Edinburgh Worldwide has published both its annual results for the year ended 31 October 2024 and a circular in relation to the general meeting requisitioned by Saba. EWI’s board strongly recommends that shareholders vote against all of Saba’s resolutions at the general meeting on 14 February and for all of the AGM resolutions – the AGM will be held immediately after the requisitioned general meeting. The EWI board’s position is emphatic and clear. It says “PROTECT YOUR INVESTMENT, PROTECT YOUR TRUST, VOTE TO STOP SABA”. EWI has set up a website to deal with Saba’s requisition – www.trustewit.com – where you can find all the relevant documentation, including the circular for the general meeting. At QuotedData, it is our opinion that Saba’s proposals represent a significant risk to shareholders. However, there is a lot at stake and we think that all shareholders need to get themselves informed and make sure they cast their votes.

Commenting on the requisition, EWI’s chair, Jonathan Simpson-Dent, says “Edinburgh Worldwide is run solely and independently for you, our Shareholders. You have chosen Edinburgh Worldwide for its unique and early access to hidden gems, ground-breaking businesses which in many cases are not available on the public markets. Let’s not let Saba take that away. This is about consumer choice, allowing you the freedom to decide how, where and when to invest your money.

“I am deeply troubled by Saba’s proposals. Investment trusts are extremely democratic by construction – Saba’s proposals are not. Saba’s overt land grab for its own end game exploits our long-standing retail Shareholder base, who usually do not vote.”

EWI summarises its case

EWI’s announcement explains why it believes shareholders should reject Saba’s demands and VOTE AGAINST all the Saba resolutions as follows:

PROTECT YOUR INVESTMENT

Edinburgh Worldwide offers its Shareholders a unique and exciting portfolio of publicly traded and private businesses that are operating at the frontiers of technological innovation and transformation. For retail investors in particular, this investment strategy is difficult to find elsewhere.

Your Trust’s Manager, Baillie Gifford, has a long-term track record in the specialist arena of global smaller companies investing in both publicly traded and private businesses. The clearly differentiated strategy of Edinburgh Worldwide has delivered strong returns over the long-term.

Following a review of strategy conducted last year, which followed a difficult period from 2021 to 2023 as growth investing dropped out of fashion, the Board of Directors is confident that your portfolio is in good shape.

Saba has timed its attempt to seize control just as the Trust is turning a corner – with Net Asset Value (NAV) having increased by 15.3% between 30 August 2024 and 31 December 2024.

PROTECT YOUR TRUST

Saba is a US hedge fund manager with no apparent track record in specialist small company investing. Its mandate would be very different to the one approved by Shareholders and, with the questionable governance framework it has proposed, risks prioritising Saba’s commercial self-interest over fully independent governance and value creation for the benefit of Shareholders as a whole.

Saba has stated clearly that its plan is to remove the current board of directors and appoint its own directors. Saba could then appoint itself as investment manager and turn your Trust into a fund of funds vehicle – as per the plan outlined on its campaign website.

Your Trust’s mandate would be switched from long-term investment in growth companies, into short-term arbitrage and financial engineering. This is not an alarmist warning, but rather a summary of Saba’s stated strategy.

VOTE TO STOP SABA

Saba’s proposals represent an existential threat to the Edinburgh Worldwide that you have invested in. Its proposal COULD be voted through unless you USE YOUR VOTE TO STOP SABA. Historically, only 15% of Edinburgh Worldwide’s Shareholders vote at our shareholder meetings. Saba controls just under 24% of the Trust. In the Board’s view, Saba’s plan is partly based on an assumption that Shareholders will not vote on the Saba Resolutions.

EWI – results for the year ended 31 October 2024

EWI has provided the following key highlights from its results:

• Over the year to 31 October 2024, the company’s net asset value (‘NAV’) per share increased by 12.8% and the share price by 26.1%. The comparative index, the S&P Global Small Cap Index total return, increased by 21.6% in sterling terms.
• Among the top contributors to performance over the year were: Alnylam Pharmaceuticals, a drug developer focused on harnessing gene silencing technology; and AeroVironment, a defence contractor headquartered in the USA, that designs and manufactures unmanned aerial vehicles.
• Over the course of the financial year, the company bought back 14,667,733 shares for treasury, representing approximately 4% of the company’s issued share capital at 31 October 2023.
• Invested equity gearing stood at +11% of shareholders’ funds at the financial year end (2023 – 14%).
• As at the year end, the company held fourteen private companies accounting for 25.3% of total assets (2023 – 26.2% of total assets in fourteen companies). No new private company investments were made during the year.
• The board maintains its conviction that the company’s proposition is unique, compelling and relevant, offering investors access to potentially outsized returns from emerging companies operating at frontiers of scientific, technological and process innovation.

Gregory Eckersley to join EWI’s board

Gregory Eckersley will be joining EWI’s board as an independent non-executive director with effect from 15 February 2025, following EWI’s AGM. He is an experienced equity investor with a professional executive career in a mix of leadership and asset management roles. Having begun his investment career at Cigna International Investment Limited, he gained international experience at Draycott Partners, Alliance Capital and AllianceBernstein, managing and overseeing teams investing in emerging market and global portfolios and, until 2019, was the global head of internal equities at the Abu Dhabi Investment Authority. Gregory is a non-executive director of Murray International Trust.

Review of the year

In his chairman’s statement, Jonathan Simpson-Dent says that the year has seen the long-awaited start of Edinburgh Worldwide’s recovery. During the year ended 31 October 2024, EWI’s share price rose by 26.1% and its net asset value per share grew 12.8% (the difference reflected a discount narrowing from 17.4% to 7.6% over the period). The comparative index, the S&P Global Small Cap Index, increased by 21.6% in sterling terms during this period.

The trend continued through to the end of the calendar year with a further 23.6% increase in EWI’s share price and 13.3% in its NAV between 31 October and 31 December 2024, while the S&P Global Small Cap Index rose by 2.5%.

Unlisted investments

As at EWI’s year end, the portfolio weighting in private companies stood at 25.3% of total assets, invested in fourteen private companies including SpaceX and PsiQuantum (2023: 26.2% of total assets in fourteen companies). The company currently has shareholder authority to make investments into unlisted investments of up to 25% of total assets, measured at the time of investment. When above this figure, the investments can continue to be held, but new positions or additions cannot be made. It should be noted that the unlisted weighting increased to 27.1% of the portfolio by 31 December 2024, following upward valuations in several investments. No new private company investments were made during the year.

Share buybacks

During the period, the company bought 14,667,733 shares to be held in treasury at a total cost of £21.82m. This represents 3.79% of the company’s issued share capital as at 31 October 2023. EWI’s board says that it will continue to operate its share buy-back programme under its available authorities. As announced in November 2024 as part of its strategic resetting plan, subject to Court approval, the board will also consider options for a significant capital return programme of up to £130m.

Earnings and dividend

The company’s objective is to achieve long term capital growth. This year the net revenue return per share was negative 0.70p per share (2023 – negative 0.65p per share) and therefore no final dividend is being recommended by the board. Should the level of underlying income increase in future years, the board will seek to distribute to shareholders the minimum permissible to maintain investment trust status by way of a final dividend.

Managers’ review – A look back at the last 12 months

“After several years of macroeconomic headwinds, the background for smaller companies growth investing in 2024 improved materially. With inflation abating across many geographies while growth and employment remained resilient, many central banks moved to ease their monetary policies and began to cut interest rates. This includes the US Federal Reserve, which cut its interest rates for the first time since the Covid pandemic. Investors began to broaden their risk appetite beyond the handful of mega-caps, which had dominated market performance and capital inflows until then. While this macroeconomic backdrop is more favourable to our investing style, we are acutely aware of the many uncertainties that can derail markets.

“Geopolitical tensions exist in many parts of the world, notably in the Middle East and between Russia and Ukraine. National security and economic protectionism remain key considerations. Efforts to revitalise domestic manufacturing and to lessen the reliance on China have resulted in a new wave of tariffs and sanctions on Chinese exports, ranging from critical metals to electric vehicles to advanced technologies like AI. China’s response has been to restrict the export of materials and technologies where it dominates the supply chain. Politically motivated economic policies are not new but have become a prominent feature of this age and add a new dimension of uncertainty and complexity to the operations of many global companies.

“Foreign policy and the fragility of the global order continue to be the topic of debate after a wave of elections across many key geographies, most notably the presidential election in the US. The US market’s response so far has been strong on expectations that the incoming administration’s policies will be pro-growth, including deregulation and a reduced corporate tax environment. However, the future of the US global alliances remains very much in question and could have profound implications for the global balance of power.

“While this can present risks, it could also unlock new opportunities for investors. We are not trying to second-guess tomorrow’s political or economic landscape and repositioning the portfolio in response. This is not our skill set. We are highly confident, however, that future progress will be driven by technologies like quantum computing, robotics, automation, and new materials engineering, amongst others. That excites us, and that is why we focus our efforts on finding those companies that are driving or enabling progress and have the potential to deliver a substantial return regardless of the macroeconomic cycle.”

Managers’ review – Process update and portfolio alignment

“After three years of testing shareholders’ patience with returns that haven’t been good enough, in the second half of 2024, we recognised the necessity to thoroughly review the ‘why’ and ‘how’ of what we do. While our approach placed us firmly in the crosshairs of recent macroeconomic headwinds, the scale of underperformance hinted at systematic errors that we were keen to understand better and remedy. We are grateful for the wholehearted support and valuable collaboration with the Board while undertaking this important work.

“We’d stress that the ‘why’ remains immovable. EWIT looks to invest in tomorrow’s winners while they are still early in their journey. Our philosophy is based on the fundamental belief that problem-solving is an inherent human trait. Over time, technology and science have led to economic prosperity and significant advancements in the human condition. By investing in technology-led innovation, we are backing human ingenuity and progress. We look for growth, entrepreneurial mindset and innovative solutions. And nowhere is this more present than in the small companies universe, a place of potential and possibility. Notably, the review underscored that our approach remains a differentiated means to access this vibrant opportunity set, particularly with the resultant access to unique private businesses.

“Yet, the “how” is iterative, with insights building over time. As a management team, we consistently learn, hypothesise, test, and interpret results. As a normal course of action, you should expect us to gradually enhance our processes to achieve better results. As painful as it is, a period like that we’ve just been in can often be the richest in learning, bringing into stark relief flaws or areas of potential improvement.

“Based on lessons from this period, we’ve made significant enhancements to the investment process, bolstering the investment decision-making structure, addressing the strategy’s key risk factor with a new portfolio construction framework, and strengthening diversification guidelines. These adjustments aim to improve our hold discipline and deliver a better spread of exposures within the portfolio regarding both financial maturity and industry.

“We’re excited that these enhancements will create greater competition for capital within specific pockets of the portfolio. The team will be made to consider the marginal holding in areas of industrial concentration and the earliest stage, most volatile assets, prompting us to delve more deeply into the team’s relative conviction levels. In short, these enhancements should create a better, more robust investment process to help us make a higher proportion of value-accretive investment decisions.

“By the end of the financial year, we had made good progress implementing these adjustments, moving around 8% of the portfolio towards alignments. This entailed reducing exposure to several of our healthcare and software companies. Simultaneously, we exited several positions where a commercial inflection point remains far into the future, but our conviction in a successful outcome has diminished^*. Accordingly, the number of portfolio holdings has come down meaningfully over the last year. We are finishing the period with around 80 holdings and may reduce that further.

“It’s worth highlighting that idea generation has continued apace. We’ve sought ideas from a broad range of geographies, sectors, and maturity stages to support the rebalancing. A few examples include:

• “Silergy, one of China’s leading analogue semiconductor companies. The manufacture of analogue chips continues to be an industry dominated by US companies. As the largest, most reputable local player, Silergy is well-placed to benefit from localisation trends.
• “US-based Rx Sight makes adjustable intra-ocular lenses, allowing doctors to customise patients’ vision after cataract surgery, enabling better vision without glasses. Its small market share leaves a runway for growth in the US and internationally.
• “Britain’s Raspberry Pi, the maker of the eponymous low-cost, compact single-board computers and computing modules, should experience substantial growth over the coming year as these get embedded and become the “brains” in IoT factories and Edge AI products.
• “dLocal is a Uruguayan payment processor that helps global merchants do business in emerging markets. Payments tend to be local in these markets, credit card fraud is rampant, and the regulatory and tax landscape is constantly evolving. Growth should remain strong as the penetration of e-commerce across these markets continues to increase.
• “We look forward to monitoring these holdings on your behalf in the years ahead.”

Managers’ review – Portfolio

“The theme that captured imaginations and headlines this year was artificial intelligence (AI). So much so that it was honoured with the 2024 Nobel Prizes, with both the Physics and Chemistry prizes awarded for AI-driven work. All eyes remain on the progress of foundational AI models and their ability to reason, and we’ve started to see AI penetrate different sectors and winners emerge in various guises, permeating well beyond Big Tech. Axon, the maker of Taser devices and body cameras, is a stellar example from the portfolio. Most market participants have been myopic in defining Axon and its addressable opportunity by the technologies it uses. The company’s potential is best captured by the problem it looks to solve, which is to modernise law enforcement. AI is just the latest tool at their disposal. They are building a suite of AI products, the flagship of which allows officers to create police reports by using the audio of their body-worn cameras, dramatically reducing the time spent on paperwork. As a near monopoly in hardware products, Axon is well-positioned to upsell the AI-enabled software which feeds off these. This makes the Axon solution stickier and strengthens its competitive moat.

“AeroVironment is pioneering AI integration into unmanned aerial systems, applying the technology to enhance its autonomous capabilities for defence and military applications. Through careful application of the technology, empowered by decades of technological expertise and extensive mission datasets, it’s developed AI solutions to allow its drones to operate effectively in communications-challenged environments and improve advanced computer vision to deliver precise object detection, classification, and tracking. The business has made phenomenal progress over the last twelve months, with significant order growth, becoming entrenched in US Government defence programmes. However, it’s hugely encouraging to see it cement its competitive advantage in this manner.

“We’re observing a similar situation in healthcare where companies with a pre-existing strong competitive advantage can quickly leverage new technology. Our holding in Doximity is a good example. As the leading professional network for medical practitioners, Doximity counts over 80% of all US physicians, over 50% of all US nurses and 90% of all US medical students as its users. It develops various tools for these professionals to allow them to communicate with patients and colleagues easier, streamline their workflows and increase their productivity. The company has quickly rolled out several AI-enabled tools, such as streamlined referral processes and medical letter drafting, transforming doctors’ practices allowing them to spend less time on paperwork and more time with their patients. We’ve highlighted these three, but many holdings have swiftly incorporated AI in their product offerings and successfully monetised these AI-powered solutions.

“AI has served as a catalyst for other holdings, accelerating the demand for their products. One example is our long-standing holding in American Superconductor. The company makes a superconducting wire which substantially boosts power transmission at a much lower voltage. The properties of the superconducting wire make it uniquely well positioned and relevant for many applications-from voltage management in wind turbines to protection systems for ships in the navy, all the way to enhancing grid efficiency and reliability. Our hypothesis for a long time has been that the grid needs to evolve, and the transmission infrastructure needs to expand to handle the electrification of the economy, distributed generation and the increasing usage of renewable energy. In that regard, power-hungry AI data centres represent only the latest challenge for the energy infrastructure. With no signs of the AI infrastructure buildout slowing down, demand for American Superconductor’s grid products, representing most revenues, has been very strong.

“The rise in energy demand by AI data centres has been so dramatic that leading technology companies have been pushed to consider nuclear energy as a part of the solution to this growing problem. In recent months, Alphabet, Microsoft, and Amazon announced their intentions to use nuclear energy to power AI by restarting old plants like Three Mile Island and investing in small modular reactors. This pro-nuclear stance only adds to a broader nuclear renaissance driven by environmental and geopolitical considerations. Russia’s invasion of Ukraine exposed the over-reliance on Russian-sourced nuclear fuel and put energy security at the top of mind. The US government launched several initiatives to support the buildout of a domestic nuclear fuel supply chain and reduce its considerable reliance on international imports. There is growing pressure to ensure enough capacity for the new generation of smaller advanced nuclear reactors currently being developed. In Australia’s Silex Systems, we believe we have found a technology that can completely reshape the nuclear fuel supply chain. Silex is pioneering a novel uranium enrichment technology using lasers – an approach that promises to be cheaper than the status quo and practical to deploy at scale. The technology behind uranium enrichment has changed little over the decades. Still, given the structural advantages of a laser-based approach, we expect it to become the leading technology in the industry over time. Silex is completing a full-scale pilot demonstration of its technology by the end of this year and looking to begin constructing its first laser enrichment plant in Kentucky after that. While the team’s focus is on uranium enrichment, the technology they have developed has broader implications. They are already exploring opportunities in silicon enrichment for quantum computing and medical isotope enrichment.

“While AI currently dominates investor psyches’, our philosophy requires us to peer out over the coming decade and consider ‘what next’. We strongly suspect that quantum computing will be the next significant unlock for computing. The technology is still being established, but success would be transformational, making the excitement around AI feel quaint. Our large holding in PsiQuantum is at the forefront of this, with strategic primacy on commercial relevance. Over the year, it received two large non-dilutive cash injections from the US and Australian governments, further validating its technology and progress.

“We’ve discussed the evolution of the space industry on previous occasions. SpaceX has continued to progress with the development of its Starship rocket, which recently demonstrated an ability to catch the rocket’s enormous booster section back at the launchpad. This is one of the key steps in unlocking a fully and rapidly reusable launch system, which will significantly increase capacity and decrease costs for the future space economy. Testing will continue in 2025, with ambitions to pass other key milestones such as in-orbit refuelling and gradually increase the frequency of launches. In the meantime, Falcon 9 remains the main workhorse and has flown over 100 times this year (an average of 1 launch every 3 days). Its Starlink business, which provides satellite broadband worldwide, has continued to scale, too. It now features almost 7,000 satellites in orbit, adding millions of new customers yearly. The network is now ready to turn on direct-to-cell services in the US, allowing phones and Internet of Things devices to receive signals and send messages regardless of location.

“We’d be remiss not to mention the ongoing progress in healthcare. Alnylam, a company we have owned since 2014, is the undisputed leader in RNA interference, a technology allowing selective silencing of genes implicated with various diseases. Earlier this year, they demonstrated a successful Phase 3 readout in an age-related form of cardiovascular disease, an indication that is likely to be a huge commercial success and push them into sustained profitability. This allows Alnylam to aggressively pursue its expanding pipeline and broaden its targets outside the liver. One fascinating aspect of the company’s ambition is in neurology, where demand continues to be unmet and patient outcomes are poor. Over the last decades, academia and the pharmaceutical industry have been almost exclusively focused on the theory that flaws in the production of beta-amyloid protein cause Alzheimer’s. Alnylam takes a slightly different approach by going upstream and targeting a protein that causes the overproduction and build-up of beta-amyloid in the brain. The company is currently in a phase 1 trial in early-onset Alzheimer’s patients, and the early results look very promising. This is just the first step in a very long journey, but there are strong reasons for optimism for the millions of patients diagnosed with central nervous system diseases. If successful, the reward for Alnylam shareholders will be substantial. The company continues to be a top holding in the portfolio.”