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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
absolute and relative 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.
In 2024, the Board undertook a detailed review of the Company's
strategy, execution and performance resulting in a comprehensive
action plan to improve execution. Shareholders approved amendments
to the investment policy at the General Meeting held on 18
December. Please refer to the Chair's Statement on page 5 of the
Annual Report and Financial Statements.
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Risk Level: High
This risk has continued to increase
and led to the Board and Managers' review and an action plan
implemented which is being carefully monitored. Market conditions
for growth
stocks typically held by the Company
are improving. Since the year end, a significant
minority shareholder has initiated
actions which may lead to a change of investment
strategy, if approved by the
shareholders. Further details are set out in the Chair's statement
on pages 5, 8 and 9 of the Annual Report and Financial
Statements.
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Financial risk
The Company's assets are listed and
unlisted securities 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 17 to the Financial
Statements.
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The Board has considered the impact
of market volatility driven by macroeconomic factors such as higher
interest rates and geopolitical concerns. To manage this risk, the
Board regularly reviews metrics on portfolio composition and
diversification alongside investment transactions. Discussions with
the portfolio manager cover individual investments and market
insights. An annual strategy meeting is conducted. Following a
detailed review in 2024 of the Company's strategy and performance
involving independent advisors, the Board is actively monitoring
the execution of an action plan for improved execution and
performance..
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Risk level: High
This risk is considered to increased
as market volatility remains due to continuing
geopolitical instability.
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Smaller Company Risk
The Company has investments in
smaller, immature companies which are generally considered higher
risk as changes in their share prices may be greater and the shares
may be harder to sell. Smaller, immature companies may do less well
in periods of unfavourable economic conditions.
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To mitigate this risk, the Board reviews the investment portfolio
at each
meeting and
discusses the
merits and
characteristics of
individual investments with the Managers. A spread of risk is
achieved by holding stocks classified across at least fifteen
industries and six countries.
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Risk level: High
This risk is considered to have
increased as market volatility from ongoing geopolitical
instability has a greater impact on
the share prices of smaller companies which are typically more
sensitive to market sentiment and macroeconomic shocks.
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Private Company (Unlisted) Investments Risk
The Company's risk is increased by
its investment in private company securities. These investments may
be more difficult to buy or sell, assessment of their value is more
subjective than for investments listed on a recognised stock
exchange and their valuations may be perceived to be more volatile
or out of date.
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To mitigate this risk, the Board
considers the private company securities in the context of the
overall investment strategy and provides guidance to the Managers
on the maximum exposure to unlisted investments.
Valuations of private companies are carried out on
a frequent basis by the manager and updated regularly for
identified changes in operational developments or recent
transactions in shares. The Board reviews the valuations in detail
which are carried out by a third-party valuation specialist,
subject to the Managers' private company valuation specialist input
and is also subject to external audit scrutiny annually.
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Risk level: Moderate
This risk is considered
to
have increased as private company
investment valuation risk increases in volatile markets. The more
difficult fundraising environment and IPO conditions increase
overall investment risk conditions for private
companies.
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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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The Board monitors the level of discount/premium
at which the shares trade and the Company has
authority to buy back its existing shares or issue shares
(including authority to sell shares held in treasury), when deemed
by the Board to be in the best interests of the Company and its
shareholders. During the year the Board significantly increased the
level of buybacks and has announced its intention to return up to
£130m to shareholders
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Risk level: High
This risk is considered to have
increased as although the Company's discount narrowed
during the year there is an elevated
risk that sentiment towards the Company's shares
could change resulting in a widening
of the discount.
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Political and Associated Economic Risk
The Board is of the view that
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 closely
monitored and considered by the Board. It monitors portfolio
diversification by investee companies' primary location and
considers the potential for negative impacts arising from military
action, trade barriers or other political factors
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Risk level: High
This risk is considered to be
increasing as governments and consumers around the world continue
to assess the impact of heightened geopolitical tensions and
conflicts as well as challenging macroeconomic tensions.
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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. 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 and
Management Engagement Committee review Reports on Internal Controls
published by Baillie Gifford and other
third party service providers. Baillie Gifford's Business Risk
Department report to the Audit and Management Engagement 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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Risk level: Moderate
This risk is considered to be
increasing due to ongoing geopolitical tensions and an observed
increase in malign cyber activity. 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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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 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. In addition, the valuation of investments
could be impacted by climate change.
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This is mitigated by the Managers'
strong ESG stewardship and engagement policies which are integrated
into the investment process which includes the risk inherent in
climate change (see page 55 of the Annual Report and Financial
Statements), and which are discussed regularly by the Board with
the Managers. Further details of the Managers' approach are set out
on page 36 of the Annual Report and Financial Statements and also
on the Managers' website, bailliegifford.com/esg. The Directors
have considered the impact of climate change on the Financial
Statements of the Company and this is included in note 1a to the
Financial Statements on page of the Annual Report and Financial
Statements.
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Risk level: Moderate
The risk is considered to be
unchanged. The Managers continue to employ strong ESG stewardship
and engagement policies.
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Regulatory Risk
Failure to comply with applicable
legal and regulatory requirements such as the tax rules for
investment trust 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. 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 and Management Engagement
Committee on Baillie Gifford's monitoring programmes. Should major
regulatory change seem likely to could impose disproportionate
compliance burdens on the Company representations are is made to
the relevant authorities 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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Risk level: Low
The risk is considered to be low.
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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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 and Management Engagement
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 unlisted portfolio holdings to
confirmations from investee companies. In
addition, the existence of assets is subject to annual
external audit and the Custodian's internal controls assurance
reports are reviewed by Baillie Gifford's Business
Risk Department and a summary of the key points is reported to the Audit and Management Engagement Committee and any concerns
investigated.
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Risk level: Low
The risk is considered to be low.
All control procedures are working effectively
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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 and
Management Engagement 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 and a summary of the key points is reported to the Audit and Management Engagement 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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Risk level: Low
This risk is considered to
be
low. All control procedures are
working effectively.
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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
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. Details of the Company's
current borrowing facilities and drawings can be found in note 10
on page 103 of the Annual Report and
Financial Statements. The majority of the Company's investments are
in quoted securities that are readily realisable. Further
information on leverage can be found on
page of the Annual Report and Financial Statements and the Glossary
of Terms and Alternative Performance Measures on pages 122 to 124 of the Annual Report and Financial
Statements.
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Risk level: Low
This risk is considered to be low.
There has been no significant change in risk level.
The Company continues to deploy
gearing and has two revolving credit facility loans
in place which expire in
2026.
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Emerging Risks - as explained
on page 70 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.
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