Scottish Investment Trust
Annual Report 2021

Plain-text annual report

THE SCOTTISH INVESTMENT TRUST PLC | 134TH ANNUAL REPORT THE SCOTTISH INVESTMENT TRUST PLC 134TH ANNUAL REPORT 31 OCTOBER 2021 The Scottish Investment Trust PLC | Annual Report 2021 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. Objective of The Scottish Investment Trust PLC Cover painting: Up and Over by Kirsty Wither The Scottish Investment Trust PLC | Annual Report 2021 iii Contents 2 Year at a Glance 3 Chairman’s Statement 6 Board of Directors 7 Manager’s Review 11 The Investment Team 12 Strategic Report 18 Financial Summary 19 List of Investments 21 Distribution of Assets 23 Ten Year Record Directors’ Report 24 Responsibility Statement 25 Corporate Governance Report 32 Report of the Audit Committee 34 Directors’ Remuneration Report Financial Statements 37 Independent Auditors’ Report 43 Income Statement 44 Balance Sheet 45 Statement of Comprehensive Income 46 Statement of Changes in Equity 47 Cash Flow Statement 48 Accounting Policies 51 Notes to the Financial Statements Additional Information 65 Investor Information 67 Useful Addresses 68 Glossary Annual General Meeting 70 Notice of Annual General Meeting The Scottish Investment Trust PLC | Annual Report 2021 01 02 The Scottish Investment Trust PLC | Annual Report 2021 Year at a Glance 15.9% NAV* total return†§ MSCI ACWI 29.5% 24.3% Share price total return†§ MSCI ACWI 29.5% £670.7m Total assets 31 October 2020: £662.9m 3rd Quartile AIC Global peer group (one year share price total return) 31 October 2020: 4th quartile 22.78p Revenue return per share 31 October 2020: 21.70p 0.56% Ongoing charges figure§ 31 October 2020: 0.52% 3.6% Share price discount to NAV*§ (cum-income) 31 October 2020: 9.9% 6% Gearing§ 31 October 2020: 0% 51 Number of listed holdings 31 October 2020: 59 Revenue reserve 2.7x Regular dividend 31 October 2020: 2.6x † 2020: Share price total return -12.0%; NAV total return -10.6%; MSCI ACWI 5.0%. § Alternative Performance Measures (please refer to Glossary on pages 68 and 69). * NAV with borrowings at market value. 31 October 2021 38 years of consecutive increase in regular dividend 24.40p Regular dividend per share 31 October 2020: 23.20p The Scottish Investment Trust PLC | Annual Report 2021 03 Chairman’s Statement Future of the Company Following a review of investment management arrangements, and a recommendation from the Board, shareholders approved on 9 December 2021 the proposal that JPMorgan Funds Limited (‘JPMF’) be appointed as the Company’s manager and the Company adopt a new investment strategy (the ‘Investment Management Change’) ahead of a proposed combination of assets with JPMorgan Global Growth & Income plc (‘JGGI’). It is anticipated that the Investment Management Change will take place around 21 January 2022, shortly before the upcoming Annual General Meeting, and that the combination with JGGI (‘the Combination’) will be undertaken at the end of the first quarter of 2022. If completed, the Combination with JGGI will mark a significant shift for The Scottish which has largely maintained the same structure since it was established in 1887. The investment landscape has changed considerably since that time, particularly in recent years, and the proposed changes offer a number of attractions to shareholders which are set out below under ‘Result of Review’. Performance The share price total return for the year was +24.3% and the net asset value per share (NAV) total return (with borrowings at market value) was +15.9%. The Company does not have a formal benchmark but, by way of comparison, the sterling total return of the international MSCI All Country World Index (ACWI) was +29.5%. A recovery in economic prospects from the depths of the pandemic helped to drive absolute gains in the period. The environment has generally not favoured a contrarian approach in recent years and performance has lagged the comparator index. Income and dividend Over the past year, earnings per share increased by 5.0% to 22.8p (2020: 21.7p). Businesses have begun the process of resuming dividend distributions that were paused in response to the pandemic. The Company plans for any disruptions by maintaining a large revenue reserve, built during times when income generation is more abundant. Accordingly, the Company will utilise a small portion of its reserve in this financial year to cover the regular dividend. The revenue reserve remains substantial at 66.1p per share, equivalent to more than two and a half times the regular dividend. The Board recommends a final dividend of 7.0p which, if approved, will mean that the total regular dividend for the year will increase by 5.2% to 24.4p. The current dividend policy will remain unchanged until the Combination is implemented, although the timing of any dividend payments may vary from previous years. The Board intends to announce a dividend in respect of the first quarter to 31 January 2022 of 6.1p, equal to a quarter of the previous year’s total dividend. It is expected that a final interim dividend will be paid prior to the Combination becoming effective. It is anticipated that the changes in the portfolio to align it more closely with JGGI’s, following the appointment of JPMF, will result in a lower level of income. As a result, a greater proportion of the Company’s revenue reserve may be utilised for these dividends. Discount, share buybacks and ongoing charges The Company follows a policy that aims, in normal market conditions, to maintain the share price discount to NAV (with borrowings at market value) at or below 9%. This policy was temporarily suspended in the weeks preceding the announcement of the result of the investment management review on 20 October 2021. The discount at 31 October 2021 was 3.6% and the average discount over the year was 10.2%. During the period, 6.7m shares were purchased for cancellation at an average discount of 10.9% and a cost of £48.4m. In the previous year, 1.0m shares were purchased. The ongoing charges figure (OCF) for the year under review was 0.56% (2020: 0.52%). Gearing Gearing was increased over the year and finished the period at 6%. Result of Review Earlier this year, your Board announced its intention to undertake a review of the Company’s investment management arrangements. The Board announced on 20 October 2021 that it had agreed heads of terms with JPMorgan Global Growth & Income plc and JGGI’s manager, JPMorgan Funds Limited, for a combination of the assets of the Company with JGGI by means of a section 110 scheme of reconstruction. In reaching this decision, the Board noted a number of attractions to a combination with JGGI: 04 The Scottish Investment Trust PLC | Annual Report 2021 Strong historic investment performance: Over the five years ended 31 October 2021, the NAV total return of JGGI was 13.65% per annum representing outperformance of 1.39% per annum against the MSCI All Country World Index in sterling. Style-agnostic: The JGGI investment strategy is agnostic as between value and growth, focusing purely on the best total return opportunities. This affords the investment manager the flexibility to tilt the portfolio further towards, or further away from, value stocks or growth stocks as it sees fit, in a manner which is not possible under the Company’s current investment strategy. Deeply resourced capability: JPMorgan Chase & Co (Asset and Wealth Management) is one of the leading global asset managers with assets under management of USD3.0 trillion as at 30 September 2021, and the JGGI investment management team is supported by over 80 in-house research analysts located globally. The Board believes this highlights the increasing difficulties faced by a self-managed company with limited resources, such as the Company, to have the required depth of research to pursue a global equity mandate, and therefore the benefits of the Combination with JGGI. Attractive dividend: JGGI has a distribution policy which targets aggregate dividends in each financial year representing at least 4% of JGGI’s NAV at the end of the preceding financial year. The expected dividends of 16.96 pence per JGGI share in respect of the 12 months from 1 July 2021 represent a yield of 3.8% based on the closing JGGI share price of 441 pence on 30 November 2021. Expected substantial uplift for shareholdings in the Company: The Company’s shareholders are expected to benefit from a re-rating of their investment in the Company. The Company’s shares traded at an average discount to NAV (cum income, debt at fair value) of 10.4% in the three months preceding the announcement of the Company’s strategic review on 2 June 2021. In contrast, JGGI traded at an average premium to NAV (cum income, debt at fair value) of 2.5% over the same time period. As at close of business on 30 November 2021, JGGI’s shares traded at a 1.9% premium to NAV (cum income, debt at fair value). Since announcement of the Company’s proposal to appoint JPMF as the Company’s AIFM and undertake the Combination, the Company’s discount has narrowed from 12.6% (as at 19 October 2021) to 3.8% (as at 30 November 2021). Scale: The combined company will have net assets in excess of £1.2 billion (based on valuations as at 30 November 2021), creating a leading investment vehicle for global equity investing that delivers an attractive dividend yield. The scale of the combined company should improve secondary market liquidity for the Company’s shareholders and will achieve cost efficiencies. Low ongoing charges: JGGI will benefit from a new scaled annual management charge (‘AMC’) agreed between JGGI and JPMF. By way of illustration, based on valuations as at 30 November 2021, this new AMC would result in an initial weighted average AMC of 0.49% of net assets and forecast ongoing charges of 0.56% in the 12 months following implementation of the Combination. For the avoidance of doubt, during the period of JPMF’s appointment as the Company’s AIFM up until implementation of the Combination, JPMF will be entitled to receive a management fee payable by the Company quarterly at a rate equivalent to 0.55% per annum on net assets. Leading investment trust platform: JPMorgan Asset Management (UK) Limited (‘JPMAM’) is one of the leading managers of closed-ended vehicles in the UK, managing 20 investment companies with an aggregate market cap in excess of £13.4 billion (as at 30 November 2021). JGGI benefits from JPMAM’s extensive investment company management and marketing resources. Contribution from J.P. Morgan Asset Management: JPMAM has agreed to make a costs contribution in respect of the Combination equivalent to the management fees payable by the enlarged vehicle in respect of the eight month period immediately following completion of the Combination. Timescale It is anticipated that it may be a number of months before the Combination can formally proceed, due to the additional complexities inherent in a self-managed investment vehicle such as the Company. The Board, JGGI and JPMF agreed that the process should be effected in two stages, with the Company initially appointing JPMF (which will delegate to JPMorgan Asset Management (UK) Limited (‘JPMAM’)) to manage its portfolio and adopting a new investment strategy substantially identical to that of JGGI. The Investment Management Change, the first stage in this process, was approved by shareholders at the General Meeting on 9 December. This will take effect on or around 21 January 2022 from which point the Company will be managed by JPMF and JPMAM in a comparable fashion to JGGI. It is expected that realignment of the portfolio will occur around the date of JPMF’s appointment. It is also expected that company secretarial and administration functions will also move across to JPMAM as part of the Investment Management Change. The Combination, the second stage, will proceed as and when the Company has taken all steps necessary to allow it to be placed into liquidation in an orderly fashion. At that time, the scheme of reconstruction will take place and the Company's shareholders will have their shareholdings in the Company replaced with shares in the newly enlarged JGGI. Chairman’s Statement (continued) The Scottish Investment Trust PLC | Annual Report 2021 05 Chairman’s Statement (continued) While the two stages of the process are inextricably linked, so that support for the appointment of JPMF as the Company's manager is also likely to imply support for the Combination, the latter will be the subject of separate shareholder votes at general meetings of the Company to be held in the first quarter of 2022. It is currently anticipated that the Combination will be undertaken at the end of the first quarter of 2022. Debtholders The Company currently has both secured bonds and perpetual debenture stock. Implementation of the Combination is conditional on the approval of the secured bond holders and the Board continues to liaise with the trustee of the bonds in seeking to obtain the approval of the underlying holders as soon as possible. The Board intends to repay the perpetual debenture stock following implementation of the Combination (if approved). Dividends following the Combination Under JGGI’s current distribution policy, at the start of each financial year the company announces the distribution it intends to pay to shareholders in the forthcoming year in quarterly instalments. In aggregate, JGGI’s current intention is to pay dividends totalling at least 4% of the NAV of JGGI as at the end of the preceding financial year. Where the target dividend is likely to result in a dividend yield that is materially out of line with the wider market, the JGGI board may choose to set the target dividend at a different level that is more in-line with the wider market and other global income trusts and funds. For the avoidance of doubt, the Company’s current dividend policy will not change up until the effective date of the Combination. Following implementation of the Combination, the above JGGI dividend policy (which includes the ability to pay dividends out of capital) will apply to all new JGGI shares held by the Company’s shareholders. Whilst the JGGI policy differs from the approach adopted by the Company historically (which has focused on payment of dividends from earnings, as supplemented by revenue reserves), your Board believes the ability to pay dividends out of capital can offer tangible benefits to shareholders, including allowing the investment manager to retain full flexibility and control over stock picking without sacrificing high conviction opportunities in the pursuit of yield, and offering the ability to smooth dividend payments through low yield environments. Annual General Meeting (‘AGM’) The Board continues to monitor the impact of the Covid-19 pandemic upon the arrangements for the Company’s AGM. The Board was disappointed that the AGM in 2020 was restricted to following the minimum legal requirements for an AGM but believes it was in the best interests of shareholders. At present, the intention is to hold the Company’s AGM on Tuesday, 1 February 2022 at 10.30am at The Royal College of Physicians of Edinburgh, 9 Queen Street, Edinburgh, EH2 1JQ. Should there be a change of circumstances, shareholders will be notified in the usual way through an announcement. A representative of JP Morgan Asset Management will give a presentation at the forthcoming AGM on the Company’s new investment strategy. The Company’s in-house team Pending the Investment Management Change around 21 January 2022, the Company’s investment management team will continue to manage the portfolio in line with the Company’s current investment strategy. The Board and I are grateful for the considerable efforts of the whole ‘Scottish’ in-house team over both recent years and during the period of the investment management review and would like to place on record our deep gratitude to them. All team members are dedicated, enthusiastic and professional and have worked hard in every aspect of their respective roles to deliver for shareholders. The last few years have, however, been a challenging period during which to manage money with a contrarian approach. Outlook The economy, and investment markets, appear to be at a delicate point as the world emerges from the pandemic and attempts are made to unwind the massive stimulus programmes that helped avert greater fallout. The economy remains in a state of flux, with the after-effects of the pandemic disruption to industry colliding with a resurgence in demand. Pinch points within supply chains are evident across many sectors, potentially slowing the economic recovery. Inflation is an obvious consequence, and the world appears to be adjusting to the notion that this could be more persistent than some had initially believed. Notwithstanding the various challenges that the current environment holds, we are optimistic for the future and we believe that shareholders will be well served by the new arrangements. James Will Chairman 17 December 2021 06 The Scottish Investment Trust PLC | Annual Report 2021 Board of Directors James Will Appointed to the Board in May 2013 and became Chairman in January 2016. Chair of the Nomination Committee. James 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. He is Chair of Asia Dragon Trust plc and Senior Independent Director of Herald Investment Trust plc. Shares held: 10,000 Fees: £60,000 Jane Lewis Appointed to the Board in December 2015. Chair of the Remuneration Committee and Senior Independent Director. Jane 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. She is Chair of Invesco Perpetual UK Smaller Companies Investment Trust PLC and a director of BlackRock World Mining Trust plc, BMO Capital and Income Investment Trust PLC and Majedie Investments PLC. Shares held: 2,500 Fees: £32,500 Mick Brewis Appointed to the Board in December 2015. Mick is an experienced investor who was a partner at Baillie Gifford for 21 years, heading the North American equities team and having global asset allocation responsibilities. Prior to that he managed UK equity portfolios at the firm. He has a non-executive advisory role with Castlebay Investment Partners, and is a trustee of the National Library of Scotland Foundation and the OG Bursary Fund. Shares held: 10,000 Fees: £32,500 Karyn Lamont Appointed to the Board in October 2017. Chair of the Audit Committee. Karyn is a chartered accountant and former audit partner at PwC, which she left in 2016. 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. She is a director of The North American Income Trust plc, The Scottish American Investment Company P.L.C., Scottish Building Society and iomart Group plc. Shares held: 2,500 Fees: £40,000 Neil Rogan Appointed to the Board in September 2019. Neil has broad experience of investment companies both as an investment manager and as a non-executive director. He was Head of Global Equities at Gartmore with sole responsibility for Gartmore Global Focus Fund. At Jardine Fleming Investment Management and Fleming Investment Management, he was the lead manager of Fleming Far Eastern Investment Trust for many years. He is Chair of both Murray Income Trust PLC and Invesco Asia Trust plc. Shares held: 10,352* Fees: £32,500 *8,456 held personally, 1,896 by members of his family. The Scottish Investment Trust PLC | Annual Report 2021 07 Manager’s Review This year represented a microcosm of the longer term fortunes of our investment strategy. Relative to wider markets our results were not as strong as we would have hoped, although the portfolio did record an absolute gain. Our holdings enjoyed a brief but notable period of strong returns as confidence built in the prospects for ‘reopening’ which raised our hopes of a sustained turn in market leadership. We have applied our contrarian philosophy consistently over the last five years in the belief that, when cycles ultimately change, it would prove rewarding. However, we were, once again, left jilted at the metaphorical altar as the prospects for economic growth slowed in the summer. The scale of economic stimulus remained extraordinary but investors became concerned that this stimulus was likely to be scaled back due to a pronounced pick up in the rate of inflation. A wall of money has been created which had been largely confined to speculative activities but has now clearly filtered into the ‘real’ world. How this issue is addressed will have an important bearing on markets in future years. The portfolio Portfolio activity was concentrated in the early part of the period, as increased confidence in the outlook allowed an acceleration towards ideas best placed for the recovery phase, taking advantage of discounted valuations in the process. Several new positions were established, replacing some of the more defensive investments taken at the outset of the pandemic to shield capital. Exposure to the financials sector was increased, including a new investment in US bank Wells Fargo (+£9.8m total return). Wells Fargo is focused on major operational improvement and its potential for success had not been credited, in our view. As the economic outlook improved, many banks were able to reclaim some of the significant reserves that were set aside earlier in the pandemic to absorb anticipated credit losses. This tailwind lifted most of our banks, including Banco Santander (+£5.0m), Lloyds Banking (+£3.1m), JPMorgan Chase (+£2.8m), First Horizon National (+£2.4m), Intesa Sanpaolo (+£2.3m), Mitsubishi UFJ Financial (+£2.0m). Only Brazilian bank Itaú Unibanco (-£1.0m) recorded a loss as local markets fared less well. Investments in insurers Aegon (+£4.5m), AIG (+£3.4m) and Aviva (+£1.4m) were bolstered by progress with efforts to streamline each of those businesses alongside hardening prices for general insurance. The reopening of the economy supported greater demand for energy, and good gains were recorded across our investments in this sector. Energy majors Exxon Mobil (+£8.0m), Royal Dutch Shell (+£7.3m), BP (+£7.3m), TotalEnergies (+£6.6m) and Chevron (+£2.2m) were all buoyed by higher energy prices. This improved backdrop also supported energy services companies such as Halliburton (+£6.2m) and Helmerich & Payne (+£2.0m). Among communication services stocks, BT (+£5.4m) was boosted by the regulatory clarity that emerged from Ofcom’s review of the fibre market. There was also a solid gain for South African multinational MTN (+£5.2m), which is moving past legacy challenges. Further gains came from Australian operator Telstra (+£2.4m) and Germany’s Deutsche Telekom (+£1.0m) while, in the US, Verizon Communications (-£1.2m) recorded a loss. The positive return for French media agency Publicis (+£1.4m) was supported by an inflection in cyclical and secular growth trends. There were solid gains within the retail sector where we see a number of successful business transformations underway, including US fashion house and retailer Capri (+£3.8m), UK based DIY group Kingfisher (+£3.2m), US retailer Target (+£1.5m), and French supermarket chain Carrefour (+£1.2m). We made a well timed divestment of Tesco (+£2.6m), as the group had largely fulfilled its turnaround ambitions. Consumer stocks linked to social activities were lifted by easing pandemic restrictions. US theme park operator Six Flags Entertainment (+£1.3m) saw a strong recovery in demand as its properties reopened. Easing lockdowns also helped Brazilian brewer Ambev (+£1.3m) which saw robust growth in beer volumes. Meanwhile, Japanese beverages conglomerate Kirin (-£1.2m) dipped amid a slower reopening of the domestic economy. We reduced our exposure to tobacco during the year, though retained investments in Altria (+£1.9m) and Philip Morris International (+£0.9m) where discounted valuations suggested that durable cash flows and a transition to lower risk products were not yet recognised. Within the healthcare sector, Pfizer (+£2.0m) has been instrumental in the Covid 19 response and has received a substantial boost to cash flow from its vaccine. Efforts to reinvigorate growth and improve operations helped US biopharmaceutical major Gilead Sciences (+£1.4m) and French health group Sanofi (+£1.1m). 08 The Scottish Investment Trust PLC | Annual Report 2021 Manager’s Review (continued) Our holdings in gold miners were a notable disappointment. Soaring inflation would, ordinarily, be a favourable backdrop for gold. Despite that, gold prices were swayed by other market forces over the short run of this financial year. Barrick Gold (-£14.5m), Newmont (-£7.5m), Newcrest Mining (-£4.3m), AngloGold Ashanti (-£3.6m) and Gold Fields (-£1.4m) all recorded declines. UK engineering services group Babcock International (+£1.7m), which plays a critical role in the UK’s defence capabilities, is restoring its balance sheet and profitability under new leadership. US industrial equipment group General Electric (+£0.9m) rose as its operational turnaround gained momentum. Meanwhile, East Japan Railway (-£1.2m) declined as passenger volumes in Japan remained curtailed by the pandemic. Valedictory This is the final Manager’s Review for the company in self managed form. One of the benefits of having occupied the same building since 1889 is access to my predecessors’ musings which catalogue, with an investor’s eye, the history of the modern world. There are many lessons to draw but perhaps the most striking is that change is constant. With that in mind, the proposed combination with JPMorgan Global Growth & Income heralds a new era for shareholders of The Scottish Investment Trust. It has been an honour and privilege to serve the Company in various roles over the past 18 years. I have always enjoyed my interactions with shareholders over the years, whether in person, over a cup of coffee at the AGM, or in writing and I would be delighted to hear from any of you who wish to remain in touch. Additionally, it has been tremendous working with such a dedicated and enthusiastic in house team. I am grateful to them, and the Board, for their support as a niche investment offering was created. This attempted to preserve the very best elements of the self managed model but, at the same time, making the essential changes to ensure the Company was relevant for the modern era. However, the time has come for the Company to start a new chapter. The team and I wish the Company every success for the future. Alasdair McKinnon Manager 17 December 2021 The Scottish Investment Trust PLC | Annual Report 2021 09 Manager’s Review (continued) Our approach To apply our approach, we divide the stocks in which we invest into three categories. First, we have those that we describe as ugly ducklings – unloved shares that most investors shun. These companies have endured an extended period of poor operating performance and, for the majority, the near- term outlook continues to appear uninspiring. However, we see their out-of-favour status as an opportunity and can foresee the circumstances in which these investments will surprise on the upside. The second category consists of companies where change is afoot. These companies have also endured a long period of poor operating performance but have recently demonstrated that their prospects have significantly improved. However, other investors continue to overlook this change for historical reasons. In our third category, more to come, we have investments that are more generally recognised as good businesses with decent prospects. However, we see an opportunity as we believe there is scope for further improvement that is not yet fully recognised.for further improvement that is not yet fully recognised. Improving Reluctant Pessimistic Underestimated Overlooked Challenged OPERATING PERFORMANCE ugly ducklings positive potential change is afoot overlooked progress more to come underappreciated prospects MARKET SENTIMENT Categorisation of Investments 10 The Scottish Investment Trust PLC | Annual Report 2021 Manager’s Review (continued) Contribution % Equity portfolio (ungeared) +14.4 Gearing +1.7 Total equities +16.1 Other income and currency -0.2 Buybacks +0.8 Expenses -0.8 Interest charges -0.6 Change in market value of borrowings +0.7 Change in pension surplus -0.1 NAV with borrowings at market value total return +15.9 NAV Absolute Performance Attribution Year to 31 October 2021 Top Ten Gains and Losses Year to 31 October 2021 Gains £m Wells Fargo 9.8 Exxon Mobil 8.0 Royal Dutch Shell 7.3 BP 7.3 TotalEnergies 6.6 Halliburton 6.2 BT 5.4 MTN 5.2 Banco Santander 5.0 Aegon 4.5 Losses £m Barrick Gold -14.5 Newmont -7.5 Newcrest Mining -4.3 AngloGold Ashanti -3.6 Cheesecake Factory -2.9 Gold Fields -1.4 East Japan Railway -1.2 Verizon Communications* -1.2 Kirin -1.2 Itaú Unibanco -1.0 *sold during the year. The Scottish Investment Trust PLC | Annual Report 2021 11 The Investment Team Alasdair McKinnon Manager Alasdair joined the Company in 2003 and became Manager in 2015. He has 22 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. James Webb Investment Manager James joined the Company as an Investment Manager in 2020. He has 9 years of investment experience. He graduated MA with Honours in Economics and International Relations from the University of Aberdeen. James is a CFA® charterholder. Igor Malewicz Investment Analyst Igor joined the Company in 2017. He graduated MA with Honours in Economics and Finance and MSc in Petroleum, Energy Economics and Finance, both from the University of Aberdeen. Martin Robertson Deputy Manager 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 11 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. 12 The Scottish Investment Trust PLC | Annual Report 2021 Strategic Report Business Model and Status This section should be read in conjunction with the Chairman's Statement on pages 3 to 5 which sets out important information about the future of the Company. 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. The Company has a premium listing on the London Stock Exchange, within the Financial Services sector, and is identified by the TIDM or ticker symbol ‘SCIN’. The Company’s ISIN is GB00007826091 and SEDOL is 0782609. 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 the MSCI All Country World Index, the composition of the index 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 index. 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 19 and 20 and detailed analysis of the spread of investments by geographic region and industry sector is shown on page 21. A further analysis of changes in asset distribution by industry sector over the year, including the sources of gains/losses, is shown on page 22. Attribution of NAV performance is shown on page 10. At the year end, the number of listed holdings was 51 (2020: 59). The top ten holdings comprised 34.5% of total assets (2020: 39.5%). 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 7 to 9. The Scottish Investment Trust PLC | Annual Report 2021 13 Manager’s Review (continued) Additional limitations on borrowings Under the Company’s Articles of Association, the Directors control the borrowings of the Company and its subsidiary to ensure that the aggregate amount of borrowings does not, unless approved by an ordinary resolution of shareholders, exceed the aggregate of the reserves excluding unrealised capital profits of the Company and its subsidiary, 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 Company are considered under the following categories: • Strategic – the level of investor appetite for the Company declines resulting in divestment or the Company’s objective is challenged by significant external events such as regulatory change, global financial instability and the uncertainties around the consequences of Brexit, Scottish independence and the global pandemic; • Investment portfolio and performance – the Company becomes unattractive due to the level of relative performance, whether against peers or global market trends; • Financial – failure to set and monitor appropriate policies and controls in relation to market risk, credit risk and liquidity risk; • Operational – the potential failure of the Company’s third party service providers’ systems, including vulnerability to cyber attack or loss of key personnel; and • Tax, legal and regulatory – compliance with existing requirements and the ability to identify and respond to the continued volume of change in this area. 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 pages 29 to 30 and in note 16 to the accounts on pages 59 to 64 and on internal controls in the Report of the Audit Committee on page 32. Performance Management provides the Board with detailed information on the Company’s performance at every Board meeting. Performance is assessed in comparison with the Company’s peers and the comparator index. During the financial year, the Board received regular updates from the management team, in response to and in order to more closely monitor market volatility and macro-economic uncertainty caused by the global pandemic. Key Performance Indicators The Directors use the following Key Performance Indicators (KPIs) and a number of Alternative Performance Measures (APMs) in order to assess the Company's success in achieving its objectives. These KPIs and APMs are viewed by the Board to be the most appropriate long term measures to enable investors to gain an understanding of the Company's business. • 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. Due to the contrarian nature of the Company's investment strategy, no formal targets are set for the KPIs and APMs referred to above. Definitions of the APMs can be found in the Glossary on pages 68 and 69. 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 7 to 9. Dividends The Board may declare dividends, including interim dividends, but no dividend is payable in excess of the amount recommended by the Directors. The Company updated its Articles of Association in 2019 to allow distribution of its capital profits. The Directors recommend a final dividend of 7.0p payable on 11 February 2022. With the interim dividends each of 5.8p already paid in May, August and November 2021, this makes a total of 24.4p for the year. Based on 66,173,178 shares in issue at 31 October 2021, the final dividend will cost £4.632m. The total dividend for the year will cost £16.195m. Share capital General The Company had 66,173,178 shares of 25p each in issue on 31 October 2021 (2020: 72,896,247). Since the year end, the Company has not bought back any shares. 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. Strategic Report (continued) 14 The Scottish Investment Trust PLC | Annual Report 2021 Rights to the capital of the Company on winding up Shareholders would be entitled to the assets of the Company in the event of a winding up (after the Company’s other liabilities had been satisfied). Voting On a show of hands, every shareholder present in person or by proxy has one vote and on a poll every member present in person or by proxy has one vote for each share. Transfer There are no restrictions concerning the holding or transfer of shares in the Company and there are no special rights attaching to any of the shares. The Company is not aware of any agreements between shareholders which might result in any restriction on the transfer of shares or their voting rights. Deadlines for exercising voting rights If a shareholder wishes to appoint a proxy to attend, speak and vote at a meeting on their behalf, a valid appointment is made when the form of proxy (together, where relevant, with a notarially certified copy of the power of attorney or other authority under which the form of proxy is signed) is received by the Company’s registrar not less than 48 hours before the start of the meeting or the adjourned meeting at which the proxy is appointed to vote (or, in the case of a poll taken more than 48 hours after it is demanded, no later than 24 hours before the time appointed for taking the poll). In calculating these time periods, no account is taken of any day or part thereof that is not a working day. 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 2021, the Company bought back for cancellation a total of 6,723,069 shares of 25p each representing 9.2% of shares in issue at 31 October 2020, at a cost of £48,411,000. At the AGM on 2 February 2021, authority was granted to repurchase up to 14.99% of shares in issue on that date. The number of shares authorised for repurchase was 10,578,569. Share buybacks from the date of the AGM to the Company’s year-end amounted to 4,397,664 shares or 6.23% out of the 14.99% authority. Holdings in listed closed-ended investment funds 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 £2.4m (0.4% of shareholders’ funds). These comprise the Company’s office property and subsidiary company. Viability statement As shareholders will be aware, the Board recently concluded a review of the Company’s investment management arrangements. The outcome of this review was a recommendation by the Board that the Company’s assets be combined with those of JPMorgan Global Growth & Income PLC (‘JGGI’) by means of a section 110 scheme of reconstruction (the ‘Scheme’). Upon completion of the combination of the assets and the allotment of JGGI shares to shareholders, the implementation of the Scheme will, subject to shareholder approval at general meetings, result in the voluntary liquidation of the Company. The outcome of the general meetings to place the Company into liquidation represents a material uncertainty in the context of the preparation of these financial statements. Notwithstanding this, the Directors have assessed the prospects of the Company for a period of five years. The Board believes this time period continues to be most appropriate as it aligns with the Company’s strategy to deliver above-average returns over the longer term, being at least five years. 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 (or premium), asset allocation, income and operating expenses. Consideration was also given to the principal risks and uncertainties faced by the Company (outlined in more detail on page 29), its portfolio of liquid listed international equity investments and cash balances, as well as its ability to achieve the stated dividend policy and to cover the interest payments on the Company's debt. The Board has also considered the implications of the global pandemic and resultant global macro- economic uncertainty, in relation to the Company’s Strategic Report (continued) Discount to NAV* 5 Years to 31 October 2021 0 3 6 9 12 15 18 Oct 16 Oct 17 Oct 18 Oct 19 Oct 21 Oct 20 % 0 3 6 9 12 15 18 % Discount to Cum-Income NAV * with borrowings at market value Source: The Company Discount to Ex-Income NAV The Scottish Investment Trust PLC | Annual Report 2021 15 Strategic Report (continued) investment position, its future income streams, its gearing covenants and its ability to continue trading operationally. The Company was in a resilient financial position as at 31 October 2021, with a strong asset-backed balance sheet and a flexible team capable of adapting to different working patterns. If necessary, the Company would be able to withstand continuing market volatility, reduced asset values and income streams and a depressed macro-economic outlook for a considerable period of time. Based on the above, and notwithstanding a more uncertain macro-economic outlook this year, the Board confirms it has a reasonable expectation that the Company would be able to continue in operation and meet its liabilities as they fall due over the five year period of this viability assessment. Stakeholder relations (s.172 Statement) In performing its duties, the Board applies the following key principles of section 172 of the Companies Act 2006, being those relevant to the Company as a listed investment company, to all its decision making: (a) the likely consequences of any decision in the long term; (b) the interests of the Company’s employees; (c) the need to foster the Company’s business relationships with suppliers, customers and others; (d) the impact of the Company’s operations on the community and the environment; (e) the desirability of the Company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the Company. As the Board considers that the Company in fact has relatively few external stakeholders, the key groups being its shareholders, its employees and key service providers, all of which are fundamental to the success of the Company, the Directors have focused attention on ensuring the following robust mechanisms protect their interests: Stakeholder Engagement in year Shareholders Employees The Board recognises the importance of communications with shareholders. The primary modes of communication are the interim and annual reports which are designed to provide shareholders with a full understanding of the Company's activities and performance. As a result of the review of investment management arrangements and the resultant decision to recommend the Combination with JGGI, the Board has had greater engagement with shareholders during the year by way of the publication of regulatory announcements, thereby ensuring that shareholders remained apprised of developments. Subsequent to the year end a circular was sent to shareholders setting out the proposed transaction and the rationale for the Board’s decision. The circular also included notice of a general meeting of the Company whereat shareholders were invited to vote on the proposed change of AIFM. Shareholders voted in favour of the change of AIFM at the general meeting which took place on 9 December 2021. The Company also engages with shareholders and potential shareholders via its website, social media and a regular newsletter. Under normal circumstances, the Board welcomes the opportunity to meet with shareholders at the Annual General Meeting and to respond to any questions that may be raised. Due to the unprecedented circumstances arising from the global pandemic, the Company held a closed AGM in 2021. Shareholders are welcome to submit questions ahead of the AGM or at any time throughout the year via email to info@thescottish.co.uk or by writing to the Chairman at the Company’s registered office. The Company is fortunate to benefit from a group of long-serving, experienced staff. The team works closely with the Board in defining and implementing strategy to meet the Company’s objective. In light of the small number of employees, there is regular formal and informal interaction between the Board and staff. An Employee Handbook is provided to all staff. The Company has also established a whistleblowing policy which enables concerns to be raised and investigated in a confidential manner. As a result of the potentially far-reaching implications of the investment management review for employees, the Board kept staff informed of developments insofar as was reasonably practicable. Since the outbreak of the global pandemic, provision has been made to ensure that employees are able to work safely and effectively from home. 16 The Scottish Investment Trust PLC | Annual Report 2021 Strategic Report (continued) Principal Decisions We set out below some examples of how the Board has had regard to the matters set out in section 172(1) (a)-(f) when discharging its section 172 duty and the effect of that on decisions taken by us. We define principal decisions as both those that are material to the Company, but also those that are significant to any of our key stakeholders. In making the following principal decisions, the Board considered the relevant impact on stakeholders as well as the need to maintain a reputation for high standards of business conduct. Principal decision 1 – Review of investment management arrangements During the year, the Board undertook a review of the investment management arrangements. As announced in June 2021, the Board appointed Stanhope Consulting to assist it in this review. Proposals were invited from established fund management groups, with the experience of managing listed closed-ended funds, designed to deliver, over the longer term, above index returns through a diversified global portfolio of attractively valued companies with good earnings prospects and sustainable dividend growth. A large number of proposals were received and these were reviewed alongside the Company’s current management arrangements. Following a detailed review of all proposals, the Board concluded that a combination of the assets of the Company with JGGI by means of a section 110 scheme of reconstruction would be in the best interests of the Company and its shareholders as a whole. In reaching this decision, the Board took into consideration the implications for the Company’s other key stakeholders, including its employees and third party service providers. The Chairman’s Statement on page 4 explains the benefits to shareholders of this decision. Principal decision 2 – Dividend declarations Each year, in conjunction with advice from the Manager, the Board makes an assessment of the strength of the Company’s income, forecast revenue, revenue reserve and future prospects relative to uncertainties in the external environment and makes decisions about the payment of dividends. Despite the uncertainties arising from the global pandemic and having reviewed a range of metrics, the Board approved and declared dividends totalling £16.195m to shareholders during the year to 31 October 2021. 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 29 and in note 16 on page 60. Performance comparators The Company does not have a formal benchmark. Performance is reviewed in the context of returns achieved by a broad basket of international equities through the MSCI All Country World Index (ACWI). The portfolio is not modelled on any index. Management The Board has appointed the Company’s wholly-owned subsidiary, S.I.T. Savings Limited, as its Alternative Stakeholder Engagement in year Community & Environment In pursuing the Company’s objectives, various factors that may impact on the performance are considered and these may include environmental, social and governance issues. The consideration of ESG factors is an important part of the investment process as the Company believes that poor practices can have an impact on the value of investments and potential investments. In a broader context, the Company's operations create employment, aid economic growth, as well as generating tax revenues and wealth, thereby benefitting the community, economy and environment more generally. Key Service Providers As a company with a listing on the Premium Segment of the London Stock Exchange, the Board is mindful of the importance of ensuring compliance with appropriate corporate legislation and the rules and regulations of the Financial Conduct Authority insofar as they relate to the Company and its wholly owned subsidiary, S.I.T. Savings Limited. There is a robust oversight framework in place to evaluate the performance of key service providers, including Maitland (who provide company secretarial and administration services) as well as our custodian and depositary. The Board and management maintain regular communication with senior personnel at key service providers to provide feedback, ensure open communications and to develop and maintain long-term collaborative partnerships. The Company continued to monitor its key service providers during the year to ensure that service levels are maintained and that business continuity processes continue to operate effectively. The Scottish Investment Trust PLC | Annual Report 2021 17 Strategic Report (continued) Investment Fund Manager (AIFM). On 9 December 2021, shareholders approved the appointment of JPMorgan Funds Limited as the Company’s AIFM, such appointment to take effect on or around 21 January 2022. 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 Limited to provide company secretarial, administration and accounting services to the Company. Northern Trust acts as custodian and depositary. Substantial shareholdings At 31 October 2021, the Company had been informed of the following notifiable interest in its voting rights: Shares % held 1607 Capital Partners, LLC 3,785,706 5.7 Analysis of share register at 31 October 2021 Category of holder Share capital % Individuals 86.0 Investment companies 4.0 Pension funds 4.0 Other 6.0 Total 100.0 Company’s directors and employees The table below shows the breakdown of Directors and employees. 31 October 2021 31 October 2020 Male Female Male Female Directors 3 2 3 2 Senior Manager 1 0 1 0 Employees 5 4 5 5 Purpose, Culture and Stakeholders Reflecting the time the Board has spent considering these areas during the year, our stakeholder responsibilities and approach to purpose, culture and values are reviewed in more detail on pages 15 to 16 and 30. 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. Environmental, social and governance (ESG) considerations are inextricably linked with the risks and returns of an investment and, accordingly, are integral to our investment process. ESG and due diligence on new investments We do not apply prescriptive criteria but instead consider the circumstances of each situation, as part of our process of conducting research on potential investee companies. For each investment, analysis of material ESG risks relating to the company, or sector, forms part of the overall assessment of risk. Where material risks are recognised, we identify and record any specific mitigations in place. In the absence of sufficient mitigating factors, the potential investment would be rejected. If our analysis identifies ESG shortcomings which are insufficient to deter investment, we will engage with the company to highlight these as an area meriting action. ESG and existing investments When we have an ESG concern pertaining to an existing investment, we will first consider the impact on the long term sustainability of our investment case. Depending on our conclusion, we will either engage with the company to encourage an appropriate resolution of the issue or sell the investment. We may use our voting powers to further voice our opinion should the need arise. Voting powers We review resolutions put to general meetings of investee companies and, wherever practicable, will vote, usually by proxy. In voting on its shareholdings, the Company normally supports management, but will vote against resolutions which are considered damaging to shareholders’ rights or interests. Modern Slavery 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. Anti-bribery and corruption The Company has a zero tolerance policy towards bribery and corruption and a commitment to carry out business fairly, honestly and openly. The Company has an Anti-Bribery and Corruption Policy with which all staff are required to comply. Criminal Finances Act 2017 The Company has a zero tolerance policy to tax evasion and the facilitation of tax evasion. The Strategic Report was approved by the Board and signed on its behalf by: James Will Chairman 17 December 2021 18 The Scottish Investment Trust PLC | Annual Report 2021 Oct 16 Oct 17 Oct 18 Oct 19 Oct 21 Oct 20 NAV* and Share Price against Comparator Indices Total Return – 5 years to 31 October 2021 *with borrowings at market value Chart data source: Bloomberg and the Company MSCI ACWI Share Price NAV 90 110 130 150 170 190 210 90 110 130 150 170 190 210 Financial Summary 2021 2020 Change % Total return % NAV with borrowings at market value 851.1p 755.5p 12.6 15.9§ NAV with borrowings at amortised cost 886.3p 793.6p 11.7 14.7§ Ex-income NAV with borrowings at market value§ 845.1p 750.9p 12.5 Ex-income NAV with borrowings at amortised cost 880.3p 789.0p 11.6 Share price 820.0p 681.0p 20.4 24.3 Discount to NAV with borrowings at market value§ 3.6% 9.9% MSCI ACWI 27.6 29.5 £’000 £’000 Equity investments 620,106 581,235 Pension surplus 414 1,161 Net current assets 50,231 80,542 Total assets 670,751 662,938 Long-term borrowings at amortised cost (84,105) (84,013) Pension scheme deferred tax on surplus (145) (406) Shareholders’ funds 586,501 578,519 Earnings per share 22.78p 21.70p 5.0 Regular dividend per share (2021: proposed final 7.00p) 24.40p 23.20p 5.2 UK Consumer Prices Index – annual inflation 4.2 Year’s High & Low Year to 31 October 2021 Year to 31 October 2020 High Low High Low NAV with borrowings at market value 914.1p 755.5p 924.0p 705.2p Closing share price 827.0p 681.0p 841.0p 557.0p Discount to NAV with borrowings at market value 14.9% 3.6% 25.8% 5.9% § Alternative Performance Measures (please refer to Glossary on pages 68 and 69). The Scottish Investment Trust PLC | Annual Report 2021 19 List of Investments As at 31 October 2021 Listed Equities Holding Country Market value £’000 Cumu­lative weight % Newcrest Mining Australia 29,760 Newmont US 28,436 Barrick Gold Canada 25,598 Wells Fargo US 24,634 Exxon Mobil US 22,381 BT UK 20,774 Royal Dutch Shell UK 20,672 Halliburton US 20,565 Banco Santander Spain 19,844 TotalEnergies France 18,704 37.3 BP UK 18,298 East Japan Railway Japan 17,139 AIG US 16,353 Gilead Sciences US 15,991 Kingfisher UK 14,184 Mitsubishi UFJ Financial Japan 14,143 AngloGold Ashanti South Africa 13,920 Sanofi France 13,899 United Utilities UK 13,888 Kirin Japan 13,482 61.7 Gold Fields South Africa 12,484 Six Flags Entertainment US 12,420 MTN South Africa 11,650 Cheesecake Factory US 11,326 Helmerich & Payne US 11,115 Ambev Brazil 10,975 Intesa Sanpaolo Italy 10,886 Pfizer US 10,275 Carrefour France 10,230 Aegon Netherlands 9,773 79.6 Lloyds Banking UK 9,299 Babcock International UK 9,167 General Electric US 9,113 Itaú Unibanco Brazil 8,987 Publicis France 7,484 Altria US 7,466 First Horizon US 7,230 Aviva UK 7,065 KPN Netherlands 6,237 Whitbread UK 6,211 92.3 20 The Scottish Investment Trust PLC | Annual Report 2021 As at 31 October 2021 Listed Equities Holding Country Market value £’000 Cumu­lative weight % Bristol-Myers Squibb US 5,965 Hennes & Mauritz Sweden 5,423 Bayer Germany 5,218 Adecco Switzerland 4,945 AT&T US 4,845 Tele2 Sweden 4,384 Philip Morris International US 3,585 Royal Mail UK 3,036 PageGroup UK 2,881 CCR Brazil 2,827 99.2 Capri US 2,564 Total listed equities 617,731 99.6 Unlisted Holding Country Market value £’000 Cumu­lative weight % Heritable property and subsidiary UK 2,375 Total unlisted 2,375 0.4 Total equities 620,106 100.0 The 10 largest holdings have an aggregate market value of £231,368,000 List of Investments (continued) Listed Equities by Category (Market Value Weighted) more to come 2% ugly ducklings 47% change is afoot 51% The Scottish Investment Trust PLC | Annual Report 2021 21 Distribution of Assets 31 October 2021 % 31 October 2020 % UK 19.1 15.6 Europe (ex UK) 17.4 13.5 North America 35.7 36.6 Latin America 3.4 0.4 Japan 6.7 7.9 Asia Pacific (Ex Japan) 4.4 10.8 Middle East & Africa 5.7 2.9 Pension surplus 0.1 0.2 Net current assets 7.5 12.1 Total assets 100.0 100.0 by Region Allocation of Total Assets 31 October 2021 % 31 October 2020 % Energy 16.7 4.9 Materials 16.4 22.9 Industrials 7.3 0.9 Consumer Discretionary 7.8 1.9 Consumer Staples 6.8 15.7 Health Care 7.6 14.5 Financials 19.5 5.0 Information Technology – – Communication Services 8.2 13.0 Utilities 2.1 8.9 Real Estate – – Pension surplus 0.1 0.2 Net current assets 7.5 12.1 Total assets 100.0 100.0 by Sector Distribution of Total Assets Total equities 92.4% Pension surplus 0.1% Net current assets 7.5% Allocation of Shareholders’ Funds % Total equities 105.7 Pension surplus 0.1 Net current assets 8.5 Borrowings at amortised cost -14.3 Provisions for liabilities 0.0 Shareholders’ funds 100.0 22 The Scottish Investment Trust PLC | Annual Report 2021 Changes in Shareholders’ Funds 31 October 2020 £m Net purchases (sales) £m 31 October 2021 £m Gains/ (losses) £m Dividend income £m Total return £m Total equities 581.2 (23.8) 620.1 62.7 19.6 82.3 Pension surplus 1.2 – 0.4 Net current assets 80.5 (29.1) 50.2 Total assets 662.9 (52.9) 670.7 Borrowings at amortised cost (84.0) (0.1) (84.1) Provision for liabilities (0.4) – (0.1) Shareholders’ funds 578.5 (53.0) 586.5 by Sector 31 October 2020 £m Net purchases (sales) £m Gains/ (losses) £m 31 October 2021 £m Energy 32.7 42.8 36.2 111.7 Materials 151.7 (7.7) (33.8) 110.2 Industrials 6.0 43.3 (0.2) 49.1 Consumer Discretionary 12.8 33.9 5.4 52.1 Consumer Staples 103.7 (62.1) 4.1 45.7 Health Care 95.8 (46.0) 1.6 51.4 Financials 32.9 62.2 35.5 130.6 Information Technology – – – – Communication Services 86.3 (44.5) 13.6 55.4 Utilities 59.3 (45.7) 0.3 13.9 Real Estate – – – – Total equities 581.2 (23.8) 62.7 620.1 Distribution of Assets (continued) Changes in Asset Distribution The Scottish Investment Trust PLC | Annual Report 2021 23 Ten Year Growth Record Year to 31 October Earnings per share Regular dividend per share1 Consumer Prices Index Share price Share price total return NAV (debt at amortised cost) total return NAV (debt at market value) total return MSCI ACWI4 total return 2011 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2012 96.6 108.2 102.6 106.0 108.4 109.2 108.4 108.8 2013 107.9 111.5 104.9 133.4 139.4 135.2 138.9 134.4 2014 92.6 115.4 106.2 132.3 141.4 137.3 140.3 145.5 2015 128.0 120.2 106.1 134.5 146.6 142.7 146.0 150.7 2016 173.9 129.8 107.1 170.2 190.5 185.3 189.0 194.5 2017 185.5 192.3 110.3 186.5 214.9 206.4 209.8 220.3 2018 209.3 203.8 112.9 182.5 218.9 207.2 212.0 227.8 2019 239.3 219.2 114.6 178.5 221.2 210.7 213.1 253.3 2020 174.6 223.1 115.4 150.7 194.6 189.4 190.5 265.8 2021 183.3 234.6 120.2 181.4 241.8 217.4 220.7 344.2 Ten year return per annum 6.2% 8.9% 1.9% 6.1% 9.2% 8.1% 8.2% 13.2% Five year return per annum 1.1% 12.6% 2.3% 1.3% 4.9% 3.2% 3.2% 12.1% 1. Excluding special dividends of 1.80p in 2013, 3.50p in 2015, 9.00p in 2016, 5.00p in 2017, 4.00p in 2018 and 7.45p in 2019. 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. Ten Year Record Year to 31 October Earnings per share p Regular dividend per share p1 Total expenses £’000 Ongoing charges figure % Total assets £’000 Share-­ holders’ funds £’000 Buybacks £’000 NAV (debt at amortised cost) p Share price p cum- income % ex- income % NAV (debt at amortised cost) total return % 2011 12.43 10.40 4,443 0.71 708,972 598,870 19,339 524.2 452.0 9.6 8.2 (0.0) 2012 12.01 11.25 4,632 0.79 734,801 628,244 11,121 561.6 479.0 9.8 8.6 9.2 2013 13.41 11.60 5,110 0.75 857,545 750,818 10,139 682.7 603.0 9.8 8.6 23.8 2014 11.51 12.00 4,887 0.68 841,189 734,293 11,308 679.5 598.0 9.6 8.7 1.5 2015 15.91 12.50 4,900 0.52 840,005 733,056 15,426 694.3 608.0 10.1 8.6 3.9 2016 21.62 13.50 4,080 0.49 935,934 849,017 59,944 881.2 769.5 10.0 8.1 29.9 2017 23.06 20.00 3,517 0.49 845,199 760,371 135,1883 956.8 843.0 8.8 6.8 11.4 2018 26.02 21.20 3,254 0.52 800,478 715,312 19,602 926.8 825.0 8.3 7.2 0.4 2019 29.75 22.80 4,133 0.58 761,993 676,793 26,978 915.9 807.0 8.1 6.6 1.7 2020 21.70 23.20 3,415 0.52 662,938 578,519 7,334 793.6 681.0 9.9 9.3 (10.1) 2021 22.78 24.40 3,451 0.56 670,751 586,501 48,411 886.3 820.0 3.6 3.0 14.7 Discount to NAV2 24 The Scottish Investment Trust PLC | Annual Report 2021 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 Financial Statements 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; 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 and signed on its behalf by: James Will Chairman 17 December 2021 The Scottish Investment Trust PLC | Annual Report 2021 25 Corporate Governance Report Introduction The Board prioritises the highest principles of corporate governance within its own workings and throughout the Company’s operations. The following Corporate Governance Report provides more information on: how the Company has responded to the expectations of the updated governance standards; and how the Board, supported by the committees that it has established and the executive management team, has continued to achieve its strategic aims over the course of the year. Statement of compliance The Board has reviewed the principles set out in both the UK Corporate Governance Code (revised in July 2018), which can be found at www.frc.org.uk, and the Association of Investment Companies Code of Corporate Governance (published in February 2019), which can be found at www.theaic.co.uk 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 in full. Directors’ independence A Director’s maximum tenure of office will normally be for up to nine years, except that the Board may determine otherwise if it is considered that the continued service on the Board of an individual Director is in the best interests of the Company and its shareholders. The Chairman’s maximum tenure of office will also normally be for up to nine years. However, the Board may determine otherwise if it is considered that the continued service on the Board of a Chairman, who has in addition served a period of time as a Director, is in the best interests of the Company and its shareholders. In such circumstances, the Chairman may serve up to an aggregate twelve years as an officer of the Company. Following review during the year, the Board believes that each Director is independent in character and judgement and that there are no relationships with the Company or its employees which might compromise their independence. Board committees The Board has established three committees: Audit, Remuneration and Nomination. Each of the committees has written terms of reference which are reviewed at least annually and clearly define their responsibilities and duties. The terms of reference for these committees are available on the Company’s website www.thescottish.co.uk Audit Committee The Audit Committee is chaired by Karyn Lamont and comprises the whole Board, with the exception of the Chairman, who may attend Committee meetings by invitation as an observer. The Committee 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 2021; • it has approved the 2021 Annual Report and Financial Statements as a fair, balanced and understandable assessment of the Company’s position and future prospects as at 31 October 2021; • it has considered the Company’s going concern and future viability assessments, particularly in the context of the continuing macro-economic uncertainty arising from the global pandemic and also in light of the material uncertainty in relation to going concern arising from the proposed section 110 scheme of reconstruction. Notwithstanding the material uncertainty in relation to going concern, the Audit Committee has recommended to the Board that the Financial Statements continue to be prepared on a going concern basis. Further information is given in the Going concern statement on page 28; • it has reviewed the effectiveness of the Company’s internal controls and risk management during the financial year; • 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 re-appointment of the external auditors and it has considered the proposed terms of their engagement; • it has satisfied itself as to the independence of the external auditors and agreed that any non-audit services provided by the auditors 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 32 and 33. Independent auditors The Board proposes the continuing re-appointment of PricewaterhouseCoopers LLP as auditors. PricewaterhouseCoopers LLP has expressed its willingness to be re-appointed auditors to the 26 The Scottish Investment Trust PLC | Annual Report 2021 James Will* 5 5 – – 2 2 3 3 Jane Lewis 5 5 3 3 2 2 3 3 Mick Brewis 5 5 3 3 2 2 3 3 Karyn Lamont 5 5 3 3 2 2 3 3 Neil Rogan 5 5 3 3 2 2 3 3 Company. The re-appointment is subject to shareholder approval at the Annual General Meeting to be held on 1 February 2022 and resolutions concerning PricewaterhouseCoopers LLP’s re-appointment and remuneration will be submitted to that meeting. 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 34 to 36. The Company aims to provide levels of employee remuneration which reward responsibility and achievement and are comparable with other fund management organisations operating in Scotland. Remuneration is reviewed annually. Every employee is entitled to a salary and other benefits including a contributory pension scheme. In addition, there is a discretionary performance-related bonus scheme. For all staff, bonuses payable depend, inter alia, on individual performance and the Company’s short and medium term performance in both absolute and relative terms. Any other metrics that are considered appropriate may be taken into account. Given the size and scale of the Company’s operations, the Remuneration Committee has deemed that the utilisation of a remuneration consultant is not necessary. Nomination Committee The Board has formed a Nomination Committee, membership of which comprises 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, prepares 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 as a matter of policy. In order to recruit relevant candidates, the identification of such candidates may be carried out in conjunction with 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 Financial Statements. The Committee will consider candidates on merit and against objective criteria having regard to the benefits of diversity, including gender and ethnicity. The Board’s diversity policy is discussed in more detail on pages 27 and 28. Board and committee meetings The Board has adopted a schedule of matters reserved for the Board which includes investment strategy, accounting and financial controls, dividends and announcements, capital structure (including share buybacks), gearing and major contracts. The Board has appointed the Company’s wholly- owned subsidiary, S.I.T. Savings Limited, as its 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 is shown in the table below. Ad hoc Board meetings are also held as and when required. In addition to the scheduled meetings, the review of the investment management arrangements which took place during the year resulted in a significant number of additional Board meetings. Directors’ time commitments The Company has a policy of ensuring that all non- executive directors of the Company have sufficient time to commit to the respective duties and responsibilities applicable to their particular Board roles. Corporate Governance Report (continued) * Whilst not a member of the Audit Committee, James Will was invited to, and attended, the three Audit Committee meetings held during the year. Audit Remuneration Nomination Board Committee Committee Committee Held Attended Held Attended Held Attended Held Attended The Scottish Investment Trust PLC | Annual Report 2021 27 When making new appointments, the Board takes into account other demands on potential candidates’ time and prior to appointment any significant commitments are disclosed with an indication of the time involved. In the year under review the Board assessed the time commitment of each individual Director on external appointments. Each Director’s aggregate time commitment is discussed with him or her as part of the annual appraisal process. In the year under review, all Directors were considered to have sufficient time to commit to their respective roles on the Board, taking account of their external appointments. If at any time any Director wishes to accept an additional significant external appointment, the prior approval of the Board is first required. In considering whether to grant such approval, the Board will, in particular, consider the Director’s other time commitments and any potential conflicts of interest. Biographical details for each of the Directors, including their significant external appointments, can be found on page 6. 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 also assessed and appraised in his absence by the other Directors, led by the Senior Independent Director. 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 an appraisal form and one-to-one appraisals of each Director by the Chairman (and, in the case of the Chairman, by the Senior Independent Director). The appraisals and assessments considered, amongst other criteria, the balance of skills of the Board, training and development requirements, the contribution of individual Directors and the overall effectiveness of the Board and its committees. Following this process it was concluded that the performance of each Director, the Chairman, the Board and its committees continues to be effective and that each Director and the Chairman remain committed to the Company. Appointment and re-election of Directors The Company’s policy on the appointment of Directors is shown on the Company’s website, www.thescottish.co.uk New Directors receive an induction from the Company’s Manager and the Company Secretary on joining the Board, and all Directors will receive other relevant training as necessary. All Directors are appointed for initial three year terms, renewable every three years, subject to the Company’s policy for all Directors to stand for re-election annually. Each of the Directors has made a valuable and effective contribution to the Company and the Board therefore recommends that shareholders vote in favour of their re-election. Directors’ letters of appointment are available by request to the Company's registered office. 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 and Neil Rogan) on 26 August 2016 and in favour of Karyn Lamont and Neil Rogan on their appointments. The deeds constitute qualifying third party indemnity provisions and were in place throughout the financial year and at the date of approval of these Financial Statements. 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 Corporate Governance Report (continued) 28 The Scottish Investment Trust PLC | Annual Report 2021 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, ethnicity, experience and background. 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 formal diversity targets. The Board currently consists of three male and two female Directors. This exceeds the recommendation of the ‘Women on Boards’ review by Lord Davies. Whilst the Board does not currently have the same levels of ethnic diversity, this will be kept under review by the Nomination Committee. Conflicts of interest The Companies Act 2006 and the 2018 version of the UK Corporate Governance Code require that the Board manages potential conflicts of interest. Individual directors are required to avoid situations 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. Covid-19 pandemic The Covid-19 pandemic initially had a significant impact on world stockmarkets; however, with greater knowledge around the virus, the widespread roll- out of a number of vaccines and the economic stimulus provided by governments around the world, stockmarkets have largely recovered. The Directors have considered the implications of the pandemic in determining the Company’s going concern assessment and viability statement. The Board’s investment strategy together with the Company’s financial position provide sufficient diversification, liquidity and resilience to withstand a further macro-economic downturn. The Board closely monitors market analysis of the pandemic and best practice guidance to ensure that it has the best advice available in forming related judgements. The Company's staff and those of its third party service providers have continued to work remotely for the majority of 2021. Notwithstanding this, the business continuity arrangements have all functioned efficiently, resulting in no noticeable variations in either service levels or the Company's ability to operate effectively. Going concern The Board considered, and sought advice on, the appropriateness of continuing to prepare the Financial Statements on a going concern basis. Notwithstanding the material uncertainty in relation to going concern surrounding the implementation of the proposed scheme of reconstruction (the ‘Scheme’), the Board concluded that it remained appropriate to continue to prepare the Financial Statements on a going concern basis. In reaching this conclusion the Board came to the view that, as the Scheme was contingent on shareholder approval and the Company is considered solvent in all other regards, there is no irrevocable path to liquidation and thus going concern remained the most appropriate basis for preparation. In concluding that the adoption of the going concern basis of accounting is appropriate, the Directors, and specifically the Audit Committee members, have given due consideration to the risks associated with the implementation of the Scheme, as well as the risks associated with the ongoing pandemic. The Board and the Company’s executive management monitor developments closely and are confident that the going concern basis remains appropriate. The viability statement, under which the Directors assess the prospects of the Company over a longer period, can be found on pages 14 and 15. 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. The Board confirms that an ongoing process is in place for identifying, evaluating and managing the significant risks faced by the Company in accordance with the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' issued in September 2014. This process has been in place throughout the year ended 31 October 2021 and up to the date that the Financial Statements were approved. The Directors confirm that they have undertaken a robust assessment of emerging and principal risks facing the Company during the year, including those that would threaten its business model, future performance or liquidity. The Company maintains a risk matrix which sets out the risks facing the Company, the likelihood and potential impact of each risk and the controls established to mitigate those risks. The risk matrix is reviewed by the Audit Committee and Board on a regular basis throughout the year. 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. Corporate Governance Report (continued) The Scottish Investment Trust PLC | Annual Report 2021 29 Corporate Governance Report (continued) 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. This section should be read in conjunction with the Chairman's Statement on pages 3 to 5 which sets out the potential risks associated with the implementation of the Scheme. Principal risks Mitigation Tax, legal and regulatory The Company is required to comply with a range of legislation and regulation and may be impacted by changes in the external environment. The Company employs internal and external resource to ensure compliance with relevant legislation and regulation and the Board receives periodic reports on any issues and potential changes. Strategic Risks in relation to the level of investor appetite for the Company, which may decline, resulting in disinvestments from the Company, pressure on the discount and declining economies of scale. The Company needs to remain alert to any challenges from the external environment, such as potential regulatory changes which impact the investment trust sector more widely; global financial markets which impact on the stability of the banking system; the uncertainties around the consequences of Brexit; Scottish independence; and the various risks arising from the global pandemic. The Company has a regular programme of engagement with key institutional investors and keeps shareholders and investors informed with regular communications. Quarterly board meetings review developments in the external environment and specifically in relation to the performance of the Company and take action as required. 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 the comparator index and peer group performance over discrete periods. 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. 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. These risks are magnified by the heightened risk of either a continuation of the global pandemic, or a future macro-economic event. The threat of cyber attack has become more prevalent across all sectors. The Company monitors the performance of its service providers, whether internal (S.I.T. Savings Limited is the Company’s AIFM) or external (such as: custody and depositary, company secretarial, administration and accounting services) through regular meetings and review of available internal control reports. The Company and each of its third party providers has adapted to new business continuity procedures designed to facilitate remote working whilst maintaining the operational standards required for the Company to continue to operate effectively. 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. The Company holds a portfolio which is 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. 30 The Scottish Investment Trust PLC | Annual Report 2021 Corporate Governance Report (continued) These and other risks facing the Company, are reviewed regularly by the Audit Committee and the Board. Details of the main features of the Company's internal control and risk management systems in relation to the financial reporting process are included in the Audit Committee Report on page 32. Further information on risks is detailed in note 16 to the accounts on pages 59 to 64. Relations with shareholders The Company recognises the value of good communication with its shareholders. Management engages with private client stockbrokers, wealth managers and the Company’s major institutional shareholders. The Board receives regular briefings from the Company’s broker on these themes and activity in the Company’s share register. Annual and Half-Year 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 normally encouraged to attend the AGM and to vote on the resolutions which are contained in the Notice of Meeting on page 70 and which is posted to shareholders at least 20 working days prior to the meeting. 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. Corporate Purpose, Values and Culture The Board has determined that the Company’s purpose is as set out in its established objective which 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”. This represents the Company’s purpose as envisaged by the UK Corporate Governance Code. The Company is an independent, self-managed investment trust and its values and culture reflect that independence. The Board always strives to focus on delivering long term returns for shareholders. In doing this, the Board, while recognising the Company’s distinctive heritage, aims to ensure that the Company always remains at the forefront of best practice, whether in relation to investment approach, operational excellence, shareholder communication or cost efficiency. The Board undertakes an in-depth review of the Company’s strategy annually to consider these and other matters. Our track record demonstrates that we are prepared to make changes when necessary to remain successful, as evidenced by the outcome of the recent review of investment management arrangements. Further details on the review can be found in the Chairman’s Statement on pages 3 to 5 and in the Strategic Report on page 16. The Board and the investment team prioritise extensive discussion of investment proposals, whether potential buy or sell decisions. There is a collegiate approach and a willingness to take a contrarian position to established thinking or valuations. The Board is committed to following high standards of corporate governance and always seeks to operate with integrity, transparency and respect in everything that it does. The Board is mindful of the importance of employee engagement in building and maintaining the desired culture and values throughout the Company. Further information on employee engagement is set out on page 35. 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 Scottish Investment Trust PLC | Annual Report 2021 31 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 Gross method Commitment method Maximum limit (AIFM) 200% 200% Maximum limit (Board) 120% 120% Actual at 31 October 2021 106% 114% Annual General Meeting The Company’s 134th Annual General Meeting will be held at the Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ at 10.30am on Tuesday 1 February 2022. 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 70, seeks to renew the authority to purchase shares until 1 May 2023. The principal rationale for such purchases is to reduce the discount between the Company’s share price and net asset value. This is achieved through the Company purchasing shares for cancellation at prices which, after allowing for costs, improve the NAV for remaining shareholders, in line with the Board’s discount control policy. The maximum number of shares which may be purchased pursuant to this authority shall be 9,919,359 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 Financial Conduct 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 - Authority to call General Meetings on 14 days' clear notice This resolution, set out in the Notice of AGM on page 70, seeks shareholder authority to call general meetings, other than the AGM, on 14 clear days’ notice. The approval will be effective until the Company’s next AGM. The Board will utilise this authority to provide Corporate Governance Report (continued) flexibility when merited and would not use it as a matter of course. Resolutions 11 and 12 will be proposed as special resolutions that require 75% of votes cast to be in favour in order to be passed. Streamlined Energy and Carbon Reporting The Company’s carbon emissions result predominantly from its consumption of electricity at its single freehold office in Edinburgh. Using Defra/DECC’s GHG conversion factors for company reporting 2015, emissions for the year to 31 October 2021 were 26.8 tonnes of CO2e (2020: 21.0 tonnes CO2e). This equates to 0.07 tonnes of CO2e (2020: 0.06 tonnes of CO2e) per square metre. Reflecting the size of its operations, the Company is therefore formally categorised as a lower energy user under the HMRC Environmental Reporting Guidelines March 2020 and is not required to make the additional detailed disclosures of energy and carbon information, and specifically its annual energy usage, intensity ratio and methodologies, as set out within those guidelines. Stakeholder Engagement The Board gives regular consideration to the need to foster good relationships with all of its key stakeholders. Details of stakeholder engagement undertaken during the financial year is set out in the Strategic Report on pages 15 and 16. Board Approval of Report The Directors’ Report on pages 24 to 36, 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 28, have been approved by the Board. The Strategic Report on pages 12 to 17 includes information relating to: Future Developments, Dividends, Share capital and Discount control policy (including share buybacks). There have been no significant post-balance sheet events, with the exception of that referred to in note 18 on page 64. The Corporate Governance Report was approved by the Board and signed on its behalf by: Maitland Administration Services Limited Company Secretary 17 December 2021 32 The Scottish Investment Trust PLC | Annual Report 2021 Report of the Audit Committee The Audit Committee has written terms of reference which are shown on the Company’s website. The Committee’s duties include risk assessment and oversight; reviewing the internal control environment, the Company’s accounting policies and its Financial Statements prior to their release; ensuring that the Annual Report presents a fair, balanced and understandable assessment of the Company’s performance and prospects; and monitoring the Company’s procedures on whistleblowing. The Committee is also responsible for all aspects of the Company’s relationship with its external auditors including: • reviewing the scope and effectiveness of the annual audit, including the independence and objectivity of the external auditors; • the appointment, remuneration and terms of engagement of the external auditors; and • the level of non-audit work, if any, carried out by the external auditors. Composition of the Committee Membership of the Committee is shown on page 25. The Committee benefits from the Audit Chair having recent and relevant financial experience. Additionally, the Committee as a whole has competence relevant to the financial services sector in which the Company operates. Annual Report The Audit Committee reviews the Annual Report to ensure that it is fair, balanced and understandable. The Committee also reviews the Interim Report . Internal controls The Company does not have an internal audit function as the Audit Committee believes that the Company’s straightforward structure and relatively small number of employees do not warrant such a function at the current time. 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 and risk management systems 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 and risk management systems 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 appropriately 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 during the financial year. Therefore, a confirmation of completion of necessary actions has not been considered appropriate. The Committee and management also monitor the controls and risk management of the Company’s independent advisers Maitland Administration Services Limited (“Maitland”) and Northern Trust. Maitland provides company secretarial, administration and accounting services to the Company and Northern Trust provides 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. In light of the outcome of the review of the investment management arrangements, the Committee considered the appropriateness of continuing to prepare the Financial Statements on a going concern basis. Notwithstanding the material uncertainty in relation to going concern surrounding the implementation of the Scheme, the Committee concluded that it remained appropriate for the Financial Statements to continue to be prepared on a going concern basis. The Company has continued to monitor the risks associated with the ongoing Covid-19 pandemic. These are risks not specific to the Company, its approach or sector of the economy, and have not impacted on the Company’s underlying liquidity at any time. We specifically discuss the implications of the outcome of the investment management review and of the Covid-19 pandemic for our going concern assessment and viability statement in more detail on pages 28 and 14 to 15 respectively. The Committee also asked the Company’s auditor to pay particular attention to the valuation and ownership of investments and recognition of income, as in 2020. The Scottish Investment Trust PLC | Annual Report 2021 33 The Committee reviewed and challenged the results of the audit with the external auditors; however, there were no material disagreements. Investments are valued in accordance with the accounting policy on page 48. 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. Auditors Assessment To fulfill its responsibility regarding the independence and objectivity of the external auditors, the Committee reviewed both the external auditors’ audit plan, which includes a description of their arrangements to manage independence, and a report from the external auditors on the conclusion of the audit, setting out why they remain independent and the extent of any approved non-audit services provided. To assess the effectiveness of the external auditors and the audit process, the Committee reviewed and considered the audit plan and the audit findings report on conclusion of its work. The Audit Committee chair also met privately with PricewaterhouseCoopers LLP (“PwC”) during the year. The PwC Engagement Partner attended the Audit Committee meeting in December to present the results of their audit work. Feedback on the performance of the audit team was obtained from management and Maitland and the Committee also considered the Audit Quality Inspection Report on PwC issued by the FRC in July 2021. The Committee is of the opinion that PwC have performed satisfactorily during the financial year and have provided reassurance through the events related to the global pandemic. PwC were first appointed external auditors to the Company at the Annual General Meeting in 2020. The audit partner responsible for the audit is rotated at least every five years in accordance with professional and regulatory standards in order to protect independence and objectivity. The current audit partner is therefore in the second year of his rotation cycle with the Company. PwC have confirmed that they believe that they are independent within the meaning of professional and regulatory requirements and that the objectivity of the audit partner and staff is not impaired. Having carried out the assessment described above, the Committee is satisfied that the external auditors remain independent and effective for the purpose of this year’s audit. 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 Responsibilities) Order 2014 throughout the financial year. Fees paid to the External Auditors The fees for audit and non-audit services (which comprised a CASS assurance opinion and debenture covenant assurances) were £40,560 (2020: £39,000) and £8,535 (2020: £7,500), respectively. All costs for non-audit services are considered to be appropriate relative to fees paid for audit services and are incurred in accordance with the Committee’s related policy. 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 auditors is not compromised by the provision of non-audit services. Re-appointment of auditors Resolutions to re-appoint PwC as the Company’s auditors, and to authorise the Directors to determine the level of audit fees, will accordingly be proposed at the forthcoming Annual General Meeting. Disclosure of information to auditors It is the Company’s policy to allow the auditors 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 auditors are 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 auditors are 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. The Report of the Audit Committee was approved by the Board and signed on its behalf by: Karyn Lamont Chair of the Audit Committee 17 December 2021 Report of the Audit Committee (continued) 34 The Scottish Investment Trust PLC | Annual Report 2021 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 1 February 2022. 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, James Will, Karyn Lamont and Neil Rogan. Further details on the Remuneration Committee are given on page 26. Details of the terms of Directors’ appointments and their duration are shown on page 27. Policy on Directors’ fees On 31 October 2021, the Board consisted of five 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 £300,000 in aggregate payable to Directors in any financial year. The policy on Directors’ fees was last approved by shareholders at the AGM held in February 2021 and this policy therefore applied for the period up to 31 October 2021. This approval is valid for three years and therefore the policy will be subject to approval and adoption by shareholders at the Company’s Annual General Meeting to be held in February 2024. Any views expressed by shareholders on Directors’ fees are taken into consideration by the Board when reviewing the policy. Directors’ fees were last increased in 2017. The Remuneration Committee believes that more regular fee reviews are appropriate and should take into account factors such as the prevailing rate of inflation and research carrried out by third parties on the level of fees paid to the non-executive directors of the Company’s peers and within the investment trust industry generally. No change in the level of Directors’ fees is proposed for the year ending 31 October 2022. 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 2022 £ Actual fees for the year to 31 October 2021 £ Chairman 60,000 60,000 Audit Committee Chair 40,000 40,000 Non-executive Director 32,500 32,500 Annual statement The level of Directors’ fees was unchanged during the financial year, with the exception of that paid to the Audit Committee Chair, which increased from £37,500 to £40,000 per annum with effect from 1 November 2020, to recognise the additional workload and responsibilities required in that role. Directors’ emoluments (audited) Year to 31 October 2021 £ Change over prior year % Year to 31 October 2020 £ James Will 1 60,000 – 60,000 Russell Napier (retired 4 February 2020) – -100.0 8,481 Jane Lewis 32,500 – 32,500 Mick Brewis 32,500 – 32,500 Karyn Lamont 2 40,000 6.7 37,500 Neil Rogan 32,500 – 32,500 Total 197,500 -2.9 203,481 1 Chairman 2 Audit Committee Chair 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 directly consult with employees when drawing up the Remuneration Report. The Scottish Investment Trust PLC | Annual Report 2021 35 The Board considers that the existing regular opportunities for staff members to raise concerns or suggested improvements, including in respect of staff rewards and incentives, are sufficient to cover its responsibilities in respect of employee engagement, given the size of the business operationally and number of staff appointed. EU Shareholder Rights Directive II (‘the Directive’) The Committee has reviewed its responsibilities in respect of the Directive. The Committee considers that its governance arrangements and operation of the Board’s conflicts policy at all times allows any potential issues, the likelihood of which are low in any case, to be proactively managed. Discussion and analysis of the percentage change in the aggregated Directors’ fixed fees, together with a comparison with all employee costs, can also be found below. The Committee is of the opinion that these disclosures give sufficient information for the purposes of compliance with the Directive and given the Directors’ fixed pay structure. As a UK listed investment company, the requirements of the Directive do not otherwise apply. Service contracts The Directors do not have service contracts. All Directors retire and seek re-election at the Annual General Meeting on an annual basis. Directors’ interests The interests of the Directors and their families in the Company’s capital are as follows: Shares of 25p 31 October 2021 31 October 2020 James Will 10,000 10,000 Jane Lewis 2,500 2,500 Mick Brewis 10,000 10,000 Karyn Lamont 2,500 2,500 Neil Rogan 10,352 10,352 There were no changes in the Directors’ interests between 31 October and 16 December 2021. 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. This index has been chosen as it is a common performance comparator for companies such as The Scottish Investment Trust PLC. Relative importance of Directors’ fees 2021 £’000 2020 £’000 % Change Directors’ fees 198 203 -2.5 Expenses 3,451 3,415 1.1 Staff costs 1,274 1,210 5.3 Dividends paid and proposed 16,195 16,924 -4.3 Directors’ fees as a percentage of: 2021 % 2020 % Expenses 5.7 6.0 Staff costs 15.5 16.8 Dividends paid and proposed 1.2 1.2 Further details of the Company’s expenses and staff costs can be found in notes 2 and 3, respectively, on page 51 and of dividends paid and proposed on page 43. Directors’ Remuneration Report (continued) SIT – Share Price (Total Return) MSCI UK All Cap Index (Total Return) 00 5 0 5 00 5 0 100 125 150 175 200 225 250 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 36 The Scottish Investment Trust PLC | Annual Report 2021 Directors’ Remuneration Report (continued) In accordance with the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 the table below sets out the annual percentage change of each Director’s remuneration compared to the annual percentage change of the average remuneration of the Company’s employees, calculated on a full-time equivalent basis and the performance of the Company over the same preceding financial year. Percentage change on prior year James Will – Jane Lewis – Mick Brewis – Karyn Lamont 6.7 Neil Rogan – Average remuneration of employees* 14.6 NAV total return 15.9 * calculated on a full-time equivalent basis The voting to approve the Directors’ Remuneration Policy at the Company’s AGM held on 2 February 2021 was as follows: Votes cast For % For Votes cast Against % Against Votes Withheld Approve Directors’ Remuneration Policy 14,238,672 80.8 3,386,712 19.2 195,667 The voting to approve the Directors’ Remuneration Report at the Company’s AGM held on 2 February 2021 was as follows: Votes cast For % For Votes cast Against % Against Votes Withheld Approve Directors’ Remuneration Report 14,367,624 81.4 3,293,147 18.6 159,087 The Directors’ Remuneration Report was approved by the Board and signed on its behalf by: Jane Lewis Chair of the Remuneration Committee 17 December 2021 The Scottish Investment Trust PLC | Annual Report 2021 37 Report on the audit of the Financial Statements Opinion In our opinion, The Scottish Investment Trust PLC’s Financial Statements: • give a true and fair view of the state of the Company’s affairs as at 31 October 2021 and of its return and cash flows for the year then ended; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law); and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the Financial Statements, included within the Annual Report, which comprise: the Balance Sheet as at 31 October 2021; the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity and the Cash Flow Statement for the year then ended; the Accounting Policies; and the notes to the Financial Statements. Our opinion is consistent with our reporting to the Audit Committee. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided. Other than those disclosed in the Directors' Report, we have provided no non-audit services to the Company or its controlled undertakings in the period under audit. Material uncertainty related to going concern In forming our opinion on the Financial Statements, which is not modified, we have considered the adequacy of the disclosure made in section (a) of the Accounting Policies to the Financial Statements concerning the Company’s ability to continue as a going concern. The Board concluded its review of the future investment management arrangements of the Company and announced on 20 October 2021 that it had agreed heads of terms with JPMorgan Global Growth & Income plc (“JGGI”) and JGGI’s manager, JPMorgan Funds Limited, for a combination of the assets of the Company with JGGI by means of a section 110 scheme of reconstruction. The liquidation of the Company is not imminent as the scheme has not been approved by the shareholders of the Company and JGGI. These conditions, along with the other matters explained in section (a) of the Accounting Policies to the Financial Statements, indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern. The Financial Statements do not include the adjustments that would result if the Company were unable to continue as a going concern. In auditing the Financial Statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the Financial Statements is appropriate. Our evaluation of the Directors’ assessment of the Company’s ability to continue to adopt the going concern basis of accounting included: • obtaining and evaluating the Directors' going concern assessment, which reflects conditions up to the point of approval of the Annual Report. • reviewing the heads of terms agreement with JGGI and JGGI’s manager, JPMorgan Funds Limited. • reviewing the minutes of the Board. • assessing the disclosures presented in the Annual Report in relation to the scheme of reconstruction and its impact on the going concern assessment by reading the other information, including Principal Risks and Uncertainties, the Viability Statement set out in the Strategic Report and the Going Concern Statement in the Basis of Accounting, and assessing its consistency with the Financial Statements and the evidence we obtained in our audit. Independent Auditors’ Report to the members of The Scottish Investment Trust PLC 38 The Scottish Investment Trust PLC | Annual Report 2021 Independent Auditors’ Report (continued) In relation to the Directors’ reporting on how they have applied the UK Corporate Governance Code, other than the material uncertainty identified in section (a) of the Accounting Policies to the Financial Statements, we have nothing material to add or draw attention to in relation to the Directors’ statement in the Financial Statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting, or in respect of the Directors’ identification in the Financial Statements of any other material uncertainties to the Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the Financial Statements. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. Our audit approach Context The Company is a self-managed Investment Trust Company. The Company’s wholly-owned subsidiary S.I.T Savings Limited has been appointed as the AIFM. Maitland Administration Services Limited has been appointed as the Company Secretary and Administrator. Overview Audit scope • We conducted our audit of the Financial Statements using information from the Administrator to whom the Directors have delegated the provision of the majority of administrative functions. • We tailored the scope of our audit to ensure that we have performed sufficient and appropriate work to be able to give an opinion on the Financial Statements as a whole, taking into account the accounting processes and controls, and the industry in which the Company operates. • We obtained an understanding of the control environment in place at the Company and adopted a fully substantive testing approach using reports obtained from the AIFM. Key audit matters • Material uncertainty related to going concern (see Material uncertainty section above) • Valuation and existence of listed investments • Income from listed investments Materiality • Overall materiality: £5,865,000 (2020: £5,700,000) based on 1% of net assets. • Performance materiality: £4,398,000. The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the Financial Statements. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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) identified by the auditors, including 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, and any comments we make on the results of our procedures thereon, 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. In addition to going concern, described in the Material uncertainty related to going concern section above, we determined the matters described below to be the key audit matters to be communicated in our report. This is not a complete list of all risks identified by our audit. Consideration of impact of the material uncertainty around going concern is a new key audit matter this year. Considerations of the impact of Covid-19, which was a key audit matter last year, is no longer included because of the reduced uncertainty of the impact of Covid-19 in the current year as markets and economies continue to recover. Otherwise, the key audit matters below are consistent with last year. The Scottish Investment Trust PLC | Annual Report 2021 39 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the Financial Statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which it operates. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the Financial Statements as a whole. Valuation and existence of listed investments Refer to page 32 (Report of the Audit Committee), page 48 (Accounting Policies) and page 56 (Notes to the Financial Statements). The investment portfolio at the year-end comprised listed equity investments valued at £618 million. We focused on the valuation and existence of investments because investments represent the principal element of the net asset value as disclosed on the Balance Sheet in the Financial Statements. We tested the valuation of the listed equity investments by agreeing the prices used in the valuation to independent third party sources. No misstatements were identified by our testing. We tested the existence of the investment portfolio by agreeing investment holdings to an independent custodian confirmation. No differences were identified. Independent Auditors’ Report (continued) Key audit matters How our audit addressed the key audit matter Income from listed investments Refer to page 32 (Report of the Audit Committee), page 48 (Accounting Policies) and page 51 (Notes to the Financial Statements). ISAs (UK) presume there is a risk of fraud in income recognition because of the pressure management may feel to achieve a certain objective. In this instance, we consider that ‘income’ refers to all the Company’s income streams, both revenue and capital (including gains and losses on investments). As the Company has an income objective, there might be an incentive to overstate income. As such, we focussed this risk on the existence/occurrence of revenue from investments, completeness of gains/losses from investments and its presentation in the Income Statement as set out in the requirements of The Association of Investment Companies’ Statement of Recommended Practice (the “AIC SORP”). We assessed the accounting policy for dividend income recognition for compliance with accounting standards and the AIC SORP and performed testing to check that income had been accounted for in accordance with this stated accounting policy. We found that the accounting policies implemented were in accordance with accounting standards and the AIC SORP, and that income has been accounted for in accordance with the stated accounting policy. The gains/losses on investments held at fair value comprise realised and unrealised gains/ losses. For unrealised gains and losses, we tested the valuation of the portfolio at the year-end (see above), together with testing the reconciliation of opening and closing investments. For realised gains/losses, we tested a sample of disposal proceeds by agreeing the proceeds to bank statements and we re-performed the calculation of a sample of realised gains/losses. In addition, we tested the accuracy of dividend receipts by agreeing the dividend rates from investments to independent market data. No material misstatements were identified. We tested occurrence by testing that all dividends recorded in the year had been declared in the market by investment holdings, and we traced a sample of dividends received to bank statements. Our testing did not identify any material misstatements. We also tested that the allocation and presentation of dividend income between the revenue and capital return columns of the Income Statement are in line with the requirements set out in the AIC SORP by determining reasons behind dividend distributions. Our procedures did not identify any material misstatements. 40 The Scottish Investment Trust PLC | Annual Report 2021 Independent Auditors’ Report (continued) Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows: We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to £4,398,000 for the Company Financial Statements. In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £293,000 (2020: £285,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Reporting on other information The other information comprises all of the information in the Annual Report other than the Financial Statements and our auditors’ report thereon. The Directors are responsible for the other information. Our opinion on the Financial Statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance 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 an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of 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. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors' Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. Strategic Report and Directors' Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors' Report for the year ended 31 October 2021 is consistent with the Financial Statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors' Report. Directors’ Remuneration In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance statement The Listing Rules require us to review the Directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the Financial Statements and our knowledge obtained during the audit, and, except for the matters reported in the section headed ‘Material uncertainty related to going concern’, we have nothing material to add or draw attention to in relation to: Overall materiality £5,865,000 (2020: £5,700,000). How we determined it 1% of net assets. Rationale for benchmark We believe that net assets is the primary measure used by the shareholders in assessing applied the performance of the entity, and is a generally accepted auditing benchmark. The Scottish Investment Trust PLC | Annual Report 2021 41 Independent Auditors’ Report (continued) • The Directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks; • The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; • The Directors’ statement in the Financial Statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the Financial Statements; • The Directors’ explanation as to their assessment of the Company’s prospects, the period this assessment covers and why the period is appropriate; and • The Directors’ 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 its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Our review of the Directors’ statement regarding the longer-term viability of the Company was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the Financial Statements and our knowledge and understanding of the Company and its environment obtained in the course of the audit. In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the Financial Statements and our knowledge obtained during the audit: • The Directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the Company's position, performance, business model and strategy; • The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and • The section of the Annual Report describing the work of the Audit Committee. We have nothing to report in respect of our responsibility to report when the Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors. Responsibilities for the Financial Statements and the audit Responsibilities of the Directors for the Financial Statements As explained more fully in the Responsibility Statement, the Directors are responsible for the preparation of the Financial Statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they 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. Auditors’ 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 auditors’ 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. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. Based on our understanding of the Company and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of section 1158 of the Corporation Tax Act 2010 (see page 12), and we considered the extent to which non-compliance might have a material effect on the Financial Statements. We also 42 The Scottish Investment Trust PLC | Annual Report 2021 Independent Auditors’ Report (continued) considered those laws and regulations that have a direct impact on the Financial Statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the Financial Statements (including the risk of override of controls), and determined that the principal risks were related to posting of inappropriate journal entries to increase income or to overstate the value of investments and increase the net asset value of the Company. Audit procedures performed by the engagement team included: • Discussions with the Administrator, executive management and the Audit Committee, including consideration of known or suspected instances of non-compliance with laws and regulation and fraud; • Reviewing relevant meeting minutes, including those of the Board and the Audit Committee; • Assessment of the Company’s compliance with the requirements of section 1158 of the Corporation Tax Act 2010, including recalculation of numerical aspects of the eligibility conditions; • Identifying and testing journal entries, in particular year-end journal entries posted by the Administrator during the preparation of the Financial Statements and any journals with unusual account combinations; and • Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing. There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the Financial Statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the Financial Statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not obtained all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of Directors’ remuneration specified by law are not made; or • the Financial Statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the Audit Committee, we were appointed by the members on 4 February 2020 to audit the Financial Statements for the year ended 31 October 2020 and subsequent financial periods. The period of total uninterrupted engagement is two years, covering the years ended 31 October 2020 and 31 October 2021. Allan McGrath (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 17 December 2021 The Scottish Investment Trust PLC | Annual Report 2021 43 Income Statement Income Statement For the year to 31 October 2021 Notes Revenue £’000 2021 Capital £’000 Total £’000 Revenue £’000 2020 Capital £’000 Total £’000 Net gains/(losses) on investments held at fair value through profit or loss 8 – 62,732 62,732 – (78,698) (78,698) Net (losses)/gains on currencies – (1,037) (1,037) – 818 818 Income 1 21,761 – 21,761 21,737 – 21,737 Expenses 2 (2,350) (1,101) (3,451) (2,346) (1,069) (3,415) Net Return before Finance Costs and Taxation 19,411 60,594 80,005 19,391 (78,949) (59,558) Interest payable 5 (1,732) (3,217) (4,949) (1,732) (3,217) (4,949) Return on Ordinary Activities before Tax 17,679 57,377 75,056 17,659 (82,166) (64,507) Tax on ordinary activities 6 (2,169) (81) (2,250) (1,673) – (1,673) Return attributable to Shareholders 15,510 57,296 72,806 15,986 (82,166) (66,180) Return per share (basic and fully diluted) 22.78p 84.15p 106.93p 21.70p (111.52)p (89.82)p Weighted average number of shares in issue during the year 68,089,959 73,677,432 Notes 2021 £’000 2020 £’000 Dividends paid and proposed 7 First interim 2021: 5.80p (2020: 5.70p) 3,875 4,207 Second interim 2021: 5.80p (2020: 5.70p) 3,850 4,204 Third interim 2021: 5.80p (2020: 5.70p) 3,838 4,168 Final 2021: 7.00p (2020: 6.10p) 4,632 4,345 Total 2021: 24.40p (2020: 23.20p) 16,195 16,924 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. 44 The Scottish Investment Trust PLC | Annual Report 2021 Balance Sheet As at 31 October 2021 2021 2020 Notes £’000 £’000 £’000 £’000 Fixed Assets Investments 8 620,106 581,235 Non-current Assets Pension surplus 4 414 1,161 620,520 582,396 Current Assets Debtors 10 5,663 7,188 Cash and cash equivalents 8 45,670 75,981 51,333 83,169 Creditors: liabilities falling due within one year 11 (1,102) (2,627) Net Current Assets 50,231 80,542 Total Assets less Current Liabilities 670,751 662,938 Creditors: liabilities falling due after more than one year Long-term borrowings at amortised cost 12 (84,105) (84,013) Provisions for Liabilities Pension scheme deferred tax on surplus 4 (145) (406) Net Assets 586,501 578,519 Capital and Reserves Called-up share capital 13 16,543 18,224 Share premium account 14 39,922 39,922 Other reserves: Capital redemption reserve 14 54,318 52,637 Capital reserve 14 431,959 423,402 Revenue reserve 14 43,759 44,334 Shareholders’ Funds 586,501 578,519 Net Asset Value per share with borrowings at amortised cost (basic and fully diluted) 886.3p 793.6p Number of shares in issue at year end 66,173,178 72,896,247 The Financial Statements on pages 43 to 64 were approved by the Board of Directors and were signed on its behalf by: James Will Chairman 17 December 2021 The accompanying notes are an integral part of this statement. The Scottish Investment Trust PLC | Annual Report 2021 45 Statement of Comprehensive Income For the year to 31 October 2021 Notes Revenue £’000 2021 Capital £’000 Total £’000 Revenue £’000 2020 Capital £’000 Total £’000 Return attributable to shareholders 15,510 57,296 72,806 15,986 (82,166) (66,180) Actuarial losses relating to pension scheme 4 (268) (498) (766) (412) (764) (1,176) Pension scheme deferred tax on surplus 4 91 170 261 (142) (264) (406) Total comprehensive income/(loss) for the year 15,333 56,968 72,301 15,432 (83,194) (67,762) Total comprehensive income/(loss) per share 22.52p 83.66p 106.18p 20.95p (112.92)p (91.97)p 46 The Scottish Investment Trust PLC | Annual Report 2021 Statement of Changes in Equity For the year to 31 October 2021 Notes 2021 £’000 2020 £’000 Opening balance 578,519 676,793 Total comprehensive income 72,301 (67,762) Dividends 7 (15,908) (23,178) Share buybacks (48,411) (7,334) Closing balance 586,501 578,519 The accompanying notes are an integral part of this statement. The Scottish Investment Trust PLC | Annual Report 2021 47 Cash Flow Statement For the year to 31 October 2021 2021 2020 Notes £’000 £’000 Operating activities Net revenue before finance costs and taxation 19,411 19,391 Expenses charged to capital (1,101) (1,069) (Increase)/decrease in accrued income (184) 278 Decrease in other payables (99) (60) Decrease in other receivables 1 158 Net return from other finance income and pension contributions 4 (19) (3,616) Tax on investment income 6 (2,284) (1,637) Cash flows from operating activities 15,725 13,445 Investing activites Purchases of investments (308,774) (178,725) Disposals of investments 332,196 203,970 Cash flows from investing activities 23,422 25,245 Cash flows before financing activities 39,147 38,690 Financing activities Dividends paid (15,908) (23,178) Share buybacks (48,693) (7,052) Interest paid 5 (4,857) (4,857) Cash flows used in financing activities (69,458) (35,087) Net movement in cash and cash equivalents (30,311) 3,603 Cash and cash equivalents at the beginning of year 75,981 72,378 Cash and cash equivalents at the end of year* 45,670 75,981 *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. 48 The Scottish Investment Trust PLC | Annual Report 2021 Accounting Policies A summary of the principal accounting policies is set out in paragraphs (a) to (m) below. All have been applied consistently throughout the current and the preceding year. (a) Basis of accounting The Financial Statements have been prepared in accordance with Financial Reporting Standard 102 and with the AIC ’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) and in accordance with the Companies Act 2006. They are also prepared on a going concern basis (see page 28) under the historical cost convention, modified to include the revaluation of investments at fair value. On 2 June 2021, the Board announced its plan to undertake a review of the future investment management arrangements of the Company. On 20 October 2021, the Board concluded its review and announced that it had agreed heads of terms with JPMorgan Global Growth & Income plc (‘JGGI’) and JGGI’s manager, JPMorgan Funds Limited (‘JPMF’), for a combination of the assets of the Company wth JGGI by means of a section 110 scheme of reconstruction (the ‘Scheme’). The liquidation of the Company is not imminent as the Scheme has not been approved by the shareholders of the Company and JGGI, but does represent a material uncertainty which may cast doubt on the Company's ability to continue as a going concern. If the shareholders approve the Scheme the Company will be liquidated after the assets have been transferred. If the shareholders do not approve the Scheme it is expected that the Company would continue as a going concern. The Financial Statements do not include the adjustments that would result if the Company was unable to continue as a going concern. In arriving at the decision on the basis of preparation, the Board has considered the financial position of the Company, its cashflow and liquidity position as well as the uncertainty surrounding the outcome of the Scheme. The Board concluded that, as the Scheme is contingent on shareholder approval and the Company is considered solvent in all other regards, there is no irrevocable path to liquidation and thus going concern remains the most appropriate basis for preparation. If it were not appropriate to prepare the Financial Statements on a going concern basis of accounting then adjustments would be required to reclassify all assets as current, a provision for further liabilities including liquidation costs would be made and investments would need to be restated to include costs associated with their sale. The Company’s perpetual debenture stocks, which would be repaid on the event of the Scheme being successful, would be reclassified as a current liability. The Company’s defined benefit pension scheme would move to a buy-out basis and would continue to be accounted for under existing defined benefit accounting until settlement. In the Directors’ opinion the impact of these adjustments on the Financial Statements is not expected to be significant. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates. The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments. (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. 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. The Scottish Investment Trust PLC | Annual Report 2021 49 Accounting Policies (continued) 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. Staff costs, investment and accounting services and research costs 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. 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. 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 Where expenses are allocated between capital and revenue, any tax relief obtained in respect of those expenses is allocated between capital and revenue on the marginal method and the Company’s effective rate of corporation tax for the accounting period. 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. (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 amount of the capital reserve that is distributable is complex to determine and is not necessarily the full amount of the reserve as disclosed within these Financial Statements. The following are accounted for in this reserve: • gains and losses on the realisation of investments; • realised and unrealised exchange differences of a capital nature; • realised and unrealised gains and losses on transactions undertaken to hedge an exposure of a capital nature; • the funding of share and secured bond buybacks; • expenses and interest charged to capital; • increases and decreases in the valuation of investments held at the year end; and • increases and decreases in the valuation of the pension fund surplus or deficit. (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. 50 The Scottish Investment Trust PLC | Annual Report 2021 Accounting Policies (continued) (j) Pensions Employer contributions for the defined benefit scheme are calculated by reference to the triennial actuarial valuation. Employer contributions for the defined contribution scheme are a predetermined percentage of the employee’s salary. Actuarial gains and losses are recognised in the Statement of Comprehensive Income. Further information on the Company’s pension scheme is contained in note 4 to the Financial Statements on pages 52 to 54. (k) Cash and cash equivalents Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents. (l) Debtors Debtors include sales for future settlement, other debtors and pre-payments and accrued income in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. (m) Creditors Creditors include purchases for future settlements, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors are classified as creditors – amounts due within one year, if payment is due within one year or less. If not, they are presented as creditors – amounts due after more than one year. Statement of estimation uncertainty 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. There have been no significant judgements, estimates, or assumptions for the year. The Scottish Investment Trust PLC | Annual Report 2021 51 Notes to the Financial Statements For the year to 31 October 2021 1. Income 2021 £’000 2020 £’000 UK dividends including special dividends of £96,000 (2020: £nil) 4,343 5,098 Overseas dividends including special dividends of £nil (2020: £342,000) 17,412 16,423 Rental Income* 3 – Deposit interest 3 216 21,761 21,737 * Rental income was received from the lease of 4 Wemyss Place Mews during the year to 31 October 2021. 2. Expenses 2021 £’000 2020 £’000 Staff costs (note 3) 1,274 1,210 Directors’ fees 198 203 Auditors’ remuneration for audit services 41 39 Auditors’ remuneration for other assurance services 9 7 Investment and accounting services 217 199 Professional fees, marketing and research costs 819 822 Company secretarial and administration fee 166 183 Office expenses 213 297 Depositary, custody and bank charges 180 164 Other expenses 334 291 3,451 3,415 3. Staff costs 2021 £’000 2020 £’000 Remuneration 1,100 960 Social security costs 139 172 Pensions and post-retirement benefits 35 78 1,274 1,210 The average monthly number of persons employed during the year was: 2021 Number 2020 Number Investment 5 5 Administration 5 5 10 10 Details of the Directors’ remuneration are noted on pages 34 to 36. 52 The Scottish Investment Trust PLC | Annual Report 2021 Notes to the Financial Statements (continued) 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. Actuarial valuations are obtained triennially and are updated at each balance sheet date. A full actuarial valuation was carried out as at 31 July 2019 by XPS Pensions Group which disclosed a scheme deficit of £3,699,000. 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. In October 2020, the Company made a one-off contribution of £3,220,000 such that the pension scheme was in a net surplus position as at 31 October 2020 of £1,161,000 which, as at 31 October 2021, had reduced to £414,000. This surplus has created a deferred tax liability of £145,000 (2020: £406,000) which would be incurred at source and only if any funds were returned to the Company. For the avoidance of doubt, this deferred tax liability does not form part of the Company’s taxation. 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. 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 £54,000 (2020: £51,000). There were no outstanding payments due at either 31 October 2021 or 2020. The Scottish Investment Trust PLC | Annual Report 2021 53 Notes to the Financial Statements (continued) 4. Pension scheme (continued) The major assumptions used for the actuarial valuation of the final salary scheme were: 2021 % 2020 % 2019 % 2018 % 2017 % Rate of increase in salaries – 2.9 3.2 3.2 3.2 Rate of increase in pensions in payment 3.6 3.4 3.4 3.6 3.5 Discount rate 1.8 1.7 2.5 3.3 3.2 Inflation – RPI 3.4 2.9 3.0 3.4 3.2 – CPI 2.5 2.0 2.0 2.4 2.2 Life expectancies on retirement at age 60 are: Retiring today – males 26.8 26.4 26.4 26.5 26.7 – females 29.3 28.5 28.9 28.6 28.6 Retiring in 20 years’ time – males 28.2 27.9 27.9 28.1 28.2 – females 30.8 30.1 30.4 30.2 30.3 The fair value of the scheme assets and the present value of the scheme liabilities were: 2021 £’000 2020 £’000 2019 £’000 2018 £’000 2017 £’000 Equities 4,420 4,672 4,803 8,072 7,913 Bonds 7,092 3,029 2,379 3,437 4,992 With-profit policies – – 301 301 288 Cash 298 4,562 1,830 265 1,180 Total fair value of assets 11,810 12,263 9,313 12,075 14,373 Present value of scheme liabilities (11,396) (11,102) (10,592) (13,412) (15,464) Net pension asset/(liability) 414 1,161 (1,279) (1,337) (1,091) Reconciliation of the opening and closing balances of the present value of the scheme assets 2021 £’000 2020 £’000 Fair value of scheme assets at beginning of year 12,263 9,313 Interest income on scheme assets 206 223 Returns on assets, excluding interest income (398) 299 Contributions by employer – 3,643 Benefits paid (261) (1,215) Fair value of scheme assets at end of year 11,810 12,263 Reconciliation of the opening and closing balances of the present value of the scheme liabilities 2021 £’000 2020 £’000 Liabilities at beginning of year 11,102 10,592 Interest cost 187 250 Actuarial losses 368 1,475 Benefits paid (261) (1,215) Liabilities at end of year 11,396 11,102 54 The Scottish Investment Trust PLC | Annual Report 2021 Notes to the Financial Statements (continued) 4. Pension scheme (continued) Analysis of amount chargeable to operating profit during the year 2021 £’000 2020 £’000 2019 £’000 2018 £’000 2017 £’000 Analysis of amount credited/(charged) to other finance income Interest income return on assets 206 223 324 428 476 Interest on liabilities (187) (250) (371) (457) (576) Net return 19 (27) (47) (29) (100) Movement in surplus/(deficit) during year Surplus/(deficit) at beginning of year 1,161 (1,279) (1,337) (1,091) (3,272) Movement in year: Current service cost – – (539) – – Contributions for year – 3,643 411 399 455 Net return from other finance income 19 (27) (47) (29) (100) Actuarial (losses)/gains in Statement of Comprehensive Income (766) (1,176) 233 (616) 1,826 Surplus/(deficit) at end of year 414 1,161 (1,279) (1,337) (1,091) Deferred tax on surplus 145 406 – – – The Scottish Investment Trust PLC | Annual Report 2021 55 Notes to the Financial Statements (continued) 5. Interest payable 2021 £’000 2020 £’000 On secured bonds and debentures 4,857 4,857 Amortisation of secured bonds issue expenses 92 92 4,949 4,949 6. Tax on ordinary activities 2021 £’000 2020 £’000 Taxation UK corporation tax at 19.00% (2020: 19.00%) – – Overseas tax 2,169 1,673 Overseas tax on capital gains 81 – Total tax 2,250 1,673 The tax charge for the year is lower than that resulting from applying the standard rate of corporation tax in the UK. 2021 £’000 2020 £’000 Return on ordinary activities before tax 75,056 (64,507) Corporation tax at 19.00% (2020: 19.00%) 14,261 (12,256) Effects of: Non-taxable capital returns (11,722) 14,797 Finance costs and expenses charged to capital (820) (814) Non-taxable dividends (4,134) (4,089) Unutilised expenses 2,415 2,362 Capital gains tax on realised gains 81 – Overseas tax 2,169 1,673 2,250 1,673 Deferred tax No deferred tax asset has been recognised on unrelieved expenses (2020: nil) as the Company does not expect to have future profits to offset those expenses. A deferred tax liability of £145,000 (2020: £406,000) was created on the pension scheme as a result of the Company's one-off contribution, in October 2020, of £3,220,000. This charge would be incurred at source and only if any funds were returned to the Company (see note 4 for further details). For the avoidance of doubt, this deferred tax liability relates to the pension scheme and does not form part of the Company’s taxation. 7. Dividends 2021 £’000 2020 £’000 Dividends paid on shares recognised in the financial year: Previous year final of 6.10p per share (2019: 6.90p) 4,345 5,098 Previous year special of Nil per share (2019: 7.45p) – 5,501 Three interims each of 5.80p per share (2020: 3 interims each of 5.70p) 11,563 12,579 15,908 23,178 56 The Scottish Investment Trust PLC | Annual Report 2021 Notes to the Financial Statements (continued) 8. Investments 2021 £’000 2020 £’000 Investments listed on a recognised investment exchange 617,731 578,860 Unlisted investments 2,025 2,025 Subsidiary undertaking (note 9) 350 350 620,106 581,235 Listed in UK £’000 Listed overseas £’000 Unlisted £’000 Total £’000 Opening book cost 129,965 454,288 358 584,611 Opening unrealised (losses)/gains (28,943) 23,550 2,017 (3,376) Opening valuation 101,022 477,838 2,375 581,235 Movements in the year: Purchases at cost 74,307 232,286 – 306,593 Sales – proceeds (82,731) (247,723) – (330,454) Profits on investments in the year 32,879 29,853 – 62,732 Closing valuation 125,477 492,254 2,375 620,106 Closing book cost 117,843 453,320 358 571,521 Closing unrealised gains 7,634 38,934 2,017 48,585 Closing valuation 125,477 492,254 2,375 620,106 The Company received £330,454,000 (2020: £209,171,000) from investments sold in the year. The book cost of these investments when they were purchased was £319,298,000 (2020: £260,654,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments. The purchases at cost and sales proceeds figures include transaction costs of £647,000 (2020: £466,000), comprising commissions, government stamp duty and other fees. In the year to 31 October 2021 the portfolio turnover rate was 48% (2020: 26%). Unlisted investments include heritable property valued at £2,025,000 (2020: £2,025,000). The property was valued on an open market basis by Ryden LLP, chartered surveyors, on 7 September 2021. The valuation was made in accordance with the RICS Valuation – Global Standards 2020 (The Red Book) with the latest edition having taken effect from 31 January 2020. The report is also fully compliant with the International Valuation Standards (IVS) issued by the International Valuation Standards Council (IVSC). The basis of value is market value: the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Taking the comparable sales evidence into consideration, the valuer came up with a benchmark capital rate which can be supported for the property itself. The wholly-owned subsidiary is held at cost at a value equal to the total share capital of S.I.T. Savings Limited. The Scottish Investment Trust PLC | Annual Report 2021 57 Notes to the Financial Statements (continued) 8. Investments (continued) Cash and cash equivalents Financial assets – cash and deposits Fixed £’000 2021 Floating £’000 Total £’000 Fixed £’000 2020 Floating £’000 Total £’000 Sterling 15,000 20,940 35,940 50,000 17,781 67,781 US dollar – 9,730 9,730 – 8,200 8,200 15,000 30,670 45,670 50,000 25,981 75,981 The maximum maturity period for fixed rate deposits outstanding at the year end was 3 days (2020: 7 days). The weighted average fixed interest rate at the year end was 0.00% (2020: 0.02%). Floating interest rates vary in relation to short-term rates in the currencies in which deposits are held. 9. Subsidiary undertaking The Company has an investment in the following subsidiary: Name of undertaking Principal activities Country of incorporation Description of shares held Proportion of nominal value of issued shares and voting rights held S.I.T. Savings Limited AIFM UK Ordinary 100% The financial statements 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. This is in line with s405 of the Companies Act 2006. 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 2021 £’000 2020 £’000 Amounts due from brokers 3,459 5,201 Overseas tax recoverable 920 886 Prepayments and accrued income 1,284 1,101 5,663 7,188 11. Creditors: liabilities falling due within one year 2021 £’000 2020 £’000 Amounts due to brokers 597 1,741 Other creditors 505 886 1,102 2,627 12. Creditors: liabilities falling due after more than one year 2021 2020 Book value £’000 Fair value £’000 Book value £’000 Fair value £’000 4% Perpetual Debenture Stock 350 558 350 515 4¼% Perpetual Debenture Stock 700 1,185 700 1,093 5% Perpetual Debenture Stock 1,009 2,010 1,009 1,855 5¾% Secured Bonds due 17 April 2030 82,046 103,685 81,954 108,311 84,105 107,438 84,013 111,774 58 The Scottish Investment Trust PLC | Annual Report 2021 Notes to the Financial Statements (continued) 12. Creditors: liabilities falling due after more than one year (continued) 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 £107.4m (2020: £111.8m) has the effect of decreasing the year end NAV per share from 886.3p to 851.1p (2020: decreasing from 793.6p to 755.5p). 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. 13. Called-up share capital Allotted, called-up and fully paid 2021 2020 Shares of 25p £16,543,295 £18,224,062 Number of shares in issue 66,173,178 72,896,247 6,723,069 shares were repurchased in the stockmarket during the year to 31 October 2021 (2020: 997,261). No shares were repurchased from 1 November to 16 December 2021. 14. Reserves Share premium account £’000 Capital redemption reserve £’000 Capital reserve £’000 Revenue reserve £’000 At 1 November 2020 39,922 52,637 423,402 44,334 Net losses on currencies – – (1,037) – Gains on investments in the year – – 62,732 – Share buybacks – 1,681 (48,411) – Actuarial losses relating to pension scheme – – (498) (268) Pension scheme deferred tax on surplus – – 170 91 Expenses and interest charged to capital – – (4,318) – Capital gains tax – – (81) – Return attributable to shareholders – – – 15,510 Dividends paid – – – (15,908) At 31 October 2021 39,922 54,318 431,959 43,759 Share premium account £’000 Capital redemption reserve £’000 Capital reserve £’000 Revenue reserve £’000 At 1 November 2019 39,922 52,387 513,930 52,080 Net gains on currencies – – 818 – Losses on investments in the year – – (78,698) – Share buybacks – 250 (7,334) – Actuarial losses relating to pension scheme – – (764) (412) Pension scheme deferred tax on surplus – – (264) (142) Expenses and interest charged to capital – – (4,286) – Return attributable to shareholders – – – 15,986 Dividends paid – – – (23,178) At 31 October 2020 39,922 52,637 423,402 44,334 The Scottish Investment Trust PLC | Annual Report 2021 59 Notes to the Financial Statements (continued) 15. Analysis of changes in net debt during the year 1 November 2020 £’000 Cash flows £’000 Non-cash movements* £’000 31 October 2021 £’000 Cash 25,981 4,689 – 30,670 Short-term deposits 50,000 (35,000) – 15,000 Long-term borrowings at amortised cost (84,013) – (92) (84,105) (8,032) (30,311) (92) (38,435) *Amortisation of secured bonds’ issue expenses. 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 48 explain how the various categories of financial instrument are measured. 2021 £’000 2020 £’000 Financial assets Financial assets at fair value through profit and loss: Fixed asset investments – designated as such on initial recognition 620,106 581,235 Current assets: Debtors 5,663 7,188 Cash and short-term deposits 45,670 75,981 51,333 83,169 671,439 664,404 Financial liabilities Creditors: liabilities falling due within one year Amounts due to brokers (597) (1,741) Other creditors (505) (886) (1,102) (2,627) Creditors: liabilities falling due after more than one year Long-term borrowings at amortised cost (84,105) (84,013) (85,207) (86,640) 60 The Scottish Investment Trust PLC | Annual Report 2021 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. Please refer to the Corporate Governance Report on page 28 regarding the Company’s risk as a result of Covid-19. 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 the MSCI ACWI, the composition of the index 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 index. 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 84% 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. The Scottish Investment Trust PLC | Annual Report 2021 61 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 2021 and 31 October 2020 are shown below. 2021 US $ £’000 Euro £’000 Other £’000 Debtors (amounts due from brokers, dividends receivable and accrued income) 3,631 702 1,049 Creditors (amounts due to brokers) – – – Cash 9,730 – – Foreign currency exposure on net monetary items 13,361 702 1,049 Equity investments at fair value through profit and loss 259,823 102,274 130,157 Total net foreign currency exposure 273,184 102,976 131,206 2020 US $ £’000 Euro £’000 Other £’000 Debtors (amounts due from brokers, dividends receivable and accrued income) 5,522 198 987 Creditors (amounts due to brokers) (811) (932) – Cash 8,200 – – Foreign currency exposure on net monetary items 12,911 (734) 987 Equity investments at fair value through profit and loss 244,924 64,005 168,908 Total net foreign currency exposure 257,835 63,271 169,895 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 2021 US $ £’000 Euro £’000 Other £’000 Maximum 20,855 – – Minimum 1,717 – – Year to 31 October 2020 US $ £’000 Euro £’000 Other £’000 Maximum 49,970 – – Minimum 8,200 – – 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 2021. 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. 2021 2020 US $ £’000 Euro £’000 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 784 412 769 261 Capital return 27,318 10,298 25,703 6,234 Return attributable to shareholders 28,102 10,710 26,472 6,495 62 The Scottish Investment Trust PLC | Annual Report 2021 Notes to the Financial Statements (continued) 16. Financial instruments (continued) Foreign currency sensitivity (continued) 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 57. Details of interest rates on financial liabilities are included in note 12 on page 57. Management of the risk The Company finances part of its activities through borrowings at levels which have been approved and are monitored by the Board. Interest rate exposure The exposure, at the year end, of financial assets and financial liabilities to interest rate risk is shown below. Within one year £’000 2021 More than one year £’000 Total £’000 Within one year £’000 2020 More than one year £’000 Total £’000 Exposure to floating interest rates Cash 30,670 – 30,670 25,981 – 25,981 Exposure to fixed interest rates Short-term deposits 15,000 – 15,000 50,000 – 50,000 Long-term borrowings – (84,105) (84,105) – (84,013) (84,013) Total exposure 45,670 (84,105) (38,435) 75,981 (84,013) (8,032) 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: 2021 £’000 2020 £’000 Return attributable to shareholders – (11) A 5% increase in interest rates would result in an equal and opposite effect on the above amounts. The Scottish Investment Trust PLC | Annual Report 2021 63 Notes to the Financial Statements (continued) 16. Financial instruments (continued) d. Liquidity risk Almost all of the Company’s assets comprise listed securities which represent a ready source of funds. The maturity profile of the Company’s borrowings is included in note 12 on page 57. The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows: 2021 2020 Less than three months £’000 Three to twelve months £’000 More than one year £’000 Total £’000 Less than three months £’000 Three to twelve months £’000 More than one year £’000 Total £’000 Long term borrowings – – 82,046 82,046 – – 81,954 81,954 Interest on long term borrowings – 4,763 40,311 45,074 – 4,763 45,073 49,836 Amount due to brokers 597 – – 597 1,741 – – 1,741 Other creditors and accruals 320 – – 320 701 – – 701 Total exposure 917 4,763 122,357 128,037 2,442 4,763 127,027 134,232 The following debenture stocks do not have a fixed repayment date and are, as a result, not shown in the above table: 4% Perpetual Debenture Stock, 4.25% Perpetual Debenture Stock and 5% Perpetual Debenture Stock. 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 (2020: 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. 64 The Scottish Investment Trust PLC | Annual Report 2021 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. The investments in level 3 relate to the heritable property and the subsidiary (please see note 8 for information on the valuation of these investments). Further details on the valuation techniques used for level 3 investments are also included in the Company’s accounting policies on page 48. 2021 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 Financial assets at fair value through profit and loss 617,731 – 2,375 620,106 2020 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 Financial assets at fair value through profit and loss 578,860 – 2,375 581,235 There were no transfers between Level 1 & 2 during the year (2020: same). Reconciliation of Level 3 fair value measurements of financial assets Fair value through profit and loss 2021 £’000 Fair value through profit and loss 2020 £’000 Balance at 31 October 2020 2,375 1,500 Purchase costs – – Sales proceeds – – Total profit: in profit and loss – 875 Balance at 31 October 2021 2,375 2,375 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 34 and 35. There were no matters requiring disclosure under section 412 of the Companies Act 2006. S.I.T. Savings Limited is a wholly-owned subsidiary of the Company. During the year to 31 October 2021 the net amount received from S.I.T. Savings Limited was £3,358 (2020 net amount paid: £1,667) in relation to expenses. At 31 October 2021 the net amount due to S.I.T. Savings Limited was £15,065 (2020: £10,501). The net amount receivable from S.I.T. Savings Limited was £15,634 (2020: £13,860). 18. Subsequent events On 9 December, shareholders voted at a General Meeting to approve the appointment of JPMorgan Funds Limited as the Company’s Alternative Investment Fund Manager, such appointment to take effect on or around 21 January 2022. Details of shares repurchased since the year end are disclosed in note 13 on page 58. The Scottish Investment Trust PLC | Annual Report 2021 65 Investor Information Combination with JGGI Earlier this year, your Board announced its intention to undertake a review of the Company’s investment management arrangements. The Board announced on 20 October 2021 that it had agreed heads of terms with JPMorgan Global Growth & Income plc and JGGI’s manager, JPMorgan Funds Limited, for a combination of the assets of the Company with JGGI by means of a section 110 scheme of reconstruction. On 9 December 2021, shareholders approved the appointment of JPMorgan Funds Limited as the Company’s manager. For further details please refer to the Chairman’s statement on pages 3 to 5. 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. More information on ways to invest can be found in the How to invest section of the Company’s website www.thescottish.co.uk Dividends paid The following dividends have been paid during 2020/21: Record Payment Dividends Amount XD date date date Third Interim 2021 5.80p 30/9/21 1/10/21 1/11/21 Second Interim 2021 5.80p 1/7/21 2/7/21 2/8/21 First Interim 2021 5.80p 8/4/21 9/4/21 10/5/21 Final 2020 6.10p 14/1/21 15/1/21 12/2/21 Dividend reinvestment Shareholders who hold share certificates The default arrangement for shareholders who hold share certificates is for dividends to be paid out as income, either by cheque or by direct credit to a bank account. However, shareholders who would prefer to have their dividends automatically re-invested into further purchases of Scottish Investment Trust shares, can easily arrange this by joining the Dividend Reinvestment Plan (DRIP). Details of the DRIP, together with an application form, can be found in the Shareholder information section of our website; www.thescottish.co.uk Alternatively, to receive a DRIP application form and booklet by post, please telephone our Registrar, Computershare Investor Services PLC, on 0370 703 0195. 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 enables dividends to be automatically reinvested to buy more shares. Please note that dividend reinvestment is usually a chargeable service; you should establish the cost of any such facility. Identifiers ISIN: GB0007826091 SEDOL: 0782609 Ticker: SCIN LEI: 549300ZL6XSHQ48U8H53 Monitoring your investment The Company’s share price, together with performance information, can be found on the Company’s website, www.thescottish.co.uk A number of financial websites, such as the Financial Times, www.ft.com and the London Stock Exchange, www.londonstockexchange.com carry share price information. In addition, the share price is published daily in most quality newspapers. The Company publishes a daily NAV and a monthly factsheet on its website. An Interim Report is issued in June of each year and the Annual Report is distributed in December. On the Company’s website www.thescottish.co.uk you can find our latest News & views as well as educational videos and guides in the Learning hub. There is also an option to subscribe for a monthly email roundup. Items of interest to our investors are regularly highlighted on LinkedIn, YouTube and Twitter @ScotInvTrust 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 www.thescottish.co.uk 66 The Scottish Investment Trust PLC | Annual Report 2021 Investor Information (continued) 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. 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. Alternatively, if they have been provided with a Form of Direction, they can indicate their voting instructions on the form and return it as directed. The AGM will be held at The Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ on Tuesday, 1 February 2022 at 10.30am. Should there be a change of circumstances, shareholders will be notified in the usual way through an announcement. 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 The Common Reporting Standard (CRS) CRS requires financial institutions, including the Company, to obtain information on individual account holders which meet certain criteria set out in the legislation and report it to their local tax authority who may then share this information with other international tax authorities as required. You will be asked by the Registrar to complete and return a tax self-certification form for this purpose. Further information can be found on HMRC’s website; www.gov.uk/government/publications/exchange-of- information-account-holders Retail investors advised by IFAs The Company currently conducts its affairs so that its shares can be recommended by Independent Financial Advisors (IFAs) to retail private investors in accordance with the Financial Conduct Authority’s (FCA) rules in relation to non-mainstream pooled investment producers. The shares are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in a UK listed investment trust. Risk warning Past performance may not be repeated and is not a guide to future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest. The 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. The Scottish Investment Trust PLC | Annual Report 2021 67 Useful Addresses Registered Office 6 Albyn Place Edinburgh EH2 4NL Telephone: 0131 225 7781 Website: www.thescottish.co.uk Email: info@thescottish.co.uk Company Registration Number: SC001651 Legal Entity Identifier: 549300ZL6XSHQ48U8H53 Company Secretary Maitland Administration Services Limited Hamilton Centre Rodney Way Chelmsford CM1 3BY Depositary Northern Trust Investor Services Limited 50 Bank Street Canary Wharf London E14 5NT Custodian The Northern Trust Company 50 Bank Street Canary Wharf London E14 5NT Independent Auditors PricewaterhouseCoopers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX 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: 0370 703 0195 Website: www.investorcentre.co.uk 68 The Scottish Investment Trust PLC | Annual Report 2021 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. 2021 2020 NAV with borrowings at market value a 851.1p 755.5p Share price b 820.0p 681.0p Discount to NAV with borrowings at market value (a-b)/a 3.6% 9.9% Ex-income NAV is the NAV excluding current year revenue. Ex-income NAV with borrowings at market value 2021 £’000 2020 £’000 Net assets 586,501 578,519 Less: Fair value of borrowings Plus: Book value of borrowings Less: Revenue return Plus: Dividends paid (107,438) 84,105 (15,510) 11,563 (111,774) 84,103 (15,986) 12,579 Net assets excluding current year revenue at market value a 559,221 547,351 Number of shares in issue at year end b 66,173,178 72,896,247 Ex-income NAV with borrowings at market value a/b 845.1p 750.9p Ex-income NAV with borrowings at amortised cost 2021 £’000 2020 £’000 Net assets 586,501 578,519 Less: Revenue return Plus: Dividends paid (15,510) 11,563 (15,986) 12,579 Net assets excluding current year revenue at amortised cost a 582,554 575,112 Number of shares in issue at year end b 66,173,178 72,896,247 Ex-income NAV with borrowings at amortised cost a/b 880.3p 789.0p Gearing§ is the true geared position of the Company: long-term borrowings less net current assets and pension scheme surplus expressed as a percentage of shareholders’ funds. 2021 £’000 2020 £’000 Book value of borrowings Less: Net current assets Less: Pension scheme surplus 84,105 (50,231) (414) 84,013 (80,542) (1,161) a 33,460 2,310 Shareholders' funds b 586,501 578,519 Gearing a/b 6% 0% Gross gearing is the geared position if all the borrowings were invested in equities: borrowings expressed as a percentage of shareholders’ funds. 2021 £’000 2020 £’000 Book value of borrowings a 84,105 84,013 Net assets b 586,501 578,519 Gross gearing a/b 14% 15% NAV† is net asset value per share after deducting borrowings at amortised cost or market value, as stated. Glossary † 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. The Scottish Investment Trust PLC | Annual Report 2021 69 † 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. 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. 2021 2020 NAV at start of year 755.5p 878.5p NAV at end of year 851.1p 755.5p Effect of dividends* 24.5p 29.6p NAV at end of year including effect of dividends 875.6p 785.1p NAV total return 15.9% -10.6% *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. 2021 £’000 2020 £’000 Expenses Less: non-recurring projects 3,451 (252) 3,415 (198) Regular recurring expenses a 3,199 3,217 Average Shareholders’ Funds b 568,488 613,380 Ongoing Charges Calculation a/b 0.56% 0.52% Portfolio turnover rate is the average of investment purchases and sales expressed as a percentage of opening total assets. Share price total return§ is the measure of how the Company’s share price has performed over a period of time, taking into account both capital returns and entitlement to dividends declared by the Company. 2021 2020 Share price at start of year 681.0p 807.0p Share price at end of year 820.0p 681.0p Effect of dividends* 26.3p 29.0p Share price at end of year including effect of dividends 846.3p 710.0p Share price total return 24.3% -12.0% *Assumed reinvested at the time of dividend going ex-dividend. Total assets means total assets less current liabilities. Glossary (continued) 70 The Scottish Investment Trust PLC | Annual Report 2021 Notice of Annual General Meeting Notice is hereby given that the one hundred and thirty- fourth Annual General Meeting (AGM) of The Scottish Investment Trust PLC will be held at the Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ, on Tuesday,1 February 2022 at 10.30am, for the purpose of transacting the following: Ordinary Resolutions   1. To receive and consider the Annual Report and Financial Statements for the year to 31 October 2021. 2. To approve the Directors’ Remuneration Report for the year to 31 October 2021.   3. To declare a final dividend of 7.00p per share.   4. To re-elect James Will as a Director.   5. To re-elect Jane Lewis as a Director.   6. To re-elect Mick Brewis as a Director. 7. To re-elect Karyn Lamont as a Director. 8. To re-elect Neil Rogan as a Director. 9. To re-appoint PricewaterhouseCoopers LLP as auditors. 10. To authorise the Directors to fix the remuneration of the auditors. Special Business Special Resolutions 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 9,919,359 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 (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; and d) unless previously varied, revoked or renewed, the authority hereby conferred shall expire on 1 May 2023, 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. To authorise the Directors to call general meetings of the Company, other than annual general meetings, on not less than 14 clear days’ notice. Maitland Administration Services Limited Company Secretary By order of the Board 17 December 2021 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you reside in the UK and you are in any doubt as to the action you should take, you should immediately consult your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000. If you reside outside the UK, you should consult an appropriately authorised financial adviser. If you have sold or otherwise transferred all of your holding in The Scottish Investment Trust PLC, please forward this document as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was or is being effected for delivery to the purchaser or transferee. The Scottish Investment Trust PLC | Annual Report 2021 71 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. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. The first- named holder entered in the Company's Register of Members is considered the most senior for this purpose. 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, Bridgwater 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. 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 International 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 International 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 72 The Scottish Investment Trust PLC | Annual Report 2021 Notice of Annual General Meeting (continued) the rights of any person to attend and vote at the meeting. In the case of joint holders, the vote of the senior holder tendering a vote will be accepted to the exclusion of the votes of the other joint holders. The first-named holder entered in the Company's Register of Members is considered the most senior for this purpose.   8. Any person to whom this notice is sent who is a person nominated under section 146 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, 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 Guidance and Transparency Rules. 11. On 16 December 2021 (being the last practicable date prior to the publication of this notice), the Company’s issued share capital comprised 66,173,178 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 16 December 2021, the total number of voting rights exercisable at the AGM was 66,173,178. 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. 13. Members meeting the threshold requirements set out in the Companies Act 2006 have the right to: (a) require the Company to give notice of any resolution which can properly be, and is to be, moved at the meeting pursuant to section 338 of the Companies Act 2006; and/or (b) include a matter in the business to be dealt with at the meeting, pursuant to section 338A of the Companies Act 2006. 14. Further information regarding the AGM, including the information required by section 311A of the Companies Act 2006 is available from www.thescottish.co.uk 15. Under section 319A of the Companies Act 2006, the Company must answer any question relating to the business being dealt with at the meeting put by a member attending the meeting unless: a) answering the question would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; b) the answer has already been given on a website in the form of an answer to a question; or c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 16. 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. 17. 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. 18. Investors whose holdings are in nominee names and who wish to attend and vote are advised to contact their nominee before 21 January 2022. 19. The final dividend, if approved, will be paid on 11 February 2022 to shareholders registered at the close of business on 14 January 2022. 20. This report was sent to the address currently registered for communications. Any change of address should be notified to the Company’s registrar. The Scottish Investment Trust PLC | Annual Report 2021 73 6 ALBYN PLACE | EDINBURGH | EH2 4NL T: 0131 225 7781 | E: info@thescottish.co.uk www.thescottish.co.uk @ScotInvTrust The Scottish Investment Trust

Continue reading text version or see original annual report in PDF format above