limited in investment trust
business development and at WestLB Panmure as an
investment trust broker.
Other investment company directorships: BlackRock
World Mining Trust, BMO Capital and Income
Investment Trust and Invesco Perpetual UK Smaller
Companies Investment Trust.
Shares held: 1,000 Fees: £32,500
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The Scottish Investment Trust PLC | Annual Report 2018
07
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08
The Scottish Investment Trust PLC | Annual Report 2018
Manager’s Review
It’s too early to tell
In a conversation with US President Richard Nixon in
1972, the Chinese Prime Minister, Zhou Enlai, reputedly
quipped that it was ‘too early to tell’ when asked about
the impact of the French Revolution on Western
civilisation. After listening to the translated reply,
President Nixon was delighted by this profound example
of far-sighted wisdom with reference, he presumed, to
the seismic events of 1789. Disappointingly, witnesses to
the conversation have subsequently insisted that the
Prime Minister was, in fact, referring to the Paris student
riots of 1968. However, the misunderstanding was
allowed to stand, possibly because it suited all
concerned.
Whatever actually happened in the above exchange, the
episode does suggest two things that have relevance for
today. Firstly, it is reasonable to expect major events in
human history to cause reverberations for surprisingly
long periods of time and, secondly, reality can be
distorted to suit the interests of those involved.
The financial world has recently marked the tenth
anniversary of the defining moment of the financial crisis
of 2008/9, namely the collapse of Lehman Brothers. The
occasion prompted more than a dollop of self-satisfied
backslapping from the economics profession, politicians
and officials about the inspired actions taken to avert a
meltdown. The various measures employed were
presented as calmly rationalised options that were
deployed with known outcomes. The truth, of course,
was far less edifying. In reality, increasingly panicked
measures were thrown like mud at a wall in the hope that
one of them would stick. Major industries were bailed
out, toxic asset purchases arranged, sales taxes cut,
accounting rules suspended, interest rates slashed to
near zero and ‘quantitative easing’ (a clever way of
printing money) was introduced. Eventually the rot was
stopped.
Of course, something had to be done. But it is worth
bearing in mind that some of the policies employed
would have been considered downright heretical by
mainstream economists even a few weeks before they
were deployed. Further, despite a short history of usage,
zero (or even negative) interest rates and quantitative
easing are today treated as legitimate and controllable
policy options that can be tweaked as required. From
this, we can only surmise that, like the conversation in
1972, reality has been ‘revised’ to suit all concerned.
introduced a raft of unintended consequences. Perhaps
the biggest of these has been the increase in wealth
inequality, particularly across generations. There are now
fewer people with a meaningful stake in the system and,
as they tend to be younger, the full implications of this
will take some time to become clear.
If excessive debt was one of the main contributing
factors to the financial crisis, the measures taken over the
past ten years have not addressed this. In fact, they have
arguably made it worse.
It seems unlikely that an entire generation will commit itself
to a life of indentured servitude to repay debt that they had
no choice but to accumulate. History would instead
suggest that the rules of the system will be changed.
It is, of course, ‘too early to tell’ how the rules will change
but the time-tested solution is currency debasement, in
other words inflation.
Our Approach
In previous Manager’s Reviews, I have outlined the
simple philosophy that underpins our contrarian
approach to investment. At the core of this philosophy is
a recognition that investors are not, in aggregate,
dispassionate calculating machines but, instead, make
decisions based heavily on emotion.
While this may not seem a surprising observation, it
nonetheless conflicts with the conclusions of substantial
bodies of research in finance and economics.
Conventional theory essentially expounds that ‘the
wisdom of the crowd’ ensures that the irrational decisions
of individuals are cancelled out and a rational decision is
reached.
There is, of course, a sound logic to this theoretical point
of view. Our very civilisation has been created by the
ability of the crowd to achieve great things. Living
standards are far higher because we work as a group
allowing division of labour, specialisation and economies
of scale. In short, ‘many hands make light work’.
A second trait that we possess is a desire to imitate the
successful actions of others as a way to quickly acquire
accumulated knowledge. There might be many ways to
skin a cat, but it makes sense to replicate the most
efficient method while bypassing a period of trial and
error.
So, in the ‘real’ world, sticking with the crowd and
copying success are both useful human characteristics.
Despite this desire to paint a picture of certainty and
control, the various crisis rescue measures have already
However, we believe that these useful instincts do not
translate well into the ‘virtual’ world of financial markets.
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The Scottish Investment Trust PLC | Annual Report 2018
09
Manager’s Review (continued)
The trouble is that, unlike a physical task, copying others
in investment markets does not necessarily yield the
same result. There are too many dynamic factors at work
and the starting point is not static.
There is an assumption that, if an investment appears
well positioned the price will go up, whereas if an
investment appears poorly positioned the price will go
down. But this is not necessarily the case. If expectations
are high, favourable trends can continue but the price
can go down if expectations are not met. Likewise,
unfavourable trends can continue but if they are better
than expected, the price can go up.
believe in cycles, and we use this thought process to
maximise the odds in our favour.
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.
Overall, 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. It is
this momentum mentality which creates the business
cycle and the numerous bubbles (and subsequent busts)
which have always bedevilled investment markets.
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.
We do not attempt to follow investment fashions and
instead seek investments in which we can foresee long
term upside. We actively seek unpopular areas because
this is where the balance between risk and reward can be
most favourable. Rather than perpetual trends, we
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.
Categorisation of Investments
more
to come
underappreciated
prospects
change
is afoot
overlooked progress
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positive potential
Challenged
Overlooked
Underestimated
OPERATING PERFORMANCE
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10
The Scottish Investment Trust PLC | Annual Report 2018
Manager’s Review (continued)
The Portfolio
We have a number of holdings in retailers and these
produced some of our largest gains during the year.
Each was different but, generally, we thought pessimism
surrounding long-established retailers had reached a
crescendo, creating ‘ugly duckling’ opportunities. US
department store operator Macy’s (+£12.1m) produced
better than expected results, aided by a revitalised
approach and an improved consumer environment. US
retailer Target (+£4.9m) benefited from the same themes
and the introduction of a more convenient store format.
UK supermarket retailer Tesco (+£4.8m) is making good
progress towards rebuilding the profitability of its
domestic business after well documented problems. The
combination with Booker should deliver superior
purchasing power. US retailer GAP (+£2.2m) has
continued to see strong results from the Old Navy and
Athleta brands, albeit this has been largely
overshadowed by a lack of progress at the namesake
brand. UK retailer Marks & Spencer (-£2.2m) is
undergoing a far-reaching transformation overseen by
turnaround expert Chairman Archie Norman. We
continue to believe that the company, which remains very
profitable, has a great brand which can be revived.
NAV Absolute Performance Attribution
Year to 31 October 2018
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
%
+0.6
+0.5
+1.1
+0.2
+0.2
-0.6
-0.5
+0.7
0.0
+1.1
Top Ten Gains and Losses
Year to 31 October 2018
Performance†
%
Gains
£m
Performance†
%
Losses
£m
99.0
30.4
25.7
19.4
17.3
46.1
21.3
28.7
12.0
56.1
12.1
ING
6.5
4.9
4.8
4.3
4.3
3.9
2.9
2.9
2.7
Standard Chartered
BNP Paribas
General Electric*
Cemex*
Newmont Mining
Newcrest Mining
Adecco
BASF
Marks & Spencer
-30.0
-25.4
-26.5
-51.2
-27.7
-17.1
-10.8
-33.7
-24.1
-8.5
-8.7
-7.0
-4.9
-4.0
-3.8
-3.4
-3.2
-3.1
-2.9
-2.2
Macy's
Pfizer
Target
Tesco
GlaxoSmithKline
Sony
BHP Billiton
Verizon Communications
Royal Dutch Shell
TGS Nopec Geophysical
* Sold during the year.
† Total return on investment, taking into account both capital returns and entitlement to dividends declared, for the
period the investment was held during the year.
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The Scottish Investment Trust PLC | Annual Report 2018
11
Manager’s Review (continued)
US pharmaceutical company Pfizer (+£6.5m) gained as
the company’s lowly valuation was re-evaluated in light of
a promising pipeline of new products. UK company
GlaxoSmithKline (+£4.3m) reassured investors about the
sustainability of the dividend after sensibly opting to buy
Novartis’s share of their consumer healthcare joint
venture rather than pursuing a more ambitious
acquisition. The new CEO is determined to better
commercialise the company’s gargantuan R&D efforts.
Energy stocks were volatile but generally performed well
over the year as resurgent oil prices and efforts to reduce
costs boosted cash flows. Our largest gain in this sector
came from UK listed oil major Royal Dutch Shell
(+£2.9m) which has done an excellent job of
transforming its portfolio and managing costs, driving a
rebound in cash flow. We also saw gains from TGS
Nopec Geophysical (+£2.7m), Hess (+£2.5m) and Total
(+£2.1m).
UK listed miner BHP Billiton (+£3.9m) gained as the
more favourable commodity price environment,
alongside productivity improvements, helped drive solid
cash flow and dividend growth. Our investments in
unloved gold miners, including Newcrest Mining
(–£3.2m) and Newmont Mining (–£3.4m), delivered
negative returns. Gold has been out of favour in recent
years, but we think it looks well placed for a recovery. We
see gold as both a potential safe haven and a potential
beneficiary if the inflationary environment picks up.
European banks have recovered well in recent years,
benefiting from attractive valuations and a more settled
regulatory environment. However, this year was tougher
as uncertain European politics and concerns regarding
emerging markets weighed on sentiment. We made
losses in our holdings in ING (–£8.7m) and BNP Paribas
(–£4.9m). UK listed but emerging market exposed bank
Standard Chartered (–£7.0m) was impacted by the
slowdown in these markets. We increased our holding in
Sumitomo Mitsui Financial Group (+£1.0m) as we
considered it likely to be a beneficiary of any rise in bond
yields in Japan.
Mexican cement producer Cemex (–£3.8m) was
hampered by a combination of headwinds and we sold
our holding due to the changing political climate in
Mexico. We also sold our holding in US industrial
conglomerate General Electric (–£4.0m) as a quick
succession of leadership changes led to a reset of
expectations for earnings and the dividend. BASF
(–£2.9m) declined as trade tensions weighed on stocks
sensitive to economic growth. Swiss based recruiter
Adecco (–£3.1m) performed poorly as the outlook for
European economic growth remained muted.
Japanese electronics and entertainment group Sony
(+£4.3m) gained as an extensive restructuring delivered
growing profits following years of losses. Our investment
in US telecommunications provider Verizon
Communications (+£2.9m) rose as it focused on
upgrading its network to win customers in a mature
market and its lowly valuation was reconsidered
Honourable mentions must also be made for two stocks
we sold completely during the year. Rentokil Initial,
which was an unloved and underperforming
conglomerate and is now a business focused chiefly on
pest control, produced a total return for us of +£24m
over the period we held the shares. Australian based
global wine producer, Treasury Wine Estates, which was
for a long time our largest holding, has been an
exceptional investment, providing a total return of
+£39m over the three years we held the shares. These
companies have transformed and their progress is now
more widely recognised. While their prospects remain
promising, we believe they are now reflected in the share
prices and consider that the balance of risk and reward is
no longer as favourable.
Outlook
In my youth, I read The Ragged Trousered Philanthropists
by Robert Tressell. Looking back, the book presented
socialist ideas in a more digestible form and the title was
meant to illustrate the irony of poverty stricken
‘philanthropists’ performing gruelling work for
inadequate pay on behalf of avaricious masters.
I always considered the title very clever, as it summed up
the thrust of the book, and as I look at today’s
stockmarket, I wonder if the author would have managed
a wry smile at the gigantic malinvestment in the
ecommerce area. Today, investors are acting as
philanthropists as they subsidise unprofitable user
growth by ‘disruptive’ entrants in a variety of areas.
Investments connected with internet shopping, food
delivery, ride hailing services, scooter rentals, music
streaming and video streaming, to name just some, are
strongly favoured by investors despite their continued
propensity to burn cash. That the consumer appreciates
a service sold below the cost of production is not a
surprise. The challenge is converting a subsidised, or free
service, to a sustainably profitable business model. The
lack of scepticism about the difficulty of achieving this is
a symptom of ten years of cheap money.
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The Scottish Investment Trust PLC | Annual Report 2018
Manager’s Review (continued)
In recent reviews, I have noted some concern with regard
to investor attitudes to risk driven by a fear of missing
out. The mania for cryptocurrency get-rich-quick
schemes proved to be brief but was concerning as it
represented a proxy for both the ease and speculative
nature of financial conditions. The investor infatuation
with all things technological was also highlighted as a
concern as the area appeared to be awash with both
cash and excessive optimism. The premium smartphone
boom has peaked, social media is now subject to
increasing regulatory pressure and the ecommerce
business model will have to evolve further. We have
minimal exposure to these areas as we see elevated
expectations and thus scope for disappointment.
It is now increasingly popular for politicians to pledge tax
cuts and increased spending in anticipation of these
actions generating improved future growth (and hence
tax revenues). This may well prove correct but, equally,
once politicians get a taste for this type of strategy, it is
the first step on the road to currency debasement via
inflation. That said, this is likely to be a lengthy journey, as
a large number of stakeholders favour the status quo.
Generally speaking, the spread of valuations across the
market is wide and we continue to identify opportunities
that we believe will generate good long-term returns for
shareholders.
As I have previously noted, as contrarian investors we
actively seek unfashionable and unpopular investments
that we believe can recover. This is where we find the best
balance between risk (expectations are low) and reward
(things can get better). 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.
investor.
Alasdair McKinnon
Manager
7 December 2018
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13
The Investment Team
Alasdair McKinnon
Manager
Sarah Monaco
Investment Manager
Alasdair joined the Company in 2003 and became
Manager in 2015. He has 19 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.
Sarah joined the Company in 2000 and became an
Investment Manager in 2002. She has 16 years of
investment experience. She graduated with a Master
of Business Administration from the University of
Edinburgh and previously gained a BA in Commerce.
Sarah also has broader investor relations experience
and a Post Graduate CIM Diploma in Marketing. Sarah is
a member of the CFA Institute.
Martin Robertson
Deputy Manager
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.
Martin joined the Company in 2004 and became
Deputy Manager in 2015. He has over 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 an Associate of the UK Society of
Investment Professionals.
Mark Dobbie
Investment Manager
Mark joined the Company in 2000 and became
an Investment Manager in 2011. He has 8 years
of investment experience. He also has extensive
knowledge of the operation of investment trusts,
including valuation and performance analytics, from
previous roles with the Company. Mark is a CFA®
charterholder.
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The Scottish Investment Trust PLC | Annual Report 2018
Strategic Report
Business Model and 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 50
(2017: 54). The top ten holdings comprised 33.8% of
total assets (2017: 35.1%).
Details of the extent to which the Company’s objective
has been achieved and how the investment policy
was implemented are provided in the Chairman’s
Statement on pages 3 to 5 and the Manager’s Review
on pages 8 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 2018
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 and
credit 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.
Further information on risks and their mitigation is
detailed in the Corporate Governance Report on page
30 and in note 16 to the accounts on pages 61 to 66
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.
Future Developments
The main trends and factors likely to affect the future
development, performance and position of the
Company’s business are set out in the Chairman’s
Statement on pages 3 to 5 and the Manager’s Review
on pages 8 to 12.
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 Company is
however proposing an amendment to its Articles of
Association to allow distribution of its capital profits, as
detailed on page 31.
The Directors recommend a final dividend of 6.2p and
a special dividend of 4.0p payable on 15 February
2019. With the interim dividends each of 5.00p already
paid in May, August and November 2018, this makes a
total of 25.2p for the year. Based on 77,184,578 shares
in issue at 31 October 2018, the final and special
dividend will cost £7.873m. The total dividend for the
year will cost £19.590m.
Share capital
General
The Company had 77,184,578 shares of 25p each in
issue on 31 October 2018 (2017: 79,468,458). Since
the year end, the Company has bought back 110,000
shares for cancellation. The rights attaching to shares
in the Company are set out in the Company’s Articles
of Association which may be amended by the passing
of a special resolution of shareholders, that is, by the
approval of a majority of not less than 75% of votes cast.
The Financial Conduct Authority rules in relation to
non-mainstream investment products do not apply to
the Company.
Rights to the capital of the Company on winding up
Shareholders would be entitled to the assets of the
Company in the event of a winding up (after the
Company’s other liabilities had been satisfied).
Voting
On a show of hands, every shareholder present in
person or by proxy has one vote and on a poll every
member present in person or by proxy has one vote for
each share.
Transfer
There are no restrictions concerning the holding
or transfer of shares in the Company and there are
no special rights attaching to any of the shares. The
Company is not aware of any agreements between
shareholders which might result in any restriction on
the transfer of shares or their voting rights.
Deadlines for exercising voting rights
If a shareholder wishes to appoint a proxy to attend,
speak and vote at a meeting on their behalf, a valid
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The Scottish Investment Trust PLC | Annual Report 2018
Strategic Report (continued)
appointment is made when the form of proxy (together,
where relevant, with a notarially certified copy of the
power of attorney or other authority under which the
form of proxy is signed) is received by the Company’s
registrar not less than 48 hours before the start of the
meeting or the adjourned meeting at which the proxy
is appointed to vote (or, in the case of a poll taken
more than 48 hours after it is demanded, no later than
24 hours before the time appointed for taking the poll).
In calculating these time periods, no account is taken of
any day or part thereof that is not a working day.
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 2018, the Company bought back
for cancellation a total of 2,283,880 shares of 25p each
representing 2.9% of shares in issue at 31 October
2017, at a cost of £19,603,000.
At the AGM on 2 February 2018, authority was granted
to repurchase up to 14.99% of shares in issue on that
date. The number of shares authorised for repurchase
was 11,784,849. Share buybacks from the date of
the AGM to the Company’s year end amounted to
1,433,491 shares or 1.82 percentage points of the
14.99% authority.
Discount to NAV*
5 Years to 31 October 2018
%
0
3
6
9
12
15
18
%
0
3
6
9
12
15
18
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
* with borrowings at market value
Discount to Cum-Income NAV
Discount to Ex-Income NAV
Source: The Company
Holding in listed closed-ended investment
fund
Company holdings include one investment in a listed
closed-ended investment fund of £12.5m: 1.6% of total
assets (2017: £12.7m: 1.5%). This comprised solely of
an investment in British Land, a UK property fund. The
Company has a policy not to invest more than 15% of
total assets in other listed closed-ended investment funds.
Unlisted portfolio
The Company’s unlisted holdings were valued at £1.5m
(0.2% of shareholders’ funds). These comprise the
Company’s office property and subsidiary.
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 16 on page 62.
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.
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The Scottish Investment Trust PLC | Annual Report 2018
17
Strategic Report (continued)
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.
The Board has appointed Maitland Administration
Services (Scotland) Limited to provide company
secretarial, administration and accounting services to
the Company.
Substantial shareholdings
At 31 October 2018, 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
6.4
4.5
There have been no changes notified to the Company
in respect of the above holdings, and no new holdings
notified, since 31 October 2018.
Analysis of share register at 31 October 2018
Environmental, Social and Governance
Policy
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
environmental, social and governance issues.
As an investment trust, the Company does not
provide goods or services in the normal course of
business, nor does it have customers. Accordingly,
the Directors consider that the Company does not
fall within the scope of the Modern Slavery Act 2015
and that there are no disclosures to be made in
respect of human rights or community issues.
Bribery Act 2010
The Company has a zero tolerance policy towards
bribery and a commitment to carry out business fairly,
honestly and openly.
Criminal Finances Act 2017
The Company has a zero tolerance policy to tax
evasion and the facilitation of tax evasion.
Category of holder
Individuals
Insurance companies
Investment companies
Pension funds
Other
Total
Share
capital
%
80.4
2.0
7.5
6.3
3.8
100.0
James Will
Chairman
7 December 2018
Company’s directors and employees
The table below shows the breakdown of Directors and
employees.
Directors
Senior Manager
Employees
31 October 2018 31 October 2017
Male Female
Male Female
3
1
5
2
0
3
4
1
6
2
0
2
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The Scottish Investment Trust PLC | Annual Report 2018
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The Scottish Investment Trust PLC | Annual Report 2018
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 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 (2018: proposed final 6.20p)
Special dividend per share
Total dividend per share
UK Consumer Prices Index – annual inflation
2018
2017
Change
%
Total return
%
900.1p
926.8p
888.9p
915.5p
825.0p
8.3%
924.4p
956.8p
904.8p
937.2p
843.0p
8.8%
£’000
£’000
717,547
801,302
82,931
43,897
800,478
845,199
(83,829)
(83,737)
(1,337)
(1,091)
715,312
760,371
26.02p
21.20p
4.00p
23.06p
20.00p
5.00p
25.20p
25.00p
(2.6)
(3.1)
(1.8)
(2.3)
(2.1)
+1.4
(5.1)
+1.1§
+0.4§
+1.9
+3.4
(1.3)
+12.8
+6.0
+0.8
+2.4
§ Alternative Performance Measures (please refer to Glossary on page 72).
Year’s High & Low
NAV with borrowings at market value
Closing share price
Discount to NAV with borrowings at market value
Year to
31 October 2018
Year to
31 October 2017
High
991.8p
902.0p
10.7%
Low
844.9p
771.0p
6.2%
High
938.2p
850.0p
12.2%
Low
817.1p
739.0p
7.1%
NAV* and Share Price against Comparator Indices
Total Return – 5 years to 31 October 2018
200
180
160
140
120
100
80
MSCI ACWI
Share Price
NAV
MSCI UK All Cap
200
180
160
140
120
100
80
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
*with borrowings at market value
Chart data source: Bloomberg and the Company
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The Scottish Investment Trust PLC | Annual Report 2018
List of Investments
As at 31 October 2018
Listed Equities
Holding
Tesco
Sumitomo Mitsui Financial
GlaxoSmithKline
Pfizer
Target
Royal Dutch Shell
Newcrest Mining
Macy's
Gap
Suncor Energy
Marks & Spencer
BHP Billiton
Newmont Mining
Standard Chartered
ING
Exxon Mobil
PepsiCo
Roche
Total
Citigroup
China Mobile
Mitsubishi UFJ Financial
Chevron
United Utilities
Sony
BNP
National Oilwell Varco
Verizon Communications
British Land
Vinci
Royal Bank of Scotland
Hess
BASF
East Japan Railway
Citizens Financial
Carrefour
Bank of Kyoto
Nintendo
TGS Nopec Geophysical
BT
Country
UK
Japan
UK
US
US
UK
Australia
US
US
Canada
UK
UK
US
UK
Netherlands
US
US
Switzerland
France
US
Hong Kong
Japan
US
UK
Japan
France
US
US
UK
France
UK
US
Germany
Japan
US
France
Japan
Japan
Norway
UK
Market
value
£’000
32,230
29,130
29,087
27,325
26,686
25,891
25,718
25,146
25,084
24,212
21,935
21,248
20,497
20,348
19,795
19,704
17,327
16,143
15,565
15,344
15,009
14,115
13,979
13,838
13,525
13,143
12,987
12,752
12,497
11,668
9,452
8,979
8,969
8,899
8,156
8,144
7,730
7,645
7,497
6,926
Cumu lative
weight
%
37.7
63.9
82.5
94.8
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The Scottish Investment Trust PLC | Annual Report 2018
21
List of Investments (continued)
As at 31 October 2018
Listed Equities
Holding
Adecco
Intesa Sanpaolo
Bank of Ireland
Baker Hughes
KDDI
Diamond Offshore Drilling
BorgWarner
Tourmaline Oil
Freehold Royalties
Greggs
Total listed equities
Unlisted
Country
Switzerland
Italy
Ireland
US
Japan
US
US
Canada
Canada
UK
Holding
Heritable property and subsidiary
Country
UK
Total unlisted
Total equities
The 10 largest holdings have an aggregate market value of £270,509,000.
Listed Equities by Category
(Market Value Weighted)
Cumu lative
weight
%
Market
value
£’000
6,044
5,784
5,654
5,302
5,013
4,769
3,608
2,563
1,871
1,114
716,047
99.8
Market
value
£’000
1,500
1,500
717,547
Cumu lative
weight
%
0.2
100.0
more to come
6%
change is afoot
20%
ugly ducklings
74%
164275 SIT AnRep18 PRINT.indd 21
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The Scottish Investment Trust PLC | Annual Report 2018
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
Communication 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
2018
%
31 October
2017
%
Net current assets
10.4%
17.9
9.5
3.3
14.6
7.2
9.1
18.8
–
5.9
1.7
1.6
10.4
100.0
15.2
8.4
10.0
8.6
11.8
8.5
19.2
4.5
5.2
1.9
1.5
5.2
100.0
31 October
2018
%
31 October
2017
%
Allocation of Shareholders’ Funds
Total equities
Net current assets
Borrowings at amortised cost
Pension liability
Shareholders’ funds
24.5
14.8
34.5
–
10.7
5.1
10.4
28.6
17.9
26.5
3.0
8.2
10.6
5.2
100.0
100.0
Total equities
89.6%
%
100.3
11.6
-11.7
-0.2
100.0
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The Scottish Investment Trust PLC | Annual Report 2018
23
Distribution of Assets (continued)
Changes in Asset Distribution
by Sector
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Total equities
31 October
2017
£m
128.5
70.9
84.2
73.1
99.4
72.1
162.5
37.7
44.3
15.9
12.7
Net
purchases
(sales)
£m
Appreciation
(depreciation)
£m
31 October
2018
£m
8.1
16.9
(47.8)
27.0
(49.0)
(8.9)
18.1
(36.7)
3.1
–
–
6.7
(11.4)
(9.8)
17.0
7.3
9.4
(30.4)
(1.0)
(0.1)
(2.1)
(0.2)
143.3
76.4
26.6
117.1
57.7
72.6
150.2
–
47.3
13.8
12.5
801.3
(69.2)
(14.6)
717.5
Changes in Shareholders’ Funds
Total equities
Net current assets
Total assets
Borrowings at amortised cost
Pension liability
Shareholders’ funds
31 October
2017
£m
801.3
43.9
845.2
(83.7)
(1.1)
Net
purchases
(sales)
£m
(69.2)
39.0
(30.2)
(0.1)
–
31 October
2018
£m
Appreciation
(depreciation)
£m
(14.6)
717.5
82.9
800.4
(83.8)
(1.3)
760.4
(30.3)
715.3
Dividend
income
£m
23.7
Total
return
£m
9.1
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The Scottish Investment Trust PLC | Annual Report 2018
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
amortised
cost)
p
Share
price
p
Discount to NAV2
ex-
income
%
cum-
income
%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
11.00
10.62
9.50
9.60
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
23.06
20.00
3,517
0.49
845,199
760,371 135,1883
956.8
843.0
2018
26.02 21.20
3,254
0.52 800,478 715,312
19,602
926.8
825.0
9.0
10.1
10.0
9.6
9.8
9.8
9.6
10.1
10.0
8.8
8.3
7.5
8.9
9.0
8.2
8.6
8.6
8.7
8.6
8.1
6.8
7.2
NAV
(debt at
amortised
cost) total
return
%
(30.7)
17.6
17.0
(0.0)
9.2
23.8
1.5
3.9
29.9
11.4
0.4
Ten Year Growth Record
Earnings
per share
100.0
96.5
93.3
113.0
109.2
121.9
104.6
144.6
196.5
209.6
Regular
dividend
per share1
Consumer
Prices
Index
100.0
101.1
105.8
109.5
118.4
122.1
126.3
131.6
142.1
210.5
100.0
101.5
104.8
110.0
112.9
115.4
116.9
116.8
117.8
121.3
Share
price
100.0
110.2
126.2
121.5
128.8
162.1
160.8
163.4
206.9
226.6
Share
price
total
return
NAV
(debt at
amortised
cost) total
return
NAV
(debt at
market
value)
total return
MSCI UK
All Cap
Index
total return
MSCI
ACWI4
total return
100.0
113.1
132.5
130.2
141.1
181.4
184.0
190.8
248.0
279.7
100.0
117.6
137.6
137.5
150.2
186.0
188.8
196.3
254.9
283.9
100.0
114.3
133.4
130.3
141.2
181.0
182.8
190.2
246.2
273.3
100.0
123.6
144.3
145.9
159.9
196.4
197.2
201.6
226.3
257.0
100.0
120.2
141.4
140.7
153.0
189.2
204.7
212.0
273.7
310.0
236.5
223.2
124.2
221.8
285.0
285.0
276.2
253.5
320.5
9.0%
8.4%
2.2%
8.3% 11.0% 11.0% 10.7%
9.7%
12.4%
14.2%
12.8%
1.5%
6.5%
9.5%
8.9%
8.8%
5.2% 11.1%
Year to
31 October
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ten year
return
per annum
Five year
return
per annum
1. Excluding special dividends of 1.80p in 2013, 3.50p in 2015, 9.00p in 2016, 5.00p in 2017 and 4.00p in 2018.
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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The Scottish Investment Trust PLC | Annual Report 2018
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
7 December 2018
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 2018
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.
relationships with the Company or its employees which
might compromise this independence. The Board has
noted Russell Napier’s tenure of over nine years in this
context.
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
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
Board has not adopted early the revised UK Corporate
Governance Code published in July 2018, which
first applies to the Company for its financial year
commencing 1 November 2019.
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. Although
the evaluation of the Board has not been externally
facilitated during the current year, the Board intends
to engage an external consultant to undertake this
process during the year to 31 October 2019.
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
•
•
•
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 2018;
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.
Remuneration Committee
The Board has appointed a Remuneration Committee
to recommend pay and conditions for the Board and
employees. 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
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The Scottish Investment Trust PLC | Annual Report 2018
Corporate Governance Report (continued)
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.
accounting and financial controls, dividends and
announcements, capital structure (including share
buybacks), gearing and major contracts.
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.
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 out 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.
Hamish Buchan retired from the Board at the AGM held
on 2 February 2018. 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,
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.
On an annual basis the Board normally meet five times,
the Audit Committee three times, the Remuneration
Committee twice and the Nomination Committee at
least once. Attendance at the scheduled and additional
meetings throughout the year is shown in the table
below.
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.
James Will
Russell Napier
Jane Lewis
Mick Brewis
Karyn Lamont
Hamish Buchan (retired 2 February 2018)
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Held Attended
Held Attended
Held Attended
Held Attended
5
5
5
5
5
1
5
5
5
5
5
1
4
4
4
4
4
1
4
4
4
4
4
1
2
2
2
2
2
1
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
n/a
n/a
In addition to the above meetings, the Board met on three occasions via teleconference. One such meeting was to discuss matters relating to
the Company’s defined benefit pension scheme. As trustees of the scheme, Russell Napier and Karyn Lamont declared a conflict of interest
and absented themselves from the meeting. The other two meetings were ad-hoc, for one of which Jane Lewis tendered apologies. All other
Directors attended all three meetings, except Hamish Buchan who had previously retired from the Board.
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29
Corporate Governance Report (continued)
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.
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 Director (other than Karyn Lamont)
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.
The Board currently consists of three male and two
female Directors.
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.
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.
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The Scottish Investment Trust PLC | Annual Report 2018
Corporate Governance Report (continued)
This process has been in place throughout the year ended 31 October 2018 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 and
credit 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.
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 Board considers strategy and the business model
on a regular basis, including the discount level 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
shareholder communications 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.
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, including Brexit, are reviewed regularly by the Audit Committee and
the Board. As a global investment trust with a diversified portfolio of international equities, it is unlikely that the
Company’s business model will be adversely impacted as a direct result of Brexit.
Further information on risks is detailed in note 16 to the accounts on page 62.
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The Scottish Investment Trust PLC | Annual Report 2018
31
Corporate Governance Report (continued)
Relations with shareholders
The Company recognises the value of good
communication with its shareholders. 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. Annual and Interim Reports and
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 74 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.
Corporate governance and stewardship
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. In voting on its shareholdings,
the Company will normally support management.
The Company votes against resolutions which are
considered to damage shareholders’ rights or
economic interests.
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 2018
Gross
method
Commitment
method
200%
200%
20%
0%
20%
12%
Annual General Meeting
The Company’s 131st AGM will be held at The Royal
College of Physicians of Edinburgh, 9 Queen Street,
Edinburgh, EH2 1JQ on Thursday 7 February 2019 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 10 are self-explanatory.
Resolution 11 - Renewal of authority to purchase shares
This resolution, set out in the Notice of AGM on page 74,
seeks to renew the authority to purchase shares until 7
May 2020. The principal reasons for such purchases are
to enhance the NAV of the shares by purchasing shares
for cancellation at prices which, after allowing for costs,
improve the NAV for remaining shareholders and to
allow implementation of the Company’s discount control
policy. The maximum number of shares which may be
purchased pursuant to this authority shall be 11,553,479
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 market value of a share for 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 - Adoption of new Articles of Association
This resolution, set out in the Notice of AGM on page 74,
seeks to adopt new Articles of Association. The principal
changes proposed to be introduced in the new Articles
of Association and their effect, are set out below.
Distributions out of capital
The principal change that the Board is proposing to
make to the Company's current Articles of Association
(the "Existing Articles") relates to the Company's ability
to distribute its capital profits. Certain statutory rules
governing investment trusts and companies were
amended in 2012. In particular, the rule which prohibited
an investment trust from distributing any surplus arising
from the realisation of its investments was repealed.
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The Scottish Investment Trust PLC | Annual Report 2018
Corporate Governance Report (continued)
As noted in the Chairman's statement, in the light of
the amended rules, the Board no longer considers it
appropriate for the Existing Articles to contain such a
prohibition. Accordingly, the Board is seeking authority
at the AGM to amend the Existing Articles to allow the
Company to distribute capital profits. The proposed
Articles therefore reflect this change and remove all
references to the prohibition of the distribution of capital
profits by way of dividend.
The Board believes that the removal of this restriction
will give the Company greater flexibility in the long term
as it will enable the Company to make distributions from
any surplus arising from the realisation of any investment.
However, the Board has no intention of exercising this
authority at the current time.
Directors aggregate remuneration limit
The Board is taking the opportunity to increase the
aggregate limit of remuneration that the Directors
may receive per annum from, in aggregate, £250,000
to £300,000. The increase in the aggregate limit of
Directors’ remuneration provides additional flexibility
over the number of Directors on the Board and ensures
that the Company continues to have the ability to pay
Directors’ fees in line with the market in the future. This
reflects the remuneration policy of the Board as set out
on page 36.
International tax regimes requiring the exchange of
information and the common reporting standards
The Board is also proposing to include provisions in the
new Articles to provide the Company with the ability
to require shareholders to co-operate in respect of the
exchange of information to comply with the Company's
international tax reporting obligations.
The Hiring Incentives to Restore Employment Act 2010
of the United States of America commonly known
as the Foreign Account Tax Compliance Act and all
associated regulations and official guidance ("FATCA")
imposes a system of information reporting on certain
entities including foreign financial institutions such
as the Company following the enactment of the UK
International Tax Compliance (United States of America)
Regulations 2013 on 1 September 2013. These
regulations have now been replaced by the International
Tax Compliance Regulations 2015 (the "Regulations").
The Articles provide the Company with the ability to
require shareholders to co-operate with it in ensuring
that the Company is able to comply with its obligations
under the Regulations in order to avoid being deemed
to be a "Nonparticipating Financial Institution" for the
purposes of FATCA and consequently having to pay
withholding tax to the IRS. The Articles also ensure that
the Company will not be liable for any monies that
become subject to a deduction or withholding relating to
FATCA, as such liability would be to the detriment of the
Company's shareholders as a whole.
The Regulations also include the automatic exchange of
information regimes being brought in under the auspices
of the Organisation for Economic Co-operation and
Development and the European Union. The Existing
Articles have therefore also been amended in order
to provide the Company with the ability to require
shareholders to co-operate in respect of these broader
common reporting obligations.
The Alternative Investment Fund Managers Directive
("AIFMD")
The Board is also proposing to include provisions in the
new Articles in relation to the AIFMD. For example the
Articles will now specifically provide that the NAV of the
Company shall be calculated at least annually and the
valuation of the Company's assets shall be performed in
accordance with prevailing accounting standards. However,
this amendment will have no bearing on current practice
and simply articulates the minimum requirements of the
AIFMD Regulations.
Minor amendments
The Board is also taking the opportunity to propose some
additional minor amendments to the Existing Articles
including the removal of the Director’s shareholding
qualification and the Chairman's casting vote provision
as well as the more out-of-date provisions relating to
the conversion and transfer of stock and the rights of
stockholders.
Resolutions 11 and 12 each 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 2018
were 27.7 tonnes of CO2e (2017: 28.1 tonnes CO2e). This
equates to 0.08 tonnes of CO2e (2017: 0.07 tonnes of
CO2e) per square metre.
The Directors’ Report on pages 26 to 37, which includes
the Responsibility Statement, the Corporate Governance
Report, the Report of the Audit Committee and the
Directors’ Remuneration Report, and the Going concern
statement on page 29, 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).
There have been no significant post-balance sheet events.
By order of the Board.
Maitland Administration Services (Scotland) Limited
Company Secretary
7 December 2018
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33
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The Scottish Investment Trust PLC | Annual Report 2018
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 level of non-audit work, if any, carried out by the
auditor.
•
•
•
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,
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.
The Committee and management also monitor
the controls and risk management of Maitland and
Northern Trust. Maitland provide company secretarial,
administration and accounting services to the
Company and Northern Trust provide custody and
depositary services.
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 51.
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 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.
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 Board is however considering a competitive
tender for the audit of the financial year commencing
1 November 2019. This is due to the aforementioned
requirement to change audit firm by 2023 and also the
audit partner rotation requirements meaning the next
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The Scottish Investment Trust PLC | Annual Report 2018
35
Report of the Audit Committee (continued)
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
7 December 2018
financial year will be the final year the current audit
partner will be leading the audit.
The fees for audit and non-audit services were
£31,500 (2017: £34,000) and £16,200 (2017:
£21,950), respectively. Non-audit services include: tax
compliance £10,500 and assurance services £5,700.
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 partner responsible for the audit is 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.
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36
The Scottish Investment Trust PLC | Annual Report 2018
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 7 February 2019.
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 Mick Brewis,
Russell Napier, James Will and Karyn Lamont.
Policy on Directors’ fees
On 31 October 2018, the Board consisted of 5
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 Company is
proposing an amendment to its Articles of Association
to increase the maximum level of remuneration to
£300,000, as detailed further on page 32.
The policy on Directors’ fees was approved at the AGM
held in February 2018 and this policy applied for the
period up to 31 October 2018. This approval is valid for
three years and it is therefore intended that this policy
will apply for the period to 31 October 2020. Any views
expressed by shareholders on Directors’ fees are taken
into consideration by the Board when reviewing the
policy.
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 previously last increased
in 2013.
Since 2013 there had 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 therefore
believed it 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. Directors do
not receive exit payments and are not provided with
any compensation for loss of office.
Proposed fees for
the year to
31 October 2019
£
Actual fees for
the year to
31 October 2018
£
Chairman
Audit Committee Chair
Non-executive Director
60,000
37,500
32,500
60,000
37,500
32,500
Annual statement
The level of Directors' fees was increased at the
beginning of the financial year, as explained above.
Directors’ emoluments (audited)
James Will 1
Hamish Buchan (retired
2 February 2018)
Russell Napier
Ian Hunter 2
Jane Lewis
Mick Brewis
Karyn Lamont 3
Year to
31 October
2018
£
Year to
31 October
2017
£
60,000
8,375
32,500
–
32,500
32,500
37,500
50,000
30,000
30,000
27,500
30,000
30,000
2,500
203,375
200,000
1 Chairman
2 Audit Committee Chair (resigned 30 September 2017)
3 Audit Committee Chair (with effect from 1 October
2017)
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The Scottish Investment Trust PLC | Annual Report 2018
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.
Directors’ interests
The interests of the Directors and their families in the
Company’s capital are as follows:
James Will
Russell Napier
Jane Lewis
Mick Brewis
Karyn Lamont
Shares of 25p
31 October 2018
31 October 2017
8,000*
14,000
1,000
10,000
2,500
8,000
14,000
1,000
10,000
2,500
* In addition to the 8,000 shares held, Mr Will is
a trustee of a trust which holds 11,000 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 7 December 2018.
Relative importance of Directors’ fees
Directors’ fees
Expenses
Staff costs
Dividends paid and
proposed
2018
£’000
203
3,254
1,690
2017
£’000
200
3,517
1,612
19,590
19,873
Directors’ fees as a percentage of:
Expenses
Staff costs
Dividends paid and proposed
2018
%
6.2
12.0
1.0
%
Change
1.5
(7.5)
1.5
(1.4)
2017
%
5.7
12.4
1.0
Excluding discretionary performance-related bonuses
and the refund of previously paid expenses, expenses
increased by 2.2% and staff costs decreased by 9.4%.
Further details of the Company’s expenses and staff
costs can be found in notes 2 and 3, respectively,
on page 53 and of dividends paid and proposed on
page 47.
Approval
Voting on the resolution to approve the Directors’
Remuneration Report 2017, at the Company’s AGM on
2 February 2018, was as follows:
%
For
%
Withheld
%
Against
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
10 year period.
Approve Directors’
Remuneration Report
99.2
0.5
0.3
The Directors’ Remuneration Report was approved
by the Board on 7 December 2018 and signed on its
behalf by:
300
250
200
150
100
300
250
200
150
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
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.
Jane Lewis
Chair of the Remuneration Committee
7 December 2018
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The Scottish Investment Trust PLC | Annual Report 2018
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 2018 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 February 2018 “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 Statement of Comprehensive Income;
the Balance Sheet;
the Statement of Changes in Equity;
the Cash Flow Statement; and
the related notes 1 to 18.
The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom
Accounting Standards, including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in
the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
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 Financial Reporting Council’s (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
The key audit matters that we identified in the current year were:
• Valuation and existence of listed investments
• Recognition of investment income
The key audit matters in this report are consistent with those reported in the prior year.
Materiality
Scoping
The materiality that we used in the current year was £7.1m which was determined on the
basis of 1% of net assets at 31 October 2018.
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
Going concern
We have reviewed the Directors’ statement on page 29 about whether they considered it
appropriate to adopt the going concern basis of accounting in preparing the financial statements
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 their approval.
We are required to state whether we have anything material to add or draw attention to in relation
to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially
inconsistent with our knowledge obtained in the audit.
We confirm
that we have
nothing
material to
add or draw
attention to
in respect of
these matters.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent
with the knowledge we obtained in the course of the audit, including the knowledge obtained
in the evaluation of the Directors’ assessment of 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 page 30 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; or
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.
•
•
We confirm
that we have
nothing
material to
report, add or
draw attention
to in respect of
these matters.
We are also required to report whether the Directors’ statement relating to the prospects of
the Company required by Listing Rule 9.8.6R(3) is 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 £716.0m (2017: £799.9m) represent the most significant number on the
balance sheet and is the main driver of the Company’s performance. Listed investments represented
89.4% (2017: 94.6%) of total assets of the Company at 31 October 2018 (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. We have 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.
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The Scottish Investment Trust PLC | Annual Report 2018
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 assessed 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 concluded that the valuation
and existence of listed investments are appropriate.
Recognition of investment income
Key audit matter description
How the scope of our audit
responded to the key audit
matter
Dividend income of £25.4m (2017: £25.7m) represented 98.2% (2017: 99.2%
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 as discussed on
page 34.
We have performed the following procedures to address this key audit matter:
• 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 concluded that recognition of
investment income is appropriate.
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The Scottish Investment Trust PLC | Annual Report 2018
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
£7.1m (2017: £7.5m)
Basis for
determining
materiality
1% (2017: 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
£143,000 (2017: £150,000), as well as differences below that threshold that, in our view, warranted reporting on
qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing
the overall presentation of the financial statements.
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.
Other information
The Directors are responsible for the other information. The other information
comprises the information included in the annual report, other than the financial
statements and our auditor’s report thereon.
We have nothing to report
in respect of these matters.
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 2018
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 position and 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.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set
out below.
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.
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43
Independent Auditor’s Report (continued)
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-
compliance with laws and regulations, our procedures included the following:
• enquiring of management, the administrator and the Audit Committee, including obtaining and reviewing
supporting documentation, concerning the Company’s policies and procedures relating to:
o identifying, evaluating and complying with laws and regulations and whether they were aware of any
instances of non-compliance;
o detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or
alleged fraud;
o other internal controls established to mitigate risks related to fraud or non-compliance with laws and
regulations;
• discussing among the engagement team regarding how and where fraud might occur in the financial statements
and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following
areas: Valuation of investments as an incorrect investment price could result in a material misstatement in the net
asset value of the Company; and recognition of investment income as there is a potential risk that if investment
income is manipulated so it is incomplete it could have a material impact on the Company’s net asset value; and
• obtaining an understanding of the legal and regulatory framework that the Company operates in, focusing
on those laws and regulations that had a direct effect on the financial statements or that had a fundamental
effect on the operations of the Company. The key laws and regulations we considered in this context included
Companies Act 2006 and UK Listing Rules, as well as the Company qualification as an Investment Trust under UK
tax legislation
Audit response to risks identified
As a result of performing the above, we identified the valuation of investments and recognition of investment
income as the key audit matters where there is a potential fraud risk. The key audit matters section of our report
explains the matter in more detail and also describes the specific procedures we performed in response to those
key audit matters.
Our procedures to respond to the risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance
with relevant laws and regulations discussed above;
• enquiring of management and the Audit Committee concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of
material misstatement due to fraud;
• reading minutes of meetings of those charged with governance and reviewing correspondence with HMRC and
the FCA; and
•
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal
entries and other adjustments; assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of any significant transactions that are
unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team
members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout
the audit.
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The Scottish Investment Trust PLC | Annual Report 2018
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, or returns adequate for our
audit have not been received from branches not visited by us; or
• the financial statements are not in agreement with the accounting records and
returns.
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.
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The Scottish Investment Trust PLC | Annual Report 2018
45
Independent Auditor’s Report (continued)
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 17 years,
covering the years ending 31 October 2002 to 31 October 2018.
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).
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.
Andrew Partridge CA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
7 December 2018
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The Scottish Investment Trust PLC | Annual Report 2018
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The Scottish Investment Trust PLC | Annual Report 2018
47
Income Statement
Income Statement
For the year to 31 October 2018
Net (losses)/gains on investments held
at fair value through profit and loss
Net gains/(losses) on currencies
Income
Expenses
Net Return before
Finance Costs and Taxation
Interest payable
Return on Ordinary
Activities before Tax
8
1
2
Notes
Revenue
£’000
2018
Capital
£’000
Total
£’000
Revenue
£’000
–
–
(14,566)
(14,566)
819
819
–
–
2017
Capital
£’000
Total
£’000
50,816
50,816
(1,185)
(1,185)
25,854
–
25,854
25,898
–
25,898
(2,045)
(1,209)
(3,254)†
(2,075)
(1,442)
(3,517)
23,809
(14,956)
8,853
23,823
48,189
72,012
5
(1,732)
(3,217)
(4,949)
(2,474)
(2,475)
(4,949)
22,077
(18,173)
3,904
21,349
45,714
67,063
Tax on ordinary activities
6
(1,697)
–
(1,697)
(1,252)
–
(1,252)
Return attributable to Shareholders
20,380 (18,173)
2,207
20,097
45,714
65,811
Return per share (basic and fully diluted)
26.02p (23.20)p
2.82p
23.06p
52.46p
75.52p
Weighted average number of
shares in issue during the year
78,338,201
87,144,760
Dividends paid and proposed
First interim 2018: 5.0p (2017: 5.5p)
Second interim 2018: 5.0p (2017: Nil)
Third interim 2018: 5.0p (2017: Nil)
Final 2018: 6.2p (2017: 14.5p)
Special 2018: 4.0p (2017: 5.0p)
Notes
7
2018
£’000
3,931
3,906
3,880
4,786
3,087
Total 2018: 25.2p (2017: 25.0p)
19,590
† Includes a refund of previously paid expenses.
2017
£’000
4,543
–
–
11,400
3,930
19,873
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 2018
Balance Sheet
As at 31 October 2018
Fixed Assets
Investments
Current Assets
Debtors
Cash and cash equivalents
2018
2017
Notes
£’000
£’000
£’000
£’000
8
10
8
12,733
83,236
95,969
717,547
801,302
2,113
42,936
45,049
(1,152)
82,931
800,478
43,897
845,199
(83,829)
(83,737)
(1,337)
715,312
19,296
39,922
51,565
555,308
49,221
715,312
(1,091)
760,371
19,867
39,922
50,994
593,484
56,104
760,371
Creditors: liabilities falling due within one year
11
(13,038)
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)
926.8p
956.8p
Number of shares in issue at year end
77,184,578
79,468,458
The Financial Statements on pages 47 to 66 were approved by the Board of Directors and were signed on its behalf by:
James Will
Chairman
7 December 2018
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2018
49
Statement of Comprehensive
Income
For the year to 31 October 2018
Notes
Revenue
£’000
2018
Capital
£’000
Total
£’000
Revenue
£’000
2017
Capital
£’000
Total
£’000
Return attributable to shareholders
20,380
(18,173)
2,207
20,097
45,714
65,811
Actuarial (losses)/gains relating to pension
scheme
4
(216)
(400)
(616)
1,077
749
1,826
Total comprehensive income for the year
20,164
(18,573)
1,591
21,174
46,463
67,637
Total comprehensive income per share
25.74p
(23.71)p
2.03p
24.30p
53.31p
77.61p
Statement of Changes in Equity
For the year to 31 October 2018
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.
2018
£’000
760,371
1,591
(27,047)
–
(19,603)
715,312
2017
£’000
849,017
67,637
(21,095)
(90,255)
(44,933)
760,371
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The Scottish Investment Trust PLC | Annual Report 2018
Cash Flow Statement
For the year to 31 October 2018
Operating activities
Net revenue before finance costs and taxation
Expenses charged to capital
(Decrease)/increase in accrued income
Increase in other payables
Increase/(decrease) in other receivables
Adjustment for pension funding
Tax on investment income
2018
£’000
2017
£’000
23,809
(1,209)
(72)
264
9
(370)
(1,809)
23,823
(1,442)
226
47
(3)
(355)
(1,327)
Cash flows from operating activities
20,622
20,969
Investing activites
Purchases of investments
Disposals of investments
Cash flows from investing activities
Cash flows before financing activities
Financing activities
Dividends paid
Aviva share buyback
Regular share buybacks
Interest paid
(105,183)
(131,714)
175,216
273,474
70,033
141,760
90,655
162,729
(27,047)
–
(18,451)
(4,857)
(21,095)
(90,255)
(44,490)
(4,857)
Cash flows from financing activities
(50,355)
(160,697)
Net movement in cash and cash equivalents
40,300
2,032
Cash and cash equivalents at the beginning of year
42,936
40,904
Cash and cash equivalents at the end of year*
83,236
42,936
*Cash and cash equivalents represent cash at bank and short-term money market deposits repayable on demand.
The accompanying notes are an integral part of this statement.
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The Scottish Investment Trust PLC | Annual Report 2018
51
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, with the exception of those covered in notes (e)
and (f).
(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). They are also
prepared on a going concern basis (see page 29) 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.
Eligible expenses are allocated 65% to capital and 35%
to revenue in line with the Directors’ expectations of the
long-term future returns from the Company’s
investments. Expenses not eligible to be charged to
capital are wholly charged to revenue (2017: all
expenses allocated equally between revenue and capital
reserve (after allocating 18% to revenue)).
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 65% to capital and 35% to
revenue in line with the Directors’ expectations of the
long-term future returns from the Company’s
investments (2017: one-half to revenue reserve and
one-half to capital reserve).
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 2018
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) Reserves
(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 54 to 56.
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.
•
(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 2018
53
Notes to the Financial Statements
For the year to 31 October 2018
1. Income
UK dividends including special dividends of £nil (2017: £nil)
Overseas dividends including special dividends of £nil (2017: £429,000)
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
Refund of previously paid expenses
Other expenses
2018
£’000
2017
£’000
6,435
8,337
18,957
17,368
462
193
25,854
25,898
2018
£’000
1,690
2017
£’000
1,612
32
–
10
6
170
475
185
239
182
(535)
800
34
7
10
5
290
392
182
336
180
–
469
3,254
3,517
As previously announced, the Board has reviewed the allocation of both eligible expenses and interest between
capital and revenue, in large part due to the very different cost structure in place since the recent reorganisation and
the adoption of the new investment approach.
It was decided that, with effect from the financial year to 31 October 2018, the Company would allocate 65% of both
eligible expenses and interest to capital, with the remaining 35% of each allocated to revenue. This compares with
the previous 50%/50%. Expenses not eligible to be charged to capital would be wholly charged to revenue.
If this new allocation policy had been in place in the financial year to 31 October 2017, the net effect would have
resulted in a small increase to net income per share of 0.7p to 23.7p.
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.
2018
£’000
2017
£’000
1,432
1,127
135
123
144
341
1,690
1,612
2018
Number
2017
Number
5
4
9
5
4
9
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The Scottish Investment Trust PLC | Annual Report 2018
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 amount charged during the year was £76,000. There
was no outstanding payment due at 31 October 2018.
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 XPS Pensions Group, 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 XPS
Pensions Group 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 2018
55
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
2018
%
2017
%
2016
%
2015
%
2014
%
3.2
3.6
3.3
3.4
2.4
26.5
28.6
28.1
30.2
2018
£’000
8,072
3,437
301
265
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
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
1,180
1,976
2,343
2,243
12,075
14,373
15,822
14,535
13,310
Present value of scheme liabilities
(13,412)
(15,464)
(19,094)
(17,085)
(15,923)
Net pension liability
(1,337)
(1,091)
(3,272)
(2,550)
(2,613)
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
Benefits paid
Liabilities at end of year
2018
£’000
2017
£’000
14,373
15,822
428
(733)
399
476
906
455
(2,392)
(3,286)
12,075
14,373
2018
£’000
2017
£’000
15,464
19,094
457
(117)
576
(920)
(2,392)
(3,286)
13,412
15,464
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The Scottish Investment Trust PLC | Annual Report 2018
Notes to the Financial Statements (continued)
4. Pension scheme (continued)
Analysis of amount chargeable to
operating profit during the year
Current service cost
Past service cost
Total operating charge
Employee contribution to be set off
Analysis of amount credited to other finance income:
Interest income return on assets
Interest on liabilities
Net return
Movement in deficit during year:
Deficit at beginning of year
Movement in year:
Current service cost
Past service cost
Contributions for year
Net return from other finance income
Actuarial (losses)/gains in Statement of
Comprehensive Income
2018
£’000
2017
£’000
2016
£’000
–
–
–
–
–
–
–
–
–
–
–
–
428
(457)
(29)
476
(576)
(100)
605
(706)
(101)
2015
£’000
358
–
358
(31)
685
(687)
(2)
2014
£’000
423
–
423
(38)
643
(636)
7
(1,091)
(3,272)
(2,550)
(2,613)
(2,560)
–
–
399
(29)
–
–
455
(100)
–
–
389
(101)
(358)
(423)
–
850
(2)
–
858
7
(616)
1,826
(1,010)
(427)
(495)
Deficit at end of year
(1,337)
(1,091)
(3,272)
(2,550)
(2,613)
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The Scottish Investment Trust PLC | Annual Report 2018
57
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 19.00% (2017: 19.41%)
Overseas tax
Current tax
2018
£’000
4,857
92
2017
£’000
4,857
92
4,949
4,949
2018
£’000
2017
£’000
–
1,697
1,697
–
1,252
1,252
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 19.00% (2017: 19.41%)
Effects of:
Non-taxable capital returns
Finance costs and expenses charged to capital
Non-taxable dividends
Unutilised expenses
Overseas tax
7. Dividends
Dividends paid on shares recognised in the year:
Previous year final of 14.50p per share (2016: 8.25p)
Previous year special of 5.00p per share (2016: 9.00p)
Three interims each of 5.00p per share (2017: single interim of 5.50p)
2018
£’000
2017
£’000
3,904
67,063
742
13,017
2,612
(9,633)
(841)
(760)
(4,876)
(4,989)
2,363
1,697
1,697
2,365
1,252
1,252
2018
£’000
2017
£’000
11,400
3,930
11,717
7,916
8,636
4,543
27,047
21,095
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The Scottish Investment Trust PLC | Annual Report 2018
Notes to the Financial Statements (continued)
8. Investments
Investments listed on a recognised investment exchange
Unlisted investments
Subsidiary undertaking (note 9)
Opening book cost
Opening unrealised appreciation
Opening valuation
Movements in the year:
Purchases at cost
Sales – proceeds
– realised gains on sales
(Decrease)/increase in unrealised appreciation
Closing valuation
Closing book cost
Closing unrealised appreciation
Closing valuation
2018
£’000
2017
£’000
716,047
799,867
1,150
1,085
350
350
717,547
801,302
Listed
in UK
£’000
Listed
overseas
£’000
Unlisted
£’000
Total
£’000
210,556
439,329
358
650,243
29,774
120,208
1,077
151,059
240,330
559,537
1,435
801,302
17,672
98,391
–
116,063
(57,054)
(128,159)
(39)
(185,252)
24,360
43,692
(30,741)
(51,981)
39
65
68,091
(82,657)
194,567
521,480
1,500
717,547
195,534
453,253
358
649,145
(967)
68,227
1,142
68,402
194,567
521,480
1,500
717,547
Total purchases of equities amounted to £116,063,000 (2017: £131,120,000) and sales were £185,252,000 (2017:
£274,066,000). The purchases at cost and sales proceeds figures include transaction costs of £287,000 (2017:
£937,000), comprising commissions, government stamp duty and other fees.
Unlisted investments include heritable property valued at £1,150,000 (2017: £1,050,000). The property was valued on
an open market basis by Allied Surveyors Scotland PLC, chartered surveyors, on 18 September 2018.
Realised gains on sales
Decrease in unrealised appreciation
Net gains on investments
Financial assets – cash and deposits
Sterling
US dollar
Fixed
£’000
2018
Floating
£’000
Total
£’000
25,000
17,955
42,955
34,046
6,235
40,281
59,046
24,190
83,236
Fixed
£’000
20,000
17,696
37,696
2018
£’000
2017
£’000
68,091
92,886
(82,657)
(42,070)
(14,566)
50,816
2017
Floating
£’000
3,034
2,206
Total
£’000
23,034
19,902
5,240
42,936
The maximum maturity period for fixed rate deposits outstanding at the year end was 7 days (2017: 3 days). The
weighted average fixed interest rate at the year end was 1.48% (2017: 0.55%). Floating interest rates vary in relation to
short-term rates in the currencies in which deposits are held.
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59
Notes to the Financial Statements (continued)
9. Subsidiary undertaking
The Company has an investment in the following subsidiary:
Name of undertaking
S.I.T. Savings Limited
Principal activities
Country of
incorporation
Description of
shares held
Proportion of
nominal value of
issued shares and
voting rights held
AIFM
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
Amounts due from brokers
Overseas tax recoverable
Prepayments and accrued income
11. Creditors: liabilities falling due within one year
Amounts due to brokers
Other creditors
12. Creditors: liabilities falling due after more than one year
4% Perpetual Debenture Stock
4¼% Perpetual Debenture Stock
5% Perpetual Debenture Stock
2018
£’000
10,445
922
1,366
12,733
2018
£’000
12,235
803
2017
£’000
–
809
1,304
2,113
2017
£’000
613
539
13,038
1,152
2018
2017
Book value
£’000
Fair value
£’000
Book value
£’000
Fair value
£’000
350
700
374
795
350
700
426
906
1,009
1,348
1,009
1,538
5¾% Secured Bonds due 17 April 2030
81,770
101,855
81,678
106,652
83,829
104,372
83,737
109,522
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 £104.4m (2017: £109.5m) has the effect of decreasing the year end NAV per share from 926.8p to 900.1p
(2017: decreasing from 956.8p to 924.4p).
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.
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The Scottish Investment Trust PLC | Annual Report 2018
Notes to the Financial Statements (continued)
13. Called-up share capital
Shares of 25p
Number of shares in issue
2018
£19,296,000
77,184,578
2017
£19,867,000
79,468,458
2,283,880 shares were repurchased in the stockmarket during the year to 31 October 2018 (2017: 16,874,225).
110,000 shares were repurchased from 1 November to 7 December 2018.
14. Reserves
At 31 October 2017
Net gains on currencies
Net gains on realisation of investments
Decrease in unrealised appreciation
Share buybacks
Actuarial losses relating to pension scheme
Expenses and interest charged to capital
Return attributable to shareholders
Dividends paid
At 31 October 2018
15. Analysis of changes in net debt during the year
Cash
Short-term deposits
Long-term borrowings at amortised cost
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
39,922
50,994
593,484
56,104
–
–
–
–
–
–
–
–
–
–
–
819
68,091
(82,657)
571
(19,603)
–
–
–
–
–
–
–
–
(400)
(216)
(4,426)
–
–
–
20,380
(27,047)
39,922
51,565
555,308
49,221
31 October
2017
£’000
Cash flows
£’000
Non-cash
movements
£’000
31 October
2018
£’000
5,240
18,950
37,696
21,350
–
–
24,190
59,046
(83,737)
–
(92)
(83,829)
(40,801)
40,300
(92)
(593)
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61
Notes to the Financial Statements (continued)
16. 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 51 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
717,547
801,302
2018
£’000
2017
£’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
12,733
2,113
83,236
42,936
95,969
45,049
813,516
846,351
(12,235)
(803)
(613)
(539)
(13,038)
(1,152)
(83,829)
(83,737)
(1,337)
(1,091)
(85,166)
(84,828)
(98,204)
(85,980)
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The Scottish Investment Trust PLC | Annual Report 2018
Notes to the Financial Statements (continued)
16. 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, 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. 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. Events
may occur which affect the value of investments. 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.
Management of the risk
Company performance is monitored at each Board meeting, including investment performance. The Company holds a
portfolio which is well diversified across industrial and geographical areas to help minimise these risks. The contrarian
investment approach is explained in our shareholder communications and through meetings with media and the
investor community. 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.
b. Foreign currency risk
Approximately 73% of the Company’s assets are invested overseas which gives rise to a currency risk. From time to
time, specific hedging transactions may be 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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63
Notes to the Financial Statements (continued)
16. Financial instruments (continued)
Foreign currency exposure
The fair values of the Company’s monetary items denominated in foreign currencies at 31 October 2018 and
31 October 2017 are shown below.
2018
US $
£’000
Debtors (amounts due from brokers, dividends receivable and accrued income)
10,638
Euro
£’000
185
Other
£’000
1,414
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
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
–
(307)
(10,163)
40,281
50,919
–
–
(122)
(8,749)
247,645
88,723
185,114
298,564
88,601
176,365
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
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 2018
Maximum
Minimum
Year to 31 October 2017
Maximum
Minimum
US $
£’000
40,281
13,028
28,381
10,788
Euro
£’000
Other
£’000
–
–
–
–
–
–
–
–
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The Scottish Investment Trust PLC | Annual Report 2018
Notes to the Financial Statements (continued)
16. 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 2018. 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.
2018
US $
£’000
Euro
£’000
2017
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
984
29,856
30,840
462
8,861
9,323
604
417
23,957
12,266
24,561
12,683
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 58. Details of interest rates on financial liabilities are included
in note 12 on page 59.
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
2018
More than
one year
£’000
Total
£’000
Within
one year
£’000
2017
More than
one year
£’000
24,190
59,046
–
–
24,190
5,240
59,046
37,696
–
–
Total
£’000
5,240
37,696
–
(83,829)
(83,829)
–
(83,737)
(83,737)
83,236
(83,829)
(593)
42,936
(83,737)
(40,801)
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65
Notes to the Financial Statements (continued)
16. 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
2018
£’000
(23)
2017
£’000
(10)
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 59.
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. Management 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 (2017: 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 management. 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 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 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)
16. 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 51.
Financial assets at fair value through profit and loss
716,047
–
1,500
717,547
2018
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Financial assets at fair value through profit and loss
799,867
–
1,435
801,302
There were no transfers between Level 1 & 2 during the year (2017: same).
2017
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 2017
Purchase costs
Sales proceeds
Total profit: in profit and loss
Balance at 31 October 2018
Fair value
through
profit
and loss
2018
£’000
1,435
–
(39)
104
1,500
The table above only includes financial assets. There were no financial liabilities measured at fair value on Level 3 fair
value measurement bases.
17. 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.
18. Subsequent events
Since the year end the Board has declared a final dividend of 6.2p per share and a special dividend of 4.0p per
share in respect of the year ended 31 October 2018.
Details of shares repurchased since the year end are disclosed in note 13 on page 60.
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The Scottish Investment Trust PLC | Annual Report 2018
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 paid
The following dividends have been paid during
2017/18:
Dividends
Amount
XD date
Record
date
Payment
date
Third Interim 2018
5.00p
Second Interim 2018
5.00p
First Interim 2018
5.00p
Final 2017
14.50p
Special 2017
5.00p
4 October 5 October 2 November
2018
2018
2018
5 July
2018
6 July
2018
12 April
2018
13 April
2018
3 August
2018
11 May
2018
11 January 12 January
2018
2018
11 January 12 January
2018
2018
9 February
2018
9 February
2018
Dividend reinvestment
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 shareholder
info section on the Company’s website,
www.thescottish.co.uk.
Other Shareholders
If your shares are held elsewhere, you should refer
to your broker or share dealing platform provider for
details of their dividend reinvestment facilities.
Most brokers and platform providers offer a dividend
reinvestment service which allows you to have dividend
cash automatically reinvested to buy more shares.
Please note that most of these services charge for each
dividend reinvested and you should establish the cost of
any such facility with your provider.
Identifiers
ISIN:
SEDOL:
Ticker:
GB0007826091
0782609
SCIN
Monitoring your investment
The Company’s share price, together with performance
information can be found on the Company’s website,
www.thescottish.co.uk and on a number of financial
websites.
The Company publishes a daily NAV, a monthly factsheet,
an Interim Report and an Annual Report.
Shareholders who hold share certificates
Investors who hold share certificates can check their
holdings by registering on the registrar’s website,
www.investorcentre.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.
Other shareholders
Investors who hold shares through a third party, such as
a broker or share dealing platform, should refer to their
provider. Most brokers and platforms provide online
access to their clients.
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
In accordance with the EU Packaged Retail and
Insurance-based Investment Products (PRIIP) Regulation,
the Company’s Key Information Document is available on
the Company’s website.
Personal taxation
Capital Gains Tax (CGT)
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.
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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 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 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 Company 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.
Please remember that we are unable to offer individual
investment or tax advice. If you require such advice,
you should consult your professional adviser.
S.I.T. Savings Limited is authorised and regulated by
the Financial Conduct Authority.
The Scottish Investment Trust PLC is a UK public limited
company and complies with the requirements of the
UK Listing Authority. It is not authorised or regulated by
the Financial Conduct Authority.
Investor Information (continued)
Shareholders’ meetings
All investors are welcome to attend the Annual General
Meeting and other general meetings.
Investors who hold share certificates are entitled to attend
and vote at the AGM and other general meetings. Notices
of meetings and proxy cards, which include attendance
and voting instructions, are sent to their registered address.
Investors who hold shares through a third party, such as a
broker or share dealing platform, should contact their
provider to arrange their voting and attendance.
Alternatively, if they have been provided with a Form of
Direction, they can indicate their voting, or intention to
attend, on the form and return it as directed.
If you would like to attend any meeting as a guest please
email us at info@thescottish.co.uk to arrange.
The AGM will be held at the Royal College of Physicians of
Edinburgh, 9 Queen Street, Edinburgh, EH2 1JQ, on
Thursday 7 February 2019 at 10.30am.
Electronic voting
Shareholders who hold share certificates can submit
proxy votes electronically by following the instructions on
the proxy card.
Electronic communications
Investors who hold share certificates may choose to receive
the Company’s Interim and Annual Reports and other
shareholder communications electronically instead
of by post.
To register, visit the link in the shareholder information
section on the Company’s website,
www.thescottish.co.uk and follow the instructions.
Investors will then be advised by email when an electronic
communication is available.
Other publications
If you would like to receive a monthly email which contains
our newsletter, factsheet and other useful insights please
register your email address at
www.thescottish.co.uk/subscribe. More ways of how to
keep in touch with The Scottish can be found overleaf.
The Common Reporting Standard
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.
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Keeping in touch with The Scottish...
...newsletter
Together with our Annual Report & Accounts you
also received ‘The Contrarian’, a quarterly newsletter
to investors with our latest thinking on a variety of
investment related subjects and other key highlights.
If you would like to hear from us more frequently –
there are a number of ways to stay in touch.
...by email
Sign-up for our monthly email and receive our
factsheet with the latest commentary on markets and
trends, our contrarian thoughts and insights on a range
of investment subjects – directly to your inbox.
www.thescottish.co.uk/subscribe
...on our website
Visit www.thescottish.co.uk to keep up-to-date on performance and
portfolio statistics, browse through our annual and interim reports
and access other key shareholder information.
In our blog, you will find thought provoking articles from our
investment team, weekly thoughts, commentaries, videos and more.
www.thescottish.co.uk/blog
...on social media
Follow us on social media – be notified about any new content, highlights
from events we are attending, coverage in the press and other activities.
You can find our social profiles using the information below.
Twitter: @ScotInvTrust
LinkedIn: The Scottish Investment Trust PLC
YouTube: The Scottish Investment Trust PLC
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Keeping in touch with The Scottish...
...newsletter
Together with our Annual Report & Accounts you
also received ‘The Contrarian’, a quarterly newsletter
to investors with our latest thinking on a variety of
investment related subjects and other key highlights.
If you would like to hear from us more frequently –
there are a number of ways to stay in touch.
...by email
Sign-up for our monthly email and receive our
factsheet with the latest commentary on markets and
trends, our contrarian thoughts and insights on a range
of investment subjects – directly to your inbox.
www.thescottish.co.uk/subscribe
...on our website
Visit www.thescottish.co.uk to keep up-to-date on performance and
portfolio statistics, browse through our annual and interim reports
and access other key shareholder information.
In our blog, you will find thought provoking articles from our
investment team, weekly thoughts, commentaries, videos and more.
www.thescottish.co.uk/blog
...on social media
Follow us on social media – be notified about any new content, highlights
from events we are attending, coverage in the press and other activities.
You can find our social profiles using the information below.
Twitter: @ScotInvTrust
LinkedIn: The Scottish Investment Trust PLC
YouTube: The Scottish Investment Trust PLC
The Scottish Investment Trust PLC | Annual Report 2018
71
Financial Calendar 2019
Dividend and interest payments
Final and special for the financial year
to 31 October 2018
First Interim
Second Interim
Third Interim
Final
15 February 2019
May 2019
August 2019
November 2019
February 2020
Secured bonds
Perpetual debenture stock
17 April, 17 October
30 April, 31 October
Announcement of results
NAV
Interim figures
Final figures
Annual Report & Accounts
Annual General Meeting (AGM)
Daily
June
December
December
7 February 2019
Useful Addresses
Registered Office
6 Albyn Place
Edinburgh EH2 4NL
Telephone: 0131 225 7781
Website: www.thescottish.co.uk
info@thescottish.co.uk
Email:
Company Registration Number: SC001651
Legal Entity Identifier: 549300ZL6XSHQ48U8H53
Company Secretary
Maitland Administration Services (Scotland) Limited
20 Forth Street
Edinburgh EH1 3LH
Depositary
Northern Trust Global Services SE
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
XPS Pensions Group
40 Torphichen Street
Edinburgh EH3 8JB
The Association of Investment Companies
The Company is a member of The Association of
Investment Companies (AIC) which publishes a number
of useful consumer guides and email updates for
investors interested in investment trust companies.
The AIC
9th Floor
24 Chiswell Street
London EC1Y 4YY
Telephone: 0207 282 5555
Website: www.theaic.co.uk
Shareholders who hold share certificates
For valuations and other details of your investment
or to notify a change of address please contact the
Company’s Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Helpline:
Website:
0370 703 0195
www.investorcentre.co.uk
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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.
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.
NAV at start of year
NAV at end of year
Effect of dividends*
NAV at end of year including effect of
dividends
NAV total return
2018
2017
924.4p
854.9p
900.1p
924.4p
34.5p
24.5p
934.6p
948.9p
1.1%
11.0%
*Assumed reinvested at the time of dividend going
ex-dividend.
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.
Gearing§ is the true geared position of the Company:
borrowings less cash and equivalents expressed as a
percentage of shareholders’ funds.
Portfolio turnover rate is the average of investment
purchases and sales expressed as a percentage of
opening total assets.
The stated gearing figure of 0% at 31 October 2018
reflects the fact that almost all of the Company’s
borrowings are not invested in equities but held in cash.
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.
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.
Share price at start of year
Share price at end of year
Effect of dividends*
Share price at end of year including
effect of dividends
Share price total return
2018
2017
843.0p
769.5p
825.0p
843.0p
34.0p
25.0p
859.0p
868.0p
1.9%
12.8%
*Assumed reinvested at the time of dividend going
ex-dividend.
Total assets means total assets less current liabilities.
† UK GAAP Measure
§ Alternative Performance Measures (“APMs”) are measures not defined in FRS 102. The Company believes that APMs provide
shareholders with important information on the Company and are appropriate for an investment trust.
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The Scottish Investment Trust PLC | Annual Report 2018
Notice of Annual General Meeting
(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
7 May 2020, 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.
12. That the Articles of Association (the "Articles")
produced to the meeting and initialled by the
Chairman of the meeting for the purpose of
identification be adopted as the new Articles of
the Company in the substitution for, and to the
exclusion of, the existing Articles of Association
with effect from the conclusion of the meeting.
All resolutions are ordinary resolutions except
numbers 11 and 12 which are special resolutions.
Maitland Administration Services (Scotland) Limited
Company Secretary
7 December 2018
Map showing location of AGM venue
Map image required
Notice is hereby given that the one hundred and
thirty-first 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 Thursday 7 February 2019 at
10.30am, for the purpose of transacting the following:
1. To receive and consider the Annual Report and
Accounts for the year to 31 October 2018.
2. To approve the Directors’ Remuneration Report for
the year to 31 October 2018.
3. To declare a final dividend of 6.20p per share.
4. To declare a special dividend of 4.00p per share.
5. To re-elect James Will as a Director.
6. To re-elect Russell Napier as a Director.
7. To re-elect Jane Lewis as a Director.
8. To re-elect Mick Brewis as a Director.
9. To re-elect Karyn Lamont as a Director.
10. To re-appoint Deloitte LLP as auditor and to
authorise the Directors to fix their remuneration.
11. To authorise the Company, in accordance with
section 701 of the Companies Act 2006 (the ‘Act’)
and in substitution for any pre-existing such
authority, to make market purchases (within the
meaning of section 693 of the Act) of shares of 25p
each for cancellation, provided that:
a) the maximum number of shares hereby
authorised to be purchased shall be 11,553,479
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;
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 market value of a
share for the five business days immediately
preceding the date of purchase; and
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75
Notice of Annual General Meeting (continued)
Notes
1. 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.
2. 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 Registrars
at Computershare Investor Services PLC, The
Pavilions, Bridgewater Road, Bristol, BS99 6ZY or
www.eproxyappointment.com, 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.
3. 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.
4. 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.
5. 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.
6. The return of a completed proxy form or other
instrument of proxy will not prevent members
attending the AGM and voting in person if they wish.
7. Pursuant to Regulation 41 of the Uncertificated
Securities Regulations 2001 and section 360B of the
Companies Act 2006, the Company specifies that
only 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.
8. Any person to whom this notice is sent who is a
person nominated under S146 of the Companies
Act 2006 to enjoy information rights (a ‘Nominated
Person’) may, under an agreement between him/her
and the shareholder by whom he/she was nominated,
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The Scottish Investment Trust PLC | Annual Report 2018
Notice of Annual General Meeting (continued)
have a right to be appointed (or to have someone
else appointed) as a proxy for the Annual General
Meeting. If a Nominated Person has no such proxy
appointment right or does not wish to exercise it, he/
she may, under any such agreement, have a right to
give instructions to the shareholder as to the exercise
of voting rights.
9. The statement of the rights of shareholders in relation
to the appointment of proxies in Notes 1 and 2 above
does not apply to Nominated Persons. The rights
described in those Notes can only be exercised by
shareholders of the Company.
10. 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.
11. On 6 December 2018 (being the last practicable date
prior to the publication of this notice), the Company’s
issued share capital comprised 77,074,578. 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 6 December 2018, the
total number of voting rights exercisable at the AGM
was 77,074,578.
12. 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.
a) answering the question would interfere unduly
with the preparation for the meeting or involve the
disclosure of confidential information;
b)
c)
the answer has already been given on a website in
the form of an answer to a question; or
it is undesirable in the interests of the Company or
the good order of the meeting that the question be
answered.
15. Any corporation which is a member can appoint one
or more corporate representatives who may exercise
on its behalf all of its powers as a member provided
that they do not do so in relation to the same shares.
16. 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.
17. A copy of the current Articles of Association (the
"Existing Articles") of the Company and the proposed
new Articles of the Company (the "Articles") will be
available for inspection during normal business hours
(Saturdays, Sundays and public holidays excepted) at
the registered office of the Company at 6 Albyn Place,
Edinburgh EH2 4NL and at the offices of Dickson
Minto, Broadgate Tower, 20 Primrose Street, London
EC2A 2EW from the date of the Annual Report in
which this notice is included up until the close of the
Annual General Meeting. Copies will also be available
on the Company's website at www.thescottish.co.uk
and at The Royal College of Physicians of Edinburgh,
9 Queen Street, Edinburgh EH2 1JQ, being the place
of the Annual General Meeting, for 15 minutes prior
to, and during, the meeting.
18. Investors whose holdings are in nominee names and
who wish to attend and vote are advised to contact
their nominee before 31 January 2019.
19. The final and special dividends, if approved,
will be paid on 15 February 2019 to shareholders
registered at the close of business on 18 January
2019.
13. Further information regarding the AGM, including
the information required by section 311A of
the Companies Act 2006 is available from
www.thescottish.co.uk
20. This report was sent to the address at present
registered for communications. Any change of
address should be notified to the Company’s
registrar.
14. 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:
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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:
Looming Skies over West Coast Waters by Linda Park
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6 ALBYN PLACE | EDINBURGH | EH2 4NL
T: 0131 225 7781 | E: info@thescottish.co.uk
www.thescottish.co.uk
@ScotInvTrust
The Scottish Investment Trust PLC
THE SCOTTISH INVESTMENT TRUST PLC
131ST ANNUAL REPORT & ACCOUNTS
31 OCTOBER 2018
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