Final Results

Fidelity Japanese Values PLC Annual Results Announcement for the year ended 31 December 2014 Chairman's Statement I have pleasure in presenting the Annual Report of Fidelity Japanese Values PLC for the year ended 31 December 2014. PERFORMANCE REVIEW Although the Japanese equity market suffered a setback immediately after the increase in the consumption tax in the spring and again in the autumn when the second quarter GNP figures were released, over the balance of the year the broad TOPIX index rose by 8.1%, whilst the Russell Nomura Mid/Small Cap Index was up by 12.8%, both in local currency terms. However, the depreciation of the yen over the same period, when it fell by 6.9% against sterling, meant that the broader market was up by only 0.7% and the Company's Reference Index by 5.1% in sterling terms. Thus, it is disappointing to have to report that the Company's NAV rose by only 3.1% over the year, with the negative impact of the currency and stock selection more than offsetting the positive effects of gearing. This performance did compare favourably with that of our peer group, however, which on average managed an improvement in NAV of only 0.5%. Despite this performance against our peers, the discount to NAV widened from 8.9% to 11.6% over the course of the year, leading to your Company's share price remaining flat. I am pleased to be able to report that it has picked up significantly since then. RESULTS AND DIVIDENDS The revenue column of the Income Statement shows a net loss on ordinary activities after taxation of £509,000 (2013: £331,000). As the revenue reserve was in deficit at 31 December 2014, the Directors do not recommend the payment of a dividend. GEARING The Company is permitted to gear through the use of long Contracts for Difference ("CFDs"). During the course of the year, the Portfolio Manager and Board became more optimistic on the outlook for the Japanese market, and as a result, total portfolio exposure by the end of the year was £113.5m, equating to gearing of 22.2% compared with 16.8% at the end of 2013. This is within the limits set by the Board. The Board continues to believe that utilising long CFDs remains the most flexible way to gear the Company, costing just £77,000. This is less than traditional debt finance, as the interest rate paid has been a low 0.4% per annum. THE BOARD As I noted in last year's Annual Report, the Board recognises that refreshing its membership from time to time can be beneficial. As a result, I am pleased to be able to announce that two new Directors were appointed to the Board on 17 November 2014, namely Mami Mizutori and Dominic Ziegler. Full biographical details on Ms Mizutori and Mr Ziegler can be found in the Annual Report. The elections of Ms Mizutori and Mr Ziegler will be proposed at the Annual General Meeting ("AGM"). The Board supports their election and recommends that shareholders vote in favour of the resolutions to elect them both to the Board. As part of the planned refreshment, Simon Fraser will retire from the Board at the AGM and not seek re-election. I should like to take this opportunity, on behalf of the Board, to thank Mr Fraser for his invaluable contribution to your Company, both as its original portfolio manager and as a Director on the Board over the last fifteen years. The objective of the Board refreshment process is to bring new talent to the Board but not at the cost of losing institutional and market knowledge, and fund management expertise. However, the Board has concluded that over time, the Board should revert to a membership of five. MANAGEMENT FEE ARRANGEMENTS As noted in last year's Annual Report, the management fee was reduced on 1 January 2014 to 0.85% of gross assets. As a result, the Company's ongoing charges declined from 1.80% in 2013 to 1.62% in 2014. This places the Company below the average of the peer group, but the Board will continue to monitor costs very closely and will keep the Management Fee under review. ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE The Board worked with its advisors in order to achieve compliance with the European Alternative Investment Fund Managers Directive ("AIFMD"), which came into effect on 22 July 2014. As a result the Board has appointed FIL Investment Services (UK) Limited (a Fidelity group company) to act as the Company's Alternative Investment Fund Manager ("the Manager"). FIL Investment Services (UK) Limited has delegated the portfolio management to FIL Investments International who previously acted as the Company's Manager. FIL Investments International continues to act as Company Secretary. An additional requirement of the AIFMD was to appoint a depositary on behalf of the Company to oversee the custody and cash arrangements of the Company. The Company has appointed J.P.Morgan Europe Limited to act as the Company's Depositary. J.P.Morgan Europe Limited is part of the same group of companies as JP Morgan Chase Bank which continues to act as the Company's banker and custodian. The full AIFMD disclosure is shown in the Annual Report. SUBSCRIPTION SHARES At the General Meeting on 26 August 2014, shareholders voted to approve the Bonus Issue of one subscription share for every five ordinary shares held by qualifying shareholders. Each subscription share gives the holder the right, but not the obligation, to subscribe for one ordinary share at the end of each month from the end of September 2014 until the end of April 2016 inclusive. The exercise price, which was based on the Company's NAV at 5.00pm on 26 August 2014, plus a 2% premium to the NAV, was set at 86.50p. Up until the end of the year, a total of 47,541 subscription shares were exercised, at which point the total number of subscription shares in issue was 22,743,320. Since the end of the year, a further 1,000 subscription shares have been exercised. Further details of the subscription shares may be found in the Director's Report of the Annual Report. ANNUAL GENERAL MEETING The Annual General Meeting will be held at 11.30am on 4 June 2015 at the offices of Fidelity at 25 Cannon Street, London EC2M 5TA (St Paul's or Mansion House tube station) and all investors are encouraged to attend. The Board looks forward to the opportunity to speak to shareholders of the Company. The Portfolio Manager will attend and will give a presentation on the past year and the prospects for the coming year. OUTLOOK Prime Minister Shinzo Abe's decision to postpone a second increase in the consumption tax is a positive both for economic growth and the market. Employment conditions are becoming increasingly tight, nominal wages are rising steadily and spending by the older members of society, who hold the bulk of the country's financial assets, is robust. In addition, the Bank of Japan's recent move to expand its quantitative easing programme has reaffirmed its commitment to achieving sustainable inflation. Meanwhile, corporate tax reform and asset reallocation at the Government Pension Investment Fund (Japan) should turn out to be major supports for the market. The apparent lack of momentum behind the structural reforms pledged in the third of the three arrows of Abenomics poses a risk, and sentiment has flagged to some degree over the last year as a result of the slow progress. However, structural reforms are beginning to be implemented at the micro level. For example, Japan's new stewardship and corporate governance codes, in addition to the introduction of the JPX–Nikkei 400 Index, are focusing the minds of Japanese corporates. Many companies are actively taking steps to raise corporate value by boosting shareholder payouts and improving their return on equity, which can only add to the attraction of the Japanese market. Although the Japanese economy entered a technical recession following the consumption tax increase, corporate earnings have continued to grow. The earnings revision index in Japan has been in positive territory since late-May of last year, whereas the relevant indices for most other regions remain negative. Company guidance continues to look on the conservative side and the yen has weakened significantly more than many companies assumed in their projections. Combined with the recent oil price decline, moderately stronger external demand and the prospect of corporate tax cuts from April 2015, we are likely to see upward earnings revisions in coming months. From a valuation perspective, Japanese stocks are still historically cheap. The market trades on a prospective price–to–earnings discount to other developed markets and even has a higher prospective dividend yield than the US market. It is indeed rare for Japan to offer such a discount and this appears to present a good opportunity for investors to capture positive returns in the Japanese market. Considering the coordinated pro-growth policies and the fundamental changes in corporate behaviour that are occurring, and the fact that Japan is among the few major markets to offer a valuation discount, the mid-term outlook for Japanese equities is attractive. David Robins Chairman 30 March 2015 Portfolio Manager's Review FIL INVESTMENTS SERVICES (UK) LIMITED The Company is managed by FIL Investment Services (UK) Limited (which is authorised and regulated by the Financial Conduct Authority). It is part of the FIL Limited group which, as at 31 December 2014, had total assets under management exceeding £175.9 billion. FIL Investment Services (UK) Limited has delegated the portfolio management of the Company to FIL Investments International. SHINJI HIGAKI Shinji Higaki (Portfolio Manager from September 2007) also manages retail Japanese smaller companies funds and Japanese domestic institutional mandates. He joined Fidelity in 1999 as an equity research analyst. He has an MBA from the London Business School and a Bachelor of Arts from Keio University. MARKET REVIEW Positive returns in the Japanese equity market were generated largely during the last two months of the year. There were two events behind the year-end rally. First, the Bank of Japan's ("BoJ") move to expand its quantitative and qualitative easing ("QQE") programme in November reaffirmed its commitment to achieving sustainable inflation. This triggered a reversal in the yen/dollar rate, driving the yen to a six-year low of ¥121.85 against the US dollar in December. Second, the leading Liberal Democratic Party's victory in a snap general election for Japan's lower house of parliament in December worked as a vote of confidence for Prime Minister Shinzo Abe's decision to postpone a second sales tax hike. This also reset the clock on the four-year electoral cycle, giving him more time to implement his economic revitalisation plans. Throughout the year, the inverse correlation between the yen and the Japanese equity market remained strong. During the year-end rally, a weaker yen, combined with lower crude oil prices, created tailwinds for transportation, chemicals and technology hardware, whereas resource-related stocks such as steel, oil and coal producers performed poorly. Small-cap stocks fared better than their large-cap counterparts over the year, supported by robust growth prospects and low valuations. PERFORMANCE REVIEW The Company's NAV increased from 79.02p to 81.48p during the year under review, but it underperformed the Reference Index. As demonstrated by the Attribution Analysis below, the market's movement added 10.13p to the NAV per share, stock selection detracted 1.71p and gearing added 1.37p. Although the devaluation of the yen has improved the competitiveness of the Japanese economy and helped drive the re-rating of Japanese equities, its effect when re-valuing yen-based assets into sterling had the effect of detracting 7.25p from the NAV per share. Year ended 31 December 2014 Attribution Analysis (pence) NAV at 31 December 2013 79.02 Impact of the Reference Index (in yen terms) +10.13 Impact of Reference Index income (in yen terms) +1.56 Impact of stock selection (relative to the Index) -1.71 Impact of gearing (in yen terms) +1.37 Impact of exchange rate -7.25 Impact of charges -1.27 Impact of cash -0.14 Impact of subscription share issue costs -0.17 Gearing Expenses -0.06 NAV at 31 December 2014 81.48 Over the year, stock selection in the technology sector supported returns, with niche global manufacturers adding value. A combination of a weaker yen and robust global demand contributed to margin expansion. Major contributors included Japan Aviation Electronics, Hamamatsu Photonics and Rohm. In the wholesale sector, used car auctioneer Gulliver International, which struggled in 2013, recovered lost ground. Conversely, holdings in the retail trade sector performed poorly, as an impending consumption tax hike led to increased uncertainty. An overweight position in Seria accounted for a large part of the underperformance. Holdings in the information & communication sector also struggled; the position in WirelessGate was one of the largest detractors. Elsewhere, stock selection in the service sector was mixed. Internet-related stocks were generally weak, relinquishing a portion of last year's solid gains. Strong contributions from M3, Tosho, Resorttrust and N. Field were more than offset by losses from key holdings in Livesense, Round One, Sanix and Kakaku.com. Principal Contributors M3 operates medical portal sites dedicated to health care professionals in Japan, USA, South Korea and Europe. Strong earnings growth is driven by overseas expansion, particularly in China. It also provides large-scale clinical trial services for pharmaceutical companies, which are expected to give additional impetus to M3's mid to long term growth. M3 has consistently added value over time since the position was initiated in 2007. Japan Aviation Electronics is another good performer in the portfolio. It is a niche manufacturer of connectors used for smartphones and automobiles. It is benefiting from secular growth in electronic parts used for automobiles and has successfully maintained a large market share in connectors used for mobile devices. Strong sales growth and a weaker yen fuelled expectations for margin expansion throughout the year. Tosho operates sports club facilities and hotels primarily in the Aichi prefecture. Strong earnings momentum is driven by new openings of sports clubs and hotels. Business expansion outside Aichi is expected to be the key earnings driver over the medium term. Hamamatsu Photonics is the world's leading supplier of ultrasensitive light sensors that have potential uses in a wide range of fields, including medical, dental and chemical analysis, scientific research and transportation. It has a competitive niche in the global diagnostic imaging equipment market, with exposure to the high-end and high-margin PET/CT, PET/MRI, and digital X-ray systems. Rohm is another beneficiary of a weaker yen and increasing demand for power semiconductors for automotive use. Its products include driver integrated circuits ("IC") for light-emitting diode (LED) headlights, semiconductors for infotainment systems, and driver ICs and silicon carbide inverters to produce high efficiency motors with built-in inverters. Principal detractors Livesense operates job placement and rental apartment search websites. It was the single largest detractor from returns. Although the company was well-positioned to benefit from increasing job offers, its profit was under pressure from a decline in successful job placements and rising advertisement costs. As no near term improvement in the company's cost structure was seen, the position was sold in December 2014. NuflareTechnology is a manufacturer of semiconductor production equipment with a dominant global market share in mask writers. Its share price fell on earnings disappointments and as a result of earnings downgrades, its valuations looked stretched. The position was sold in August 2014. Seria operates a nationwide chain of 100-yen shops in Japan, an equivalent of a pound store in the UK. Despite weak consumption after the sales tax hike, Seria's same store sales have continued to grow on a year-over-year basis. However, concerns about rising costs of imported goods due to the yen's weakness weighed on its share price. The overweight position in the company is maintained, as Seria's inventory management and demand forecast capabilities make it a long term winner in the retail sector. Aeon Mall is another retailer that fared poorly amid weak consumption after the sales tax hike. It operates a chain of large-scale shopping malls in Japan. Rents received by Aeon Mall are highly sensitive to changes in sales at tenant stores, and rental income after the tax hike in April has been weak. The company also scaled back its domestic mall rollout plan in view of the current shortage of construction workers. Although the impact of weaker sales growth was within expectations, the change to its mall opening plans has negative implications for its mid term growth scenario. The position was sold in November 2014. WirelessGate provides Wi-Fi services in public spaces in Japan. It was one of the major contributors to returns in the first half of 2014, but its share price dropped sharply in response to an unexpected senior management change. The former CEO was appointed only six months ago in order to drive the new Wi-Fi environment enabler service. However, the founder of the company took over the position to accelerate an expansion of the existing MVNO (Mobile Virtual Network Operations) business. Although its profit margins are currently under pressure given the start-up costs of a new high-speed connection service, its long term growth scenario remains intact. Therefore, it remains in the portfolio. PORTFOLIO REVIEW Stock selection is based on a thorough analysis of company fundamentals with particular emphasis placed on first-hand information from companies, which is cross-checked with supply-chain and macroeconomic data. The portfolio aims to capitalise on the growth potential of smaller companies. Being relatively young and dynamic, these companies are often able to create their own niche market and may therefore be capable of expanding their business regardless of the external economic environment. Management's track record in raising shareholder returns is also a key consideration. Over the year under review, the Company maintained a diversified portfolio with balanced exposure to companies benefiting from global growth, those creating their own niche or driving change in their own industry, and those leveraging a shift in consumer behaviour in the domestic market. Positions in niche technology exporters were taken. These stocks benefited from a weaker yen and global market expansion and included Sysmex (blood testing equipment), Nakanishi (dental drilling equipment), Seiko Epson (inkjet printers) and Dai-ichi Seiko (automotive parts). Despite the near term headwinds, the Portfolio Manager feels that the long term growth potential of companies benefiting from a broad shift towards internet-based commercial and consumer services remains intact. This is reflected in the large overweight positions in the services and information & communication sectors. The holding in Sanix was sold. This was the single largest stock position during the first half of the year under review. It is a solar power integrator that installs small-scale solar panels for commercial and residential use. It was considered to be a beneficiary of increasing solar power system installations supported by the government's Feed In Tariff ("FIT") programme for purchasing clean energy. However, it was unclear just how sustainable the FIT programme would be vis-à-vis rapidly falling oil prices. As a result, power companies suspended new applications for solar power installation, thereby forcing Sanix to downgrade its earnings projections. The Portfolio Manager's stance on stock valuation is to buy into weakness and sell into strength - a strategy that can result in some trading activity given the volatility of the stocks held in the portfolio. The portfolio turnover during 2014 was 56.7%, which is lower than the previous year's 86.3%. OUTLOOK Since the end of October, authorities in Japan have delivered three policy initiatives: a boost to QQE by the BoJ; asset reallocation by the Government Pension Investment Fund ("GPIF"); and the deferral of the second sales tax hike. These recent developments notwithstanding, slow progress in areas such as labour market reforms and Trans-Pacific Partnership negotiations have fuelled scepticism about Prime Minister Abe's third arrow. However, we are seeing positive developments on the ground in terms of micro-level reforms. The new JPX Nikkei 400 Index has spurred companies to boost shareholder returns and to improve capital efficiency. By investing in assets that track the index, the BoJ and the GPIF are also supporting steps to improve returns on equity. The Stewardship Code is forcing institutional shareholders in Japan to actively engage with investee companies and hold boards accountable, and all listed companies will have to comply with a new corporate governance code, which is due to be introduced this year. Despite lingering concerns about macroeconomic headlines, Japanese companies' earnings results highlighted solid fundamentals in the corporate sector. TSE1-listed companies (excluding financials) posted a 5% increase in sales and 11% growth in recurring profits for the six months to October 2014. In addition to the benefits of a weaker yen, restructuring and cost saving measures contributed to the improvement in earnings. Moreover, lower oil prices and a weak yen create further upside in corporate earnings, while consensus earnings estimates remain somewhat conservative. More than ever, there is a broad-based commitment to reforms and, with returns going up, we can also expect valuations to rise. It is also important to note that Japanese corporate fundamentals are relatively insulated from the recent turmoil in the eurozone. Your Portfolio Manager believes that Japan could offer attractive investment opportunities in companies with long term growth potential. In addition, he also believes that there are abundant stock-picking opportunities given the diverse earnings growth drivers, ranging from a cyclical upturn in demand to a shift from stakeholder-oriented to shareholder-centric management. Shinji Higaki Portfolio Manager 30 March 2015 Strategic Report 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 systems of risk management and of internal controls 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 regularly. 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 principal risks and uncertainties faced by the Company: 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 performance. 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 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 Reference Index and target. The Company has a clearly defined strategy and investment remit which is 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 Reference Index 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. No Shares were repurchased during the year. The Company's share price, NAV and discount volatility are monitored daily by the Manager and considered by the Board regularly. 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. Gearing Risk The Company has the option to make use of 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 solely 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. The regulation which demanded the most attention from the Board in this reporting year was the Alternative Investment Fund Managers Directive. Details can be found in the Chairman's Statement of the Annual Report . An additional requirement of the AIFMD was to appoint a depositary on behalf of the Company to oversee the custody and cash arrangements of the Company. JP Morgan Chase Bank acts as the Company's current banker and custodian and will continue to do so. The Company has extended this arrangement and appointed J.P. Morgan Europe Limited, part of the same group of companies as JP Morgan Chase Bank, to act as the Company's Depositary. Operational Risks The Company has no employees and relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. The Company is dependent on the Manager's control systems and those of its Registrar, Custodian and Depositary, 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, Custodian and Depositary 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. Financial Instrument Risks The financial instrument risks faced by the Company are shown in Note 17 to the Financial Statements of 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 or losses. 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. Directors' Report RELATED PARTY TRANSACTIONS All of the Directors are non-executive. 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 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. GOING CONCERN The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Company, its cash flows, liquidity position and gearing are described in the Financial Statements and Notes thereto in the Annual Report. The Company's objectives, policies and processes for managing its capital, financial risk management objectives, details of financial instruments and its exposures to credit and liquidity risk are also set out in the Strategic Report and in the Notes to the Financial Statements in the Annual Report. The Company's assets consist mainly of securities which are readily realisable and, where outsourcing arrangements are in place including registrar, custodian and depositary services, alternative service providers are readily available. As a consequence, the Directors believe that the Company is well placed to manage its business risks. The Board receives regular reports from the Manager and the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In the light of the above, the Directors continue to adopt the going concern basis of accounting in preparing the annual financial statements. 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; • prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and • confirm that the Financial Statements are fair, balanced and understandable. 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 United Kingdom Generally Accepted Accounting Principles, 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 Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy. Approved by the Board on 30 March 2015 and signed on its behalf. David Robins Chairman Income Statement for the year ended 31 December 2014 2014 2013 revenue capital total revenue capital total Notes £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments designated at fair value through profit or loss 8 - 1,053 1,053 - 13,932 13,932 Gains on derivative instruments held at fair value through profit or loss 9 - 2,848 2,848 - 9,665 9,665 Income 2 1,366 - 1,366 1,440 - 1,440 Investment management fee 3 (954) - (954) (1,076) - (1,076) Other expenses 4 (711) - (711) (479) - (479) Exchange losses on other net assets (26) (589) (615) (59) (654) (713) ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)/ return before finance costs and taxation (325) 3,312 2,987 (174) 22,943 22,769 Finance costs 5 (77) - (77) (73) - (73) ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)/ return on ordinary activities before taxation (402) 3,312 2,910 (247) 22,943 22,696 Taxation on (loss)/return on ordinary activities 6 (107) - (107) (84) - (84) ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)/ return on ordinary activities after taxation for the year (509) 3,312 2,803 (331) 22,943 22,612 ========== ========== ========== ========== ========== ========== (Loss)/return per ordinary share - undiluted and diluted 7 (0.45p) 2.91p 2.46p (0.30p) 20.64p 20.34p ========== ========== ========== ========== ========== ========== 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. The Notes form an integral part of these Financial Statements. Reconciliation of Movements in Shareholders' Funds forthe year ended 31 December 2014 share capital share premium redemption other capital revenue total capital account reserve reserve reserve reserve equity Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 Opening shareholders' funds as at 1 January 2013 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 12 4,308 5,147 - - - - 9,455 Exercise of rights attached to subscription shares and conversion into ordinary shares 12 (862) 862 - - - - - Repurchase of ordinary shares 12 (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 Issue of ordinary shares on exercise of rights attached to subscription shares 12 12 29 - - - - 41 Net return/ (loss) on ordinary activities after taxation for the year - - - - 3,312 (509) 2,803 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Closing shareholders' funds as at 31 December 2014 28,501 6,741 2,621 57,568 11,766 (14,311) 92,886 ========== ========== ========== ========== ========== ========== ========== The Notes form an integral part of these Financial Statements. Balance Sheet as at 31 December 2014 Company number 2885584 2014 2013 Notes £'000 £'000 Fixed assets Investments designated at fair value through profit or loss 8 82,486 84,031 ---------- ---------- Current assets Derivative assets held at fair value through profit or loss 9 7,296 6,263 Debtors 10 930 309 Cash at bank 3,176 662 ---------- ---------- 11,402 7,234 ---------- ---------- Creditors Derivative liabilities held at fair value through profit or loss 9 (139) (421) Creditors 11 (863) (802) ---------- ---------- (1,002) (1,223) ---------- ---------- Net current assets 10,400 6,011 ---------- ---------- Total net assets 92,886 90,042 ========== ========== Capital and reserves Share capital 12 28,501 28,489 Share premium account 13 6,741 6,712 Capital redemption reserve 13 2,621 2,621 Other reserve 13 57,568 57,568 Capital reserve 13 11,766 8,454 Revenue reserve 13 (14,311) (13,802) ---------- ---------- Total equity shareholders' funds 92,886 90,042 ========== ========== Net asset value per ordinary share 14 81.48p 79.02p ========== ========== The Financial Statements of the Annual Report were approved by the Board of Directors on 30 March 2015 and were signed on its behalf by: David Robins Chairman The Notes form an integral part of these Financial Statements. Cash Flow Statement for the year ended 31 December 2014 2014 2013 Notes £'000 £'000 Operating activities Investment income received 943 979 CFD dividends received 221 278 Investment management fee paid (969) (992) Directors' fees paid (116) (82) Other cash payments (878) (272) ---------- ---------- Net cash outflow from operating activities 15 (799) (89) ---------- ---------- Finance costs Interest paid on long CFDs (70) (73) ---------- ---------- Net cash outflow from finance costs (70) (73) ---------- ---------- Financial investments Purchase of investments (64,074) (98,848) Disposal of investments 66,473 84,792 ---------- ---------- Net cash inflow/(outflow) from financial investments 2,399 (14,056) ---------- ---------- Derivative activities Proceeds of long CFD positions closed 1,533 5,463 ---------- ---------- Net cash inflow from derivative instruments 1,533 5,463 ---------- ---------- Net cash inflow/(outflow) before financing 3,063 (8,755) ---------- ---------- Financing Exercise of rights attached to subscription shares 40 9,456 Repurchase of ordinary shares - (59) ---------- ---------- Net cash inflow from financing 40 9,397 ---------- ---------- Increase in cash 16 3,103 642 ========== ========== The Notes form an integral part of these Financial Statements. Notes to the Financial Statements 1 ACCOUNTING POLICIES The Company has prepared its Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts ("SORP") issued by the Association of Investment Companies ("AIC"), in January 2009. a) Basis of accounting - The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of fixed asset investments and derivative assets and liabilities, and on the assumption that approval as an investment trust will continue to be granted by HM Revenue and Customs. b) Income - Income from equity investments is credited to the Income Statement on the date on which the right to receive the payment is established. Overseas dividend income includes withholding tax deducted at source. Interest receivable on short term deposits is dealt with on an accruals basis. Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend foregone is recognised in the capital column of the Income Statement. Derivative income from dividends on long Contracts For Difference ("CFDs") is credited to the revenue column of the Income Statement on the date on which the right to receive the payment is established. c) Special dividends - Special dividends are treated as a capital receipt or a revenue receipt depending on the facts and circumstances of each particular case. d) Expenses - All expenses are accounted for on an accruals basis and are charged in full to the revenue column of the Income Statement. e) Taxation - Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, at the balance sheet date, where transactions or events that result in an obligation to pay more, or a right to pay less tax in the future have occurred. A deferred taxation asset is recognised when it is more likely than not that the asset will be recoverable. f) Foreign currency - The Directors, having regard to the currency of the Company's share capital and the predominant currency in which its investors operate, have determined the functional currency to be UK sterling. Transactions denominated in foreign currencies are translated into UK sterling at the rate of exchange ruling as at the date of transactions. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. All capital gains and losses, including exchange movements on the translation of foreign currency assets and liabilities, are dealt with in the capital column of the Income Statement. g) Valuation of investments - This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company's Board of Directors. Accordingly, investments are designated by the Company as "at fair value through profit or loss", which is initially taken to be their cost and is subsequently measured as follows: • Investments listed overseas are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed, otherwise at fair value based on published price quotations. In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within gains and losses on investments and has disclosed them in Note 8 of the Annual Report. h) Derivative instruments - Some of the Company's exposure to Japanese equities is through the use of long CFDs. The gearing level is monitored and reviewed by the Board on an ongoing basis. CFDs are measured at fair value which is the difference between the settlement price of the contract and the fair value of the underlying shares in the contract, which is calculated in accordance with policy 1(g). Gains and losses in the fair value of the CFDs are included in the 'Gains on derivative instruments held at fair value through profit or loss' in the capital column of the Income Statement. Interest paid on the long CFDs is included in 'Finance costs' in the revenue column of the Income Statement. i) Capital reserve - The following are accounted for in capital reserve: • Gains and losses on the disposal of investments and derivative instruments; • Changes in the fair value of the investments and derivative instruments held at the year end; • Foreign exchange gains and losses of a capital nature; • Dividends receivable which are capital in nature; and • Costs of repurchasing ordinary shares. As a result of technical guidance by the Institute of Chartered Accountants in England and Wales in TECH 02/10: Distributable Profits, changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as "Capital reserve" in the Reconciliation of Movements in Shareholders' funds and the Balance Sheet. At the Balance Sheet date all investments held by the Company were listed on a recognised stock exchange, except the CFD positions, but all were considered to be readily convertible to cash. 2014 2013 £'000 £'000 2 INCOME Income from investments designated at fair value through profit or loss Overseas dividends 1,071 1,138 Income from derivative instruments held at fair value through profit or loss Dividends on long CFDs 295 302 ---------- ---------- Total income 1,366 1,440 ========== ========== 2014 2013 £'000 £'000 3 INVESTMENT MANAGEMENT FEE Investment management fee 954 1,076 ========== ========== FIL Investment Services (UK) Limited (a Fidelity group company) is the Company's Alternative Investment Fund Manager and has delegated the portfolio management to FIL Investments International, who previously acted as the Company's Manager. With effect from 1 January 2014 the investment management fee was reduced from 1.00% to 0.85% per annum, based on assets under management. Further details of the services provided and fees paid are given in the Directors' Report of the Annual Report. 2014 2013 £'000 £'000 4 OTHER EXPENSES AIC fees 6 6 Custody fees 11 13 Depositary fees 4 - Directors' expenses 38 40 Directors' fees1 118 113 Legal and professional fees2 103 45 Marketing expenses 84 100 Printing and publication expenses 48 54 Registrars' fees 26 31 Subscription share issue costs 193 - Fees payable to the Company's Independent Auditor for the audit of the annual financial statements 23 23 Other expenses 57 54 ---------- ---------- 711 479 ========== ========== 1 Details of the breakdown of Directors' fees are provided in the Directors' Remuneration Report of the Annual Reprot 2 The significant increase in costs is as a result of professional fees incurred in relation to the implementation of AIFMD. These fees represent a one-off cost 2014 2013 £'000 £'000 5 FINANCE COSTS Interest paid on long CFDs 77 73 ========== ========== 2014 2013 revenue capital total revenue capital total £'000 £'000 £'000 £'000 £'000 £'000 TAXATION ON RETURN ON ORDINARY 6 ACTIVITIES a) Analysis of taxation charge for the year Overseas taxation suffered (Note 6b) 107 - 107 84 - 84 ======= ======= ===== ======== ======== ====== b) Factors affecting the taxation charge for the year The taxation assessed for the year is lower than the standard rate of UK corporation tax for an investment trust company of 21.49% (2013: 23.25%). The differences are explained below. 2014 2013 revenue capital total revenue capital total £'000 £'000 £'000 £'000 £'000 £'000 Net (loss)/ return on ordinary activities before taxation (402) 3,312 2,910 (247) 22,943 22,696 ========== ========== ========== ========== ========== ========== Net (loss)/ return on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 21.49% (2013: 23.25%) (86) 712 626 (57) 5,334 5,277 Effects of: Gains on investments not taxable1 - (712) (712) - (5,334) (5,334) Income not included for taxation purposes (230) - (230) (265) - (265) Increase in excess expenses for the year 316 - 316 322 - 322 Overseas taxation 107 - 107 84 - 84 ---------- ---------- ---------- ---------- ---------- ---------- Current taxation charge for the year (Note 6a) 107 - 107 84 - 84 ========== ========== ========== ========== ========== ========== 1 Investment trust companies are exempt from UK taxation on capital gains if they meet the HM Revenue & Customs criteria set out in Section 1159 of the Corporation Tax Act 2010 c) The Company has unrelieved excess tax losses of £18,578,000 (2013: £ 17,108,000). It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised. 2014 2013 revenue capital total revenue capital total (LOSS)/RETURN PER ORDINARY SHARE - UNDILUTED AND 7 DILUTED Net (loss)/return per ordinary share - pence (0.45) 2.91 2.46 (0.30p) 20.64p 20.34p ======= ======= ===== ======= ======= ======= Net (loss)/return on ordinary activities after taxation for the year - £'000 (509) 3,312 2,803 (331) 22,943 22,612 ======= ======= ===== ======= ======= ======= The (loss)/return per ordinary share is based on 113,966,379 ordinary shares (2013: 111,140,691) being the weighted average number of ordinary shares in issue. There are no diluted (losses)/returns for the year because the average ordinary share price was below the exercise price of the subscription shares in issue. There were no diluted (losses)/returns in 2013 because the average ordinary share price, in the period prior to the final exercise date, was below the exercise price of the subscription shares in issue. 2014 2013 £'000 £'000 8 INVESTMENTS Investments designated at fair value through profit or loss Listed overseas investments 82,486 84,031 ========= ========= = = Opening fair value of investments Opening book cost 80,293 56,032 Opening investment holding gains 3,738 (945) ---------- ---------- 84,031 55,087 Movements in the year Purchases at cost 64,119 97,539 Sales - proceeds (66,717) (82,527) Sales - (losses)/gains in the year (1,731) 9,249 Movement in investment holding gains in the year 2,784 4,683 ---------- ---------- Closing fair value of investments 82,486 84,031 ========== ========== Closing book cost 75,964 80,293 Closing investment holding gains 6,522 3,738 ---------- ---------- Closing fair value of investments 82,486 84,031 ========== ========== Gains on investments designated at fair value through profit or loss - for the year (Losses)/gains on sales of investments (1,731) 9,249 Investment holding gains 2,784 4,683 ---------- ---------- 1,053 13,932 ========== ========== Gains on investments in the year are shown net of investment transaction costs incurred Purchases 61 101 Sales 52 79 ---------- ---------- 113 180 ========== ========== The portfolio turnover rate for the year was 56.7% (2013: 86.3%). 2014 2013 portfolio portfolio fair value exposure fair value exposure £'000 £'000 £'000 £'000 9 DERIVATIVE INSTRUMENTS Derivative instruments held at fair value through profit or loss Long CFDs - assets 7,296 28,109 6,263 18,150 Long CFDs - liabilities (139) 2,954 (421) 2,968 ---------- ---------- ---------- ---------- 7,157 31,063 5,842 21,118 ========== ========== ========== ========== 2014 2013 £'000 £'000 Gains on derivative instruments held at fair value through profit or loss - for the year Gains on long CFD positions closed 1,533 5,463 Movement in investment holding gains on long CFDs 1,315 4,202 ---------- ---------- 2,848 9,665 ========== ========== 2014 2013 £'000 £'000 10 DEBTORS Securities sold for future settlement 375 131 Amount receivable on ordinary shares issued 1 - Accrued income 187 118 Other debtors 367 60 ---------- ---------- 930 309 ========== ========== 2014 2013 £'000 £'000 11 CREDITORS Securities purchased for future settlement 404 359 Other creditors 459 443 ---------- ---------- 863 802 ========== ========== 2014 2013 shares £'000 shares £'000 12 SHARE CAPITAL Issued, allotted and fully paid: Ordinary shares of 25 pence each Beginning of the year 113,954,834 28,489 96,822,685 24,206 Issue of ordinary shares on the conversion of rights attached to subscription shares 47,541 12 17,232,149 4,308 Repurchase of ordinary shares - - (100,000) (25) ---------- ---------- ---------- ---------- End of the year 114,002,375 28,501 113,954,834 28,489 ========== ========== ========== ========== 2014 bonus issue of subscription shares of 0.001 pence each Beginning of the year - - - - Bonus issue of subscription shares 22,790,861 - - - Exercise of rights attached to subscription shares and conversion into ordinary shares (47,541) - - - ---------- ---------- ---------- ---------- End of the year 22,743,320 - - - ========== ========== ========== ========== 2009 bonus issue of subscription shares of 5 pence each Beginning of the year - - 17,232,149 862 Exercise of rights attached to subscription shares and conversion into ordinary shares - - (17,232,149) (862) ---------- ---------- ---------- ---------- End of the year - - - - ========== ========== ========== ========== Total share capital 28,501 28,489 ========== ========== The 2014 bonus issue of subscription shares to ordinary shareholders took place on 27 August 2014 and was on the basis of one subscription share for every five ordinary shares held. Each subscription share gave the holder the right, but not the obligation, to subscribe for one ordinary share upon payment of the subscription price of 86.50 pence, on the last business day of each month, commencing in September 2014. The final date to exercise these rights will be 29 April 2016. After 29 April 2016, the Company will appoint a trustee who will exercise any rights remaining that have not been exercised by shareholders, providing that by doing so a profit can be realised. To realise a profit the sale proceeds from selling the resulting ordinary shares in the market would need to be in excess of the 86.50 pence per share cost of exercising the rights, plus any related expenses and fees. The resulting profit will be paid to the holders of those outstanding subscription shares. The 2009 bonus issue of subscription shares to ordinary shareholders took place on 11 November 2011 and was on the basis of one subscription share for every five ordinary shares held. Each subscription share gave the holder the right, but not the obligation, to subscribe for one ordinary share upon payment of the subscription price of 55.00 pence, on the last business day of each month, commencing in February 2010. The final date to exercise those rights was 28 February 2013. After 28 February 2013, the Company appointed a trustee who exercised all the remaining rights attached to the subscription shares, that had not been exercised by shareholders. The resulting ordinary shares were sold in the market and the profit realised, being the sale proceeds less the 55.00 pence per share cost of exercising the rights and any related expenses and fees, was paid to the holders of those outstanding subscription shares. 13 RESERVES The "share premium account" represents the amount by which the proceeds from the issue of ordinary shares on the exercise of rights attached to subscription shares, exceeds the nominal value of those ordinary shares. It cannot be used to fund share repurchases and it is not distributable by way of dividend. The "capital redemption reserve" maintains the equity share capital of the Company and represents the nominal value of shares repurchased and cancelled. It cannot be used to fund share repurchases and it is not distributable by way of dividend. The "other reserve" was created in 1999 when the share premium account at that time was cancelled. It can be used to fund share repurchases. It is not distributable by way of dividend. The "capital reserve" reflects realised gains or losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives held and other income and costs recognised in the capital column of the Income Statement. It can be used to fund share repurchases and it is distributable by way of dividend. The Board has stated that it has no current intention to pay dividends out of capital. The "revenue reserve" represents the retained revenue losses recognised in the revenue column of the Income Statement. It could be distributed by way of dividend if it were not in deficit. 14 NET ASSET VALUE PER SHARE The net asset value per ordinary share is based on net assets of £92,886,000 (2013: £90,042,000) and on 114,002,375 (2013: 113,954,834) ordinary shares, being the number of ordinary shares in issue at the year end. There is no dilution of the net asset value per ordinary share because the net asset value per ordinary share is below the 86.50 pence per share exercise price of the subscription shares in issue. There was no dilution of the net asset value per ordinary share at 31 December 2013 because there were no subscription shares in issue at that date. 2014 2013 £'000 £'000 15 RECONCILIATION OF NET (LOSS)/RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES Net return before finance costs and taxation 2,987 22,769 Capital return for the year (3,312) (22,943) ---------- ---------- Net revenue loss before finance costs and taxation (325) (174) (Increase)/decrease in other debtors (376) 57 Increase in other creditors 9 112 Overseas taxation suffered (107) (84) ---------- ---------- Net cash outflow from operating activities (799) (89) ========== ========== 2014 2013 £'000 £'000 RECONCILIATION OF NET CASH MOVEMENTS TO MOVEMENT 16 IN NET FUNDS Net funds at the beginning of the year 662 674 ---------- ---------- Net cash inflow 3,103 642 Exchange movements (589) (654) ---------- ---------- Change in net funds 2,514 (12) ---------- ---------- Net funds at the end of the year 3,176 662 ========== ========== cash exchange 2014 flows movements 2013 £'000 £'000 £'000 £'000 Analysis of net funds Cash at bank 3,176 3,103 (589) 662 ========= ========= ========= = = ========== = 17 FINANCIAL INSTRUMENTS MANAGEMENT OF RISK The general risk analysis undertaken by the Board and its overall policy approach to risk management are set out in the Strategic Report of the Annual Report. This Note is incorporated in accordance with Financial Reporting Standard 29: Financial Instruments: Disclosures ("FRS 29") and refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company's financial instruments comprise: • Equity shares held in accordance with the Company's investment objective and policies; • Derivative instruments which comprise of long CFDs; and • Cash, liquid resources and short term debtors and creditors that arise from its operations. The risks identified by FRS 29 arising from the Company's financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instruments risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting period. Market price risk Interest rate risk The Company finances its operations through share capital and its retained reserves. In addition, the Company has a geared exposure to Japanese equities through the use of long CFDs which incur funding costs and provide collateral in yen. It is, therefore, exposed to financial risk as a result of increases in yen interest rates. Interest rate risk profile The values of the Company's financial instruments that are exposed to movements in interest rates are shown below: 2014 2013 £'000 £'000 Exposure to financial instruments that bear interest Gearing effect of exposure to long CFDs 23,906 15,276 ---------- ---------- Exposure to financial instruments that earn interest Cash at bank 3,176 662 ---------- ---------- Net exposure to financial instruments that bear interest 20,730 14,614 ========== ========== Foreign currency risk The Company's total net assets and total return on ordinary activities can be affected by foreign exchange movements because the Company has assets, liabilities and income which are denominated in yen whereas the Company's base currency is UK sterling. Three principal areas have been identified where foreign currency risk could impact the Company: • Movements in exchange rates affecting the value of investments and long CFDs; • Movements in exchange rates affecting short term timing differences; and • Movements in exchange rates affecting income received. The Company does not hedge the UK sterling value of investments or other net assets priced in yen or other currencies by the use of derivative instruments. Derivative instruments have been used for gearing rather than hedging purposes. The Company may also be subject to short term exposure from exchange rate movements, for example between the date when an investment is bought or sold and the date when settlement of the transaction occurs. Currency exposure of financial assets The Company's financial assets comprise equity investments, the exposure to the investments underlying the long CFDs, short term debtors and cash. The currency profile of these financial assets is shown below: 2014 investments portfolio designated at fair exposure short value through through term profit or loss long CFDs debtors cash total £'000 £'000 £'000 £'000 £'000 Financial assets held in yen 82,486 31,063 844 3,169 117,562 ======= ===== ======= ========== ========== === ===== === 2013 investments designated at fair exposure short value through profit through term or loss long CFDs debtors cash total £ £'000 £'000 £'000 '000 £'000 Financial assets held in yen 84,031 21,118 249 588 105,986 ==== ========= ======= ==== ======== ========== = === == == Currency exposure of financial liabilities The Company finances its investment activities through its share capital and retained reserves and it has a geared exposure to Japanese equities through the use of long CFDs. The Company's financial liabilities comprise the exposure to the investments underlying the long CFDs, less the fair value of those long CFDs, and other short term creditors. The currency profile of these financial liabilities is shown below: 2014 gearing effect of short term exposure to long CFDs creditors total £'000 £'000 £'000 Financial liabilities held in yen 23,906 405 24,311 ====== ========== ========== ==== 2013 gearing effect of short term exposure to long CFDs creditors total £'000 £'000 £'000 Financial liabilities held in yen 15,276 335 15,611 ======= ========== ========== === Other price risk Other price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company may suffer through holding market positions in the face of price movements. The Investment Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from long CFD positions, mainly to do with the underlying exposures, are assessed by the Manager's specialist derivative instruments team. Liquidity risk The Company's assets mainly comprise readily realisable securities, which can be sold easily to meet funding commitments if necessary. Short term flexibility is achieved by the use of overdraft facilities as required. Counterparty risk All securities and derivative instruments are transacted with brokers and carry the risk that the counterparty to a transaction may not meet its financial obligations. In accordance with the risk management process which the Manager employs, the Manager will seek to minimise such risk by only entering into transactions with counterparties which it believes to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk through the use of internal and external credit agency ratings and evaluates derivative instrument credit risk exposure. For Over The Counter ("OTC") derivative transactions, in accordance with the terms of International Swap Dealers Association ("ISDA") market standard derivative contracts, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2014, £7,916,000 (2013: £5,615,000) was held in government bonds in a segregated collateral account, on behalf of the Company, to reduce the exposure to counterparty risk of the Company. Credit risk Investments may be adversely affected if any of the institutions with which money is deposited suffers insolvency or other financial difficulties. All transactions are carried out with a large number of brokers and are settled on a delivery versus payment basis and limits are set by the Manager on the amount that may be due from any one broker. All security transactions are through brokers which have been approved as an acceptable counterparty. This is reviewed on an ongoing basis. At the year end, the exposure to credit risk includes cash at bank, outstanding securities transactions and the long CFDs at fair value. Derivative instruments risk The risks and risk management processes which result from the use of derivative instruments are included within the other risk categories disclosed above. Derivative instruments are used by the Portfolio Manager to gain unfunded long exposure to equity markets, sectors or single stocks. "Unfunded" exposure is exposure gained without an initial outflow of capital. The risk and performance contribution of these instruments to the Company's portfolio is overseen by a specialist derivative instruments team which draws on over forty years of specialist experience in derivative risk management. This team uses portfolio risk assessment tools to advise the Investment Manager on portfolio construction. RISK SENSITIVITY ANALYSIS Interest rate risk sensitivity analysis If interest rates had increased by 0.25%, total net assets and the total return on ordinary activities would have decreased by £52,000 (2013: £37,000). A decrease in interest rates by 0.25% would have had an equal but opposite effect. This is based on the Company having held its 31 December 2014 exposure to long CFDs and cash at bank throughout the year, with all other variables held constant. Foreign currency risk sensitivity analysis If UK sterling had strengthened by 10% against the yen, with all other variables held constant, at 31 December 2014, total net assets and the total return on ordinary activities would have decreased by £8,477,000 (2013: £ 8,214,000). A 10% weakening of UK sterling against the yen would have increased total net assets and the total return on ordinary activities by £10,361,000 (2013: £10,039,000). Other price risk sensitivity analysis Changes in market prices other than those arising from interest rate risk or foreign currency risk may also affect the value of the Company's net assets and its total return on ordinary activities. Details of how the Board sets risk parameters and performance objectives can be found in the Strategic Report of the Annual Report. Investments exposure sensitivity analysis An increase of 10% in the fair value of the investments at 31 December 2014 would have increased total net assets and total return on ordinary activities by £8,249,000 (2013: £8,403,000). A decrease of 10% would have had an equal but opposite effect. Derivatives instruments exposure sensitivity analysis The Company also invests in long CFDs to gain exposure to the equity markets. An increase of 10% in the price of shares underlying the long CFDs at 31 December 2014 would have increased total net assets and total return on ordinary activities by £3,106,000 (2013: £2,112,000). A decrease of 10% would have had an equal but opposite effect. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES As explained in Notes 1(g) and 1(h) of the Annual Report investments are stated at fair value, which is bid or last market price, and long CFDs are stated at fair value, which is the difference between the settlement price and the value of the underlying shares in the contract. Other financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. In the case of cash at bank, book value approximates to fair value due to the short maturity of the instruments. FAIR VALUE HIERARCHY FRS 29 requires financial companies to disclose the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values. Classification Input Level 1 Valued using quoted prices in active markets for identical assets Level 2 Valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1 Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The techniques used by the Company to value its financial instruments are explained in Accounting Policies Notes 1(g) and 1(h) of the Annual Report. All the financial instruments held at fair value by the Company are considered to fall within Level 1, with the exception of net derivative instrument assets of £7,157,000 (2013: 5,842,000) which fall within Level 2. 18 CAPITAL MANAGEMENT The Company does not have any externally imposed capital requirements. The capital of the Company comprises gearing, which is managed via the use of long CFDs, share capital and retained reserves, which are disclosed in the Balance Sheet above. It is managed in accordance with its investment policy and in pursuit of its investment objective, as disclosed in the Strategic Report of the Annual Report. The principal risks and their management are disclosed in the Strategic Report. 19 RELATED PARTY TRANSACTIONS The Company has identified the Directors as its only related parties. The Directors have complied with the provisions of Financial Reporting Standard 8 "Related Party Disclosures", which require disclosure of related party transactions and balances. The Directors' remuneration and their interests in the shares of the Company are disclosed in the Directors' Remuneration Report of the Annual Report. 2013 FINANCIAL INFORMATION The figures and financial information for 2013 are extracted from the published Annual Report and Accounts for the year ended 31 December 2013 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. 2014 FINANCIAL INFORMATION The figures and financial information for 2014 are extracted from the published Annual Report and Accounts for the year ended 31 December 2013 and do not constitute the statutory accounts for that year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course. 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 on/ around 13 April 2015 and will be available on the Company's website at www.fidelity.co.uk/its For Enquiries, please contact: Natalia de Sousa FIL Investments International Company Secretary 30 March 2015 +44 (0) 1737 837929

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