Annual Financial Report

RNS Number : 5178P

Baillie Gifford Japan Trust PLC

25 October 2012

 

THE BAILLIE GIFFORD JAPAN TRUST PLC

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 August 2012 of The Baillie Gifford Japan Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.

The Annual Report and Financial Statements for the year ended 31 August 2012 including the Notice of Annual General Meeting is also available on Baillie Gifford Japan's page of the Baillie Gifford website at:

www.japantrustplc.co.uk 

At the Annual General Meeting to be held on 29 November 2012, it is proposed that new Articles of Association are adopted. Following recent changes to statutory rules governing investment trusts, there is no longer a requirement for a company's Articles to prohibit the distribution as a dividend of surpluses arising from the realisation of investments and shareholder approval is sought at the Annual General Meeting to remove this prohibition from the Articles. Further details can be found in the Directors' Report within the Annual Report and Financial Statements for the year to 31 August 2012. Copies of the new Articles of Association are available for inspection at Broadgate Tower, 20 Primrose Street, London, EC2A 2EW and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 August 2012 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co

Company Secretaries

25 October 2012

THE BAILLIE GIFFORD JAPAN TRUST PLC

Chairman's Statement

Over the year your Company's net asset value rose by 0.8%, outperforming the 2.7% loss of the benchmark TOPIX index (in sterling terms) total return. The market level varied by a remarkably small amount over the year (12.1% from high point to low point) given the forces battering Japanese companies: namely a slowdown in China, problems in the eurozone, recovering company profits and a strong yen.

Stock selection over the year was again good but gearing detracted slightly from the performance. Further performance details can be found in the Managers' Report.

Investment income increased by a remarkable 22% over the year reflecting higher dividends. Expenses decreased slightly. Overall revenue gain per share was 1.25p. No dividend is payable as the revenue reserve remains in deficit.

Gearing

Net gearing amounted to 18% of net assets at the start of the year and ended the year at 19%. With the low cost of yen loans we believe that borrowing to invest in Japanese equities is a sensible strategy. Gross borrowings remain at 3.55bn yen.

Share Capital

The Company did not exercise its share buy back powers during the year; however, your Board believes that it is important that the Company retains this power and so, at the Annual General Meeting, it is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury, up to 5% of the Company's issued share capital, for cash on a non-pre-emptive basis. Shares would only be issued/reissued at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders. The Directors will seek to utilise this authority only if they believe that it will be in the best interests of the Company to do so.

Articles of Association

Statutory rules governing investment trusts and investment companies were amended recently. As a result of this change, there is no longer a requirement for a Company's Articles to prohibit the distribution as a dividend of surpluses arising from the realisation of investments. In light of the amended statutory rules, the Board no longer considers it appropriate to have such a prohibition in the Articles and therefore seeks shareholder approval at the AGM to remove it. The Board believes this will give the Company greater flexibility in the long term as it will allow distributions to be made from any surplus arising from the realisation of an investment. There are no present plans to pay a dividend.

Continuance Vote

Our shareholders have the right to vote annually on whether the Company should continue in business, and will again have the opportunity to do so at the Annual General Meeting to be held on 29 November 2012.

Last year the Company received support for its continuance from 97.4% of those voting. Your Directors are of the opinion that despite the continuing macro economic problems, there remain attractive opportunities in selected, well-run companies.

Given the long-term favourable outlook, my fellow Directors and I intend where possible to vote our own shareholdings in favour of the resolution and hope that shareholders will feel disposed to do likewise.

Board

Your Board is committed to high standards of corporate governance. In particular it recognises the need to have a balance of skills, experience and length of service.  It also believes that membership of the Board should be refreshed over time.  To this end, it will put together a plan over the next year to do so.

Outlook

Japanese equities continue to sell at a discount to most other world equity markets and it is difficult to know when investors will recognise this more broadly. In the meantime Japan has many companies which are growing and are expected to continue to do so, the most attractive of which are held by the Company.

Richard A Barfield

12 October 2012

Past performance is not a guide to future performance.

THE BAILLIE GIFFORD JAPAN TRUST PLC

Managers' Report

Performance

The net asset value per share, with borrowings deducted at fair value, was little changed over the year rising 0.8% to 216.9p whilst the benchmark index, TOPIX on a total return basis, fell 2.7% in sterling terms. The yen was also effectively flat on a year on year basis, appreciating by only 0.1% against sterling. This impression of stasis however is misleading as both the market and the currency moved significantly at the beginning of 2012. TOPIX rose by 17.3% in the first calendar quarter of 2012 as optimism about the global economy increased and policy measures in Japan seemed supportive. The yen mirrored this move by depreciating sharply during January to March and then appreciating as the concerns about the rest of the developed world re-emerged from April. Japan has again been regarded as a safe haven and the yen has strengthened as global concerns have increased.

In terms of the Japan Trust portfolio, the outperformance is broken down by sector in the Portfolio Performance Attribution table. Although most sectors contributed positively, the information, communication and utilities sector was the largest contributor as our investments in a range of internet stocks performed strongly overall, particularly So-Net Entertainment which was bought out by parent Sony at a 70% premium. Such is the undervaluation of Japanese shares that even that price could be regarded as cheap based on the sum of So-Net's own investments and business. Electrical and electronics also contributed significantly as our stocks did better than a weak industry, with new holding Endo Lighting contributing significantly. The worst sector was retail where one of the strong performers from last year, Start Today, did badly as did Yamada Denki as television sales fell after government subsidies ended and the digital switch-over was completed.

Portfolio

Turnover remained low at below 9% as we continue to invest with a long term outlook. We aim to buy companies based on our assessment of their prospects in three to five years and the continuing low level of trading in the portfolio reflects this long term stance.

Nevertheless we have bought six new holdings and sold six less promising businesses. The purchases range from a LED lighting manufacturer, Endo Lighting, to two further internet related businesses, Kakaku, a price comparison website and Lifenet Insurance, which is selling life insurance online. The use of the internet to disrupt established industries features in our purchase of Lifenet, which is a small company growing rapidly in the mature life insurance industry, whilst Kakaku uses the ability of the internet to disseminate information. Most of our eleven internet related holdings are in the information, communication and utilities sector, but there are several defined as commerce and services. These stocks make up around 12% of the portfolio.

We also bought Sanrio the owner of the Hello Kitty character and Fuji Heavy Industries the maker of Subaru cars. Both Sanrio and Fuji Heavy are thinking about brands in a different way to the majority of Japanese companies and we believe this will boost their long term growth prospects. The final purchase was Industrial and Infrastructure Fund, a JREIT which operates in a distinctive segment of the property market. Further details of these new purchases and the largest holdings are in the Review of Investments on pages 12 to 14 of the Annual Report and Financial Statements.

The sales we made were of several companies where developments in corporate governance were negative, notably Olympus and Accordia Golf. Others were where the industry outlook and competitive position had deteriorated such as Ricoh, Askul and Yamaha Motor. Meitec had benefited from post-crash government support however this is finishing, diminishing their immediate growth prospects and so the holding was sold.

Economy

The global economic background has become increasingly less certain as the eurozone crisis has rumbled on and China has seen slower expansion and some political uncertainty. The recovery in the US has also been muted. Perhaps surprisingly against this background the forecasts for Japan are for growth of around 2% in 2012, significantly higher than the G10 average. This is driven by domestic demand, particularly recovery from the earthquake, which is providing its own impetus. Japanese consumers are also experiencing a stronger employment situation than most developed economies and the long awaited shift to spending rather than saving by the key baby boom demographic may be emerging. Consumption figures in Japan have therefore been relatively robust, perhaps also reflecting the length of time since any property boom and the extent of adjustment. Exports though have been weak, in line with the global slowdown and the strength of the yen is putting pressure on Japanese manufacturers to shift production abroad. The Bank of Japan is responding by adopting a more explicit inflation target despite prices still falling. If it is serious about achieving inflation, more monetary easing is likely via the Asset Purchase Programme. This was expanded at the September policy meeting as economic uncertainty increased and the territorial dispute with China erupted. Such expansion may also weaken the yen. Some economic recovery globally, combined with monetary action in Japan, could be very positive for economic growth in 2013, but the core expectation is probably for growth to slow to roughly 1.5%.

Political Developments

Expectations for Mr Noda were low when he was appointed as Prime Minister just over a year ago but he has made progress in three areas. Japan continues to consider participating in talks to join the Trans Pacific Partnership (TPP), a large free trade organisation, the legislation has been passed to raise the consumption tax in 2014 and political pressure has been applied to the Bank of Japan to provide monetary stimulation. However, these achievements are not reflected in any increase in popularity and there is probably going to be a general election in the autumn. A third political force has emerged after the election of Toru Hashimoto as Mayor of Osaka.  The recent election of former Prime Minister Abe as leader of the Liberal Democratic Party and Prime Minister Noda's Cabinet re-shuffle on 1 October make forecasting the direction of policy difficult in what is now a pre-election period acutely affected by the dispute with China over the Senkaku Islands. However, expectations are low and the potential for improvement large whilst there has clearly been a desire for change signalled by the electorate.

Japanese Corporate Developments

Although the commentary in the UK on Japanese corporate governance has been very negative as a result of the fraud at Olympus, there has actually been steady but slow progress. Olympus appears to be an isolated case and the predictions of many more examples of similar egregious abuse have not been justified. The trend of companies to buy in or sell off quoted subsidiaries continues and Japan Trust benefited from this with the tender offer for So-Net Entertainment. Dividends are also rising, as are share buy backs, and the yield on the portfolio is now 2.4% in contrast with 10 year Japanese Government Bond yields of 0.8%. Companies continue to use the strength of the yen to make purchases overseas and these are predominantly in related business areas to build scale internationally. For example Itochu, our largest holding, is expanding its food and consumer goods businesses, Kubota has bought a Norwegian agricultural machinery company, Gree has bought several US games companies and Rakuten has been investing in unquoted but interesting internet start-ups in the US.

Outlook

As in so many previous years the macro-environment remains uncertain and prospects for the medium term economic growth rate in Japan are low. Potential for improvement in Japan remains large if sensible policies are adopted with regard to deregulation or free trade via the TPP, whilst the recent move by the Bank of Japan is encouraging. However our focus on individual companies and the companies' focussing on finding growth internationally, as well as domestically, continue to be points of differentiation from the index. Japan has been out of favour as a market for a considerable time and as a result expectations and valuations are low. The figures shown in the chart on page 11 of the Annual Report and Financial Statements demonstrate the superior growth and lack of any premium paid for something that might be considered rare. We believe this is not going to persist indefinitely and are therefore encouraged to be using all the gearing in the market.

Portfolio Performance Attribution for the Year to 31 August 2012^†

Computed relative to the benchmark (TOPIX total return (in sterling terms)) with net income reinvested.

	Benchmark asset allocation		Baillie Gifford Japan asset allocation		Performance*                     TOPIX		Contribution to relative return	Contribution attributable to:
Portfolio breakdown	01.09.11	31.08.12	01.09.11	31.08.12	BG Japan	total return		Stock selection	Asset allocation	Gearing
	%	%	%	%	%	%	%	%	%	%
Information, communication and utilities	9.6	9.6	13.4	13.1	15.1	(5.5)	2.7	2.7	-	-
Electricals and electronics	13.9	12.2	14.9	12.5	(4.8)	(15.6)	1.5	1.7	(0.2)	-
Chemicals and other materials	13.8	11.9	8.7	7.4	(11.3)	(16.3)	1.2	0.5	0.7	-
Commerce and services	12.3	13.0	22.5	21.9	5.3	2.9	1.1	0.5	0.6	-
Real estate and construction	4.8	5.2	3.6	6.2	22.6	9.6	0.6	0.6	-	-
Manufacturing and machinery	19.4	19.7	11.5	15.5	2.1	(1.5)	0.4	0.5	(0.1)	-
Pharmaceuticals and food	8.4	9.9	7.2	6.9	25.0	14.9	0.1	0.5	(0.4)	-
Financials	13.7	13.9	7.5	8.7	(1.9)	0.9	(0.4)	(0.2)	(0.2)	-
Retail	4.1	4.6	10.7	7.8	(18.1)	11.3	(2.2)	(2.8)	0.6	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	2.1	(2.7)	4.9	3.9	1.0	-
Impact of gearing					(0.3)	-	(0.3)	-	-	(0.3)
Total (including gearing)**					1.8	(2.7)	4.6	3.9	1.0	(0.3)

 

Past performance is not a guide to future performance.

Source: Statpro/Baillie Gifford & Co

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of 2.1% against a benchmark return of (2.7%) translates into a relative return of 4.9%, divide the portfolio return of 102.1 by the benchmark return of 97.3, subtract one and multiply by 100.  In addition, the total contribution figures include a residual element that relates to changes in weightings mid-month, which cannot be attributed to individual sectors.  Consequently, the contributions for the individual sectors do not sum to the total contribution figures.

^†        The performance attribution table is based on total assets.

*    The returns are total returns (net income reinvested), calculated on a monthly linked method.

**  The total return performance of 1.8% excludes expenses and, therefore, differs from the NAV return

       (after deducting borrowings at fair value) of 0.8% as a result.

Investment Changes (£'000)

	Valuation at  31 August 2011	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 August 2012
Equities:
Information, communication and utilities	21,221	(2,984)	2,819	21,056
Electricals and electronics	23,500	(373)	(3,034)	20,093
Chemicals and other materials	13,755	-	(1,829)	11,926
Commerce and services	35,552	(1,446)	1,037	35,143
Real estate and construction	5,773	2,902	1,230	9,905
Manufacturing and machinery	18,178	5,320	1,396	24,894
Pharmaceuticals and food	11,462	(2,549)	2,182	11,095
Financials	11,880	2,678	(534)	14,024
Retail	16,963	(1,286)	(3,056)	12,621
Total equity investments	158,284	2,262	211	160,757
Net liquid assets	3,934	(1,485)	(75)	2,374
Total assets	162,218	777	136	163,131
Bank loans	(28,511)	-	(33)	(28,544)
Shareholders' funds	133,707	777	103	134,587

TWENTY LARGEST HOLDINGS at 31 August 2012
Name	Business	2012 Value £'000	2012 % of total assets	2011 Value £'000
Itochu	Trading conglomerate	6,206	3.8	6,401
Don Quijote	Discount store operator	4,899	3.0	5,667
Japan Tobacco	Tobacco manufacturer	4,655	2.9	4,913
KDDI	Mobile telecommunications	4,485	2.7	4,559
Otsuka Corp	IT solutions for companies	4,455	2.7	3,386
Sysmex	Medical equipment	4,087	2.5	3,269
Rakuten	Internet retailer	3,945	2.4	4,498
Industrial & Infrastructure Fund	Logistics REIT	3,929	2.4	-
Misumi Group	Precision machinery parts distributor	3,862	2.4	3,551
Hitachi High-Technologies	Semiconductor production equipment	3,770	2.3	2,815
Fuji Heavy Industries	Niche car brand	3,398	2.1	-
Mitsubishi UFJ Lease & Finance	Leasing company	3,250	2.0	2,971
HIS	Travel agency	3,209	2.0	3,348
M3	Online drug marketing service	3,199	2.0	2,668
Asics	Sports shoes and clothing	3,153	1.9	3,294
Mitsubishi Electric	Industrial electric conglomerate	3,140	1.9	3,748
Isuzu Motors	Commercial vehicle manufacturer	3,086	1.9	2,635
Tokyo Tatemono	Property leasing and development	3,084	1.9	3,045
Inpex	Oil and gas producer	2,941	1.8	3,400
Osaka Securities Exchange	Stock exchange	2,933	1.8	3,374
		75,686	46.4	67,542

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 6 months notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total net assets of the Company.   The details of the management fee are as follows:

	2012 £'000		2011 £'000
Investment management fee	1,325		1,331

PRINCIPAL RISKS AND UNCERTAINTIES

The Company invests in medium to smaller sized Japanese companies and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager assesses the exposure to market risk when making individual investment decisions as well as monitoring the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 8 of the Annual Report and Financial Statements.

(i) Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

The Investment Manager monitors the Company's yen exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the currency in which a company's share price is quoted is not necessarily the one in which it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the share price of the company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company may also use forward currency contracts to limit the Company's exposure to anticipated future changes in exchange rates so that the currency risks entailed in holding the assets are mainly eliminated.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 August 2012	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	160,757		2,455		(28,544)		212		134,880
Total exposure to currency risk	160,757		2,455		(28,544)		212		134,880
Sterling	-		61		-		(354)		(293)
	160,757		2,516		(28,544)		(142)		134,587

*    Includes net non-monetary assets of £23,000.

At 31 August 2011	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	158,284		3,974		(28,511)		136		133,883
Total exposure to currency risk	158,284		3,974		(28,511)		136		133,883
Sterling	-		188		-		(364)		(176)
	158,284		4,162		(28,511)		(228)		133,707

*      Includes net non-monetary assets of £23,000.

Currency Risk Sensitivity

At 31 August 2012, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £13,488,000 (2011 - £13,388,000). A 10% weakening of sterling against the yen, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

(ii) Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

The interest rate risk profile of the Company's interest bearing financial assets and liabilities at 31 August 2012 is shown below.

Financial Assets

Cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.

Financial Liabilities

The interest rate risk profile of the Company's loans at 31 August was:

	2012			2011
	Book value £'000	Weighted average interest rate	Weighted average period until maturity	Book value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans
Yen denominated - fixed rate	28,544	2.2%	19 months	28,511	2.2%	31 months

Interest Rate Risk Sensitivity

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 8 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 15 and 16 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 10 and 11 of the Annual Report and Financial Statements.

119.4% (2011 - 118.4%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2012 would have increased total net assets and net return on ordinary activities after taxation by £16,076,000 (2011 - £15,828,000). A decrease of 10% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on page 17 of the Annual Report and Financial Statements).

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 11 of the Annual Report and Financial Statements.

The maturity profile of the Company's financial liabilities at 31 August was:

Financial Liabilities	2012 £'000	2011 £'000
In less than one year In more than one year, but not more than two years In more than two years, but not more than five years	6,030 22,514 -	- 6,023 22,488
	28,544	28,511

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·     where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

·     the Company's listed investments are held on its behalf by Mizuho Corporate Bank, Ltd as the Company's custodians. Bankruptcy or insolvency of the custodians may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodians' internal control reports and reporting its findings to the Board;

·    investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager; and

·    cash is only held at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The exposure to credit risk at 31 August was:

	2012 £'000	2011 £'000
Cash at bank and in hand	2,516	4,162
Debtors and prepayments	1,702	191
	4,218	4,353

None of the Company's financial assets are past due or impaired.

Fair Value of Financial Assets and Financial Liabilities

The Company's investments are stated at fair value and the Directors are of the opinion that the reported values of the Company's other financial assets and liabilities approximate to fair value with the exception of the long term borrowings which are stated at amortised cost. The fair value of borrowings is shown below.

	2012			2011
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		28,544	28,820	28,511	28,925

* The fair value of each bank loan is calculated with reference to a Japanese government bond

 of comparable yield and maturity.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants detailed in note 11 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 11 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 17 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on pages 22 and 23 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:   reflects financial instruments quoted in an active market

Level 2:   reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

Level 3:   reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

The valuation techniques used by the Company are explained in the accounting policies on page 33 of the Annual Report and Financial Statements.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy.  None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.  The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1158 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose disproportionate compliance burdens on the Company.  In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing Risk

The Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

·    select suitable accounting policies and then apply them consistently;

·    make judgements and accounting 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 respectively; 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 keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report 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.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

·    the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

·    the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

Richard A Barfield

12 October 2012

INCOME STATEMENT

	For the year ended 31 August 2012				For the year ended 31 August 2011
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	211	211		-	18,266	18,266
Currency losses (note 2)	-	(108)	(108)		-	(930)	(930)
Income (note 3)	3,251	-	3,251		2,664	-	2,664
Investment management fee	(1,325)	-	(1,325)		(1,331)	-	(1,331)
Other administrative expenses	(279)	-	(279)		(313)	-	(313)
Net return before finance costs and taxation	1,647	103	1,750		1,020	17,336	18,356
Finance costs of borrowings	(642)	-	(642)		(596)	-	(596)
Net return on ordinary activities before taxation	1,005	103	1,108		424	17,336	17,760
Tax on ordinary activities	(228)	-	(228)		(186)	-	(186)
Net return on ordinary activities after taxation	777	103	880		238	17,336	17,574
Net return per ordinary share (note 5)	1.25p	0.17p	1.42p		0.38p	27.99p	28.37p

 All revenue and capital items in this statement derive from continuing operations.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BALANCE SHEET

at 31 August 2012

	At 31 August 2012		At 31 August 2011
	£'000	£'000	£'000	£'000
Fixed assets Investments		160,757		158,284
Current assets
Debtors	1,702		191
Cash and deposits	2,516		4,162
	4,218		4,353
Creditors: Amounts falling due within one year	(7,874)		(419)
Net current (liabilities)/assets		(3,656)		3,934
Total assets less current liabilities		157,101		162,218
Creditors: Amounts falling due after more than one year		(22,514)		(28,511)
Total net assets		134,587		133,707
Capital and reserves
Called up share capital		3,097		3,097
Share premium		22,110		22,110
Capital redemption reserve		203		203
Capital reserve		115,656		115,553
Revenue reserve		(6,479)		(7,256)
Shareholders' funds		134,587		133,707

Net asset value per ordinary share	216.9p	215.2p
(after deducting borrowings at fair value)
Net asset value per ordinary share (after deducting borrowings at par value)	217.3p	215.9p
Ordinary shares in issue (note 8)	61,935,000	61,935,000

The Financial Statements of The Baillie Gifford Japan Trust PLC (company registration number SC75954) were approved and authorised for issue by the Board and signed on 12 October 2012.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 August 2012

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2011	3,097	22,110	203	115,553	(7,256)	133,707
Net return on ordinary activities after taxation	-	-	-	103	777	880
Shareholders' funds at 31 August 2012	3,097	22,110	203	115,656	(6,479)	134,587

For the year ended 31 August 2011

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2010	3,097	22,110	203	98,217	(7,494)	116,133
Net return on ordinary activities after taxation	-	-	-	17,336	238	17,574
Shareholders' funds at 31 August 2011	3,097	22,110	203	115,553	(7,256)	133,707

* The capital reserve balance as at 31 August 2012 includes investment holding gains of £35,796,000 (2011 - gains of £36,350,000).

 

CASH FLOW STATEMENT
	For the year ended 31 August 2012						For the year ended 31 August 2011
	£'000		£'000				£'000			£'000
Net cash inflow from operating activities			1,263							920
Net cash outflow from servicing of finance	(641)						(658)
Financial investment			(641)							(658)
Acquisitions of investments	(14,934)						(17,954)
Disposals of investments	12,741						15,688
Exchange differences on settlement of investment transactions	(262)						26
Net cash outflow from financial investment			(2,455)							(2,240)
Net cash outflow before financing			(1,833)							(1,978)
Financing
Bank loans drawn down	-						13,651
Bank loans repaid	-						(13,538)
Net cash inflow from financing			-							113
Decrease in cash			(1,833)							(1,865)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year			(1,833)							(1,865)
Net cash inflow from bank loans			-							(113)
Exchange differences on bank loans			(33)							(890)
Exchange differences on cash			187							(66)
Movement in net debt in the year			(1,679)							(2,934)
Net debt at 1 September			(24,349)							(21,415)
Net debt at 31 August			(26,028)							(24,349)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation			1,750							18,356
Gains on investments			(211)							(18,266)
Currency losses			108							930
(Increase)/decrease in accrued income			(158)							23
Increase in other debtors			-							(1)
(Decrease)/increase in creditors			(10)							66
Overseas tax suffered			(216)							(188)
Net cash inflow from operating activities			1,263							920

NOTES

1.	The financial statements for the year to 31 August 2012 have been prepared on the basis of the same accounting policies set out in the Company's Annual Financial Statements at 31 August 2011. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 19 to the financial statements within the Annual Report and Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. If the continuation resolution is not passed, the Articles provide that the Directors shall convene a General Meeting within three months at which a special resolution will be proposed to wind up the Company voluntarily. If the Company is wound up, its investments may not be realised at their full market value. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
			31 August 2012 £'000	31 August 2011 £'000
2.	Currency Losses
	Exchange differences on bank loans		(33)	(890)
	Other exchange differences		(75)	(40)
			(108)	(930)
3.	Income
	Income from investments and interest receivable		3,251	2,664
4.	No final dividend will be declared.

5.	Net Return per Ordinary Share
		2012				2011
		Revenue	Capital	Total		Revenue	Capital	Total
	Net return on ordinary activities after taxation	1.25p	0.17p	1.42p		0.38p	27.99p	28.37p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £777,000 (2011 - net revenue return of £238,000), and on 61,935,000 ordinary shares, being the number of ordinary shares in issue throughout each year.  Capital return per ordinary share is based on the net capital return for the financial year of £103,000 (2011 - £17,336,000), and on 61,935,000 ordinary shares, being the number of ordinary shares in issue throughout each year. There are no dilutive or potentially dilutive shares in issue.
6.	Bank loans of £28.5 million (¥3.55 billion) have been drawn down under yen loan facilities which are repayable between August 2013 and August 2014 (31 August 2011 - £28.5 million (¥3.55 billion)).

7.	Transaction costs incurred on the purchase and sale of investments are added to the purchase costs or deducted from the sales proceeds, as appropriate.  During the year, transaction costs on purchases amounted to £13,000 (2011 - £14,000) and transaction costs on sales amounted to £14,000 (2011 - £13,000).
8.	At 31 August 2012 the Company had authority to buy back 9,284,056 shares. No shares were bought back during the year. Under the provisions of the Company's Articles of Association share buy backs are funded from the capital reserve.
9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2012. The financial information for 2011 is derived from the statutory accounts for 2011, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2012 and the 2011 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2012 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at 2.30pm on Thursday 29 November 2012.
10.	The Report and Financial Statements will be available on the Company's page on the Managers' website www.japantrustplc.co.uk on or around 25 October 2012‡.
	‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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