Scottish Mortgage Investment : Inv Tst PLC - Circular and Annual Financial Report

Chairman's statement

I am pleased to say that the Scottish Mortgage portfolio has continued to produce good long term returns for shareholders. The past financial year, taken in isolation, has not been as strong as recent years, either in terms of the NAV performance or our own share price, but I hope that my earlier statements have been consistent in warning that not every year can be expected to produce the stellar results that we have been fortunate to see in the past.

I would stress once again that such flat periods are to be expected and are consistent with the approach taken for Scottish Mortgage. Indeed, I would go so far as to suggest that shareholders should expect that there will be periods when our investment approach is out of favour, when there is a disconnect between share prices and the underlying fundamentals of the companies, and in such circumstances our share price may well suffer. A pleasing outcome of the last twelve months was that good individual company results managed to reverse share price falls, mitigating broader negative sentiments which might otherwise have had a greater impact on the portfolio, for example regarding China, healthcare and technology.

In the context of a five year investment horizon, a single twelve month period is an insufficient time over which to evaluate the investment approach taken for Scottish Mortgage. Neither the Managers nor the Board make any attempt to mitigate the effects of short term market gyrations. The portfolio is invested in individual businesses which have the potential to offer extraordinary growth over the long term.

Over the past twelve months, behind the turbulent movement in their share prices, a number of the companies in the portfolio have reported strong operational results, reaping the benefit of prior years' capital investment. Looking ahead, the level of continued investment by the companies which Scottish Mortgage holds should provide a strong base for future growth and returns. This is particularly pleasing to see against a wider backdrop of slowing investment and companies which have been returning cash to their shareholders.

The table below shows the five and ten year total returns in percentage terms to 31 March 2016 alongside the Association of Investment Companies (AIC) Global Sector average for comparison.

Source: AIC/Morningstar

Past performance is not a guide to future performance.

Earnings and Dividends

Scottish Mortgage is clear in its focus as a growth-oriented investment trust. Our objective is to maximise total returns to shareholders but, in light of the growth investment mandate, the likelihood is that the majority of returns in the portfolio will come through capital appreciation, as distinct from dividend income, over the longer term.

Our income has fallen again this year, reflecting several aspects of our investment policy: our holdings in quoted companies have been moving away from higher income-paying stocks, in favour of longer term growth investments, and we hold more unquoted companies, which currently provide little by way of income. This year's earnings per share were 1.66p, 26% lower than in 2014/15.

The Board has encouraged the Managers to pursue a total return policy, without regard to the expected split between dividends and capital gains, believing that this is the best way to deliver value to shareholders in the long run. While we believe that Scottish Mortgage is held by investors mainly interested in capital growth, your Board nonetheless recognises the importance to many of our shareholders of the income from their holdings in the Company. After careful consideration and notwithstanding the drop in our income we are recommending an increased final dividend, providing a total distribution for the year of 2.96 pence per share, which is some 1% higher than that paid in 2014/15. To achieve this, we are once again having to use our reserves to supplement the income we have earned during the period. Once the final dividend is approved and paid, the remaining reserves will stand at 2.5 pence per share.

At this level, we are unlikely to have sufficient income and revenue reserves to continue to pay a comparable dividend over the coming years from these two sources alone. The Company is, however, permitted to make distributions from capital profits. The Board will be willing to do this in order to continue to grow our dividend payments so long as it believes that the total returns being earned by the Company over the long run justify this. The Baillie Gifford savings scheme, and many other platforms, give shareholders an opportunity to re-invest dividends in the Company, and the Board hopes that shareholders who have no immediate need of income will take advantage of this facility.

Changes to Investment Policy

Currently, whilst Scottish Mortgage's investment policy specifically lists 'unquoted entities' amongst the permissible investments, there are no formal parameters set out with regard to such. Given the rising level of these investments within the Scottish Mortgage portfolio and the changing nature of the investment opportunities being seen by the Managers, the Board is of the view that this is an appropriate moment to provide clarity for shareholders on the maximum level such investments might reach over time.

The level of the investments in private or unquoted companies within the portfolio has been rising over the past few years and was around 12% at 31 March 2016. The investment case for holding such companies within the Scottish Mortgage portfolio, as well as the reasons why the Board believes the Managers have a competitive advantage in investing in this area, were set out in the Interim Report to 30 September 2015. In addition, the Managers' Review in the Annual Report and Financial Statements will contain a more detailed exploration of this aspect of the portfolio. As always, I would encourage shareholders to read the Managers' commentary below.

Whilst Scottish Mortgage has long been able to make investments in private companies, the increase in the level and number of such unlisted investments within the portfolio in recent years has been in direct response to a shift in the balance within the capital markets between the providers and consumers of capital, rather than a change in the Managers' investment philosophy and approach. The Managers remain committed long term investors in strong growth companies. In order to maintain the breadth of their investment opportunities, the Managers have sought to utilise the flexibility of the closed ended capital structure of Scottish Mortgage to invest in a number of private companies. The Managers believe that this will provide them with a greater opportunity to continue to deliver long term returns for shareholders in the future.

Historically, the Board has provided guidance to the Managers on the appropriate maximum level for such investments within the portfolio; this guidance has been reviewed and it is now proposed to adapt it to reflect developments in the corporate funding markets, whereby emerging companies are able to finance themselves for much longer before coming to public markets. The Board believes this shift in the functioning of capital markets is likely to persist, rendering the flexibility to undertake investments ahead of public offerings of increasing importance for growth investors across the world. The Board supports the Managers in their belief that investments made in the unquoted companies within the portfolio are entirely consistent with their investment philosophy and recognises that the Managers are agnostic as to whether a company chooses to remain private, or list on a public market.

Thus the Company is tabling an Ordinary Resolution at the Scottish Mortgage Annual General Meeting (AGM) on 30 June to seek permission from shareholders to amend the Company's Investment Policy to stipulate that the maximum amount which may be invested in companies not listed on a public market shall not exceed 25 per cent of the total assets of the Company, with this test applied by reference to the current values of unquoted holdings and total assets at the time of the intended purchase of the next investment not listed on a public market.

This Resolution also asks shareholders to approve other minor changes to the Investment Objective and Policy; these are intended as simplifications and clarifications of the text, not as substantive changes to the existing policy. The wording of the current and proposed Investment Objective and Policy is set out on pages 7 and 8 of the Circular dated 27 May 2016 and sent to shareholders with the Annual Report and Financial Statements.

The Board believes that all of these changes are in the best interests of the Company and shareholders as a whole and it is unanimous in recommending that you vote in favour of all of the Resolutions, as the Directors intend to do in respect of their own holdings.

Gearing

The Board of Scottish Mortgage remains committed to the strategic use of gearing, in the belief that it is in the long term interests of shareholders to be geared into prospective long run equity market returns. No attempt is made to deploy short term tactical gearing shifts, or to express a view on future near term market moves, as we do not believe this to be one of our competitive advantages. Accordingly, gearing levels were maintained throughout the year.

The Board will continue to monitor the appropriate level of gearing for the long term and is mindful that further rises in the allocation to private companies within the portfolio may result in it becoming appropriate to reduce the level of borrowing so as to keep a broadly consistent level of gearing relative to the listed equity portion of Shareholders' Funds.

Buybacks and Share Issuance

Despite some dramatic swings in sentiment in the broader equity markets throughout the past 12 months, Scottish Mortgage continued to see a reasonably sustained level of demand, with the Company's shares trading around, or at a small premium to, NAV for much of the period.

In line with the stated policy of aiding the efficient functioning of the market in its shares, Scottish Mortgage both sold shares from Treasury from time to time and, on one occasion, bought back a small number of shares, when there were supply and demand imbalances building up in the market. The balance of these operations was heavily in favour of our issuing shares and we were able to attract additional net capital of £180 million, growing the Company by some 5%.

It is the Board's intention to continue this liquidity management policy in normal market conditions, with regard to share issuance and share buybacks, as it believes this to be in the interest of all shareholders. The Company has 109 million shares remaining in Treasury and the Board is once again seeking the necessary shareholder approvals to continue to undertake such transactions in the Company's own shares.

Low Cost

Keeping costs low for shareholders continues to be a priority for the Board and an important competitive advantage for Scottish Mortgage, given the erosive effect of high costs on compounded returns to shareholders.

I am therefore delighted to announce that, for the year to 31 March 2016, Scottish Mortgage's 'Ongoing Charges Ratio' has fallen once again, this year by over 6% to 0.45%, from 0.48% the previous year. This figure remains one of the lowest reported in the investment trust sector.

Board and AGM

I would like to take this opportunity to thank Gordon McQueen for his considerable number of years of service to the Company as a Director and in particular for his dedication and diligence in his role as Chairman of the Audit Committee. He has decided that, after more than fifteen years on the Board of Scottish Mortgage, he will not stand for re-election at the forthcoming AGM. We wish him all the very best in his future endeavours.

Gordon will be succeeded in his role as Audit Committee Chairman by Justin Dowley, who joined the Board last year and brings us many years of commercial and financial experience. We also welcome to the Board Professor Patrick Maxwell who was appointed at the start of the current financial year and, like Justin, stands for election at the forthcoming AGM. Amongst other distinguished roles, Patrick holds the position of Regius Professor of Physic at Cambridge University and it is, I hope, appropriate to point out that 'Physic' is a mediaeval term for what we now know as Medicine; given your Company's increasing exposure to life science businesses, we look forward to Patrick's contributions in this and other fields.

The Annual General Meeting will be held in Edinburgh at the Merchants' Hall, at 4.30pm on 30 June 2016. The joint Managers of the Trust, James Anderson and Tom Slater, will make a presentation to shareholders on the investments and take questions. I do hope you will be able to attend.

Scottish Mortgage Forum for Individual Investors

In recent years, the Board has been pleased to see considerable growth in the number of individual shareholders investing directly through execution-only platforms, but we realise that it can be difficult for many shareholders to attend the AGM, which is always held in Edinburgh. In order to provide our broad investor base with the opportunity to hear directly from those investing their assets, the Managers are holding a series of shareholder events, starting with a session in London on 22 June. For further details on this event please see page 61 of the Annual Report and Financial Statements or the Scottish Mortgage website www.scottishmortgageit.com.

Investment Strategy

The Statement of the Managers' core investment beliefs is included below. The stability of their core investment philosophy and the consistency with which the Managers have applied this to the portfolio over many years is one of Scottish Mortgage's key strengths.

This style of investing requires commitment and a willingness to look through short term market gyrations. Both the Managers and the Board believe true investment risk is the permanent loss of capital. It cannot be encapsulated or even meaningfully estimated by measuring volatility over the short term relative to a market average. Where short term share price moves disconnect significantly from companies' fundamentals, this may provide even more attractive opportunities for the Managers.

Outlook

Scottish Mortgage's portfolio offers shareholders access to some of the most exciting growth companies across the world, whether they be public or private, which are themselves aiming to change the future of a wide range of industries over the coming years. We do not try to disguise the fact that our portfolio is a concentrated one and in many cases invested in businesses (of which Tesla is a prime example) whose intention is to disrupt the present incumbents and which has been constructed in accordance with the convictions of our Managers and with no heed to benchmarks or indices.

The Board acknowledges that there are some very obvious risks in the world, be they political in nature as countries negotiate their future relationships; or economic, as much of the world struggles with low growth, zero interest rates and a radically different supply/demand balance for fossil fuels. I will confine my comments on 'Brexit' to noting that, by the time we meet in Edinburgh at the end of June, the result will be known.

There are many threats out there and your Board spends a great deal of its time thinking about risk and trying to understand how well diversified our portfolio really is. We also have a suspicion that the real hazard is what one American politician tried to articulate as the 'unknown unknowns'. Beyond ensuring that we are properly diversified from a political, geographical and industrial perspective, we focus on the opportunities which such events may offer to Scottish Mortgage if and when they occur. We believe strongly in two things: first, that passive investing is no longer an adequate approach if investors wish to preserve capital in the medium term - there are simply too many competitive threats to established businesses, many of which will not survive. Secondly, that many of the companies in our portfolio offer the potential for growth based on structural rather than cyclical changes over the long term.

Looking to the future, the Board believes that, through the consistent application of its long term growth investment strategy, Scottish Mortgage offers its shareholders a real alternative to other investment vehicles. We are about as far removed from being an 'index tracker' as it is possible to be and we offer an active investment management approach at a very competitive cost.

John Scott

Chairman

18 May 2016

Past performance is not a guide to future performance.

Managers' review

It has been a year of sound and fury. In conventional terms it has signified very little. Markets and our portfolio ended the 12 months little changed in prices after varied and frenetic zigzags throughout the period. Mr. Market has been more than usually emotional in his moods but has ended up back much where he was a year ago.

Equally the shape of the portfolio is familiar. The top 5 holdings are in the same companies for the second year running. We still own 29 of the top 30 shares from the previous year.

Despite the indecision of markets we believe that the last year may come to be seen as one of those rare occasions when the world we are likely to inhabit underwent radical change. Naturally many of the shifts have long antecedents and may still be but dimly grasped but this should not be allowed to disguise the reality of extraordinary change. With such a backdrop it is not surprising that ructions have been frequent and market progress halting - there are many companies and investment approaches that are raging against the dying of the old lights. This process is bound to be uncomfortable.

Last year we concluded that we needed to concentrate on three new questions in order both to convey the direction of our thoughts to shareholders and to assess whether our views and portfolio are productive and meaningful interpretations of the investment world. So far we think all three of these questions retain their relevance.

Will major and accelerating improvements in core technologies lead to progress in healthcare, energy and transportation analogous to those in information technology in recent years? Or will secular stagnation and limited productivity gains dominate?

This seems to us to have become the central debate of our investing - perhaps even our economic - times. It needs scarcely be added that the predominant mood in markets, politics and the media is that we are condemned to an era of pervasive doom and gloom. The academic version of this is perhaps best captured by Robert Gordon's 'The Rise and Fall of American Growth' but the market version has been buttressed by the widespread belief that low stated GDP growth and minimal inflation are indicators of distress and justification for negative government bond yields in several countries. In equity terms this has been matched by an assumption that this must mean that we are condemned to a low return world and by a chronic lack of confidence that active investment management is worthwhile.

We disagree with this vision of futility. Unfortunately the more the investment world endorses these pessimistic mantras the more likely they become. If the world's savings are merely tied up in bonds yielding little or nothing issued by governments attempting little or nothing or in seeking out those quoted companies that have the least conceivable need of capital or desire to invest in uncertain future growth then we can hardly be surprised if stagnation is the result. The only compensation is that the returns for those few who aspire to more are likely to rise as competition falls.

But the simplest reason we do not adhere to the dystopian version of the investment world is that it has been badly misguided. Ultimately for equity investors the economic context as defined by GDP growth, government deficits, inflation and bond yields is at best of minor and unclear relevance to markets and at worst a dangerous distraction. What matters is the creation of wealth by companies. This has already happened in the 21st century in quite astonishing scale. Whilst cynics, value investors and commentators can argue all they like as to the precisely 'correct' valuations afforded to the great (predominately) technology driven companies of our era even the most dedicated and morose cannot wish away their existence. That Apple and Alphabet (Google) are the two largest companies in the world by market capitalization is hardly a figment of fevered speculation but of levels of profitability that even conservative valuation principles cannot ignore. For an equity investor this ought to matter far more than endless speculation over the odds of a quarter point rise in the Federal Reserve's monetary settings or the trajectory of UK GDP growth (or otherwise) in 2016.

What matters still more and next is whether the extraordinary value creation of the recent past can be replicated or bettered in the future. We think that it can. Indeed we think that the chances that this is so in the future have increased and are increasing.

The evidence that this is so appears to us to be particularly compelling in the fields of transportation and energy. Until recently we thought that the mutually reinforcing trio of electric vehicles, autonomous vehicles and renewable energy would require at the very least five years (and more probably a decade) to become a significant economic influence. This did not mean that we regarded these areas as unfit for investment but that we felt the lengthy time frames and inevitable uncertainties of technological and competitive clarity combined with bureaucratic and selfinterested inertia and obstructionism by incumbents did require more than our usual patience and willingness to be wrong in return for significant upside potential. Our position sizing reflected this.

This has proven unduly conservative. That this is so is principally to the credit of Tesla. Whilst the underlying trends have been supportive, the ability to tie the strands together, to apply the necessary capital, to thereby drive down the cost of batteries and storage, to manufacture from scratch and to build electric vehicles of performance and allure has transformed the probabilities and the time scale involved. Sheer ambition matters.

The extraordinary success of the Model 3 unveiling seems to us to be one of those rare moments that have meaning beyond the normal. In the first two days Tesla received 232,000 orders (with a $1,000 reservation fee) and a potential $8.1bn in revenue. In comparison in the first two days of the original iPhone in 2007 Apple sold 270,000 units for $135m. Whether electric vehicles have come of age or not Tesla itself most certainly has. By 2020 the impact on the mass market ought to be apparent. By 2030 Musk believes the entire market will be 100% electric and 100% autonomous. Given the sustained improvement in performance and price electric vehicles will, he suggests, be cheaper even if the price of oil 'goes to zero'. Tesla's Autopilot already seems to have cut accident rates by 50%. We have bought more Tesla shares.

Our contentions that healthcare is embarking on a path of radical reinvention survive - but they have not advanced as much as those surrounding transportation and energy. It's tempting to say that this is unsurprising as healthcare is complex, highly politicized and at the mercy of incumbent interests. But this may be indulgent: all these apply to energy and transport too and the economic and personal motivations ought to be at least as strong in creating pressure for healthcare improvements. Equally it is unclear that the breakthroughs that are occurring in healthcare are less significant than in transportation. Our experience over the last year has been that of listening to expert industry veterans repeating as in a mantra that they do not like to use the term 'cure' but that this is what they are observing at least at the conceptual level. At an individual company level it is not even obvious that the time and capital required are out of kilter with that expended by Tesla. But at an industry level this translates into a very high barrier. Immunotherapy oncology is a clear example. The clinical testing for each specific type of cancer usually runs into billions of dollars and as genomic science progresses, the indications become more and more specific. It is only in rare instances that an appeal to the public directly can accelerate the process. Illumina's non-invasive Down's syndrome test has been a clear instance of such a success.

Eventually we do believe that the promise of new technologies in healthcare will reward patient investors. From genomics to immunotherapy to gene editing and therapy the methodology, the proofs of concept and the economics are falling into place. Much of what is needed now is the building out of scale, data, training and experience.

Which companies will prove to have the greatest profitability resilience and longevity?

We wrote last year about the risks that matter to us as investors. Tom Slater pointed out that we do not believe that risk can be defined as volatility and that doing so indeed detracts from the ability to discern true risk in the form of a permanent loss of capital.

We would now go further than in the past. It seems to us that there is usually no longevity without volatility. As with states and individuals, exaggerated stability leads to complacency and an inability to respond to changed circumstances. From the storied supposed safety of newspaper franchises (even Warren Buffett believed in this one for too long) to the downfall of notable food retailers ('people will always need food') decades of effortless prosperity proved a recipe for disaster. Barnes & Noble and Borders proved much more prone to permanent loss of capital than the volatile and supposedly risky Amazon. Investors redouble the problem. In the search for low volatility positive returns they push companies to manage for stability, cash-flow and dividends thereby frequently undermining the necessary investment. Many then gear up their portfolios and trading position on the basis that these stocks are virtually riskless according to the models.

These considerations seem to us to be likely to be even more relevant in the future. On the one hand the rise of low volatility and passive investing are clear. They unduly support the apparently stable and the complacent large. On the other the direct assault on the businesses of the apparently secure is rapidly growing. If Musk is right about transportation in 2030 then whither oil companies or the inventors of the combustion engine? If personalized medicine and early cures do indeed arrive then what happens to the trillions in market capitalization enjoyed by the exploiters of questionable blockbuster drugs and unquestionably unjustified pharmaceutical price inflation? Valeant's demise is likely to be the lead indicator of much greater pain.

In contrast we increasingly believe that the business models and mentalities of the (frequently volatile) companies that make up the bulk of the Scottish Mortgage portfolio have the capability to enjoy long as well as profitable lives. We noted last year that from their very long-term visions to their low capital requirements and strong networks, there might be reason to doubt the all too prevalent assumption that the internet platform companies of today would turn out to be the inflated but near identical brethren of the 1990's bubble.

The last year has provided substantial practical evidence of this in ways that have both helped and hindered our results. In both the US and China, the current evidence is that instead of the power of the internet incumbents being threatened by the next innovation, rather their reach and authority has expanded, thereby squeezing both smaller competitors and the pre-internet behemoths. For good or ill Tencent, Alibaba and Baidu appear to control directly or indirectly almost the entire internet ecosystem in China. At the same time they are starting to encroach on the world of finance and banking in an apparently remorseless manner. In America the clearest example may be Facebook. It has used its data, insights and financial power in a manner that appears to be extending its reach and potential longevity as each new technology and business model comes into view. Through analyzing and buying Instagram, WhatsApp and Oculus Rift Facebook has made itself the leading presence in emergent areas rather than disappearing as AOL or My Space did. What we have to acknowledge is that this dominant position has increasingly come at the cost of the smaller players in the market. The prospects of Twitter and LinkedIn have soured.

Corporations, states and citizens. Who wins?

Beneath so many of the headlines of the last year lurks the increasingly acrimonious battle for the share of the spoils of economies and societies. It is not possible to assume any longer that the effortless dominance of capital over labour, or in popular terms the 1% over the 99%, will continue as it has done since the late 1970's. From Donald Trump to Yanis Varoufakis many of the most colourful people and episodes over the last year have explored such issues. But almost as frequently the relative power of the state and the corporate sector has been the issue at stake. From iPhone encryption to Google's tax affairs tensions have grown. Once again this has not been confined to the west. Facebook has been involved in both a vitriolic argument about Indian Internet access at low cost and an elaborate minuet with the Chinese authorities, who in turn seem increasingly unsure whether to be proud of the modernizing impact of their technology companies or scared of their allure to a querulous middle-class.

Whilst these issues continue to rise up the agenda we find it hard to come to any conclusions as to what the likely impact and resolutions will be at this stage. This is principally because none of the parties to these messy struggles seems to be very convincing in conveying its case. Noise levels are high. Our own sole conviction is that we should use our limited influence to persuade the companies in which we invest that they are better thinking of their long-run credibility than their short-run profit maximization. We are quite prepared to be outspoken about these issues.

Concluding Observations

We find ourselves in a very strange environment. The investment world appears to be becoming ever more self-referential, ever more short-term, ever more obsessed by positioning and macroeconomic soothsaying. Neither building great companies nor sensibly allocating precious capital resources appears to be of much interest.

As we have discussed the market mood is full of pessimism and negativity. We need to reiterate in closing that to us this is misguided. The opportunities for fundamental, long-term growth investment do not turn on stated GDP growth or on central banks or overall corporate earnings. They are instead dependent on the skills, circumstances and opportunities available to build great businesses at scale with high and persistent returns. The flow of such companies, quoted and unquoted and frequently at quite enormous scale, seems to us to have increased and be increasing. The territory is fertile.

James Anderson

Investing in private companies for Scottish Mortgage

Scottish Mortgage's portfolio of unlisted companies has been growing and we believe there are some tremendous opportunities to deploy capital in this area. Our reputation as a long-term supportive shareholder helps us to get access to appealing growth businesses and our scale enables us to invest in them at a cost that few can match.

Why are a growing number of our investment ideas coming from outside of the listed sphere? Our philosophy and process are unchanged and we are not becoming early stage venture capitalists. What has changed is that the capital cost of building a company has collapsed. Ten years ago, businesses had to buy servers, infrastructure and software. Today they use free development tools and pay a fee to Amazon Web Services to host their infrastructure. Ten years ago, their addressable market was the three hundred million people that could access a website using a desktop computer, most of whom were in the United States. Today there are more than three billion people across the globe accessing the Internet with a mobile device, which means breakthrough businesses can achieve huge scale whilst raising only modest amounts of capital.

Without pressure from dominant early funding partners wanting to recoup their capital, the attitude of the entrepreneurs involved has changed. They are staying private longer, avoiding the burdens of the public markets and being selective about their investors. They are listing at a time and on terms to suit their businesses. This provides a challenge for public market investors if they wish to retain their opportunity set. This was starkly illustrated by the listing of Alibaba in September 2014 at a market capitalisation of over $150bn. A great deal of value creation had taken place before it became a listed company.

Retaining private status allows companies to make decisions in a different way from those beholden to stock markets. It allows founders to think long-term and invest in projects without immediate payoffs. Such an approach is often difficult for listed companies. The average holding period across major stock markets has declined significantly and as a result, the focus on quarterly earnings statements has increased, as has the demand for predictable and increasing short-term profitability. This forces decisions to be taken in a different way, which we believe is increasingly detrimental to the chances of long-term outsized returns. As a result, unlisted companies may have a structure that confers an advantage over our investment time horizon.

Scottish Mortgage has two important assets when seeking unlisted investments. The first is our reputation as a long-term and supportive custodian. We've held Amazon shares in size for over ten years and that kind of behaviour stands out amidst short-termism elsewhere. This matters because the management teams involved are careful about whom they will allow onto their shareholder register. Just because companies don't want to go public, it doesn't mean they don't have financing requirements and, for rapidly scaling companies, this can require the resources of public market investors. Our second asset is our structure.

Being closed-ended means that we can own these investments on a long-term time horizon. We do not have the liquidity constraints of open-ended funds or the limited life constraints of most venture capital structures.

As outlined elsewhere in this report, we value our unlisted holdings using the International Private Equity and Venture Capital guidelines. An important element of this accounting approach is that we regularly estimate the price at which a company would trade if there were a market in its shares. We are concerned that this pushes us to become the conduit through which exaggerated stock market volatility is transmitted to unlisted companies. We do not wish to make it harder for the management of investee companies to take long-term decisions, thereby eroding one of the key advantages that originally attracted us to them. Within the context of the guidelines we therefore aim to have a robust and thoughtful valuation process that emphasises the evolving performance of these businesses and does not simply reflect stock market noise.

We are in the fortunate position to get the opportunity to invest in unlisted companies with great potential and remarkable management teams. We need to continue to earn a reputation as desirable shareholders to ensure that we remain able to invest in the best growth companies available globally. We are excited about the prospects for long-term returns and committed to keeping the costs of investing low.

Tom Slater

The Managers' core investment beliefs

Whilst fund managers claim to spend much of their careers assessing the competitive advantage of companies they are notoriously reluctant to perform any such analysis on themselves. The tendency is to cite recent performance as evidence of skill despite the luck, randomness and mean-reverting characteristics of most such data. If this does not suffice then attention turns to a discussion of the high educational qualifications, hard work and exotic remuneration packages that the fund manager enjoys. Sometimes the procedural details of the investment process are outlined with heavy emphasis on risk controls. Little attention is given to either the distinctiveness of the approach or the strategic advantages the manager might enjoy in order to make imitation improbable. We think we should try to do better than this.

¾ We are long term in our investment decisions. It is only over periods of at least five years that the competitive advantages and managerial excellence of companies becomes apparent. It is these characteristics that we want to identify and support. We own companies rather than rent shares. We do not regard ourselves as experts in forecasting the oscillations of economies or the mood swings of markets. Indeed we think that it is hard to excel in such areas as this is where so many market participants focus and where so little of the value of companies lies. Equally Baillie Gifford is more likely to possess competitive advantages for the good of shareholders when it adopts a long term perspective. We are a 100 year old Scottish partnership. We think about our own business over decades not quarters. Such stability may not be exciting but it does encourage patience in this most impatient of industries. We only judge our investment performance over five year plus time horizons. In truth it takes at least a decade to provide adequate evidence of investment skill.

¾ The investment management industry is ill-equipped to deal with the behavioural and emotional challenges inherent in today's capital markets. Our time frame and ownership structure help us to fight these dangers. We are besieged by news, data and opinion. The bulk of this information is of little significance but it implores you to rapid and usually futile action. This can be particularly damaging at times of stress. Academic research argues that most individuals dislike financial losses twice as much as they take pleasure in gains. We fear that for fund managers this relationship is close to tenfold. Internal and external pressures make the avoidance of loss dominant. This is damaging in a portfolio context. We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain.

¾ We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the views of investment banks. We try to screen out rather than incorporate their noise. In contrast we think that the world offers joyous opportunities to hear views, perspectives and visions that are barely noticed by the markets. There is more in the investment world than the Financial Times or Wall Street Journaldescribe.

¾ We are global in stock selection, asset allocation and attribution. We are active not passive - or far worse - index plus in stock selection. Holding sizes reflect the potential upside and its probability (or otherwise) rather than the combination of the market capitalisation and geographical location of the company and its headquarters. We do not have sufficient confidence in our top-down asset allocation skills to wish to override stock selection. We do not have enough confidence in our market timing abilities to wish to add or remove gearing at frequent intervals. We do, however, have strong conviction that our portfolio should be comparatively concentrated, and that it is of little use to shareholders to tinker around the edges of indices. We think this produces better investment results and it certainly makes us more committed shareholders in companies. We suspect that selecting stocks on the basis of the past (their current market capitalisation) is a policy designed to protect the security of tenure of asset managers rather than to build the wealth of shareholders. Companies that are large and established tend to be internally complacent and inflexible. They are often vulnerable to assault by more ambitious and vibrant newcomers.

¾ We are Growth stock investors. Such has been the preference for Value and the search to arbitrage away minor rating differentials that investors find it very hard to acknowledge the extraordinary growth rates and returns that can be found today. The growth that we are particularly interested in is of an explosive nature and often requires minimal fixed assets or indeed capital. We think of it as 'Growth at Unreasonable Prices' rather than the traditional discipline of 'Growth at a Reasonable Price'. We need to be willing to pay high multiples of immediate earnings because the scale of future potential and returns can be so dramatic. On the stocks that flourish the valuation will have turned out to be derisorily low. On the others we will lose money.

¾ We believe that it is our first duty to shareholders to limit fees. Both the investment management fee (0.30%) and ongoing charges ratio (0.45% as at 31 March 2016) are low by comparative standards but at least adequate in absolute terms. We think that the malign impact of high fees is frequently underestimated. The difference between an ongoing charges ratio of 0.45% and one of 1.5% may not appear great but if the perspective is altered to think of costs as a percentage of expected annual returns then the contrast becomes obvious. If annual returns average 10% then this is the difference between removing approximately 5% or 15% of your returns each year. Nor do we believe in a performance fee. Usually it undermines investment performance. It increases pressure and narrows perspective.

Thirty largest holdings and twelve month performance at 31 March 2016

Absolute performance (in sterling terms) has been calculated on a total return basis over the period 1 April 2015 to 31 March 2016.

Contribution to absolute performance (in sterling terms) has been calculated to illustrate how an individual stock has contributed to the overall return. It is influenced by both share price performance and the weighting of the stock in the portfolio, taking account of any purchases or sales in the period.

Figures relate to part-period returns where the equity has been purchased during the period.

Denotes unlisted investment

Source: Baillie Gifford/StatPro.

Past performance is not a guide to future performance.

Distribution of assets

Key Performance Indicators

The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:

- the movement in net asset value per ordinary share (after deducting borrowings at fair value);

- the movement in the share price;

- the movement of net asset value and share price performance compared to the Benchmark;

- the premium/discount (after deducting borrowings at fair value);

- ongoing charges ratio;

- revenue return; and

- dividend per share.

The one, five and ten year records of the KPIs are shown on pages 5, 6 and 21 of the Annual Report and Financial Statements.

In addition to the above, the Board considers performance against other companies within the AIC Global Sector.

Future developments of the company

The outlook for the Company is set out in the Chairman's Statement on pages 2 to 4 and the Managers' Report on pages 10 to 13 of the Annual Report and Financial Statements.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on Page 31 of the Annual Report and Financial Statements.

No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

Management fee arrangements

Details of the Investment Management Agreement are disclosed on page 24 of the Annual Report and Financial Statements. Baillie Gifford & Co Limited's annual management fee is 0.30% of total assets less current liabilities (excluding short term borrowings for investment purposes). The management fee is levied on all assets, including holdings in. The management fee is levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co; however the OEICs' share class held by the Company does not itself attract a management fee.

Principal Risks

As explained on page 27 of the Annual Report and Financial Statements there is a process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below:

Financial Risk - the Company's assets consist mainly of listed securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 19 to the Financial Statements on pages 50 to 55 of the Annual Report and Financial Statements. To mitigate this risk, the Board considers at each meeting various metrics including portfolio concentration, regional and industrial sector weightings, top and bottom stock contributors to performance and contribution to performance by industrial sector. The Managers provide the rationale for stock selection decisions and both the investment strategy and portfolio risk are formally considered in detail annually.

Unlisted Investments - the Company's risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may

be greater.

To mitigate this risk, the Board considers the unlisted investments in the context of the overall investment strategy and provides guidance to the Managers on the maximum exposure to unlisted investments.

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive with reference to inside information.

Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including breaches of cyber security. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.

Operational Risk - failure of Baillie Gifford's accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.

Premium/Discount Volatility - the premium/discount at which the Company's shares trade can change. To mitigate this risk, the Board monitors the level of premium/discount and the Company has authority to issue new shares and buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.

Leverage Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found in note 20 on page 55 of the Annual Report and Financial Statements and the Glossary of Terms on page 61 of the Annual Report and Financial Statements.

Political Risk - the Board is aware that the forthcoming UK Referendum on its membership of the European Union introduces elements of political uncertainty which may have practical consequences for the Company and its Managers. Developments are being closely monitored and considered by the Board and the Managers.

Viability Statement

In accordance with provision C2.2 of the UK Corporate Governance Code (published by the Financial Reporting Council in September 2014) that the Directors assess the prospects of the Company over a defined period, the Directors have elected to do so over a period of 10 years. The Directors believe this period to be appropriate as the investment objective of the Company is aimed at investors with a 5 to 10 year investment horizon and, subject to the assumptions detailed below, the Directors do not expect there to be any significant change to the current principal risks facing Scottish Mortgage nor to the adequacy of the controls in place to effectively mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a 10 year period.

Assumption 1

There is no significant adverse change to the regulatory environment and tax treatment enjoyed by UK investment trusts.

Assumption 2

The Company does not suffer sustained inadequate relative investment performance with the current or any successor fund managers such that the Company fails to maintain a supportive shareholder base.

Using the long term expectations of shareholders as the main determinant of the chosen assessment period, the Directors have conducted a robust assessment of the principal risks and uncertainties facing the Company (as detailed on pages 8 and 9 of the Annual Report and Financial Statements) and in particular the impact of market risk where a significant fall in global equity markets would adversely impact the value of the investment portfolio. In reviewing the viability of the Company, the Directors have considered the key characteristics of the Company which include an investment portfolio that takes account of different degrees of liquidity, with moderate levels of debt and a business model where substantially all of the essential services required are outsourced to third party providers; this outsourcing structure allows key service providers to be replaced at relatively short notice where necessary.

The Directors have also considered the Company's leverage and liquidity in the context of fixed term debentures and short term bank loans, the revenue projections, the readily realisable nature of the portfolio which could be sold to provide funding if necessary and its stable closed end structure. The Directors have concluded that these sustainable long term characteristics provide a high degree of flexibility to the Company and afford an ability to react so as to mitigate both controllable and most external uncontrollable risks and events in order to ensure the long term prosperity of the business.

Based upon the Company's processes for monitoring operating costs, share price premium/discount, the Managers' compliance with the investment objective, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Board believes that the prospects of the Company are sound and the Directors are able to confirm that they have a reasonable expectation that it will continue in operation and meet its liabilities as they fall due over a period of at least 10 years.

Going Concern

In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern.

The Company's principal risks are market related and include market risk, liquidity risk and credit risk.

An explanation of these risks and how they are managed is contained in note 19 to the Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. Accordingly, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements.

Financial Instruments

As an Investment Trust, the Company invests in listed and unlisted equities and makes other investments so as to achieve its investment objective of maximising total return, whilst also generating dividend growth, from a focused and actively managed global portfolio. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility. Risk provides the potential for both losses and gains and in assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value of future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 9 and on pages 45 to 46 of the Annual Report and Financial Statements.

Currency Risk

Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.

The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess 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. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

* Includes net non-monetary assets of £34,000.

* Includes net non-monetary assets of £12,000.

Currency Risk Sensitivity

At 31 March 2016, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

The analysis is performed on the same basis for 2015.

Interest Rate Risk

Interest rate movements may affect directly:

¾ the fair value of the investments in fixed interest rate securities;

¾ the level of income receivable on cash deposits;

¾ the fair value of the Company's fixed-rate borrowings; and

¾ the interest payable on the Company's variable rate borrowings.

Interest rate movements may also impact upon the market value of the Company's investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value at fair value.

The interest rate risk profile of the Company's financial assets and liabilities at 31 March is shown below:

Financial Assets

*Based on expected maturity date.

The cash deposits generally comprise call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the Interbank market rates.

Financial Liabilities

The interest rate risk profile of the Company's bank loans and debentures (at amortised cost) and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31 March are shown below.

Interest Rate Risk Profile

The interest rate risk profile of the Company's financial liabilities at 31 March was:

Maturity Profile

The maturity profile of the Company's financial liabilities at 31 March was:

*Includes £675,000 irredeemable debenture stock.

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 March 2016 would have decreased total net assets and total return on ordinary activities by £2,177,000 (2015 - £5,481,000) and would have increased the net asset value per share (with borrowings at fair value) by 0.84p (2015 - increased by 0.94p). A decrease of 100 basis points would have had an equal but opposite effect.

Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the short term fluctuations of the benchmark. The Board provides guidance to the Managers on the level of unlisted investments.

Other Price Risk Sensitivity

Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 18 to 20 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a list of the 30 largest investments by their aggregate market value are contained in the Strategic Report.

99.5% (2015 - 106.8%) of the Company's net assets are invested in quoted equities. A 3% increase in quoted companies equity valuations at 31 March 2016 would have increased total assets and total return on ordinary activities by £103,177,000 (2015 - £106,766,000). A decrease of 3% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is potentially significant but the majority of the Company's assets are investments in quoted securities that are believed to be readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.

The Company has the power to take out borrowings, which give it access to additional funding when required.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

¾ Where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

¾ The Board regularly receives information from the Investment Managers on the credit ratings of those bonds and other securities in which the Company has invested;

¾ the Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Depositary has delegated the custody function to Bank of New York Mellon SA/NV London Branch. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board;

¾ Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations at the same time as any transfer of cash or securities away from the Company is completed;

¾ Transactions involving derivatives, and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers of the creditworthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and

¾ Cash is held only at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The maximum exposure to direct credit risk at 31 March was:

None of the Company's financial assets is past due or impaired.

Fair Value of Financial Assets and Financial Liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the Balance Sheet with the exception of long term borrowing. Long term borrowings in relation to debentures are included in the accounts at the amortised amount of net proceeds after issue, plus accrued finance costs in accordance with FRS102. The fair value of bank loans is calculated with reference to government bonds of comparable maturity and yield. A comparison with the fair value (closing offer value) is as follows:

All short term floating rate borrowings are stated at fair value, which is considered to be equal to their par value.

Deducting long term borrowings at fair value would have the effect of reducing the net asset value per share from 263.8p to 259.2p. Taking the market price of the ordinary shares at 31 March 2016 of 262.5p, this would have given a premium to net asset value of 1.3% as against a discount of 0.5% on a debt at par basis. At 31 March 2015 the effect would have been to reduce the net asset value from 268.0p to 262.4p. Taking the market price of the ordinary shares at 31 March 2015 of 267.2p, this would have given a premium to net asset value of 1.8% as against a discount of 0.3% on a debt at par basis.

Capital Management

The capital of the Company is its share capital and reserves as set out in notes 13 and 14 in the Annual Report and Financial Statements together with its borrowings (see notes 11 and 12 in the Annual Report and Financial Statements). The objective of the Company is to maximise total return, whilst also generating dividend growth, from a focused and actively managed global portfolio. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements (the Board are proposing changes to the investment objective and policy - see the Circular which is being sent to Shareholders with this Annual Report). In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on pages 8 and 9 and on pages 27 and 28 of the Annual Report and Financial Statements. The Company has the authority to issue and buy back its shares (see page 25 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in notes 13 and 14. The Company does not have any externally imposed capital requirements other than the covenants on its loans which are detailed in notes 11 and 12 of the Annual Report and Financial Statements.

Alternative Investment Fund Managers (AIFM) Directive

In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM remuneration policy is available at www.bailliegifford.com or on request (see contact details on the back cover) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) are available at www.bailliegifford.com.

The Company's maximum and actual leverage levels (see Glossary of Terms on page 61 of the Annual Report and Financial Statements) at 31 March 2016 are shown below:

Leverage

Investments

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 102, the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is

indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions

that are not supported by observable current market prices or are not based on observable

market data.

The valuation techniques used by the Company are explained in the accounting policies on page 40 of the Annual Report and Financial Statements.

Statement of directors' responsibilities in respect of the annual report and the financial statements

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration 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 they have elected to prepare the Financial Statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). 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:

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

¾ 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 and the Directors' Remuneration Report 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.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's pages on the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Managers section, confirms that, to the best of their knowledge:

¾ the Financial Statements, which have been prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾ the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy; and

¾ 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 that it faces.

By order of the Board

John Scott

18 May 2016

Income statement

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations.

Balance sheet

Statement of changes in equity

For the year ended 31 March 2016

For the year ended 31 March 2015

* The Capital Reserve balance at 31 March 2016 includes investment holding gains of £1,533,836,000 (31 March 2015 - gains of £1,776,507,000).

Cash flow statement

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

Notes to the financial statements

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

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