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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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Financial Risk
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The Company's assets consist mainly
of listed securities (94% of the investment portfolio) and its
principal and emerging financial 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 19 to the Financial Statements on pages 97 to 103 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. In order to oversee this risk, the Board
considers at each meeting various metrics including regional and
industrial sector weightings, top and bottom stock contributors to
performance along with sales and purchases of investments.
Individual investments are discussed with the portfolio manager
together with general views on the investment markets and sectors.
A strategy session is held annually.
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The prospect of market volatility
remains, given continuing geopolitical instability.
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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
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Pursuit of 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
raises any matters of concern with the Managers.
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During the year, the Company's NAV
total return was behind the benchmark. However, there are signs
that the market's appetite
for growth stocks, typically held by
the Company, is recovering.
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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 and
associated
economic risk
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Political change in areas in which
the Company invests or may invest may have financial consequences
for the Company.
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To mitigate this risk developments
are closely monitored and considered by the Board and are regularly
discussed at Board meetings.
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The prospect of market
volatility remains, given
continuing geopolitical
instability.
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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
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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
traded
at an average discount of
14.3% throughout the year
and it bought back
6,365,921
ordinary shares during
the year. The Board has
also
put in place a performance
related
tender offer as set out
on page 8 of the Annual Report and
Financial Statements.
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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
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Failure to comply with applicable
legal and regulatory requirements such as the tax rules for
investment trust companies, the UK 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. Changes to the
regulatory environment could negatively impact the
Company.
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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 are working
effectively. There have been no material regulatory changes that
have impacted the Company during the year.
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What is the risk?
|
How
is it managed?
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Current assessment of risk
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Custody and
depositary
risk
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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 who also agree
uncertificated private portfolio holdings to confirmations from
investee companies. The Custodian's audited 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 are 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
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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. The Audit Committee reviews Baillie Gifford's
Report on Internal Controls and reports by other key third party
providers are reviewed by Baillie Gifford on behalf of the Board
and a summary of the key points is reported to the Audit Committee
and any concerns investigated. 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 are 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
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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
extent 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
borrowings 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 majority of the
Company's investments are in quoted securities that are readily
realisable. Further information on leverage can be found on page
115 of the Annual Report and Financial Statements and the Glossary
of terms and alternative performance measures on pages 118 to 120
of the Annual Report and Financial Statements.
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The Company has in place long term
borrowings, expiring in 2036 and 2040.
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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
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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 Managers 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 Managers'
strong ESG stewardship and engagement policies which are available
to view on the Managers' website, bailliegifford.com/esg, and which have
been reviewed and endorsed by the Company, and which have been
fully integrated into the investment process. Due diligence
includes assessment of the risks inherent in climate change (see
page 66 of the Annual Report and Financial Statements.).
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The Investment Manager continues 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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Cyber
security risk
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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.
Emerging technologies, including AI
and quantum computing capabilities, may
introduce new, and increase existing
information security risks that impact operations.
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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. 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 risk
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As explained on page 64 and 65 of
the Annual Report and Financial Statements, the Board has regular
discussions on principal and emerging risks, including any risks
which are not an immediate threat but could arise in the longer
term. The Board considers emerging risks at each Board meeting and
discusses any mitigations required.
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