Annual Results

The Scottish Investment Trust PLC

Annual Results for the year ended 31 October 2016.

The Scottish Investment Trust PLC invests internationally and is independently managed. Its objective is to provide investors, over the longer term, with above-average returns through a diversified portfolio of international equities and to achieve dividend growth ahead of UK inflation. Today it announces its results for the year to 31 October 2016.

Highlights

· First quartile performance over 12 months.

· 29.4% NAV total return.

· 40.6% increase in total dividend per share.

· First full year of high conviction, global contrarian approach.

Enquiries:

Alasdair McKinnon, Manager

0131 225 7781

Chairman's Statement

Performance

In my first year end statement, I am delighted to report that the Company's performance has been strong during the 12 months to 31 October 2016. Over that period, the share price total return was 30.0% and the net asset value per share (NAV) total return was 29.4% (with borrowings at market value). While the Company's objective is to produce above-average returns over the longer term, it is nevertheless pleasing that the Company's new investment approach has demonstrated early benefits.

At the financial year end the Company was ranked in the first quartile of the AIC global peer group over the prior12 months.

The high conviction, global contrarian investment approach adopted by Alasdair McKinnon and his team has been deployed for the full financial year. This approach differentiates the Company from our global growth investment trust peers. The portfolio currently contains 68 listed equity holdings and is invested without reference to the composition of any index.

The Company does not have a formal benchmark but, by way of comparison, the sterling total return of the international MSCI All Country World Index (ACWI) was 29.1%, while the UK based MSCI UK All Cap Index total return was 12.3%.

An inflation-beating dividend

Over the financial year, earnings per share rose by 35.9% to 21.6p (2015: 15.9p), with a higher level of income generation from the portfolio and a boost from sterling weakness.

The Board recommends a final dividend of 8.25p per share which, if approved, will mean that the total regular dividend for the year will increase by 8.0% to 13.5p and will represent the 33rd consecutive year of regular dividend increase.

In view of the strong income generation this year, the Board also recommends a special dividend of 9.0p which follows a special dividend of 3.5p in the previous financial year. The total dividend for the year will, if approved, thus increase by 40.6% to 22.5p.

The Board wishes to maintain both the long track record of dividend increases and the aim of the Company to provide dividend growth ahead of UK inflation over the longer term. The Company has healthy revenue reserves which cover in excess of four years of the regular dividend. The Board considers it important for the Manager to examine the merits of investments from a total return perspective and does not wish the composition of the portfolio to be dictated by the income requirements of the Company. Accordingly, the Board believes that these reserves should be utilised, if required, in the future.

As was the case for the past two years, the Board also considers that income generated in excess of the requirement of the regular dividend should be distributed as a special dividend.

Board composition

I was appointed as Chairman at the AGM in January 2016, following the retiral of Douglas McDougall. The Company benefited greatly from his knowledge, experience and leadership over many years. On behalf of the Board, I should like to thank Douglas for his outstanding contribution.

Jane Lewis and Mick Brewis were appointed as non-executive Directors in December 2015 and elected at the AGM in January 2016. Jane is an investment trust specialist and Mick is an investment management specialist and both bring the experience of long careers in their fields.

Process of change

The Company has undergone a number of changes over the past two years which I believe have positioned it well for future success.

Alasdair McKinnon was appointed as the Company's Manager in February 2015 and, since then, the investment team has been reorganised and the majority of our company secretarial and back office operations have been outsourced.

An important element of the changes has been the introduction of the high conviction, global contrarian investment approach which, as I mention earlier, differentiates the Company from our global growth investment trust peers. This approach reflects the investment team's natural style as independent thinkers and active, long-term investors who seldom follow the herd. It seeks opportunities created by the tendency of markets to concentrate too much on past performance. The Manager's view is that fashionable companies eventually become overvalued and unfashionable companies eventually become undervalued.

Central to the new investment approach is the Manager's high conviction in the Company's underlying investments and, in reflection of this, the Board considers it appropriate for the portfolio to contain fewer holdings than the previous typical range of 70 to 120 listed international equity investments. Accordingly, the portfolio will now typically contain 50 to 100 listed international equity investments. The number of listed holdings as at 31 October 2015 and 31 October 2016 was 74 and 70 respectively.

Following the changes outlined above, we now have a streamlined investment team that is focused for effective decision-making and has a clear investment approach which is explained more fully in the Manager's Review.

We have also changed our approach with regard to marketing and communications. We will seek to raise the Company's profile, as we believe that it is an attractive investment vehicle which should appeal to a broad range of potential investors when its attributes are effectively communicated. The first steps in this are visible in our relaunched website at www.thescottish.co.uk and a refreshed Annual Report. This has been achieved at a very reasonable cost and within our longstanding annual marketing budget.

Low costs

The ongoing charges figure for the year under review was 0.49% which compares favourably with other actively-managed investment vehicles. As a self-managed investment trust, this figure represents the ongoing costs of running the Company rather than an ad valorem charge. The process of change over the two years, most notably the restructuring of the investment team and outsourcing of other functions, has helped to reduce the ongoing charges figure from 0.68% in 2014, to 0.52% in 2015 and to 0.49% in the year under review.

Gearing and partial repayment of long-term borrowings

Gearing was largely unchanged and finished the year at 5%.

As I mentioned in the Interim Report, the majority of the Company's long-term borrowings, which mature in 2030, were arranged almost 17 years ago when a 5.75% coupon was considered attractive. The interest rate environment has changed considerably over this timeframe.

The original purpose of the borrowings was to invest on the basis that the return from a portfolio of equities would exceed the cost of borrowings on a long-term timeframe especially if deployed at an opportune time. The Board believes that this remains a valid assumption given that the borrowings have more than 13 years until expiry and, furthermore, the Board is conscious that a premium would currently be required for early repayment of the borrowings.

However, over recent years the proportionate size of these borrowings has increased due to shares being bought back and cancelled as part of the Company's discount control policy. Accordingly, we took the opportunity to repurchase £21m nominal, being around 20%, of the Company's secured bonds in December 2015. While this decision had a one-off negative impact on the NAV of 0.4% (with borrowings at market value) or 1.0% (with borrowings at par), the £1.2m reduction in the annual interest charge going forward means that the cost will be clawed back well within the lifetime of the bond.

Discount and share buybacks

The Company follows a policy that aims, in normal market conditions, to maintain the discount to the ex-income NAV (with borrowings at market value) at or below 9%.

The discount at which the share price traded to the NAV over the period varied more than in previous years but finished the period at 8.1%. During the year 9.2m shares were purchased for cancellation at an average discount of 10.6% and a cost of £59.9m.

Outlook

Although the UK Brexit vote to leave the European Union wrongfooted markets, the swift recovery, particularly in sterling terms, benefited the Company. Since the year-end, there has been a further challenge to the political status quo with the election of Donald Trump as US President. Forthcoming elections have the potential to highlight further rancour towards the European Union.

I do not propose to add to the large volume of material that exists on analysis of these events other than to observe that there is a view, not only confined to the US and the UK, that large sections of the population feel disadvantaged by the consequences of globalisation. In contrast, many large corporations have benefited from these trends but it is still too early to determine what changes, if any, will emerge under new political regimes. Regardless, politicians and bureaucrats are likely to remain sensitive to market movements and will not intend to damage investor confidence.

Finally, the Board believes that the progress made over the year stands the Company in good stead as a low-cost investment vehicle focused on delivering both above-average returns and dividend growth over the longer term.

James Will

Chairman

3 January 2017

Manager's Review

Our contrarian approach

Before examining the year under review, I thought it would be useful to outline our contrarian investment philosophy which we believe will benefit a long-term investor in the Company.

Our contrarian approach is grounded in the simple observation that people like to belong to a group or to feel part of something bigger. Humans, as a species, have evolved to feel uncomfortable outwith the mainstream because, in more arduous times, a coordinated group stood a better chance of survival.

However, we believe this crowding instinct works against the best interests of an investor and that a different stance is required to profit. Accordingly, we do not attempt to follow investment fashions and instead seek investments in which we can foresee long term upside.

We think it is crucial to ignore the emotions associated with past performance and, rather, to view each investment on its future merit. This requires lateral thinking and the willingness to adopt a contrarian point of view as both markets and company management teams have a propensity for hubris in the good times and unjustified pessimism when times are hard.

We divide the stocks in which we invest into three categories.

First, we have those that we describe as ugly ducklings - unloved shares that most investors shun. These companies have endured an extended period of poor operating performance and, for the majority, the near-term outlook continues to appear uninspiring. However, we see their out-of-favour status as an opportunity and can foresee the circumstances in which these investments will surprise on the upside. These stocks often have a higher than average dividend yield which can provide an attractive income while we wait for our investment thesis to unfold.

The second category consists of companies where change is afoot. These companies have seen a significant improvement in their prospects but this progress has not yet been recognised by the market. Often, they are disliked for historical reasons, with investors unwilling to credit the signs of change that are so far evident.

Thirdly, we have stocks where we see more to come. Unlike the first two categories, these companies are generally recognised as good businesses but we see an opportunity as the market does not appreciate the scope for further improvement.

In our experience, the best investments can, over time, move along an axis from 'ugly duckling' through 'change is afoot' and into the 'more to come' category but we are happy to purchase and hold investments in any of the categories.

A key strength of our contrarian approach is that it provides profitable opportunities in all market environments as there are always underappreciated areas of the market.

The financial year

This was a strong year for investment returns but there were two volatile periods that favoured our contrarian approach.

There was a sharp change in investor sentiment in January 2016 in the aftermath of a small interest rate increase by the US Federal Reserve. Almost overnight, investors shunned highly valued, fashionable stocks in favour of more attractively valued, but unfashionable, investments.

The outcome of the Brexit vote surprised investors who had set excessive store in the soothsaying abilities of opinion pollsters and bookmakers. The kneejerk plunge in markets was chaotic but the portfolio made a swift recovery and quickly advanced to new highs for the year. The downward movement in sterling had an obvious beneficial impact to the value of our overseas investments when considered in sterling terms. The vote also triggered an awakening of interest in our UK domiciled international companies, which stood to benefit from the conversion of their substantial non-sterling revenues.

NAV Absolute Performance AttributionYear to 31 October 2016

Contributors to Absolute PerformanceYear to 31 October 2016

* Sold during the year.

Given our focus on individual stock ideas, rather than reporting portfolio activity in terms of geography or industry, I thought it more meaningful to discuss the notable gains and losses, in total return terms, over the year.

Treasury Wine Estates (+£21.0m), the largest holding in our portfolio, delivered outstanding performance and more than doubled in sterling terms over the year. This Australian wine company has been rejuvenated under the leadership of Michael Clarke and is being repositioned towards a brand-led strategy. The acquisition of Diageo's wine assets greatly expanded the company's scale and scope at a very reasonable price. On purchase, we viewed the company as an 'ugly duckling' but progress to date and a more general acceptance of the company's strategy means that we now believe that 'change is afoot'.

Sands China (+£13.0m), the Macau casino operator, is another investment we view as an 'ugly duckling'. The share price had suffered from the perception that the Chinese economy was heading for a period of very slow growth. However, a recovery in visitor spending supported our view of the broader appeal of Macau as a tourist destination while investor sentiment towards China improved. This, alongside an appealing dividend yield, helped produce a strong total return.

Microsoft (+£10.7m) appreciated meaningfully during the year as it continued to demonstrate an ability to shift a large user base to a more valuable subscription model. We originally viewed the company within the 'change is afoot' category but now consider the company has 'more to come'.

Rentokil Initial (+£10.1m), the UK support services company, is another example of where we see 'change is afoot'. Following a period of substantial restructuring, the company has refocused on the pest control market and has an opportunity to improve profit margins further. The company performed particularly well in the aftermath of Brexit as a high proportion of overseas revenues proved attractive to investors.

Leading Japanese games company Nintendo (+£7.0m) has the opportunity to bring its content to a wider audience and this was highlighted by the enthusiastic reception for the Pokémon Go smartphone game. We consider that 'change is afoot' and the upcoming launches of new smartphone games have the potential to shine further light on Nintendo's underappreciated intellectual property.

We view Standard Chartered (+£6.2m) as an 'ugly duckling' as it was shunned for high loan exposure to weak emerging markets and commodities. The prospects for these loans are improving which, alongside the company's ambitious restructuring plan, has the potential to improve the company's lowly valuation.

Improving sentiment towards emerging markets, oil and commodities in general was a common theme for several more of our best investments, particularly in the second half of the financial year. As reported last year, we had increased our exposure to certain stocks where we judged that pessimistic scenarios, related to a slowdown in emerging markets, were overly discounted in share prices. We saw large gains from our investments in Suncor Energy (+£5.5m), Royal Dutch Shell (+£5.5m), Rio Tinto (+£4.0m), Cemex (+£3.7m) and BHP Billiton (+£2.6m).

In a strong year for markets, it is unsurprising that we made comparatively few notable absolute losses. British Land (-£4.3m) suffered from the perceived threat to the UK commercial property market from Brexit but gloomy market assumptions present an interesting 'ugly duckling' recovery opportunity. BT (-£2.2m) also performed poorly in the aftermath of the Brexit vote and this was compounded by a potential shift in the regulatory framework. Being contrarian can require patience and this was the case with our new holding in Marks & Spencer (-£2.3m). We continue to think this 'ugly duckling' will benefit from the meaningful change which has commenced in earnest under the new leadership of Steve Rowe.

An important part of our contrarian investment approach is to sell investments where we no longer envisage a prospect for significant further upside. Most notably, we sold Pandora (+£4.9m), which had performed extremely well and which we considered fully valued, as we saw a less favourable balance of risks for this fashion driven stock. We also sold a number of other long-term holdings, where we judged the current valuation fully reflected their prospects, including Ross Stores, Associated British Foods, Persimmon, Alphabet, Svenska Handelsbanken and Sampo.

The Brexit vote and, subsequent to the year end, the election of Donald Trump as the forthcoming US President indicate that there may be a shift in the political and investment environment. Large segments of the populations in the developed world clearly feel that a decline in their living standards has been ignored by the establishment.

A change in the political zeitgeist, if it actually occurs, will undoubtedly benefit some companies more than others. However, our contrarian investment approach is designed to anticipate and benefit from change and we will continue to seek opportunities which we believe will profit a long-term investor.

Alasdair McKinnon

Manager

3 January 2017