Scottish Mortgage to use capital to increase dividend

Its board proposes paying a final dividend of 1.68p a share, which will result in a total dividend of 3.07p a share in respect of its financial year to 31 March 2018, an increase of just over 2 per cent on the 3p it paid out in its previous financial year.

But its earnings for the year to 31 March 2018 of 1.2p a share, although 12 per cent up on its previous financial year, are not enough even if it uses its revenue reserve of 0.47p a share. This is because many of its investments, 15 per cent of which are unlisted, retain and invest most or all of their earnings to support future growth. This results in a relatively low level of dividend income for Scottish Mortgage Investment Trust. 

The trust's chairman, Fiona McBain, said they understand "that many shareholders value the income from Scottish Mortgage's dividend and while returns for Scottish Mortgage’s shareholders will predominantly come through capital appreciation, a modest and growing dividend will also be paid. Given the strength of the long-run capital returns and the trust's investment objective, the board has decided that a modestly increased dividend would be appropriate this year".

The trust had been allocating 75 per cent of its management and borrowing costs to capital, and 25 per cent to revenue. But as of 1 April all these costs are being allocated to capital. Ms McBain said this is "to reflect better the split of returns between capital and income. The total costs will not be affected by this change in accounting treatment and the distinction is somewhat arbitrary given the changing nature of investment returns."

The trust's ongoing charge has fallen nearly 16 per cent from 0.44 per cent at the end of March 2017 to 0.37 per cent as of 31 March 2018, reinforcing its reputation as one of the cheapest active funds. It introduced a tiered annual management fee from 1 April 2017 in place of the previous 0.3 per cent flat charge. So it now charges 0.3 per cent for its first £4bn of assets under management and 0.25 per cent for those above. The trust had total assets of £6.68bn at the end of March.

The only cheaper trust in the Global sector is Independent Investment Trust (IIT), which has an ongoing charge of 0.25 per cent, according to the Association of Investment Companies (AIC). Other cheap Global trusts include Law Debenture Corporation (LWDB) with an ongoing charge of 0.43 per cent, Bankers (BNKR) on 0.44 per cent and Scottish Investment Trust (SMT) on 0.47 per cent.

Scottish Mortgage Investment Trust's board is planning to increase its gearing (debt) because the strong performance of its investments means the proportion of its debt relative to its assets fell over its last financial year, and it is currently possible to borrow at reasonable rates. So its board is arranging to borrow via the private placement market to lock in attractive long-term rates. The trust currently has gearing of 7 per cent.

Scottish Mortgage Investment Trust continues to perform well, with net asset value (NAV) and share price returns of 25 per cent and 21.6 per cent over the year to 31 March 2018, against 2.9 per cent for its benchmark FTSE All World index.

"Scottish Mortgage has a unique long-term investment approach that focuses on disruptive growth companies, both quoted and unquoted, with no regard to market indices," said analysts at Numis. "It benefits from active discount control and has an outstanding track record, with NAV growth of 23.5 per cent a year over the past five years, compared with 9.3 per cent from the Global Equity peer group and 9.2 per cent a year from the MSCI AC World Index (total return in Sterling). But global technology stocks have had a strong run and some short-term volatility cannot be ruled out."

The trust has a significant allocation to tech investments and its largest holdings include Amazon.com (AMZN:NSQ), Tencent (700:HKG), Alibaba (BABA:NYQ) and Baidu (BIDU:NSQ).

SCOTTISH MORTGAGE INVESTMENT TRUST (SMT)

Source: Winterflood as at 16 May 2018, *Baillie Gifford, **Morningstar

Performance

Source: Winterflood as at 16 May 2018

Top 10 holdings as at 31 March 2018 (%)

Source: Baillie Gifford

Geographic breakdown (%)

Source: Baillie Gifford