Chairman's Statement

 

Performance

In the year to 31 October 2021, the Company's net asset value('NAV') per share, when calculated by deducting borrowings at fair value, increased by 18.3% and the share price by 11.1%, both in total return terms. The comparative index, the S&P Global Small Cap Index* total return, increased by 35.9% in sterling terms during this period. The Company finished the year with a market capitalisation of £1,294.6 million and total assets of £1,407.5 million. Over the course of the financial year the share price averaged a 0.7% premium to net assets, with borrowings deducted at fair value. Portfolio turnover^† was 9.1% compared to 8.4% for the Company's financial year to 31 October 2020 and the ongoing charge has reduced to 0.66% from 0.72%. The Company's portfolio has been managed with a focus on the opportunity set lower down the market capitalisation spectrum since the end of January 2014. It is pleasing to note the 280.7% growth in the NAV since then is significantly ahead of the 149.9% achieved by the comparative index. The chart below shows the distribution of returns for all the stocks held within the portfolio since 31 January 2014; each bar representing the return of each stock whilst held in the portfolio. This cumulative period holding analysis shows the broad distribution of returns achieved by the holdings from time of initial purchase to 31 October 2021 or the date in which the holding was fully sold from the portfolio.

 

Asymmetry of Returns

 

 

 

Whilst it is understandably disappointing to report relative underperformance for the year to 31 October 2021, this should be set in the context of positive absolute returns and this being the first financial year of relative NAV underperformance since the financial year to 31 October 2016. Over the year, the top contributors to relative and absolute performance included Tesla, an electric car, autonomous driving and solar energy company, Codexis, an industrial and pharmaceutical enzyme developer, Upwork, an online freelancing and recruitment services platform and unlisted PsiQuantum, a developer of commercial quantum computing. In addition, the formerly private company QuantumScape, a developer of solid state lithium metal batteries for electric cars, and Oxford Nanopore, a DNA sequencer, both of which listed during the year. The top detractors to relative and absolute performance over the year are names that rank amongst the top contributors to performance over five years: LendingTree, an online consumer finance marketplace, MarketAxess, an electronic bond trading platform, and Ocado, an online grocery retailer and technology provider.

 

Share Buybacks, Treasury and Issuance

The Company will once again be seeking to renew its share buyback, issuance and treasury share authorities. The buyback facility is sought to allow the Company to buy back its own shares when the discount is substantial in absolute terms and relative to its peers. Issuance, either from treasury or of new shares, will only be undertaken at a premium to the prevailing NAV, with debt calculated at par, in order to satisfy natural market demand. Issuance at a premium enhances the NAV per share for existing shareholders, dilutes ongoing costs and helps with the trading liquidity of the shares of the Company.

Over the course of the last financial year, the Company issued 50.9 million new shares at a premium to its NAV, raising net proceeds of £182.2 million and increasing the NAV per share by 0.32%. This equates to 14.4% of the issued share capital at the start of the year. Growth in assets along with the Company's tiered management fee has contributed to the reduction in the Company's ongoing charges for the year.

 

Unlisted Investments

The Managers have shareholder authority to invest up to 15% of the Company's total assets, at the time of initial investment, in unlisted investments. As at the Company's year end, the portfolio weighting in private companies stood at 10.8% of total assets, invested in twelve companies (2020 - 5.8% of total assets in nine companies). Six new private company investments were made during the year: Relativity Space, a 3D printing and aerospace launch company, QuantumScape which has now listed, Astranis Space Technologies, a geostationary communications satellite operator and manufacturer, Shine Technologies (Illuminated Holdings), producer of medical radioscopes, Snyk, a software security developer, and Lightning Labs, a money transfer software developer.

At the Company's Annual General meeting ('AGM') held on 23 January 2019, shareholders approved an increase in the permissible limit of investment in unlisted investments from 5% to 15% of total assets at the time of initial investment. As part of the 2 February 2022 AGM business, the Board is seeking shareholder approval to increase this authority to 25% as the Board and Managers are of the view that private companies are becoming an increasingly relevant part of the Company's objective; to invest in a global portfolio of initially immature entrepreneurial companies, typically with a market capitalisation of less than US$5 billion at the time of initial investment, which are believed to offer long-term growth potential.

Accelerating improvements in technology are reducing the capital and time needed for young businesses to both experiment with and scale their product offerings. For many new entrepreneurs this is delaying the need for a public fundraising or resulting in some really exceptional companies entering the stock market when they are larger and more mature, and the rising availability of private capital is serving to compound this shift. In 2006, 18 private companies globally had valuations of over US$500 million with an aggregate value of US$18 billion. As of the end of 2020 there were 923 companies with valuations of over US$500 million, and an aggregate value of US$2.2 trillion. This makes this market approximately the same size as the S&P MidCap 400 index. As at 31 October 2021, Baillie Gifford had £4 billion invested in 73 private companies across 14 countries.

Given the potential for this to be an increasingly valuable source of investment ideas for Edinburgh Worldwide and Baillie Gifford's growing capability to deploy capital here, the Board would like the Managers to have flexibility to invest a greater portion of the Company's assets in private companies as suitable opportunities arise. This would allow better scope for long term asymmetry to play out within existing private holdings without limiting the Managers' ability to invest opportunistically in new ideas in the future. The number of private holdings is expected to continue increasing gradually whilst several more businesses will also undertake public listings in the fullness of time, as has been the case to date with, for example, Oxford Nanopore, QuantumScape and Spire Global this year.

Over the last seven years, Edinburgh Worldwide has invested in eighteen private companies and the weighting has risen from 0% to a little under 11% of the Company's assets as at 31 October 2021. Depending on the outcome of the shareholder vote, and in due course reflecting on future investor sentiment at the time towards private companies and the investable opportunity set, and the performance being generated from such holdings, the Board will keep the matter of the weighting to unlisted investments under review.

 

 

Borrowings

The extent and range of equity gearing is discussed by the Board and Managers at each Board meeting. Both parties agree that the Company should typically be geared to equities to maximise potential returns, with the current aspirational parameters set at +5% to +15% of shareholders' funds. Over the year, the invested equity gearing ranged between -2.7% and +2.6%, and stood at +2.5% of shareholders' funds at the financial year end (2020 - +0.9%).

During the period, the Company entered into a new five year £100 million multi-currency revolving credit facility, with The Royal Bank of Scotland International Limited, with an expiry date of 9 June 2026. This facility is in addition to the existing five year £25 million multi-currency revolving credit facility, with National Australia Bank Limited, with an expiry date of 29 June 2023 and the five year £36 million multi-currency revolving credit facility, with National Australia Bank Limited, with an expiry date of 30 September 2024. As at 31 October 2021, the Company had drawings of €7,200,000, US$53,150,000 and £21,300,000.

 

Earnings and Dividend

The Company's objective is that of generating capital growth and investors should not expect any income from this investment. This year the net revenue return per share was a negative 0.62p (2020 - negative 0.46p per share). As the revenue account is running at a deficit, no final dividend is being recommended by the Board. Should the level of underlying income increase in future years, the Board will seek to distribute to shareholders the minimum permissible to maintain investment trust status by way of a final dividend.

 

Board Composition and Ceiling on Aggregate Remuneration

During the course of the year, Mr William Ducas retired from the Board. I would like to place on record my and the Board's thanks for his contribution to Company discussions and his pragmatic advice and guidance. There are no changes expected in Board composition over the coming year although Mr Donald Cameron has highlighted to colleagues that he is unlikely to stand for re-election at the Company's 2023 AGM.

 

The current aggregate remuneration ceiling for Directors' fees is set at £200,000 per annum. Based on the level of aggregate remuneration expected to be paid for the financial year ending 31 October 2022 (£182,500 - being £40,500 for the Chairman, £27,000 for each Director, an additional £6,000 for the Chairman of the Audit and Management Engagement Committee and an additional £1,000 for the Senior Independent Director), should the Board wish to appoint a new Director the aggregate fees would likely exceed the current authorised limit. Accordingly, it is proposed that, pursuant to Resolution 14, as set out in the Notice of Annual General Meeting, the maximum permissible aggregate amount of fees payable to the Directors be increased to £250,000 per annum in aggregate.

 

Investment Outlook

Markets continued to rise notably until the tail end of the first quarter of 2021 and subsequently declined due in part to concerns regarding future inflation and dislocated supply, largely as a result of Covid-19 and the measures put in place to curb its impact on businesses. More recently, market sentiment has been pushed and pulled by attempts at 'normality' against a backdrop of new virus variants and a Chinese regulatory clampdown. However, there are now signs that markets are becoming more fundamentals-led rather than momentum driven.

As mentioned in the past, your portfolio managers continue to direct their efforts to picking the best entrepreneurial, immature growth companies that create and exploit investment opportunities, and which exhibit excellent long-term growth prospects and the potential for positive long term returns wherever they are listed and whatever the macro backdrop. Whilst markets exhibit volatility, the investment trust structure permits the portfolio managers and discerning long-term investors to take positions in exciting, dynamic and innovative companies for the long term.

An overview of the portfolio is provided on pages 13 and 15 of the Annual Report and .Financial Statements.

 

 

 

Annual General Meeting

As part of the Company's AGM business, the Company is seeking to update its Articles of Association, details of which can be found on page 71 of the Annual Report and Financial Statements. The principal proposed change regards the ability to hold hybrid AGMs, permitting, in extremis circumstances such as those resulting from Covid-19, shareholders to attend by electronic means as well as in person. It is however intended that future meetings be physical unless restrictions prohibiting this are in force at the time.

It is anticipated that the Company's next AGM will be held in person and be held at Baillie Gifford's offices in Edinburgh at 12 noon on Wednesday 2 February 2022. The Managers will be presenting and I and the Board look to see as many of you there as possible.

Should the situation change, further information will be made available through the Company's website at edinburghworldwide.co.uk and the London Stock Exchange regulatory news service. Further information, including the proposed resolutions and information on the deadlines for submitting votes by proxy should you not be able to attend, can be found on pages 68 to 70 of the Annual Report and Financial Statements. Shareholders who hold shares

in their own name on the main register will be provided with a Form of Proxy and there are also special arrangements for holders of shares through the abrdn Investment Trusts Share Plan, Individual Savings Account and Investment Plan for Children who are provided with a Form of Direction. If you hold shares through a share platform or other nominee, the Board would encourage you to contact these organisations directly as soon as possible to arrange for you to submit votes in advance of the AGM.

 

 

Henry CT Strutt

Chairman

9 December 2021

 

 

 

^* Source: Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.

^† calculated by dividing the value of sales by the average of the opening and closing value of the investment portfolio.

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.
 

Managers' Review

 

What We Seek to Offer

Edinburgh Worldwide Investment Trust's philosophy is one where we seek ambitious, problem-solving companies with what we believe to be excellent long-term growth potential. By identifying attractive growth companies earlier, we seek to benefit during the most dynamic phase of a company's lifecycle and retain ownership of successful companies as they grow and thrive. It's an approach that requires patience, a long-term mindset and recognition that progress in young companies rarely happens in a straight line. The solutions that our holdings are working towards are not designed to be transient or modestly incremental. Should they succeed the likelihood is that they will embed themselves as key drivers of their respective industries in the years that follow.

Our style of investing is one in which many of our ideas will ultimately fail to live up to our lofty aspirations for them. Rather than fret about this we view it as an inevitable outcome of our bias towards immature companies with long-term potential. Occasionally, that failure can be abrupt, with clear implications for the viability of the business and the capital invested. For others, it will be much less spectacular: a solid business emerges with acceptable returns for investors but with nagging frustration that the outcomes could have been much better. But some companies (and it's the minority) will both surprise and delight: their initial traction in opening new avenues for growth will likely make our original hypothesis look rather feeble. This wide range of outcomes is evident in the asymmetry of returns chart shown in the Chairman's statement.

It's from this extreme dispersion of outcomes that we actively desire long-term returns to be moulded. Sorting the deep winners from the losers and the also-rans takes both time and patience. The differentiating factors that drive that outcome will most likely be formed within the individual companies themselves, refined further by their operating environment and lastly polished through the actions of their shareholders. Attempting to take the readout on that experiment at anything less than five years will probably not tell you very much. It's for this reason that we view the NAV performance in the year ended 31 October 2021 as more an observation. It's effectively a snapshot that probably conveys more about the prevailing narrative within stock markets than a useful barometer on how our approach is faring. With Edinburgh Worldwide's NAV having risen by 203% over the five years to the end of October 2021 (versus the 69% rise in the comparative index*) we think the evidence leans towards our philosophy having long-term merit.

Implicit in the dispersion of winners versus losers discussed above is the direct link between a company's progress and the magnitude of the investment returns that it can generate. A company's operational success will translate ultimately into cashflow, the present value of which investors can use to judge a company's intrinsic value. But the notion of a company's cashflow (or its more relatable cousin, profits) is not an abstract one that resides in a CFO's or investment analyst's spreadsheet. It's the output of a myriad of interactions and decisions involving the company and its surroundings. How those cashflows are produced and how they impact a wider group of stakeholders, society and the environment, will also be crucial determinants of not only their size, but their long-term durability and permissibility. Consequently, the notion of sustainability, in all its guises, is something we believe to be deeply ingrained in bona fide long-term growth investing.

In Edinburgh Worldwide, we think our remit and philosophy enable us to go a step further. We have long found that the most interesting companies are invariably those that position themselves on the frontiers of socio-economic change, rather than shy away from it. They are the ones that address the most pressing questions, seek to tackle the largest problems and build solutions that seek to drive the world forward. For such companies, sustainability is not just the how they go about operating, it's also the why: why they exist, why society should care and why, ultimately, they might be an outstanding investment opportunity.

We think our focus on companies pursuing durable long-term progress, improving outcomes and reducing both costs and frictions across a range of diverse areas, means that the portfolio is well-positioned to participate in the change that will follow. Moreover, through provision of primary capital to private companies we think that role can become more active.

 

Observations and Portfolio Update

The past year has seen stock markets wrestle with a world trying to get back to normal and the oscillations from optimism to fear seem even more pronounced than usual. Second and third order effects related to the pandemic will likely persist but predicting these with conviction is difficult and can arguably be a distraction from our core task (although we are mindful of the opportunities they may create in markets prone to overreaction). In the near-term, we expect that supply-demand imbalances will persist, behaviours of consumers and businesses will be hard to predict and the overall level of uncertainty will remain elevated. Against such a backdrop we expect the narrative and typical time horizon in equity markets to remain skewed to a 'here and now' mindset.

The second and third quarter reporting periods have been atypical in that companies were annualising the immediate impact of the pandemic. For some companies this presents as a recovery-type boost but for several of our companies, especially those that were natural beneficiaries of the pandemic (e.g. Telemedicine providers or ecommerce businesses) this period has been one where the comparator has been tough. As previously discussed, we are more intrigued by how the fortunes of such businesses have been transformed on a multi-year, perhaps even a multi-decade basis. Annualising an extreme base effect often excites stock markets but it tends to tell you very little of relevance to the real long-term progress of a business.

For companies such as Teladoc, the stock market's questioning relates to a modest near-term membership growth opportunity. Yet we think the evidence of the company going much deeper with existing members is much more reflective of the value being built. Likewise, with Ocado the shrinking basket size and limited near-term growth could be expected from a business that was running at well above optimal capacity a year ago. Much more relevant in our minds is the increasingly delighted noises emerging from its grocery partners as they go live with their Ocado-enabled facilities.

A notable area of weakness in the portfolio has been our Chinese stocks. Referring to our holdings by geographic location always feels rather odd to us but is probably justified in this context, given the challenges that have emerged. We prefer to simplify the debate on China investing to two key axes. The first axis is a geopolitical one. The roots here extend well beyond the recent months but the 'who lists where and why' and 'where do companies keep sensitive customer data' arguments don't feel like they will be resolved imminently. The second axis is arguably a bit easier for investors to have a considered view on, namely domestic Chinese companies where the accrued power and influence have begun to sit at odds with the more holistic, openly socialist approach of the governing party. Certain sectors have been singled out for intervention, most obviously those involved in aspects of lending, education and gaming. For some of our holdings such as Huya and Agora this has created headwinds, even if the impact on these businesses is much more indirect than direct.

In actively looking for companies that are innovating and trying to move the world forward we believe we are concentrating on an opportunity set whose own actions will be the greatest determinant of their own success or failure. As observers along frontiers of innovation in a wide range of industries and applications, we continue to be excited by the opportunities that abound. Consequently, we feel that the current portfolio and investment approach is as relevant as it's ever been. We think this is well illustrated by the eleven new purchases we reported on in the Interim Report to the end of April 2021 and is reinforced by the further five names (two listed businesses and three private) we purchased over the subsequent six months. We introduce these below:

- ITM Power is a UK company which designs and manufactures PEM electrolysers (proton exchange membrane). Electrolysers are devices that produce hydrogen gas using electricity and water as inputs (with oxygen gas as a side-product). The hydrogen gas can then be used as chemical feedstock or it can be consumed in a fuel cell to yield back energy and water. With the declining cost of renewable energy and mounting imperative across society and industry of net zero targets, we see the prospect of the much-heralded hydrogen economy being transformed over the coming decades. Green electrolyser-derived hydrogen is likely to be the most viable route for many heavy emitting industries to decarbonise. While batteries are a practical energy store in many applications, when the energy storage requirement is long term and the utilisation conditions are more demanding, the benefits of hydrogen come to the fore. ITM is among the major electrolyser producers that cater to this opportunity. It focuses uniquely on the more differentiated PEM type electrolysers and has the largest PEM manufacturing capacity.

¾ Shine Technologies (Illuminated Holdings) is a private nuclear technology company, with an initial focus on the production of medical radioisotopes for diagnostic and therapeutic procedures. The company's approach offers

several advantages here, being cleaner, safer and more affordable to operate than legacy infrastructure. It also addresses a growing gap between the supply and demand for these important products within healthcare systems around the world. Longer term, Shine has a path to leverage this technology and operating experience into larger and more transformational opportunities around nuclear waste recycling and the production of clean fusion energy.

- Snyk is a private IT security company focused on the growing opportunity in application development. It offers a toolkit for software developers that allows them to detect vulnerabilities and fix bugs themselves, embedding security functions at an early stage and significantly improving the pace at which the software can be signed off and released for use. We think such tools will become increasingly standard in the software application development cycle as Snyk has the synergistic advantage of appealing to both the developer community and those tasked to maintain the robustness of a company's overall IT operations. As more code is tested against, and modified by, Snyk's toolkit we think the company will be well positioned to create a valuable data advantage that will become increasingly hard for others to replicate.                               

- Angelalign is China's leading domestic provider of invisible orthodontic products. The clear aligners market in China is relatively small but growing rapidly, underpinned by secular drivers like greater awareness of dental care and aesthetics associated with increasing disposable incomes. Angelalign effectively democratises access to such orthodontic treatments by empowering all dental professionals, not just the limited number of orthodontic specialists. We are encouraged by its success so far and with the founding management team still in place, we believe it can become the dominant player in this rapidly expanding market.

- Lightning Labs is a private San Francisco-based company which was founded to drive the adoption of, and to commercialise, the Bitcoin Lightning Network, an open source project which operates as a second layer built on top of Bitcoin. The Lightning Network substantially improves Bitcoin's utility by enabling scalable, instantaneous and nearly free payments. The software designed and maintained by Lightning Labs is quickly gaining traction among developers seeking to build Lightning applications. It has the potential to establish itself as the go-to codebase not only for payment applications but for incipient higher-level protocols for programmatically routing any data/value over the Lightning Network. It does this instantly, privately and at exceptionally low cost. While early, we are intrigued by the potential for Lightning Labs to become a key infrastructure provider in the emerging Bitcoin ecosystem.

We sold the position in Cloudera following a takeover offer from private equity. We also exited the holding in Yext. Our original investment hypothesis was that Yext was well-placed to carve out a highly differentiated position in the increasingly important area of corporate knowledge management. The product roadmap since has diverged from what we perceive to be Yext's core skillset and competitive strength.

 

 

 

 

 

* S&P Global Small Cap Index total return (in sterling terms).  Source: Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.