IIT.L Regulatory News (IIT)

The following is the unaudited preliminary statement for the year to 30 November 2016 which was approved by the board on 19 January 2017.

During the year to 30 November 2016, our company produced a net asset value (NAV) total return of 5.0%1. Theoretical investments in the FTSE All-Share Index and the FTSE World Index would have produced total returns of 9.8%1 and 25.6%1 respectively. A widening of the discount2 - from 6.9% to 11.2% - led to a share price total return of 0%1. This is clearly a disappointing result and one that leaves us bottom of the Association of Investment Companies' Global sector of investment trusts for the year in terms of NAV total return. Fortunately, it follows a very good year and so we are still comfortably above median for the three and five year periods ending 30 November 2016.

For us the most important development of the year was the UK vote to leave the EU in the June referendum. Primarily through the ensuing depreciation of the pound, this caused two problems for us. First, in constant currency terms the UK stockmarket (in which the vast majority of our assets were invested throughout the year) lagged behind most other stockmarkets and thus the FTSE World Index. Secondly, within the UK stockmarket domestically orientated sectors (which were disproportionately represented in our portfolio) performed less well than those with international exposure. Particularly painful for us was the poor performance of our large housebuilding stake, which had been such a positive contributor to our results in 2015. A remarkable feature of the year has been that apart from companies coming into the portfolio through their initial public offerings (IPOs), we have only made one purchase - an addition to our large holding in Redrow. Our experience with IPOs continues to be good on balance, although Motorpoint is currently a notable exception.

The general economic background has changed little over the last year: growth has remained lacklustre in most countries; interest rates have remained at abnormally low levels by historic standards; and stockmarkets have been boosted by loose global monetary conditions. Towards the end of our year, there were signs that the long awaited correction in global bond markets might be starting. Perhaps the most interesting developments were on the political front, where referendum results in Europe and the election result in the USA signalled dissatisfaction with the established economic policies of recent years. The risk of a more protectionist world appears to have increased significantly.

The only significant change in our sectoral distribution over the year was a material reduction in our exposure to technology and telecommunications as we sold out of our Chinese internet holdings and took profits in FDM and Gamma Communications, two of our more successful IPO investments of recent years. We ended our year with cash balances of just under 5% (2% at 30 November 2015). Further comments on the portfolio can be found in the Managing Director's Report.

Despite the disappointing results in the year under review, our long term record continues to provide grounds for encouragement: for the period from inception to 30 November 2016, we produced an NAV total return of 476%1, equivalent to a rate of roughly 11.6% per annum, of which 2.8% per annum can be offset by RPI inflation. By comparison, the notional return available from the FTSE All-Share Index over the period amounted to 117%1, or 5.0% per annum.

Earnings per share for the year were 7.93p (8.3p in 2015). Having already paid an interim dividend of 5.0p, we have decided not to propose a final dividend for 2016, but instead to pay a special dividend of 2.5p (3p in 2015). This will be paid on 6 April with an ex-dividend date of 23 February. The regular dividend for the year is therefore maintained at 5p, while the total dividend for the year is reduced from 8p to 7.5p. For 2017 we plan to revert to a pattern of paying an interim and a final with any surplus income being distributed by way of special dividend.

Our ongoing expenses ratio3 rose during the year - from 0.32% to 0.34%. Even so, we remain one of the lowest cost providers in our industry.

After a brief period of trading at a premium2 to net asset value, our shares have reverted to trading at a discount2. As in the past, we stand ready to repurchase shares on terms that are fair to both departing and continuing shareholders. In the year under review we made a single purchase of 600,000 shares at a discount2 of 4.3%.

As always, there are plenty of things to worry about in the general economic and stockmarket background. Of particular concern to us at the moment are: the uncertainties surrounding the Brexit negotiations; the high levels of debt around the world; the impact of the economic policies of the new US administration; the outlook for interest rates and bond yields; and general stockmarket valuations, which appear high by historic standards. These concerns notwithstanding, we continue to be pleased with the quality of the companies in our portfolio and optimistic about their ability both to exploit favourable developments and to cope with unfavourable ones. This is particularly the case with our housebuilding holdings, around a quarter of assets, most of which delivered exemplary trading performances in 2016 and all of which are in excellent shape to withstand even a major deterioration in trading conditions should it occur. The rest of the portfolio is invested largely in smaller companies, including several recent issues, which are seeing strongly growing demand for their products or services.

Once again, we should like to encourage you to come to the AGM, which is to be held in the Baillie Gifford offices at Calton Square at 4.30pm on 23 March 2017. It will help our planning if we know how many shareholders are likely to attend, and I shall be grateful if you will mark the proxy form accordingly and return it to the Company's registrars. I look forward to seeing as many of you as possible there.

Douglas McDougall

19 January 2017

1. Total returns include the reinvestment of dividends on the date the shares are quoted ex-dividend. Source: Baillie Gifford/Thomson Reuters Datastream.

2. The premium/discount is the positive/negative difference between the Company's quoted share price and its underlying NAV per share expressed as a percentage of the NAV per share.

3. Ongoing charges represents administrative expenses as a percentage of average shareholders' funds.

Our performance over the year has been covered in the Chairman's Statement.

One of the hazards confronting the long-term investor in housebuilding shares is the difficulty of forecasting the industry's short-term outlook. As battle-hardened industry enthusiasts we accept with stoicism the pain this characteristic sometimes inflicts upon us, but we do consider ourselves a little unlucky when housebuilding share prices fall dramatically in anticipation of developments that do not materialize, which is what happened to us in the middle of 2016. In the immediate aftermath of the referendum on British membership of the EU, a number of industry experts, many of them in the employment of large London investment banks owned overseas, reached the conclusion - apparently independently - that the decision to leave would have devastating short-term implications for housing volumes and house prices. The resulting stockmarket panic was impressive, even by the industry's exalted standards: most of our holdings experienced price declines of the order of 40% during the fortnight beginning 24 June. To date and with the sole exception of McCarthy and Stone, none of them has experienced any significant adverse effects from the vote, but many of the experts are clinging to the hope that this is disaster deferred rather than disaster averted, a hope that is still generously reflected in valuations. Our principal worries are more to do with government policy and the outlook for interest rates. The government has shown signs of wanting to interfere with the industry on the grounds, which we consider spurious, that it is deliberately hoarding land that could be used for building; and it can be argued that mortgage rates have already begun to rise. We do not believe that either issue has the capacity to undermine the long-term argument for investing in housebuilders - which is built on a chronic shortage of supply and high barriers to entry - but each clearly has the potential to hurt sentiment, already fragile, towards the sector. This is one of those occasions when we think it right to concentrate on the long-term picture and to ignore the shocks delivered by an increasingly febrile stockmarket.

The scale of our existing position in the industry made us slow to capitalize on the eye-catching values thrown up by the panic, but we did eventually add £3.4m to our Redrow holding. This had a mitigating influence on a most disappointing overall performance: despite the addition, the value of our stake declined from £56.5m at 30 November 2015 to £51.0m at 30 November 2016.

Fortunately, we fared better with our large commitment to technology and telecommunications: a stake worth £62.3m at 30 November 2015 had fallen in value to £44.6m by 30 November 2016, but this was after net sales of £23.2m. We made profitable disposals of our two Chinese internet companies, Alibaba and Baidu, and took further profits in FDM and Gamma Communications. Kainos, the software consultancy, had a disappointing year as profits were hit by investment in new markets, but our longstanding holding in Herald made good progress despite the persistence of a discount that gives no credit for the fund's excellent long-term performance. Finally, we made a small investment in Blue Prism, a leading player in the emerging field of software process automation. To date, this investment has been surprisingly profitable as the company's revenues have exceeded all expectations by a considerable margin. The company, by contrast, has yet to make a profit.

The feature of our stake in the travel and leisure industries has been the strong performance of On the Beach, which we bought at IPO in September 2015. Despite difficult conditions in the package holiday market, it produced sparkling results and appears set to make further progress in the years ahead. Gym Group had a disappointing share price performance, but this may have been more to do with its high valuation at the start of our year than with its trading performance, which appears to be in line with expectations. Finally, a new holding in Hollywood Bowl, an operator of ten pin bowling centres, made a satisfactory debut. Overall, a stake worth £15.3m at 30 November 2015 had risen in value to £24.7m by 30 November 2016 after net purchases amounting to £6.1m.

It has been an excellent year for our industrial holdings. Our old favourite Ashtead has traded well and has been singled out by investors as a beneficiary of the US infrastructure spending promised by Donald Trump. A new holding in Luceco, bought in October, has got off to a good start. Luceco is a manufacturer of electrical equipment and LED lighting products with its own factory in China. Prospects for its LED lighting products appear particularly good. Overall, a stake worth £15.3m at 30 November 2015 had grown in value to £21.4m by 30 November 2016 after net sales of £0.2m.

Our retail holdings have had a disappointing year: a stake worth £11.1m at 30 November 2015 had only grown in value to £15.2m by 30 November 2016 despite net purchases of £9.6m. A new holding, the nearly new car retailer Motorpoint, saw trading badly affected by consumer uncertainty around the time of the referendum. Our old friend Dunelm had a quiet year in trading terms and suffered a derating in consequence, and we realized a small loss on our sale of SCS. On a happier note, the clothing retailer Joules, also a new holding, made a satisfactory debut.

Our consumer services holdings also had a difficult time with the Gama Aviation share price being hit particularly hard by soft trading conditions in Europe and NAHL being affected by proposed changes to the system for personal injury litigation. The AA had a dull year as earnings were affected by a major investment programme and we made a poor decision to sell our holding in BCA Marketplace. Overall, a stake worth £22.2m at 30 November 2015 had fallen in value to £10.7m by 30 November 2016 after net sales of £6.7m.

Our holding in the soft drinks company, Fever-Tree, has once again done enough to merit a paragraph to itself with the share price almost doubling over the twelve months. Despite a further reduction early in the year (we have now realized the full value of our original investment in the company), this led to its becoming our biggest holding at 30 November 2016. The valuation is a source of concern, but the scale of the opportunity facing the company and the lack of obvious competitive threats persuade us that it is worth running our position.

Elsewhere in the portfolio, Telecom Plus saw a modest recovery in its share price as energy prices started to rise, but the value of our SThree holding fell significantly as trading conditions in the recruitment market remained tough. The distributor of audio visual equipment, Midwich, staged a rather disappointing debut despite producing better results than we were expecting. Polar Capital Insurance Fund had an excellent year, extending its fine long-term record while Bluefield Solar Income delivered a good yield and a relatively stable share price. Finally, our small holding in the Canadian oil company, Bankers Petroleum, was sold after the announcement of a Chinese bid for the company.

Max Ward

19 January 2017

List of Investments as at 30 November 2016 (unaudited)

All holdings are in equities domiciled in the UK unless otherwise stated.

* Suspended Security.

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

For the year ended 30 November 2016 (unaudited)

For the year ended 30 November 2015 (audited)

* The Capital Reserve balance at 30 November 2016 included an investment holding gain on fixed asset investments of £57,240,000 (2015 - gain of £64,549,000).

† Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

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