What is the risk?
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How
is it managed?
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Current assessment of risk
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Financial risk: The Company's
assets consist predominately of listed securities and its principal
and emerging 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 18 on pages 87
to 91 of the Annual Report and Financial Statements.
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The Board has, in particular
considered the impact of heightened market volatility due to
macroeconomic factors such as higher inflation and interest rates
and geopolitical concerns, including the Russia-Ukraine conflict.
To monitor and, where possible, mitigate these risks the Board
considers at each meeting various portfolio metrics including
individual stock performance, the composition and diversification
of the portfolio by sector, purchases and sales of investments and
the top and bottom contributors to performance. The Managers
provide rationale for stock selection decisions. A strategy meeting
is held annually.
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This risk increased due to increased
market volatility as a result of heightened geopolitical concerns
and macroeconomic factors, as well as the UK market being seemingly
out of favour with investors.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Investment strategy risk: Pursuing an investment strategy to fulfil the Company's
objective which the market perceives to be unattractive or
inappropriate, or the ineffective implementation of an attractive
or appropriate strategy, may lead to reduced returns for
shareholders and, as a result, a decreased demand for the Company's
shares. This may lead to the Company's shares trading at a widening
discount to their net asset value.
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To mitigate this risk, the Board
regularly reviews and monitors: the Company's objective and
investment policy and strategy; the investment portfolio and its
performance; the level of discount/premium to net asset value at
which the shares trade; and movements in the share register and
raise any matters of concern with the Managers.
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This risk increased as the market's
appetite for growth stocks, typically held by the Company, declined
during the recent period of heightened macroeconomic and
geopolitical concern.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Discount risk: The
discount/premium at which the Company's shares trade relative to
its net asset value can change. The risk of a widening discount is
that it may undermine investor confidence in the
Company.
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To manage this risk, the Board
monitors the level of discount/premium at which the shares trade
and the Company has authority to buy back its existing shares when
deemed by the Board to be in the best interests of the Company and
its shareholders.
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The Company's shares continued to
trade at a discount. In the year to 30 April 2024, the Company
bought back 3,841,977 shares.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Climate and governance risk: Perceived problems on Environmental, Social and Governance
('ESG') matters in an investee company could lead to that company's
shares being less attractive to investors, adversely affecting its
share price, in addition to potential valuation issues arising from
any direct impact of the failure to address the ESG weakness on the
operations or management of the investee company (for example in
the event of an industrial accident or spillage). Repeated failure
by the Investment Manager to identify ESG weaknesses in investee
companies could lead to the Company's own shares being less
attractive to investors, adversely affecting its own share
price.
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This is mitigated by the Investment
Managers' thorough ESG stewardship and engagement policies, which
are available to view on the Managers' website: bailliegifford.com and have been
reviewed and endorsed by the Company, and are fully integrated into
the investment process as well as the extensive upfront and ongoing
due diligence which the Investment Managers undertake on each
investee company. This due diligence includes assessment of the
risks inherent in climate change (see page 57 of the Annual Report
and Financial Statements). The Directors have considered the impact
of climate change on the Financial Statements of the Company and
this is included in note 1 to the Financial Statements on page 79
of the Annual Report and Financial Statements.
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The Investment Manager continued to
employ strong ESG stewardship and engagement policies.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Regulatory risk: Failure to
comply with applicable legal and regulatory requirements such as
the tax rules for investment companies, the FCA 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.
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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 and the Market Abuse
Directive with reference to inside information.
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All control procedures were working
effectively.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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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.
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To mitigate this risk, the Audit
Committee receives six monthly reports from the Depositary
confirming safe custody of the Company's assets held by the
Custodian. Cash and portfolio holdings are independently reconciled
to the Custodian's records by the Managers. The Custodian's assured
internal controls reports are reviewed by Baillie Gifford's
Business Risk 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.
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All control procedures were working
effectively.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Operational risk: Failure of
Baillie Gifford's 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.
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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 Audit
Committee
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.
The other key third party service providers have not experienced
significant operational difficulties affecting their respective
services to the Company.
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All control procedures were working
effectively.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Leverage risk: The Company may
borrow money for investment purposes (sometimes known as 'gearing'
or 'leverage'). If the investments fall in value, any borrowings
will magnify the impact of this loss. If borrowing facilities are
not renewed, the Company may have to sell investments to repay
borrowings.
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To mitigate this risk, all borrowing
facilities require the prior approval of the Board and leverage
levels are discussed by the Board and Managers at every
meeting.
Covenant levels are monitored
regularly. The Company's investments are predominately in listed
securities, at present, that are readily realisable.
Further information on leverage can
be found on page 103 and in the Glossary of terms and Alternative
Performance Measures on pages 104 to 106 of
the Annual Report and Financial Statements.
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Whilst lenders' willingness to
initiate and maintain lending facilities reduced during the year,
the one year £30m revolving credit facility was replaced with
another one year £30m revolving credit facility which expires in
July 2024. Negotiations are underway to replace this
facility.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Political risk: Political
change in areas in which the Company invests or may invest may have
practical consequences for the Company.
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Political developments are monitored
and considered by the Board. The Board continues to assess the
potential consequences for the Company's future activities
including those that may arise from further constitutional
change.
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This risk increased as governments
and consumers around the world continue to assess the impact of
heightened geopolitical tensions.
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What is the risk?
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How
is it managed?
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Current assessment of risk
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Cyber security risk: A cyber
attack on Baillie Gifford's network or that of a third party
service provider could impact the confidentiality, integrity or
availability of data and systems.
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To mitigate this risk, the Audit
Committee reviews Reports on Internal Controls published by Baillie
Gifford and other third party service providers. Baillie Gifford's
Business Risk Department report to the Audit Committee on the
effectiveness of information security controls in place at Baillie
Gifford and its business continuity framework. Cyber security due
diligence is performed by Baillie Gifford on third party service
providers which includes a review of crisis management and business
continuity frameworks.
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This risk is seen as increasing due
to recent indications that the continuation of geopolitical
tensions could lead to cyber attacks. Emerging technologies,
including AI, could potentially increase information security
risks. In addition, service providers operate a hybrid approach of
remote and office working, thereby increasing the potential
of
a cyber security threat.
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Emerging risks: As explained on
pages 55 and 56 of the Annual Report and Financial Statements, the
Board has regular discussions on principal risks and uncertainties,
including any risks which are not an immediate threat but could
arise in the longer term. The Board considers that the key emerging
risks arise from the interconnectedness of the global economy and
the related exposure of the investment portfolio to external and
emerging threats such as the societal and financial implications of
an escalation of geopolitical tensions, cyber security risks
including developing AI and quantum computing capabilities, new
coronavirus variants or similar public health threats. The Board
also notes that increased levels of government borrowing may result
in an elevated level of interest rates and/or increased market
volatility. This is mitigated by the Board discussing at each Board
meeting economic and geopolitical factors and how these might
impact the Company. The Board also considers the Investment
Managers' close links to the investee companies and their ability
to ask questions on contingency plans. The Investment Managers
believe the impact of such events may be to slow the pace of growth
rather than to invalidate the investment rationale over the long
term. The Managers monitor certain emerging risks and have
established a group to manage the response to any future events
that might result in heightened levels of market volatility.
Regular exercises are carried out to test the Managers' response to
various scenarios.
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