Scottish Mortgage stages second-half comeback

The financial year just ended was one of two halves for Scottish Mortgage Investment Trust, with the second being much more to management's liking.

Over the year to March 31st net asset value (NAV) per share fell by 5.8% and the share price by 4.6%, both of which represented under-performance against the investment trust's benchmark, the FTSE All-World Index in sterling terms, which fell by 2.9%.

It may be some consolation to Scottish Mortgage shareholders, however, that the 5.8% year-on-year decline hides a sharp recovery in the second half of the year; NAV per share was down by 20.5% in the first half of the year, while the share price was down 16.0%.

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All investment trusts prefer to point to long-term performance, however, and here the story has a happier ending, with NAV per share up 39% over five years, beating the 26% gain on the benchmark index over the same period.

Net asset value per share at the end of March, after deducting borrowings at fair market value, fell to 768.7p from 816.5p a year earlier,

The company's investments generated revenue of £46.7m in the year to March 31st, down from £47.6m the year before. The value of its investments declined by £92.6m, however, whereas the year before they rose by £317.0m. As a result, the net return before finance costs and taxation was negative to the tune of £45.9m, versus a positive return of £364.6m the year before.

Once the cost of financing its debt is factored in, the net return was a paper loss of £64.7m, compared to a paper profit the year before of £347.0m.

Net return per share in the year was down slightly at 13.07p from 13.3p the year before. The group has proposed a final dividend of 6.8p which, if approved, will take the full year dividend to 13.0p, up 8.3% on the previous year's dividend.

"Shareholders may note that the value of the equity portfolio listed in the UK now stands at 12% of total assets; a decade ago it was close to 50%," observed the trust's chairman, John Scott, adding that this shift to a more international portfolio should not be interpreted as a tacit shadowing of the trust's benchmark index.

"The portfolio does not resemble, let alone try to match, the benchmark so there will be times when performance is out of kilter with markets and indices," Scott said. "Scottish Mortgage is generally not well suited to investors with short term horizons or those who cannot endure the occasionally violent fluctuations inherent in equity investment," he advised.

The group's gearing remained broadly constant during the year. Gross assets totalled £2,378m at the financial year end while the trust's fixed rate debentures and floating rate bank loans of £366m account for 15% of total assets. While the group's bank loans are at historically low interest rates, Scottish Mortgage chose the wrong time to issue its debentures, which generally carry high coupons.

Scott noted the challenges that exist at a macro-economic level but also drew attention to the healthy state of most companies, many of which emerged from the credit crunch with much lower cost bases.

"For Scottish Mortgage it is the careful selection of individual companies and their subsequent performance which remain the most important influence on future long term returns. Our Managers continue to demonstrate that they are adept at identifying opportunities and, when taken together with the impact of low operating costs, I believe our company continues to offer its shareholders a compelling investment proposition," Scott concluded.

JH