Final Results
FIDELITY JAPANESE VALUE PLC
Final Results for the year ended 31 December 2013
FINANCIAL SUMMARY
%
2013 2012 Change
Assets at 31 December
Total portfolio exposure1 £105.1m £70.2m +49.7
Shareholders' funds2 £90.0m £58.0m +55.2
Total portfolio exposure in excess of Shareholders'
funds (gearing) 16.8% 21.0%
NAV per ordinary share - undiluted 79.02p 59.94p +31.8
NAV per ordinary share - diluted3 n/a 59.19p
Stockmarket data at 31 December
Russell Nomura Mid/Small Cap Index (in sterling terms) 2.1562 1.7716 +21.7
Yen/£ exchange rate 174.080 140.549 -19.3
Ordinary share price at the year end 72.00p 51.63p +39.5
year high 80.38p 55.50p
year low 50.50p 47.88p
Discount - undiluted at the year end 8.9% 13.9%
year high 19.9% 16.4%
year low 4.7% 12.8%
Results for year to 31 December
Revenue loss per ordinary share (0.30p) (0.06p)
Capital return/(loss) per ordinary share 20.64p (4.24p)
Total return/(loss) per ordinary share 20.34p (4.30p)
Returns for the year to 31 December
NAV per share (undiluted) - total return2 +31.8% -6.6%
Ordinary share price - total return +39.5% -1.7%
Russell Nomura Mid/Small Cap Index (in sterling terms) +21.7% -3.1%
Ongoing charges for the year to 31 December4 1.80% 2.00%
1 The total exposure of the investment portfolio, including exposure to the
investments underlying the long CFDs
2 The change in Shareholders' funds of +55.2% is greater than the NAV per
share (undiluted) total return of +31.8% because Shareholders' funds were
increased by the net proceeds of the subscription share rights exercised during
the year
3 There was no diluted net asset value per ordinary share at 31 December 2013
because there were no subscription shares at that date. At 31 December 2012
there was dilution because there were subscription shares in issue and the NAV
per ordinary share was higher than the exercise price of the rights attached
4 Ongoing charges (excluding finance costs and taxation) based on average net
asset values for the reporting year (prepared in accordance with methodology
recommended by the Association of Investment Companies)
CHAIRMAN'S STATEMENT
I have pleasure in presenting the Annual Report of Fidelity Japanese Values PLC
for the year ended 31 December 2013.
PERFORMANCE REVIEW
In last year's Annual Report we commented on the landslide victory of the
Liberal Democrat Party in the December 2012 elections and the appointment of
Shinzo Abe as Prime Minister. Since then, Japanese stock markets have responded
positively to Mr Abe's "Three Arrows" policy, aimed at rejuvenating the
Japanese economy, with the Company's Benchmark, the Russell Nomura Mid/Small
Cap Index, rising by 21.7%, in sterling terms, during 2013. I am pleased to
report that the Company comfortably outperformed the Benchmark, with the net
asset value ("NAV") per share increasing by 31.8% to 79.02 pence and the share
price increasing by 39.5% to 72.00 pence. At the same time, the discount
narrowed from 13.9% to 8.9%.
RESULTS AND DIVIDENDS
The revenue column of the Income Statement shows a net loss on ordinary
activities after taxation for the year of £331,000 (2012: £55,000). As the
revenue reserve was in deficit at 31 December 2013, the Directors do not
recommend the payment of a dividend.
GEARING
The Company gears through the use of long Contracts For Difference ("CFDs").
Total portfolio exposure was £105.1m at the year end, equating to gearing of
16.8%. Using long CFDs continues to provide more flexibility for the Company's
needs at a much lower cost than traditional debt finance.
THE BOARD
The Board currently consists of five Directors who, between them, have good
knowledge and wide experience of business in Japan, the Asian region generally
and of investment trusts. The Board considers that lengthy service does not of
itself compromise the independence or effectiveness of a Director and that
experience is a positive benefit. There is, nonetheless, a recognition that
refreshing the composition of the Board from time to time can be beneficial.
The Company will therefore seek to recruit an additional Director during the
course of 2014.
MANAGEMENT FEE ARRANGEMENTS
I am pleased to report that, with effect from 1 January 2014, the annual
management fee payable by the Company has been reduced from 1.00% of gross
assets to 0.85% of gross assets. This will be further reviewed later in the
year in the light of the competitive environment, not only considering fees
charged by other investment trusts, but also those of open ended vehicles where
costs have declined significantly since the introduction of the Retail
Distribution Review in January 2013.
SUBSCRIPTION SHARE ISSUE
During the year under review all the outstanding subscription shares were
exercised resulting in the issue of 17,232,149 ordinary shares at a fixed price
of 55 pence per share. This had the benefit of increasing the liquidity of the
Company's shares and reducing the ongoing charges by spreading costs across a
wider asset base but also had the impact of diluting the NAV per share return
for the year.
The Company is considering a further bonus issue of subscription shares to
ordinary shareholders on the basis of one subscription share for every five
ordinary shares held (the "Bonus Issue"). The Board believes that, over the
medium term, investment in Japan will deliver capital growth and that
subscription shares represent an attractive option for shareholders to
subscribe in the future for further ordinary shares in the Company. In
addition, the Bonus Issue may broaden the Company's shareholder base as the
subscription shares are dispersed in the market, attracting new investors and
improving liquidity for shareholders.
REVISED ARTICLES OF ASSOCIATION
There have been a number of recent changes in the tax, regulatory and company
law environment which affect investment trusts. The Board is therefore seeking
approval at the forthcoming Annual General Meeting to adopt new Articles of
Association, substantially in the form of the existing Articles of Association
but updated to reflect these changes. In particular, the new Articles of
Association have been amended: (i) to remove the prohibition on the
distribution of realised capital profits; this change will help to keep our
Articles in line with what is allowable under current legislation. I believe we
should move with legislative changes, but stress that the Board has no
intention of using this power in the immediate future and would only do so if
it felt that it were in the best interests of the Company's shareholders; and
(ii) to incorporate provisions to facilitate compliance with the Alternative
Investment Fund Managers Directive.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE
The Alternative Investment Fund Managers Directive ("AIFMD") is a European
Union Directive that affects investment funds which are managed or promoted
within the European Union. Under the terms of the Directive the Company is
required to appoint an Alternative Investment Fund Manager ("AIFM"). Whilst the
implementation date for the Directive was July 2013, the Financial Conduct
Authority has permitted a transitional period of one year. The Board has
reviewed the impact of the Directive on the Company's operations and has
decided in principle to appoint FIL Investment Services (UK) Limited (part of
Fidelity Worldwide Investments) as its AIFM, before the end of the transitional
period on 22 July 2014. There will be no additional fee for this service,
though there will be a small additional cost from the appointment of a
depositary, in this case J.P. Morgan Europe Limited, which is also required by
the Directive.
OTHER REGULATORY CHANGES
There have been a number of revisions to reporting requirements for companies
with accounting periods beginning on or after 1 October 2012. These include the
addition of a new Strategic Report which replaces the Business Review section
of the Directors' Report, providing insight into the Company's objectives,
strategy and principal risks, and enabling shareholders to assess how effective
the Directors have been in promoting the success of the Company during the
course of the year under review. Other changes comprise additional Audit
Committee reporting requirements on the external audit process and changes to
the structure and voting requirements in respect of the Directors' Remuneration
Report and are explained in more detail in the Annual Report.
ANNUAL GENERAL MEETING
The Annual General Meeting will be held at midday on 14 May 2014 at Fidelity's
offices at 25 Cannon Street, London EC4M 5TA (St Paul's or Mansion House
tube station) and all investors are encouraged to attend. The Board is looking
forward to the opportunity to speak to shareholders. The Portfolio Manager will
be attending and will give a presentation on the past year and the prospects
for the current year.
OUTLOOK: THE CASE FOR JAPAN REMAINS INTACT
Since the onset of Abenomics and the appointment of a new Governor of the Bank
of Japan, the rate of growth in Japan's monetary base has been much faster than
in the US. As this trend continues, we can expect the yen to weaken further,
albeit at a more subdued rate than in 2013. The depreciation of the yen has
been one of the key drivers of the rapid increase in corporate profits over the
past year. Another factor that is less widely appreciated is the decline in the
aggregate break even exchange rate. As the yen has appreciated over time,
Japanese exporters have continually cut costs and become more efficient.
While in the 1990s they broke even at around ¥130/$, by the end of 2012 they
were profitable at ¥82/$. The weaker yen is undoubtedly helping Japanese
companies, but their previous efforts to bring down costs and raise
productivity are also providing a significant tailwind.
The patient bottom-up observer can find encouraging signs of change on the
ground, but it is also important to be realistic about the likelihood of sudden
transformation in Japan. It seems Prime Minister Abe may have raised
expectations too high. When looking at how 2014 will differ from 2013, we
believe the management of expectations is a key factor. In the opening months
of his tenure, Prime Minister Abe acted as a cheerleader for Japan. In order to
generate optimism, he toured the world to promote his reform agenda and explain
how it would give birth to a virtuous cycle of rising asset prices and
increasing confidence, leading to a stronger economy. But by raising
expectations too high, he increased the scope for disappointment amongst
non-Japanese investors.
In the near term, we believe the biggest risk to the current rally is policy
disappointment with the 'Third Arrow', namely structural reform. Investors
continue to monitor closely the progress Prime Minister Abe is making on key
reform policies, including labour markets, corporate tax, agriculture, energy
and corporate governance. The increase in the consumption tax from 5% to 8%
which is scheduled for April 2014 is also a risk factor, but monetary policy is
aggressively loose and the authorities are determined to off set any negative
impact. On the external front, we expect investors will remain vigilant for
signs of weaker global growth, yen appreciation and raised tensions with China.
At the time of writing, global financial markets are experiencing turbulence
triggered by weaker-than-expected US macro data and instability in emerging
markets. Given the pace of the rally experienced last year, a period of
correction is not unexpected. However, the pick-up in the global economy
appears to remain broadly on track and Japan's recovery continues to proceed
steadily. Furthermore, Japan has led the world in terms of positive earnings
revisions over the past year and the outlook for earnings growth continues to
compare favourably with all other major regions. While risk assets are likely
to remain volatile for the time being, the outlook for the Japanese economy and
market remains positive.
David Robins
Chairman
26 March 2014
MANAGER'S REVIEW
MARKET REVIEW
While the much anticipated rotation from bonds to equities did not quite fully
unfold in 2013, a shift out of higher risk assets, particularly emerging
markets, into developed markets did take place. Worries over the timing and
magnitude of the US Federal Reserve's tapering of quantitative easing triggered
a sell-off in emerging markets that had benefited from the ultra-loose monetary
policy. Speculation about a hard landing scenario in China also fuelled panic
selling in the summer. Subsequently, the Federal Reserve's decision to delay
cutting back on quantitative easing in September, combined with modest cyclical
improvements around the world and generally low valuations, underpinned a
broad-based recovery in equities towards the end of the year.
During the year, Japan was one of the best performing markets in the world in
local currency terms. The advent of Abenomics in late 2012 drove a rapid rise
in Japanese stocks, with the broad based TOPIX ending the year at its highest
level since August 2008. The Bank of Japan's expansionary monetary policy
guided the yen lower against other currencies and boosted exporters' earnings.
Meanwhile, deflation finally started to give way to inflation, with the
Consumer Price Index at its highest level in five years.
Throughout the year, the inverse correlation between the yen and the Japanese
equity market remained strong. The year-end market rally gained momentum as the
yen depreciated to a five-year low of ¥105 against the US dollar amid
speculation that the Bank of Japan would engage in further monetary easing,
while stronger US economic data, including employment, increased confidence in
the Federal Reserve's decision to start scaling back its asset purchase
programme.
Overseas investors were active buyers of Japanese stocks, with total net
purchases reaching a record high for the year. This helped to off set net
selling by individuals ahead of a rise in the tax rate on capital gains and
dividends in January 2014.
PERFORMANCE REVIEW
As noted in the Chairman's Statement, the Company outperformed its Benchmark
during the year under review. The market environment remained favourable as
liquidity in the small cap universe increased and earnings upgrades continued
throughout the year.
As demonstrated in the Attribution Analysis, the market's movement added 30.42
pence to the NAV per share, stock selection added 2.80 pence and gearing added
5.78 pence. Although the devaluation of the yen has improved the
competitiveness of the Japanese economy and helped drive the re-rating of
Japanese equities, it detracted 17.70 pence when converting the yen value of
assets into sterling.
Year ended
Attribution Analysis 31 December 2013
(pence)
NAV at 31 December 2012 (undiluted) 59.94
Impact of the Benchmark Index (in yen terms) +30.42
Impact of Benchmark Index income (in yen terms) +1.54
Impact of stock selection (relative to the Index) +2.80
Impact of gearing +5.78
Impact of exchange rate -17.70
Impact of charges -1.11
Impact of share issues -2.77
Impact of share repurchases +0.01
Cash/residual +0.11
NAV at 31 December 2013 (undiluted) 79.02
Stock selection was particularly successful in the services sector where
holdings in internet-related companies added value. Core holdings also reacted
well to improving macroeconomic data such as housing starts, employment and
consumer spending.
Three of the top ten contributors to performance over the year were online
businesses, namely Kakaku.com, WirelessGate and M3. Both Kakaku.com and M3 are
long-term holdings, which have consistently added value over time since the
positions were initiated in 2007.
Other notable performers included three businesses that are well positioned to
benefit from the so-called 'Third Arrow', or Prime Minister Abe's structural
reform strategy. JP-Holdings is a leading operator of nursery schools in Japan
which should benefit from greater female participation in the workforce. The
Government's initiatives to set a favourable backdrop for companies with
innovative technologies, will benefit companies such as Asahi Intecc, a
specialist manufacturer of guidewires used in non-surgical procedures for
patients suffering from heart disease.
Elsewhere, expectations for domestic reflation buoyed the share prices of
homebuilders and housing-related materials makers. Ahead of the sales tax hike
in April 2014, Sekisui Chemical, a key overweight position, enjoyed strong
growth in housing orders. LIXIL Group, a producer of housing equipment and
materials, also benefited from robust housing starts. Moreover, LIXIL's
aggressive expansion in overseas markets through M&A is expected to enhance its
growth potential further over the long term.
On the other hand, the performance of holdings in global cyclical stocks was
mixed. In the transport equipment sector, auto-parts maker Takata lost ground
as product recalls resulted in disappointing earnings results and the position
was sold. In the electrical machinery sector, LED lighting makers Odelic and
Endo Lighting fell on short-term earnings weakness. The holding in Odelic has
been sold since the year end. However, we maintain an overweight position in
Endo Lighting, as we believe that it will benefit from secular growth in energy
saving in Japan.
The table below shows the principal five contributors to, and principal five
detractors from, the Company's performance relative to the Benchmark Index.
Contribution to Company performance
versus the Index
Principal contributors to Return
absolute return %*
Kakaku.com +3.5 +2.3
M3 +2.3 +1.4
JP-Holdings +2.1 +1.5
WirelessGate +2.0 +1.6
Sekisui Chemical +2.0 +1.0
* Simple price return sourced from Bloomberg.
Detraction to Company performance
versus the Index
Principal detractors to Return
absolute return %*
Fuji Kyuko -0.8 -0.5
Honeys -0.8 -0.4
Endo Lighting -0.7 -0.3
Gulliver International -0.6 -0.2
Tachi-S -0.5 -0.2
* Simple price return sourced from Bloomberg.
PRINCIPAL CONTRIBUTORS
Kakaku.com operates Japan's leading online price comparison site. In light of
improving domestic consumption, e-commerce continued to grow at a healthy pace,
reflecting the rising penetration of smartphones and the increased convenience
of online shopping. We took some profits in the stock, notably during its
strongest period of performance from July through September. However,
Kakaku.com remains a long-term structural winner in the expanding e-commerce
market and valuations look more attractive following the recent correction.
M3 provides web-based, two-way marketing/customer support services for
pharmaceutical companies and doctors. Pharmaceutical marketing is not a growth
industry, but by changing existing business practices through the utilisation
of its internet infrastructure M3 has created its own niche within the
pharmaceutical industry. M3 remains a long-term holding, which has consistently
added value over time since the position was initiated in 2007.
JP-Holdings is the leading nursery school operator in Japan. As the rate of
female labour participation is low in Japan compared with other developed
countries, the Government will improve support for working mothers by
increasing the number of private nursery schools. This should encourage future
growth in the child daycare service market, in which JP-Holdings has an
advantageous position. The stock was sold on valuation grounds during the
second half of the year.
WirelessGate is a provider of high-speed wireless broadbandservices. Its share
price more than doubled in the fourth quarter of 2013. The rising penetration
of smartphones/tablets and higher data requirements are encouraging more users
to adopt Wi-Fi services. We took some profits in December 2013, but continue to
hold the shares as we expect earnings to continue to grow in line with rising
demand for wireless communication services.
Sekisui Chemical builds and sells residential houses. It also produces PVC
housing products. Expectations for domestic reflation buoyed the share prices
of homebuilders and housing-related materials makers during the period. Sekisui
Chemical also enjoyed strong growth in housing orders ahead of the sales tax
hike in April 2014. The stock remains a key holding and we expect housing
volume growth to drive earnings upwards.
PRINCIPAL DETRACTORS
Fuji Kyuko provides passenger rail and bus services in Shizuoka, Yamanashi and
Kanagawa prefectures. The stock was purchased from April 2013 onwards and your
Company did not fully participate in the initial phase of the rally. However,
we view Fuji Kyuko as a key beneficiary of Prime Minister Abe's policy focus of
increasing inbound tourism and expect an improvement in the share price in the
future.
Honeys is a retailer of ladies' casual clothing and accessories. Its shares
performed poorly as sales in China struggled due to intensifying competition,
whilst domestic customer traffic slowed sharply in response to product
price increases. An anticipated improvement in the sales climate failed to
materialise and the position was gradually reduced towards the end of the
period.
Endo Lighting is a leading producer of LED lighting fixtures. The shares
performed poorly due to short-term earnings weakness. However, we maintain an
overweight position in the company, as we believe that it is highly levered to
secular growth in energy saving in Japan.
Gulliver International operates Japan's largest nationwide chain of used car
stores. The stock was purchased in April 2013, which in hindsight marked a
near-term peak. Retail sales, a key earnings driver, fell short of expectations
due to adverse pricing strategies. However, the used-car business has since
stabilised and we expect the company's efforts to strengthen its retail
operations through aggressive new store openings to drive future growth.
Tachi-S manufactures passenger seats for cars and trucks. We initiated a
position in the stock in May 2013, after which both absolute and relative
performance was disappointing. Production start-up costs diminished the
company's near-term profit growth, but we expect to see a recovery from fiscal
2014 as one-time factors expire and contributions from new seats emerge.
PORTFOLIO REVIEW
The following tables show the key stock positions versus the Russell Nomura Mid
/Small Cap Index at 2012 and 2013.
Company Index Active
Top Ten Positions Holding Weight Weight
At 31 December 2012 % % %
LIXIL Group 3.3 0.5 2.8
Sekisui Chemical 3.2 0.3 2.9
Maruwa 2.9 - 2.9
Honeys 2.8 - 2.8
Takata 2.8 0.1 2.7
Bit-Isle 2.8 - 2.8
Kakaku.com 2.5 0.1 2.4
M3 2.3 0.1 2.2
Sumitomo Rubber 2.0 0.2 1.8
1st Holdings 2.0 - 2.0
Company Index Active
Top Ten Positions Holding Weight Weight
At 31 December 2013 % % %
Sanix 3.0 - 3.0
M3 2.8 0.1 2.7
LIXIL Group 2.7 0.5 2.2
Sekisui Chemical 2.5 0.3 2.2
Tosho 2.4 - 2.4
Seria 2.2 - 2.2
Livesense 2.2 - 2.2
Nihon Nohyaku 2.1 - 2.1
Stanley Electric 2.0 0.2 1.8
Japan Aviation Electronics 1.9 - 1.9
The Company maintains a diversified portfolio, keeping a balance between
domestic consumer services and pro-cyclical manufacturers. Portfolio turnover
in 2013 increased to 86% from 70% in the previous year. In response to the
strong market rally, positions where share price valuations already discounted
foreseeable growth were actively trimmed and recycled into new stocks with
reasonable valuations. Meanwhile, low-growth, defensive stocks in the foods,
power utilities, pharmaceuticals and railway sectors remain underweight.
The investment focus remains on highly competitive, mid/small cap stocks in the
consumer services sector. Whilst the portfolio has relatively large overweight
positions in internet-based service companies such as M3 and Kakaku.com, it
also includes a diverse range of business models including solar power
integration, leisure & entertainment, and recruitment. Sanix, which has become
the largest single stock position, was added to the portfolio in March 2013.
The company's mainstay business is termite extermination, but it has
transformed itself into a solar power integrator that installs small-scale
solar panels for both commercial and residential use. Thanks to the
Government's subsidies for purchasing clean energy, the number of applications
for solar power system installation is growing at record rates, and Sanix is
enjoying strong growth in its orders and sales.
Another new position is Tosho, which operates sports club facilities and hotels
primarily in Aichi prefecture. Strong earnings momentum is driven by new
openings of sports clubs and hotels. Business expansion outside of Aichi is
expected to be the key earnings driver for the medium-term. Round One is also a
recent addition to the portfolio. It operates bowling alleys and video game
arcades. Sales growth has been sluggish, but there are some early signs of a
recovery due to the introduction of special promotions (e.g. weekday all you
can bowl, low priced drinks after midnight at Karaoke facilities etc) and price
reductions. In addition, recruitment and temporary staffing agencies,
including Livesense, Temp Holdings and Outsourcing, make up a relatively large
position within the consumer service sector.
Within pro-cyclical sectors, electronic component manufacturers and electronic
material makers with strong earnings growth momentum are favoured due to a
cyclical upturn in demand for smartphones and automobile parts. An overweight
position in Stanley Electric has proved rewarding. The company makes various
automotive electronic parts including LED headlamps and stands to benefit from
a weaker yen and increased automobile production at Honda Motor. Japan Aviation
Electronics ("JAE") appears to be undervalued. JAE is a niche manufacturer of
connectors used for smartphones and automobiles, the strong growth potential of
which appears underappreciated by the market. Brother Industries is a recent
addition to the portfolio, as it will benefit from a cyclical recovery in
capital spending. A position in Fujibo Holdings has also been initiated. Whilst
the company is a textile manufacturer, its main earnings growth driver
currently is synthetic abrasive materials used to polish semiconductors. Its
niche product is steadily gaining market share and the company is well
positioned to benefit from a recovery in production by semiconductor makers.
While new growth opportunities have been identified, a number of positions that
have met target prices have been closed. These include Nidec (spindle motors
for hard disk drives), Nitto Denko (LCD polarising films for smartphones and
tablets), Kubota (agricultural machinery), and Seino Holdings (haulage).
OUTLOOK
Despite the market's strong rise in 2013, valuations do not appear stretched
because earnings growth has been accelerating in line with the stock price
appreciation. This is why we believe that the downside to the market is
limited. The correction since the beginning of 2014 is related to global
uncertainty rather than any specific concerns regarding the domestic economic
outlook or valuation levels in Japan. The indiscriminate selling has created
opportunities to invest in attractive businesses at a cheaper price.
The Japanese small-cap market is a rich hunting ground for entrepreneurial
companies and yet research coverage remains patchy. This means that many growth
opportunities have yet to be reflected in share prices. Furthermore, it is
encouraging to see a buoyant initial public offering ("IPO") market. Almost all
of the 54 IPOs in 2013 rose on their first day of trading with some even
quadrupling. These new companies often have characteristics that are in line
with your Company's investment strategy - innovative business models that are
changing existing business practices in their own areas and gaining share from
incumbents. A healthy expansion of the small-cap universe provides a further
reason to be optimistic about the outlook for Japan.
FIL Investments international
26 March 2014
STRATEGIC REPORT
The Directors present the Strategic Report of the Company which replaces
reporting previously included in the 'Business Review' section of the
Directors' Report. It provides a review of the Company's business and describes
the principal risks and uncertainties it faces. An analysis of the performance
of the Company during the financial year and the position at the year end is
included taking into account its objective, strategy and risks and how these
are measured using key performance indicators.
BUSINESS AND STATUS
The Company carries on business as an investment trust and has been accepted as
an approved investment trust by HM Revenue & Customs under Sections 1158 and
1159 of the Corporation Tax Act 2010, subject to the Company continuing to meet
eligibility conditions. The Directors are of the opinion that the Company has
conducted its affairs in a manner which will satisfy the conditions for
continued approval.
The Company is registered as an investment company under Section 833 of the
Companies Act 2006 and operates as such. It is not a close company and has no
employees.
PRIMARY OBJECTIVE
The primary objective of your Company is to enhance shareholder value, achieved
through long term capital growth from an actively managed portfolio of
securities primarily of small and medium sized Japanese companies listed or
traded on Japanese stockmarkets.
STRATEGY
In order to achieve its investment objective, the Company has delegated the
management of the investment portfolio and certain other services to FIL
Investments International. The Manager will aim to achieve a capital return on
the Company's total assets over the longer term in excess of the equivalent
return on the Russell Nomura Mid/Small Cap Index, as expressed in sterling.
The Board recognises that investing in equities is a long term process and that
the Company's returns will vary from year to year. Unlike equivalent open-ended
investment vehicles, the investment trust structure offers investors a
portfolio which may be geared. The Board takes the view that long term returns
can be enhanced by the use of gearing in a carefully considered and monitored
way. The gearing range is considered by the Board at each of its meetings.
INVESTMENT POLICY
The markets in which the Company may invest comprise primarily the Tokyo Stock
Exchange along with, the Jasdaq and the regional stockmarkets of Fukuoka,
Nagoya, Osaka and Sapporo.
In order to diversify the Company's portfolio, the Board has set guidelines for
the Manager to restrict investment to a maximum of 7.5% in the aggregate of all
securities of any one company or other investment entity (10% for any group of
companies) at the time of purchase, which is further limited to 12% of the
Company's equity portfolio based on the latest market value.
The Company is permitted to invest up to 30% of its assets (at the time of
acquisition) in equity-related and debt instruments. The Company may also
invest in derivatives for efficient portfolio management to protect the
portfolio against market risk. However, any such investment would normally be
at a low level and the Company invests primarily in shares. (At the year end
the Company was 16.8% geared).
The Company may invest up to 5% of its assets (at the time of acquisition) in
securities which are not listed on any stock exchange or traded on the Jasdaq
market, but the Company would not normally make any such investment except
where the Manager expects that the securities would shortly become registered
for trading on the OTC market or become listed on a Japanese stockmarket.
A maximum of 15% of the Company's total assets may be invested in the
securities of other investment trust companies. As at 31 December 2013 there
were no such holdings in the Company's portfolio (2012: nil).
The Company's investment policy was amended on 10 November 2009 to permit
gearing through Contracts For Difference ("CFDs") following the repayment of
the Company's bank loans.
The Company's policy is to be geared in the belief that long term investment
returns will exceed the costs of gearing. This gearing is obtained through the
use of borrowing and/or through the use of CFDs to obtain exposure to Japanese
equities selected by the Manager. The effect of gearing is to magnify the
consequence of market movements on the portfolio and if the portfolio value
rises the NAV will be positively impacted, but if it falls the NAV will be
adversely impacted. The Board is responsible for the level of gearing in the
Company and reviews the position on a regular basis. The aggregate exposure of
the Company to Japanese equities, whether held directly or through CFDs, will
not exceed shareholders' funds by more than 30% at the time at which any CFD is
entered into or a security acquired. The Board also intends that the exposure
will not exceed shareholders' funds by more than 40% at any other time unless
exceptional circumstances exist.
The majority of the Company's exposure to Japanese equities will be through
direct investment, not CFDs. In addition, the limits on exposure to individual
companies and groups set out above will be calculated as if the Company had
acquired the securities to which any CFD is providing exposure (i.e. on a total
exposure basis).
The investment in Japanese equities achieved through borrowings and/or CFDs
will be subject to the acquisition and holding limits set out above. Generally,
the maximum that the Company will hold in cash will be 25% of the total value
of the Company's assets, but this limit will not include any cash or cash
equivalent paid as collateral for unrealised losses on CFDs. In practice the
cash position will normally be much lower.
The spread of risk within the Company's portfolio is achieved by having
exposure to a wide range of stocks which are chosen on their individual merits.
No material change will be made to the investment policy without shareholder
approval.
Details of the Company's Ten Largest Investments, the Full Portfolio Listing
and the Distribution of the Portfolio can be found in the Annual Report.
INVESTMENT MANAGEMENT PHILOSOPHY, STYLE AND PROCESS
The Portfolio Manager utilises a "bottom up" stock picking approach. Supported
by 25 research analysts based in Tokyo, he seeks to identify attractively
valued companies through extensive research and rigorous valuation analysis
rather than constructing the portfolio on the basis of macroeconomic analysis.
The Portfolio Manager has a focus on small caps with multi-year growth
potential.
RESULTS AND PERFORMANCE
Details of the results and performance for the year, together with an analysis
of trends and factors that may impact the future performance of the Company may
be found in the Chairman's Statement and Manager's Review above. The Chairman's
Statement and Manager's Review form part of the Strategic Report. The ten year
summary can be found in the Annual Report.
KEY PERFORMANCE INDICATORS
The key performance indicators ("KPIs") used to measure the progress and
performance of the Company over time and which are comparable to those reported
by other investment trusts are: the performance of the NAV per share, both in
absolute terms and in relation to the Russell Nomura Mid/Small Cap Index (the
Benchmark Index); share price performance; and the discount of the NAV per
share to the share price. Details of how the Company has performed against
these KPIs, may be found in the Summary of Performance in the Annual Report.
As well as the KPIs set out above, the Board also regularly monitors other
relevant statistics, including investment performance compared to the Company's
peer group.
The Directors also monitor the various factors contributing to investment
results, as set out in the Attribution Analysis table above.
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 process is regularly
reviewed by the Board in accordance with the Financial Reporting Council's
("FRC's") "Internal Control: Revised Guidance for Directors".
The Board is responsible for the Company's system of internal control and for
reviewing its effectiveness. An internal controls report providing an
assessment of risks, together with controls to mitigate these risks, is
prepared by the Manager and considered by the Audit Committee.
The Board also determines the nature and extent of any risks it is willing to
take in order to achieve its strategic objectives.
Market Risk
The Company's assets largely consist of listed securities and the principal
risks are therefore market related such as market downturn, interest rate
movements and exchange rate movements. The Portfolio Manager's success in
protecting and increasing the Company's assets against this background is core
to the Company's continued success.
Risks to which the Company is exposed and which form part of the market risks
category are included in Note 17 to the financial statements in the Annual
Report together with summaries of the policies for managing these risks. These
comprise: market price risk (comprising interest rate risk, foreign currency
risk and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instruments risk.
Performance Risk
The achievement of the Company's performance objective requires the assumption
of risk. Strategy, asset allocation and stock selection might lead to
underperformance of the Benchmark Index and target.
The Company has a clearly defined strategy and investment remit which is a
detailed in the management agreement between the Company and the Manager.
Borrowing/ derivative limits are set by the Board.
The Board relies on the Portfolio Manager's skills and judgement to make
investment decisions based on research and analysis of individual stocks and
sectors. The portfolio is managed by a highly experienced Portfolio Manager,
supported and overseen by the Manager's investment team.
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 of performance in the shorter term.
Discount Control Risk
The Board is not able to control the prices at which the Company's ordinary
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. Details of repurchases during the
year are given in the Directors' Report in the Annual Report. The Company's
share price, NAV and discount volatility are monitored daily by the Manager and
considered by the Board at each of its meetings.
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 gearing by way of long CFDs is in
yen means that part of the investment portfolio funded by gearing is naturally
hedged against changes in the yen:sterling exchange rate. Further details can
be found in Note 17 to the financial statements in the Annual Report.
Gearing Risk
The Company has the option to invest up to the total of any loan facilities or
to use Contracts for Difference ("CFDs") to invest in equities. The principal
risk is that gearing magnifies investment returns. Therefore, if the Company is
geared in strongly performing stocks the Company will benefit from gearing. If
the Company is geared in poorly performing stocks, the impact would be
detrimental. Other risks are that the cost of gearing may be too high or that
the term of the gearing is inappropriate in relation to market conditions. The
Company currently has no bank loans and geared exposure is being achieved
through the use of long CFDs. This has reduced the cost of gearing and provides
greater flexibility. The Board regularly considers gearing and gearing risk and
sets limits accordingly.
Tax and Regulatory Risks
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss
of investment trust status, resulting in the Company being subject to tax on
capital gains. A breach of other legal and regulatory rules may lead to
suspension from listing on the Stock Exchange or a qualified audit report. The
Board receives regular reports from the Manager confirming regulatory
compliance during the year.
There are a number of prospective regulations which could impact the Company.
Of greatest significance is the Alternative Investment Fund Managers Directive
("AIFMD"). The implementation date for the Directive was July 2013 but with a
transitional period whereby investment trusts will not be required to apply for
AIFMD authorisation until July 2014. The Board has reviewed the impact of the
directive on the Company's operations and decided in principle to appoint FIL
Investment Services (UK) Limited (for no additional fee) as its Alternative
Investment Fund Manager ("AIFM") before the end of the transitional period on
22 July 2014. FIL Investment Services (UK) Limited is in the process of seeking
to become a registered AIFM during the transitional period so that your Company
will become fully compliant by July 2014.
An additional requirement of the AIFMD is to appoint a depositary on behalf of
the Company which will oversee custody and cash arrangements of the Company. To
this end the Board has agreed in principle to appoint J. P. Morgan Europe
Limited to act as the Company's depositary. JPMorgan Chase Bank will continue
to act as bankers and custodian to the Company. There will be an additional
operating cost associated with this new role but it is not possible at this
stage to be precise about the level of additional cost.
Operational Risks
The Company has no employees and relies on a number of third party service
providers, principally the Manager, Registrar and Custodian. The Company is
dependent on the Manager's control systems and those of its Custodian and
Registrar, both of which are monitored and managed by the Manager on behalf of
the Board.
The security of the Company's assets, dealing procedures, accounting records
and the maintenance of regulatory and legal requirements, among other things,
rely on the effective operation of such systems. The Manager, Registrar and
Custodian are subject to a risk-based programme of reviews by the Manager's
internal audit department. In addition, service providers' own internal
controls reports are received and reviewed by the Board and any concerns
investigated.
While it is believed that the likelihood of poor governance, compliance and
operational administration by third party service providers is low, the
financial consequences could be serious, including the associated reputational
damage to the Company.
Certain of the Company's relationships with its service providers will change
as the Company implements AIFMD and in particular the Company is required to
appoint a depositary.
Financial Instrument Risks
The financial instrument risks faced by the Company are shown in Note 17 to the
financial statements in the Annual Report. The additional risk to the Company
of using long CFDs rather than traditional forms of borrowing is that the
Company does not own the Japanese equities to which the long CFDs give exposure
and is at risk if the counterparty defaults, for example for insolvency
reasons. The balance on all outstanding long 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
A continuation vote takes place every three years, with the next such vote due
to take place in 2016. There is a risk that shareholders may not vote in favour
of continuation during periods when performance is poor.
BOARD DIVERSITY
When refreshing its composition the Board carries out its candidate search
against a set of objective criteria on the basis of merit, with due regard for
the benefits of diversity on the Board, including gender. As at 31 December
2013, there were five male Directors and no female Directors on the Board.
EMPLOYEE, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
The Company has no employees and all of its Directors are non-executive, the
Company's day-to-day activities being carried out by third parties. The Company
has not adopted a policy on human rights as it has no employees and its
operational processes are delegated.
The Company's financial reports are printed by a company which has won awards
for its environmental awareness and further details of this may be found on the
back cover of this report. Financial reports and other publicly available
documentation are also available on the Company's website www.fidelity.co.uk/
its. Details about Fidelity's own community involvement may be found on its
website www.fidelity.co.uk.
CORPORATE ENGAGEMENT
The Board believes that the Company should, where appropriate, take an active
interest in the affairs of the companies in which it invests and that it should
exercise its voting rights at their general meetings. Unless there are any
particularly controversial issues (which are then referred to the Board) it
delegates the responsibility for corporate engagement and shareholder voting to
the Manager. These activities are reviewed annually.
FUTURE DEVELOPMENTS
The Company's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chairman's
Statement and Manager's Review above.
By order of the Board
FIL Investments International
Secretary
26 March 2016
RELATED PARTY TRANSACTIONS WITH THE MANAGER
The Directors have complied with the provisions of Financial Reporting Standard
8 "Related Party Disclosures", which require disclosure of related party
transactions and balances. FIL Investments International is the Manager and
Secretary of the Company and details of the services provided and fees paid are
given in the Annual Report. Fees paid to the Directors are disclosed in the
Directors' Remuneration Report of the Annual Report.
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 that 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 its 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 Strategic Report, a Directors' Report, a Corporate Governance
Statement and a Directors' Remuneration Report that comply with that law and
those regulations.
The Directors have delegated responsibility 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 Strategic Report and Directors' Report include 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.
We confirm that we consider that the annual report and accounts, taken as a
whole, is fair balanced and understandable and provides the information
necessary for shareholders to assess the Company's performance, business and
strategy.
Approved by the Board on 26 March 2014 and signed on its behalf.
David Robins
Chairman
INCOME STATEMENT
for the year ended 31 December 2013
2013 2012
revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on
investments
designated
at fair value
through profit or
loss - 13,932 13,932 - (6,376) (6,376)
Gains on
derivative
instruments held
at fair
value through
profit or loss - 9,665 9,665 - 2,635 2,635
Income * 1,440 - 1,440 1,289 - 1,289
Investment
management fee (1,076) - (1,076) (757) - (757)
Other expenses (479) - (479) (441) - (441)
Foreign exchange
losses on other
net assets (59) (654) (713) - (384) (384)
Net (loss)/return
before finance
costs and
taxation (174) 22,943 22,769 91 (4,125) (4,034)
Finance costs (73) - (73) (76) - (76)
Net (loss)/return
on ordinary
activities before
Taxation (247) 22,943 22,696 15 (4,125) (4,110)
Taxation on
(loss)/return on
ordinary
activities (84) - (84) (70) - (70)
Net (loss)/return
on ordinary
activities after
taxation for the
year (331) 22,943 22,612 (55) (4,125) (4,180)
(Loss)/return per
ordinary share -
undiluted
and diluted (0.30p) 20.64p 20.34p (0.06p) (4.24p) (4.30p)
* INCOME
2013 2012
£'000 £'000
Income from investments designated at fair value through profit or
loss
Overseas dividends 1,138 1,005
Income from derivatives held at fair value through profit or loss
Dividends on long CFDs 302 284
Total income 1,440 1,289
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2013
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 as at
1 January
2012 25,225 698 2,437 57,955 (10,364) (13,416) 62,535
Issue of
ordinary
shares on
exercise of
rights
attached to
subscription
shares 3 4 - - - - 7
Exercise of
rights
attached to
subscription
shares and
conversion
into ordinary
shares (1) 1 - - - - -
Repurchase of
ordinary
shares (159) - 159 (328) - - (328)
Net loss on
ordinary
activities
after
taxation
for the year - - - - (4,125) (55) (4,180)
Closing
shareholders'
funds as at
31 December
2012 25,068 703 2,596 57,627 (14,489) (13,471) 58,034
Issue of
ordinary
shares on
exercise of
rights
attached to
subscription
shares 4,308 5,147 - - - - 9,455
Exercise of
rights
attached to
subscription
shares and
conversion
into ordinary
shares (862) 862 - - - - -
Repurchase of
ordinary
shares (25) - 25 (59) - - (59)
Net return/
(loss) on
ordinary
activities
after
taxation for
the year - - - - 22,943 (331) 22,612
Closing
shareholders'
funds as at
31 December
2013 28,489 6,712 2,621 57,568 8,454 (13,802) 90,042
BALANCE SHEET
as at 31 December 2013
Company number 2885584
2013 2012
£'000 £'000
Fixed assets
Investments designated at fair value through profit or loss 84,031 55,087
Current assets
Derivative assets held at fair value through profit or loss 6,263 1,941
Debtors 309 2,632
Cash at bank 662 674
7,234 5,247
Creditors
Derivative liabilities held at fair value through profit or
loss (421) (301)
Creditors (802) (1,999)
(1,223) (2,300)
Net current assets 6,011 2,947
Total net assets 90,042 58,034
Capital and reserves
Share capital 28,489 25,068
Share premium account 6,712 703
Capital redemption reserve 2,621 2,596
Other reserve 57,568 57,627
Capital reserve 8,454 (14,489)
Revenue reserve (13,802) (13,471)
Total equity shareholders' funds 90,042 58,034
Net asset value per ordinary share
Undiluted 79.02p 59.94p
Diluted n/a 59.19p
The financial statements were approved and authorised for issue by the Board of
Directors on 26 March 2014 and were signed on its behalf by:
David Robins
Chairman
CASH FLOW STATEMENT
for the year ended 31 December 2013
2013 2012
£'000 £'000
Operating activities
Investment income received 979 917
CFD dividends received 278 294
Investment management fee paid (992) (790)
Directors' fees paid (82) (182)
Other cash payments (272) (471)
Net cash outflow from operating activities (89) (232)
Finance costs
Interest paid on long CFDs (73) (76)
Net cash outflow from finance costs (73) (76)
Financial investments
Purchase of investments (98,848) (51,491)
Disposal of investments 84,792 48,137
Net cash outflow from financial investments (14,056) (3,354)
Derivative activities
Proceeds of long CFD positions closed 5,463 986
Net cash inflow from derivative instruments 5,463 986
Net cash outflow before financing (8,755) (2,676)
Financing
Exercise of rights attached to subscription shares 9,456 6
Repurchase of ordinary shares (59) (328)
Net cash inflow/(outflow) from financing 9,397 (322)
Increase/(decrease) in cash 642 (2,998)
STATUS OF RESULTS ANNOUNCEMENT
The financial information contained in this announcement does not constitute
statutory accounts as defined in the Companies Act 2006. The 2013 Annual Report
and Financial Statements will be filed with the Registrar of Companies
shortly. The report of the Auditor's for the year ended 31 December 2013
contains no qualification or statement under section 498(2) or (3) of the
Companies Act 2006.
The comparative figures are extracted from the audited financial statements of
Fidelity Japanese Values PLC for the year ended 31 December 2012, which have
been filed with the Registrar of Companies. The report of the Auditor on those
financial statements contained no qualification or statement under section 498
(2) or (3) of the Companies Act 2006.
This announcement was approved by the Board of Directors on 26 March 2014.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM.
The annual report and financial statements will be posted to shareholders as
soon as is practicable and in any event no later than 11 April 2014 and will
shortly be available on the Company's website at www.fidelity.co.uk/its.
Enquiries:
David Fallon - Company Secretary, FIL Investment International - 01737 836883
Keren Holland - Corporate Communications, FIL Investments International - 0207 074 5262
Christopher Pirnie - Head of UK Company Secretariat, FIL Investment
International - 01737 837929
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