Annual Financial Report

FIDELITY JAPANESE VALUES PLC ANNUAL FINANCIAL REPORT, PROXY FORM AND ADDITIONAL DISCLOSURES TO THE PRELIMINARY RESULTS FOR THE YEAR TO 31 DECEMBER 2011 Further to the voluntary disclosure of the Company's annual results for the year ended 31 December 2011 by way of a preliminary announcement dated 16 March 2012, in accordance with the Disclosure and Transparency Rules ("the Rules") 4.1.3 and 6.3.5(2) this announcement contains the text of the preliminary announcement dated 16 March 2012 together with the additional text in compliance with the Rules. The Company's annual report and financial statements for the year ended 31 December 2011 together with the accompanying proxy form have been submitted to the UK Listing Authority, and will shortly be available for inspection on the National Storage Mechanism (NSM): www.hemscott.com/nsm.do (Documents will usually be available for inspection within two business days of this notice being given) The annual report and financial statements will shortly be available on the Company's website at https://www.fidelity.co.uk/static/pdf/common/ investment-trusts/japanese/annual-report-2011.pdf Ben McMechan FIL Investments International Company Secretary 4 April 2012 01737 836 883 FIDELITY JAPANESE VALUES PLC Forthe year ended 31 December 2011 Announcement of Year End Results Chairman's Statement For the year ended 31 December 2011 The Year's Results: NAV (undiluted) 64.17p (-4.27p; -6.2%) The ordinary share price: 52.50p (-4.75p; -8.3%) The subscription share price: 5.70p (-6.05p; -51.5%) Discount: 18.2% (16.4% in 2010) PERFORMANCE REVIEW Over the year to 31 December 2011, your Company's net asset value fell by 4.27p per share to 64.17p per share. The discount, although high, remained relatively stable. The decline in value was primarily due to market performance (-9.97p per share), and gearing detracted a further 1.31p. Although your Manager's stock selection added 3.74p per share and the yen's appreciation against the sterling pound accounted for an additional 3.70p per share, these could not fully offset the negative market performance. The decline in net asset value of 6.2% during 2011 represented an outperformance of 3.1% relative to the Benchmark Index, the Russell Nomura Mid/ Small Cap Index (when expressed in sterling). Your Company's outperformance relative to its Benchmark was largely attributable to holdings in the domestic consumer sector, which is relatively insulated from a global economic downturn. The emphasis on internet related consumer services was particularly rewarding. Rapid penetration of smartphones and tablet PCs created new business opportunities such as social networking and gaming services. Elsewhere, niche producers of high end electronic materials and components used for smartphones and fuel efficient vehicles fared well as they continued strong quarterly earnings. Conversely, the Company's exposure to semiconductor component producers detracted from relative performance due to weakening end demand for PCs and yen appreciation. Year ended 31 December 2011 Attribution Analysis (pence) NAV at 31 December 2010 (undiluted) 68.44 Impact of the Index (in yen terms) -9.97 Impact of Index Income (in yen terms) 1.20 Impact of Stock Selection 3.74 Impact of Gearing -1.31 Impact of Exchange Rate 3.70 Impact of Charges -1.34 Impact of Share Issues -2.11 Cash/Residual 1.82 NAV at 31 December 2011 (undiluted) 64.17 MARKET REVIEW In 2011, global financial markets were shaken by a series of natural disasters and geopolitical shocks throughout the year. The Japanese earthquake and the nuclear disaster in March, the Arab Spring uprisings, increased concerns about the US and Eurozone debt crises in August and the floods in Thailand in October precipitated a global flight to safety. Liquidity in global equity markets quickly dried up, while bond yields continued to decline. The Japanese equity market plummeted in the immediate aftermath of the earthquake in March. We saw a widening of the return gap between sectors. This reflected the steep declines suffered by power utilities and other companies directly impacted by the disaster. Japanese equities staged a strong rebound towards the beginning of July, as better than expected domestic macroeconomic data underscored the resilience of Japanese companies in overcoming supply chain disruptions and restoring production. This early summer rally, however, was shortlived, as investor sentiment gave way to fears of contagion from the Greek debt crisis. After the summer, weak market sentiment was compounded by the yen's postwar high and disruptions to global supply chains caused to many Japanese companies by the floods in Thailand. Against the backdrop of the Eurozone debt crisis, financials suffered the steepest declines in 2011. On the other hand, defensive segments, notably consumer staples such as foods and agricultural products, held up well. Retailers successfully implementing restructuring or overseas expansion strategies also outperformed. Overseas investors, who typically account for more than 60% of market turnover, were net buyers of Japanese stocks in 2011. However, the bulk of purchases were concentrated in the first half of the year, particularly in the period immediately following the March earthquake. As anxiety about the European debt crisis intensified, overseas investors pared back risk assets and sold more than 2 trillion yen of Japanese equities in the second half of 2011, contributing to a fall in share prices. Domestic financial institutions continued to unwind shareholdings, but this was offset by significant corporate buybacks and modest buying by individuals in search of yield. With around 70% of the Japanese market (as measured by TOPIX) trading below book value and cash reserves at an historical high, share buybacks conducted by non-financial corporations reached a post-2008 high. GEARING The Company gears through the use of Contracts For Difference ("CFDs"). Total portfolio exposure was £77.02m as at the year end, equating to gearing of 123.2%. Using CFDs continues to provide more flexibility for the Company's needs at a much lower cost than traditional bank debt. THE BOARD As well as focusing on the strategy of the Company, your Board continues to monitor corporate governance issues, reviewing and updating processes as appropriate. Having been on the Board for more than nine years, Nicholas Barber is subject to re-election at the forthcoming Annual General Meeting. He has been a most diligent member of the Board and has discharged his duties as Senior Independent Director conscientiously. The Board recommends to shareholders that they vote in favour of the proposal. Nicholas has announced his intention to step down from the Board at the end of December 2012 as the final stage of the phased change in Board composition. Simon Fraser will seek re-election at the forthcoming Annual General Meeting. I am stepping down from the Board at the conclusion of the business of this year's Annual General Meeting and am therefore not seeking re-election. Having joined the Board in 1997 and become Chairman at the end of 2004, I have to say it has been a somewhat frustrating time. The level of the Index is much the same as in 2003 due to a fundamental lack of confidence in the Japanese market but in the most recent years it is satisfying that our Manager has been outperforming the Benchmark. I would like to thank my colleagues on the Board and in Fidelity for their dedication and support. David Robins, who joined the Board on 1 February 2011, will be appointed as Chairman of the Board at the same time as I retire from the Board. I have every confidence that he will do an excellent job as he has experience of having lived in Japan as well as a considerable exposure to the investment trust arena. As detailed in the biographies in the annual report the Directors have a wide range of appropriate skills and experience to make up a balanced Board for your Company. I have, together with representatives of the Manager (including Shinji Higaki) and the Company's broker, continued to hold meetings with a number of shareholders during the year. SUBSCRIPTION SHARES The rights attaching to a total of 1,763,455 subscription shares were exercised in respect of the year ended 31 December 2011, at which point the total number of subscription shares in issue was 17,244,859. Since the year end the rights attaching to a further 4,188 subscription shares have been exercised. The final date for exercising the rights attached to the subscription shares is 28 February 2013. Further details on the subscription shares may be found in the Directors' Report in the annual report. SHARE REPURCHASES Purchases of ordinary and subscription shares for cancellation are made at the discretion of your Board and within guidelines set from time to time by the Board in the light of prevailing market conditions. Share repurchases will only be made when they will result in an enhancement to the net asset value of ordinary shares for the remaining shareholders. In past years share repurchases have been used sparingly due to their impact on liquidity and gearing. Your Board continues to believe that the ability to repurchase shares is a valuable tool and therefore a resolution to renew your Company's authority to repurchase shares will be proposed at the forthcoming Annual General Meeting. ANNUAL GENERAL MEETING - 10 MAY 2012 The Annual General Meeting will be held at midday on 10 May 2012 at Fidelity's offices at 25 Cannon Street in the City of London and all investors are encouraged to attend. It is the one occasion in the year when shareholders can meet the Directors and the Portfolio Manager. At the meeting the Portfolio Manager will give a presentation on the past year and the prospects for the current year. OUTLOOK Following a series of extreme events, Japanese equities were clear laggards among major markets in 2011. The debt crises in Europe and currency fluctuations are likely to remain key risks factors in 2012. However, economic and earnings growth forecasts for Japan compare favourably with those for most industrialised countries and there is the potential for share prices to catch up with their global peers. Sentiment among Japanese companies remains low in light of a persistently strong yen, but post-quake reconstruction demand from both the public and private sectors is expected to cushion against external headwinds in the first half of 2012. Furthermore, we are seeing some signs of improvement in US economic indicators, and China has started to shift away from its policy of monetary tightening. As demand conditions - both domestic and overseas - improve and Japanese companies regain ground lost in 2011, corporate earnings should see a firm recovery through 2012. Japanese equities continue to look cheap against a wide range of measures. The market is good value relative to its own long term history on asset and earnings based metrics such as price to book and cyclically adjusted price to earnings ratios. Interestingly, a number of Japanese sectors are the cheapest globally. The Japanese market has finally worked off its valuation premium and now compares very favourably with its own long term history and its global peers on virtually all main measures. In the current environment, we need to differentiate undervalued stocks from value traps. The key is to continue to be selective and to seek out those quality companies that are well managed but for which the market, for whatever reason, has become unjustifiably negative. William Thomson Chairman 16 March 2012 Manager's Review FIL INVESTMENTS INTERNATIONAL The Company is managed by FIL Investments International (which is authorised and regulated by the Financial Services Authority). FIL Investments International is part of the FIL Limited group which, as at 31 December 2011, had total assets under management exceeding £135.3 billion. SHINJI HIGAKI Shinji Higaki has been managing the Company's portfolio since September 2007. He also manages retail Japanese smaller companies funds and Japanese domestic institutional mandates. He joined Fidelity in 1999 as an equity research analyst, prior to which he was employed as an auditor of Chuo Audit Corporation in Tokyo. He has an MBA from the London Business School and a Bachelor of Arts from Keio University. The net asset value of the Company fell by 6.2% compared with a 9.3% decline in the Russell Nomura Mid/Small Cap Index (all figures in sterling terms). 2011 was a turbulent year for the Japanese equity market filled with unprecedented events including the Great East Japan earthquake, the subsequent nuclear power plant disaster in Fukushima, the sovereign debt crisis in Europe, the yen's rise to a post-war high, and the supply chain disruptions caused by the Thai floods. The post-earthquake impact on the market eased off by early August, as industrial production recovered to 95% of its immediate pre-quake level and the Japanese corporate earnings revision index reached its post-quake peak. However, the European debt crisis started to fuel risk aversion among international investors. In the absence of any significant domestic incentives, external factors dictated the path of Japanese stocks after the summer, and in the fourth quarter of 2011 share prices hit a low for the year amid mounting concerns about the European debt crisis and persistent yen strength. Despite strong rallies in overseas markets, the investment environment remained uncertain. In 2011, financials suffered the steepest declines due to external macroeconomic factors and selling by foreign investors. Sagging equity prices, falling interest rates, and moves towards tighter capital controls all weighed on the sector. Increased aversion to credit risk and a pick up in office vacancy rates hurt real estate related names. Securities and insurance stocks also fared poorly. Meanwhile, power utilities continued to struggle with the after effects of the Fukushima nuclear disaster. Materials companies faced lower capacity utilisation rates and declining spreads. Conversely, domestic consumer stocks in the food and retail sectors outperformed the broad market. Resource related stocks in the energy and industrials segments also performed well. Refiners benefited from reductions in supply capacity, whilst upstream names mirrored gains in crude oil prices. During the year, small cap stocks fared better than large cap stocks. Internet based consumer services and mobile communication services led the small cap outperformance. While investors shied away from blue chip exporters and mega cap banks, they sought a haven among Japanese domestic consumer related small cap stocks that are relatively insulated from a global economic downturn. PORTFOLIO REVIEW Many of the Company's top holdings, where the Portfolio Manager maintained strong convictions, performed well and contributed to outperformance. A stock selection strategy with an emphasis on fast growing internet based consumer services continued to pay off. Last year's leading contributor M3 was the best performer in the portfolio for the second consecutive year. M3's online pharmaceutical information services to medical doctors are expanding in the US. Its launch in the UK market has also gained momentum through an acquisition of a UK based healthcare research firm, Doctors.net.uk. The second largest contributor was Bit-Isle, which operates internet data centres. Its strong earnings growth and an increase in dividends boosted investors' confidence in the firm. Other internet based consumer service providers including GMO Payment Gateway (online account settlement services), Kakaku.com (price comparison and restaurant search engine) and CyberAgent (advertising and blog services) also added significant value. Elsewhere, a holding in Maruwa, producer of electronic ceramic components, aided performance and continued to demonstrate robust quarterly earnings growth. The firm's growth driver is EMC (electro magnetic compatibility) products used for NFC (near field communication) compatible smartphones. NFC based payment services are gaining traction in the US, and so are the sales of NFC compatible mobile devices. Maruwa is expected to benefit from a global diffusion of NFC based payment services and higher penetration of smartphones. On the other hand, one of the prior year's best performers, Takata, fell on concerns about global automobile production. Takata produces airbags and seat belts. Despite an earnings slowdown due to disruptions in the global automobile supply chain, the Portfolio Manager believes Takata should return to its growth path in 2012. Stocks selected in the electrical machinery sector also struggled. Semiconductor and electronic component producers sustained sharp declines due to weakening end demand for PCs and disappointing sales of Nintendo's 3DS. The Portfolio Manager sold out of positions in Elpida Memory, Megachips and Mitsumi Electric. Stocks selection strategy has not changed over the year with particular emphasis on fast growing internet based services, new technology catering for fuel efficient vehicles and factory automation. An overweight exposure to mid/small cap internet based service providers was maintained. Key holdings in this area were M3 and GMO Payment Gateway. Despite strong share price appreciation over the last two years, M3's valuations are not demanding, as it continues to grow earnings faster than expected with a solid increase in its average annual revenue per user. GMO Payment Gateway provides online payment and settlement services. Its strong earnings growth is driven by an expansion of the ecommerce and SNS (social networking services) market in Japan. Among automobile related names, as well as Takata, other key holdings are JSP and Sekisui Chemical. JSP manufactures polystyrene materials for auto parts and Sekisui Chemical produces interlayer films for laminated glass for automobiles. These companies' niche products are in high demand as automobile makers try to improve fuel efficiency by lowering the weight of cars. Within the technology sector, the Portfolio Manager sold out of semiconductor related electronic component makers, as there remain downside risks to global demand for PCs and game consoles. However, overweight positions in factory automation equipment makers including Sanyo Denki and Fanuc were maintained, as they stand to benefit from Chinese companies' strong capital spending. Outside the key stock selection themes, apparel retailers Fast Retailing and Honeys ranked in the top 20 overweight positions. Although the retail sector is underweight relative to the benchmark, the Portfolio Manager sees growth potential in these companies that are expanding their franchise in overseas markets. FAST Retailing owns an apparel brand "UNIQLO" which is gaining popularity in other developed markets such as the US and Europe, while Honeys is growing rapidly in China. OUTLOOK In the near term, the Japanese market is likely to remain vulnerable to concerns about the sovereign debt crisis in the Eurozone and the pace of recovery in the US and China. However, the current market offers excellent opportunities to invest in companies whose long term growth potential is not reflected in their share prices. Despite macro economic headwinds, at the microeconomic level Japanese companies have seen a significant improvement in earnings and profitability. They have strengthened their earnings base, improved cost efficiencies and appear to have become more accustomed to coping with persistent yen appreciation. They have also increased their overseas presence, particularly in Asia, adapting to sluggish domestic demand and structural shifts in the global economy. Meanwhile, cash reserves at listed Japanese companies have risen to record highs and free cash flow generation has improved significantly. This has served to allow companies to enhance shareholder returns through buybacks and rising dividends. Moreover companies have been seeking to capitalise on the strength of their balance sheets and the yen to acquire businesses overseas. This strategy has been supported further by the recent expansion of the government's foreign investment loan programme, which is aimed at curbing yen strength by getting Japanese companies to increase their foreign currency assets. In 2011 (through to the end of November), Japanese companies made 5.75 trillion yen of overseas acquisitions, a 53% increase on the same period a year ago. In 2011, the Portfolio Manager conducted more than 900 company meetings. The first hand information gained from these meetings convinced him that the fiscal year ending March 2012 will be the bottom of the earnings cycle and that we are likely to see a healthy earnings recovery through to 2013. The Portfolio Manager believes that the three key areas of long term growth - internet services, factory automation and new technology for automobiles - will continue to provide attractive investment opportunities and so should represent a large part of the portfolio. At the same time the Portfolio Manager will continue to visit as many companies as possible to uncover new investment ideas that are overlooked and underappreciated by the market. FIL Investments International 16 March 2012 PRINCIPAL RISKS AND UNCERTAINTIES The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the internal controls process, identifies the key risks that the Company faces. The matrix has identified strategic, marketing, investment management, company secretarial and other support function risks. These risks are identified and graded. The Board reviews and agrees policies for managing these risks. This process, together with the policies and procedures for the mitigation of risks, is updated and reviewed regularly in the form of comprehensive internal controls reports considered by the Audit Committee in accordance with the FRC's "Internal Control: Revised Guidance for Directors". The Board also determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. The Board considers the following as the major specific risks facing the Company: Top Risks Risk Mitigation Poor management of The Company has a clearly defined strategy and assets or under investment remit. Performance is reviewed at each performance for several Board meeting, including performance attribution and years in succession income forecasts. There is a clearly defined management agreement, and borrowing/derivative limits are also set by the Board. The portfolio is managed by a highly experienced Portfolio Manager. The Investment Management team supports the Portfolio Manager, and the Head of Equities Japan and the Board review performance regularly. Loss of reputation in The Company's reputation may be damaged through the market place consequences such as poor investment performance, evident non-compliance with corporate governance rules and practice or regulatory censure. The Board performs reviews of such risks on a periodic basis. Mismanagement of The Board reviews the Company's performance, shareholder including performance attribution, at each Board relationships meeting. A premium/discount policy is in place and regular dialogue is undertaken with shareholders. Security of the There is an effective and appropriate segregation of Company's assets duties in place. The Portfolio Manager is not able to trade on behalf of the Company and does not have access to trading systems. All trades are carried out by Fidelity's Trading Desk. This Trading Desk deals only with approved counterparties and these continue to be reviewed with respect to the possible impacts of the Eurozone crisis. The Trading Desk does not settle trades or have contact with the independent Custodian. These are handled by the Investment Services department. The Custodian safeguards the Company's assets which are held in the name of the nominee of the Custodian and segregated from other assets. The Association of Investment Companies ("AIC") published guidance to boards in 2011 in relation to custody risks. The Company's policy is to comply with these guidelines. Regulatory change Regulatory change is one of the most significant areas of risk, with a number of prospective regulations potentially impacting the operation of the Company together with the risk of increased costs. This includes the Alternative Investment Fund Managers ("AIFM") Directive. The processes the Company uses to manage regulatory change initiatives continue to operate effectively. Further risks identified within the matrix are: Market risk The Company's assets consist mainly of listed securities and the principal risks are therefore market related such as market recessions, interest rate movements, deflation/inflation, terrorism and protectionism. Risks to which the Company is exposed and which form part of the market risks category are included in Note 16 to the financial statements in the annual report together with summaries of the policies for managing these risks. These comprise: market price risk (including other price risk; interest rate risk and foreign currency risk); liquidity risk; counterparty risk, credit risk and derivative instruments risk. The Company has geared investment exposure through the use of CFDs. There were no loan facilities in place during 2011 and the extent to which any loan facilities will be renewed will be kept under the most careful scrutiny. A day to day overdraft facility can be used if required. The impact of limited finance from counterparties including suppliers has not affected the Company to date, however there are alternative suppliers available in the market place should the need arise. Investment management risk The Board relies on the Manager's skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company's benchmark and competitors and the outlook for the market with the Manager at each Board meeting. The emphasis is on long term investment performance and the Board accepts that by targeting long term results the Company risks volatility in the shorter term. Share price risk The Board is not able to control the prices at which the Company's ordinary and subscription shares trade; they may not reflect the value of the underlying investments. However, it can have a modest influence in the market by maintaining the profile of the Company through an active marketing campaign and, under certain circumstances, through repurchasing shares. Currency risk The Company's total return and balance sheet are affected by foreign exchange movements because the Company has assets and income which are denominated in yen whilst the Company's base currency is sterling. While it is the Company's policy not to hedge currency, the fact that borrowings by way of CFDs are in yen means that part of the investment portfolio funded by borrowing is naturally hedged against changes in the yen:sterling exchange rate. Further details can be found in Note 16 to the financial statements in the annual report. Counterparty risk The Company relies on a number of main counterparties, namely the Manager, Registrar and Custodian. The Manager is the member of a privately owned group of companies on which a regular report is provided to the Board. The Manager, Registrar and Custodian are subject to regular audits by Fidelity's internal controls team and the counterparties' own internal controls reports are received by the Board and any concerns investigated. Governance/regulatory, financial, operational administration While it is believed that the likelihood of poor governance, compliance and operational administration by other third party service providers is low, the financial consequences could be serious, including the associated reputational damage to the Company. Your Board is responsible for the Company's system of internal controls and for reviewing its effectiveness. Details of this process are provided in the Corporate Governance Statement within this annual report. Financial instrument risks The financial instrument risks faced by the Company are shown in Note 16 to the financial statements in the annual report. The additional risk to the Company of using CFDs rather than traditional forms of borrowing is that the Company does not own the Japanese equities to which the CFDs give exposure and is at risk if the counterparty defaults, for example for insolvency reasons. The balance on all outstanding CFDs is calculated on a daily basis with collateral then adjusted so that collateral equal to the outstanding balance has been recognised, although no collateral adjustment is made where the outstanding balance is less than US$1 million. This results in a potential exposure, which could be increased due to settlement practices and timing differences, to a maximum of US$1 million plus three days' unrealised trading profits. Other risks Other risks monitored on a regular basis include loan covenants in times when the Company takes out loans, which are subject to daily monitoring, together with the Company's cash position, and the consequences of shareholders not supporting the triannual vote to continue the Company's existence. Related Parties Simon Fraser was employed by the Manager until the end of December 2008. FIL Investments International is a member of the FIL Limited group of companies. As at the date of this report FIL Limited has an interest in 8,224,920 ordinary shares in the Company (8.44%) on its own account. No Director is under a contract of service with the Company and no contracts existed during or at the end of the financial period in which any Director was materially interested and which was significant in relation to the Company's business, except as disclosed in relation to Simon Fraser's interest in the Management Agreement. There have been no other related party transactions requiring disclosure under Financial Reporting Standard ("FRS") 8. Statement of Directors' Responsibilities The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under the law they have elected to prepare the financial statements in accordance with UK Generally Accepted Accounting Practice. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period. In preparing these financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, including a Business Review, a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's pages of the Manager's website www.fidelity.co.uk/its. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their own jurisdictions. We confirm that to the best of our knowledge the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties it faces. Approved by the Board on 16 March 2012 and signed on its behalf. William Thomson Chairman 16 March 2012 Income Statement for the year ended 31 December 2011 2011 2010 revenue capital total revenue capital total £'000 £'000 £'000 £'000 £'000 £'000 (Losses)/gains on - (4,114) (4,114) - 10,584 10,584 investments designated at fair value through profit or loss (Losses)/gains on - (312) (312) - 1,562 1,562 derivative instruments held at fair value through profit or loss Income* 1,445 - 1,445 1,088 - 1,088 Investment management fee (830) - (830) (760) - (760) Other expenses (441) - (441) (458) - (458) Exchange gains/(losses) on 4 483 487 (24) 466 442 other net assets Net return/(loss) before 178 (3,943) (3,765) (154) 12,612 12,458 finance costs and taxation Finance costs (83) - (83) (75) - (75) Net return/(loss) on 95 (3,943) (3,848) (229) 12,612 12,383 ordinary activities before taxation Taxation on return/(loss) (75) - (75) (58) - (58) on ordinary activities** Net return/(loss) on 20 (3,943) (3,923) (287) 12,612 12,325 ordinary activities after taxation for the year Return/(loss) per ordinary share Undiluted 0.02p (4.06p) (4.04p) (0.30p) 13.19p 12.89p Diluted 0.02p (4.04p) (4.02p) n/a n/a n/a A Statement of Total Recognised Gains and Losses has not been prepared as there are no gains and losses other than those reported in this Income Statement. The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. * Income 2011 2010 £'000 £'000 Income from investments designated at fair value through profit or loss Overseas dividends 1,099 838 Income from derivatives held at fair value through profit or loss Dividends on long CFDs 346 250 Total income 1,445 1,088 ** This relates to overseas taxation only Reconciliation of Movements in Shareholders' Funds for the year ended 31 December 2011 share capital share premium redemption other capital revenue total capital account reserve reserve reserve reserve equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 Opening shareholders' funds: 1 January 24,850 44 2,437 57,955 (19,033) (13,149) 53,104 2010 Issue of 27 32 - - - - 59 ordinary shares on the exercise of rights attached to subscription shares Exercise of (5) 5 - - - - - rights attached to subscription shares and conversion into ordinary shares Net return/ - - - - 12,612 (287) 12,325 (loss) on ordinary activities after taxation for the year Closing shareholders' funds: 31 December 24,872 81 2,437 57,955 (6,421) (13,436) 65,488 2010 Issue of 441 529 - - - - 970 ordinary shares on the exercise of rights attached to subscription shares Exercise of (88) 88 - - - - - rights attached to subscription shares and conversion into ordinary shares Net (loss)/ - - - - (3,943) 20 (3,923) return on ordinary activities after taxation for the year Closing shareholders' funds: 31 December 25,225 698 2,437 57,955 (10,364) (13,416) 62,535 2011 Balance Sheet as at 31 December 2011 2011 2010 £'000 £'000 Fixed assets Investments designated at fair value through 58,807 62,564 profit or loss Current assets Derivative assets held at fair value through 2,202 2,339 profit or loss Debtors 797 191 Cash at bank 4,056 1,237 7,055 3,767 Creditors Derivative liabilities held at fair value (2,211) (363) through profit or loss Creditors (1,116) (480) (3,327) (843) Net current assets 3,728 2,924 Total net assets 62,535 65,488 Capital and reserves Share capital 25,225 24,872 Share premium account 698 81 Capital redemption reserve 2,437 2,437 Other reserve 57,955 57,955 Capital reserve (10,364) (6,421) Revenue reserve (13,416) (13,436) Total equity shareholders' funds 62,535 65,488 Net asset value per ordinary share Undiluted 64.17p 68.44p Diluted 62.79p 66.21p Cash Flow Statement for the year ended 31 December 2011 2011 2010 £'000 £'000 Operating activities Investment income received 1,017 780 CFD dividends received 332 238 Investment management fee paid (870) (733) Directors' fees paid (137) (104) Other cash payments (227) (405) Net cash inflow/(outflow) from operating 115 (224) activities Finance costs Interest paid on long CFDs (85) (80) Net cash outflow from servicing of finance (85) (80) Financial investment Purchase of investments (58,309) (76,205) Disposal of investments 58,235 74,025 Net cash outflow from financial investment (74) (2,180) Derivative activities Proceeds from long CFD positions closed 1,673 1,176 Net cash inflow from derivative instruments 1,673 1,176 Net cash inflow/(outflow) before financing 1,629 (1,308) Financing Exercise of rights attached to subscription 971 58 shares Net cash inflow from financing 971 58 Increase/(decrease) in cash 2,600 (1,250) 1. The undiluted return/(loss) per ordinary share is based on the revenue return on ordinary activities after taxation in the year of £20,000 (2010: loss £287,000), the capital loss in the year of £3,943,000 (2010: return £ 12,612,000) and the total loss in the year of £3,923,000 (2010: return £ 12,325,000) and on 97,224,897 ordinary shares (2010: 95,653,233) being the weighted average number of ordinary shares in issue during the year. The diluted return/(loss) per ordinary share is based on the revenue return on ordinary activities after taxation in the year of £20,000, the capital loss in the year of £3,943,000 and the total loss in the year of £3,923,000 and on 97,532,957 ordinary shares being the diluted weighted average number of ordinary shares in issue during the year. There was no diluted (loss)/return per ordinary share for the year ended 31 December 2010 because the average ordinary share price for the year was below the exercise price of the rights attaching to the subscription shares. The above statements have been prepared on the basis of the accounting policies as set out in the financial statements in the annual report to 31 December 2011. This preliminary statement, which has been agreed with the Auditor, was approved by the Board on 16 March 2012. It is not the Company's statutory financial statements. The statutory financial statements for the financial year ended 31 December 2010 have been delivered to the Registrar of Companies. The statutory financial statements for the financial year ended 31 December 2011 have been approved and audited but have not yet been filed. The statutory financial statements for the financial years ended 31 December 2010 and 31 December 2011 received unqualified audit reports, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) and (3) of the Companies Act 2006. The annual report and financial statements will be posted to shareholders as soon as is practicable and in any event no later than 10 April 2012.

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