30 November 2009

The Scottish Investment Trust PLC
Preliminary figures for the year to 31 October 2009

Chairman's Statement 2009
The Scottish Investment Trust PLC

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 2009.

Performance

Over the year to 31 October 2009, the net asset value per ordinary stock unit (NAV) rose by 14.8% with borrowings at par. The primary comparator indices both rose by more - the global FTSE All-World Index™ rose by 18.3% and the UK FTSE All-Share Index™ by 18.4%. In total return terms, the NAV with borrowings at par was up 17.6% compared with 22.0% for the FTSE All-World and 23.5% for the FTSE All-Share. The NAV with borrowings at market value was suppressed to an increase of just 11.6% as the market value of the company's long term fixed rate borrowings was inflated by the decline in gilt yields over the period.

Geographic and sector positioning contributed positively to relative performance while stock selection and sterling weakness made negative contributions. Portfolio underperformance was primarily concentrated in March and May as markets turned and rallied sharply. Financials, in which we were under-represented, and other generally riskier shares advanced well ahead of the relatively defensive core portfolio as investors re-embraced risk. However, the portfolio was repositioned rapidly to a more cyclical stance and subsequently performed strongly in the period from the end of May to the year end.

The financial year began in the midst of the banking industry maelstrom with global stockmarkets having fallen heavily after the collapse of US investment bank Lehman Brothers. As a consequence, the world economy slowed sharply and global markets continued to slide between November and mid-March. Major central banks and governments responded with aggressive interest rate reductions and alternative monetary and fiscal policy measures to support banking systems and arrest the collapse in global growth.

March proved to be the pivotal month however as global stockmarkets fell initially, to levels last seen in 2003, before reversing course and turning up sharply as the first green shoots of recovery were sighted and aggressive monetary policy measures were implemented in the US and UK. Markets proceeded to rise 40% in sterling terms from early March until the end of the company's year as more evidence emerged of an improvement in the global outlook.

In sterling terms the best returns came from emerging market regions Latin America (+69.0%), Asia Pacific (ex Japan) (+59.0%) and Middle East & Africa (+45.8%) - all boosted by currency appreciation against sterling. The 12% fall against the euro transformed modest gains from European markets into a 25.0% gain in sterling terms. Japan (+9.0%) and North America (+6.7%) were relative laggards. As markets recovered, outperformance from the turning point in March until the year end was concentrated in just four industry groups - Financials, which rose by 86.6% from the lows, Basic Materials, Technology and Industrials.

There were four main themes behind portfolio activity during the year. The first was the restoration in December of the sustainable dividend generation capacity of the portfolio in the face of both a decline in domestic interest rates to near zero and a terrible year for corporate dividends. Also, a £25m portfolio of short-dated corporate bonds was created to boost income. Second, between March and May, the portfolio was repositioned to a more normal pro-growth stance with reductions to defensive areas and major additions to Financials, Technology and other more cyclical areas. Third, the level of effective equity gearing was increased further with £23.6m added in March as markets turned up and a further £26.4m over April and May taking effective gearing into equities to 114%. Towards the end of the year, profits were taken in a number of industrial cyclicals and financials which had done very well and effective gearing ended the period back at 105%. The timely use of gearing added 1.6% to relative performance. Fourth, emerging markets exposure was rebuilt over the year with additions of £35.5m to Latin America and £30.6m to Asia Pacific (ex Japan) with strong gains from both regions. Reductions were made to North America, Japan and Europe.

Overall, the portfolio appreciated by £80.4m, the biggest contributor by far being Industrials (+£27.6m), reflecting the purchases of £110m of out of favour cyclical companies made last October. Financials were rebuilt cautiously with additions of £52.0m culminating in gains of £15.6m including a strong performance by Spanish bank BBVA (+£5.7m). Other strong contributors across the portfolio included Tencent (+£5.0m), Petrobras (+£4.6m), Compal Electronics (+£4.2m), Hengan International (+£4.2m) and Li & Fung (+£4.0m).

As profits were taken late in the year and gearing lowered, the number of listed portfolio holdings was reduced to 90 (2008: 117).

Over the last five years, the company has outperformed the main comparator indices, the UK FTSE All-Share and FTSE All-World in terms of both share price total return and NAV total return.

Income

With UK interest rates being lowered from 4.5% to 0.5% over the year, aggregate dividends from the UK FTSE All-Share Index and US S&P 500 Index down by 17% and some 50% of dividend-paying companies in the FTSE All-Share suspending or paying lower dividends, this was likely to be a difficult year for income. However, changes to the portfolio and a traditional focus on strong, well-managed companies meant that total income fell by just 4.6%. Fewer stock units outstanding post-buybacks and lower expenses meant that EPS for the year were just 3.5% lower at 10.62p (2008: 11.00p).

Dividend

It is a stated objective of the company to increase the dividend by more than the UK rate of inflation over the longer term. The board is therefore recommending an increase of 1.1% in the regular dividend for the year to 9.60p per ordinary stock unit (2008 - 9.50p) which compares with the October UK RPI annual inflation rate of -0.8%. If approved, the company will have increased its dividend in each of the last 26 years.

Stock Price, Buybacks and Discount

The stock price rose by only 10.2% as the discount widened slightly to 8.9%. The discount was relatively volatile as it narrowed during the first half and for a short spell was eliminated with the stock price standing above the NAV. Under the company's buyback policy, which is intended to keep the discount to ex-income NAV at or below 9% (with borrowings at market value), 3.4m stock units were repurchased for cancellation over the financial year (adding 0.3% to NAV performance and utilising 2.05 percentage points of the 14.99% authority renewed at the January 2009 AGM) at an average discount of 9.9% and a cost of £13.8m inclusive of dealing expenses. The average discount over the year was 6.0% and the estimated daily average between the introduction of the scheme in February 2006 and the year end was 8.1%.

Board Composition

I am very pleased to welcome Mr Russell Napier to the board. A consultant global strategist with CLSA Asia Pacific Markets, Mr Napier was appointed to the board as a non-executive director on 24 July 2009. He will be standing for election at the 122nd Annual General Meeting which will be held at the Roxburghe Hotel, Charlotte Square, Edinburgh, on Friday 5 February 2010 at 10.30am.

European Regulatory Proposals - Impact on Self-Managed Trusts

Investors should be aware that the Board views with concern the EU draft directive governing so-called "Alternative Investment Fund Managers (AIFM)". While the proposals have been aimed primarily at hedge funds and private equity, conventional UK investment trusts are being inadvertently caught under these proposals which contain some inappropriate measures and ultimately, could threaten the viability of the UK investment trust industry. Moreover, the proposals create additional uncertainty for self-managed investment trusts such as The Scottish Investment Trust. Consequently, we will be working with other self-managed trusts to lobby for amendment to the proposals and will continue to support the AIC's own efforts.

Outlook

From the turning point in March to the year end, global equities rallied by 50% in local currency terms and 40% in sterling terms. Economic fundamentals continue to improve as the effects of the authorities' extraordinary policy stimulus measures are felt. Corporate earnings are recovering and there are increasing signs of stabilisation in several key economies. However, it is likely that the recovery in markets has not only priced in much of the improvement in the world economy, but may also have itself been fuelled by surplus liquidity stemming from such policy measures to support the financial system. Consequently, value in global stockmarkets is now much diminished following this rally. The timely removal of central bank and state fiscal support measures - not so early as to stifle the recovery and not so late as to spark inflation - will be a major challenge for the period ahead.

Douglas McDougall
Chairman

November 2009

The total column of this statement is the profit and loss account of the company.

Notes:

The directors recommend a final dividend of 5.15p per ordinary stock unit which, together with the interim dividend of 4.45p per unit paid on 17 July 2009, makes a total of 9.60p for the year.  The final dividend absorbs £6,501,000 and is payable on 11 February 2010 to stockholders registered at 15 January 2010.

The weighted average number of ordinary stock units in issue throughout the year was 128,817,089 (2008 – 131,554,807) and this figure has been used to calculate the return per ordinary stock unit shown in the statement of total return.  The net asset value per ordinary stock unit at 31 October 2009 has been calculated using the number of ordinary stock units in issue on that date which was 126,229,718 (2008 – 129,626,218).

The financial information set out in the announcement does not constitute the company's statutory accounts for the years ended 31 October 2009 or 2008.  The financial information for the year ended 31 October 2008 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies.  The auditors reported on those accounts; their report was unqualified and did not contain a statement under s498(2) or s498(3) Companies Act 2006.  The statutory accounts for the year ended 31 October 2009 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting on 5 February 2010.  The accounting policies applied to these accounts are consistent with those applied on the accounts for the year ended 31 October 2008.