The Scottish Investment Trust PLC Interim Report For the six months to 30 April 2010 Contents The Company 2 Financial Highlights 3 Chairman’s Review 4 Changes in Asset Distribution by Sector 5 Discount to Ex-Income NAV 5 Distribution of Total Assets less Current Liabilities 6 Performance Attribution Analysis 6 List of Investments 7 Income Statement 8 Summary Balance Sheet 8 Statement of Total Recognised Gains and Losses 9 Reconciliation of Movements in Shareholders’ Funds 9 Cash Flow Statement 9 Notes 10 Investor Information 11 Principal Risks and Uncertainties The principal risks and uncertainties facing the business are investment and market price risk, interest rate risk, liquidity risk and foreign currency risk. Responsibility Statement The board of directors confirms that to the best of its knowledge: a) the condensed set of financial statements, which has been prepared in accordance with applicable accounting standards, gives a true and fair view of the assets, liabilities, financial position and return of the company; b) the interim report includes a fair review of important events that have occurred during the first six months of the financial year and their impact on the financial statements, a description of the principal risks and uncertainties for the remaining six months of the financial year; and c) no transactions with related parties took place during the first six months of the financial year. For and on behalf of the board Douglas McDougall Chairman 28 May 2010 Interim Report 2010 The Scottish Investment Trust PLC 1 The Company Company Data as at 30 April 2010 £750,133,000 Total Assets £640,777,000 Shareholders’ Funds (with borrowings at par) £573,903,000 Market Capitalisation Objectives 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. Investment Risk Capital Structure The Scottish Investment Trust PLC (SIT) investment portfolio At 30 April 2010 the company had in issue 120,948,926 is diversified over a range of industries and regions in order ordinary shares and long-term borrowings at par amounted to spread risk. SIT has a long-term policy of borrowing money to £107,672,000 with an average annual interest cost of 5.9%. to invest in equities in the expectation that this will improve returns. However, should stockmarkets fall, such borrowings Management Expenses would magnify any losses. SIT can buy back and cancel its The total expenses of managing the company’s business own shares. All other things being equal, this would have the during the last financial year were £4,139,000, equivalent to effect of increasing gearing. 0.74% of average shareholders’ funds. The company aims to keep this percentage low in comparison with competing Performance Comparators investment products. The company does not have a formal benchmark. Performance is reviewed in the context of returns achieved by a broad ISA and SIPP basket of UK equities through the FTSE All-Share Index™ and The ordinary shares are eligible for ISAs and SIPPs. Details of international equities through the FTSE All-World Index™. of all of the savings schemes offered by SIT Savings Ltd are The portfolio is not modelled on any index. shown on page 11. Management The Association of Investment Companies (AIC) The company is managed by its employees, led by the The company is a member of the AIC, the trade organisation manager who is responsible to the directors for all aspects for the closed-ended investment company industry. of the day to day management of the company. 2 The Scottish Investment Trust PLC Interim Report 2010 Financial Highlights Capital 30 April 31 October % 2010 2009 Change NAV with borrowings at par 529.8p 465.6p 13.8 NAV with borrowings at market value 523.9p 456.2p 14.8 Ex-income NAV with borrowings at par 524.8p 459.3p 14.3 Ex-income NAV with borrowings at market value 518.9p 449.9p 15.3 Share price 474.5p 410.0p 15.7 Discount to ex-income NAV with borrowings at market value 8.6% 8.9% FTSE All-World Index 17.1 UK FTSE All-Share Index 10.8 £’000 £’000 Total assets 750,133 696,971 7.6 Borrowings at par (107,672) (107,612) Pension liability (1,684) (1,684) Equity shareholders’ funds 640,777 587,675 9.0 Income Six months to 30 April 30 April 2010 2009 £’000 £’000 Total income 9,686 9,025 Earnings per share 4.89p 4.06p Dividend per share 4.45p 4.45p UK Retail Prices Index 5.3 NAV is net asset value per share after deducting borrowings at par or market value, as stated. Performance NAV* and Share Price against Comparator Indices 5 years to 30 April 2010 200 180180 160160 ShareShare Price Price 140140 NAVFTSE All-World Index FTSENAV All-World * Index 120 120 UK FTSEUK FTSE All-Share All-Share Index Index 100100 8080 AprApr 05 05 AprApr 06 06 AprApr 07 AprApr 08 08 Apr Apr09 09 Apr 10Apr 10 * With borrowings at par. Interim Report 2010 The Scottish Investment Trust PLC 3 Chairman’s Review In the six months to 30 April 2010, the ex-income net asset value per Reductions were made in both the UK (-£16.4m) and Europe (ex UK) share (NAV) rose by 15.3% with borrowings at market value. On a total (-£13.6m). We retain no direct exposure to the countries on the eurozone return basis the ex-income NAV rose by 16.6%. The share price rose periphery having sold Telefónica (Spain) and a very profitable BBVA (Spain) by 15.7% (total return +17.1%) and narrowed the discount to 8.6% holding during the period. Moreover, much of the residual European equity from 8.9% at the year end. The significant weakness of sterling explains exposure is in Swiss francs or Swedish kroner. Japan was increased by the deviation between the returns from the company’s two primary £16.8m. Latin America was reduced by £26.1m, as profits were taken in comparator indices which were similar in local currency terms. In sterling a number of very successful regional holdings and exposure to Petrobras terms, the UK FTSE All-Share Index rose by 10.8% while the FTSE (Brazil) was reduced. In industry sector terms, a significant reduction was All-World Index rose by 17.1%. The company’s NAV performance made to Industrials (-£46.0m) as profits were taken in many of the holdings was therefore ahead of the average of the two indices. bought at the market lows in late 2008. Consumer Goods and Consumer Services exposures were increased with good early contributions coming From the introduction of the current investment approach at the end of from a new holding in McDonald’s (US). Retailers Wal-Mart de Mexico, January 2004 to 30 April 2010, the ex-income NAV with borrowings at Hennes & Mauritz (Sweden) and media group Informa (UK) all did well as did par has outperformed both comparator indices, rising 51.8% compared Asian banks DBS (Singapore) and CIMB (Malaysia). Consumer related holdings with 47.1% from the FTSE All-World Index and 30.9% from the FTSE in Li & Fung (Hong Kong), Nikon (Japan) and a new holding, Kia Motors (Korea), All-Share Index. all made strong gains. The rise in equity markets over the period reflected signs of broad economic In geographic terms, the largest absolute gains were made in North recovery around the world following the stimulus measures introduced in America (+£24.7m) and Asia Pacific (ex Japan) (+£17.0m), with currency the wake of the Lehman crisis. This optimism was however punctured by appreciation boosting returns materially there and elsewhere. By industry episodes of risk aversion relating to the debt excesses in Dubai and the sector, the largest gains in the portfolio came from Industrials (+£20.6m). eurozone periphery, as well as fears of policy tightening in China. Corporate Technology also did well with good gains from a number of holdings profits and cash flows rebounded strongly after a weak 2009 and sentiment including Hong Kong listed internet company Tencent and US consumer was further improved by a notable resumption in merger and acquisition technology group Apple which produced the largest increase in value activity, reflecting the strength of corporate balance sheets. Around the (+£5.5m). period-end, markets were troubled by the risk of sovereign debt problems spreading across southern Europe and into other indebted developed world The number of listed equity portfolio holdings has risen, from the year end countries, which prompted a €750bn package of support measures from level of 90 to 106 at the interim stage. the IMF and EU members. Central banks in the main G7 countries have kept monetary policy extremely loose and the euro crisis may well push With around 30% of the listed portfolio having a historic dividend yield back the timing of interest rate increases in the US and elsewhere. The of at least 3.75%, dividend income showed encouraging progress from impact of the UK election is not yet knowable but an early budget has been the depressed levels of 2009 and the board has declared a maintained called with a view to tackling the UK’s own budget deficit and debt levels. interim dividend of 4.45p per share (2009: 4.45p) which will be payable on 16 July 2010. Our current expectation is that the final dividend will Sector leadership had a cyclical tilt with the strongest sterling returns be at least maintained.