Annual Financial Report

RNS Number : 8665Q

Baillie Gifford Japan Trust PLC

26 October 2011

 

THE BAILLIE GIFFORD JAPAN TRUST PLC

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 August 2011 of The Baillie Gifford Japan Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do .

The Annual Report and Financial Statements for the year ended 31 August 2011 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 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 August 2011 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

26 October 2011

THE BAILLIE GIFFORD JAPAN TRUST PLC

Chairman's Statement

It was another roller coaster ride for Japanese equities over the year. The strong yen turned a loss in local currency into a gain in sterling terms. Over the year your Company's net asset value (after deducting borrowings at fair value) rose by 15.3% compared with a gain of 1.4% in the benchmark TOPIX index (in sterling terms) total return. The share price appreciated by 25%.

Stock selection over the year was again good and gearing added to the performance. Further performance details can be found in the Managers' Report.  Outperformance of the comparative index this year has been notable.  In the 30 years of the Trust's existence, there have been six occasions when it has outperformed the comparative index by more than ten percentage points.

Investment income increased by 2.3% over the year reflecting higher dividends. Expenses rose, mainly because of the effect of increasing net assets on the management fee. Overall revenue gain per share was 0.38p. 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 the same level. A tranche of the Company's loans was replaced during the year at a higher cost because of the higher margins being charged by banks. With the low cost of yen loans we believe that borrowing to invest in Japanese equities is a sensible strategy. Gross borrowings are 3.55bn yen.

Currency Hedging

It is extremely difficult to predict currency movements and currencies can appear cheap or dear for long periods of time. Your Board has therefore decided that it will not engage in currency hedging.

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 only seek to utilise this authority if they believe that it will be in the best interests of the Company to do so.

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 2011.

Last year the Company received support for its continuance from 99.8% of those voting.  Your Directors are of the opinion that despite the continuing macro economic problems, there remains attractive opportunities in selected, well-run companies.

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

Outlook

Most Japanese companies have recovered from the earthquake and tsunami which devastated part of Japan in March. Japanese equities continue to look lowly valued against other world equity markets but the companies are facing headwinds from weaker economic growth around the world and a strong yen in an uncertain political environment at home. The Manager has in the past sought out companies with good growth prospects and your Board is confident that this can continue.

Richard A Barfield

13 October 2011

Past performance is not a guide to future performance.

THE BAILLIE GIFFORD JAPAN TRUST PLC

Managers' Report

Performance

During the year to 31 August 2011 the Japanese stock market was affected both by global factors, such as concerns about the global recovery, and uniquely by the impact of the major natural disaster of the earthquake and tsunami in March.  In the first half of the Company's year the stock market rose steadily as earnings continued to recover from the global financial crisis and then, after the March disasters, fell sharply in a week.  Confidence and the market then recovered gradually until concerns about the global situation predominated in the summer and, as with other markets, the Japanese stock market fell sharply in July and August.   Against this background  the net asset value per share, with borrowings deducted at fair value, rose by 15.3%, owing primarily to strong stock selection, whilst the benchmark index declined by 2.1% in local currency terms.  The yen strengthened against sterling by 3.7% over the period and adjusted for this the benchmark rose by 1.4%.

Details of the attribution of performance by sector are shown below. All sectors, except one, contributed to the relative outperformance.  There were eleven individual stock holdings which each contributed more than 0.5% to the outperformance and only two poor performers detracting by a similar amount.  The largest contributor was Start Today, which we added to during the year, which more than tripled in share price over the period as the strength of its on-line business became better appreciated.  Gree, the mobile gaming company, doubled and Don Quijote, the somewhat unusual retail format, continued to do well.  Unusually, not owning a bad company, Tokyo Electric Power, also contributed significantly; its share price has fallen by more than 80% since the earthquake.

Poorly performing holdings included companies such as Accordia Golf, several of whose golf courses were damaged during the earthquake and where a period of self restraint reduced player numbers and SBI, the online broker, where the business is linked to stock market levels. 

Portfolio

Although the market was volatile during the year our view of individual prospects for companies did not change that much and therefore turnover fell to 11% for the year.  This remains consistent with our long term investment style and our focus on prospects for companies three to five years ahead.

However, we have made significant investments during the year  in new internet related holdings such as Digital Garage, So-Net, GMO Internet, Next and Zappallas.   Descriptions of some of these companies are shown on pages 12 to 14 of the Annual Report and Financial Statements, along with comments on the largest holdings.  The internet stocks are listed in a variety of industry sectors, but most are concentrated in the Information, Communication and Utilities sector and the weighting of that rose from 7% to 13% of the portfolio as a result of additions to the sector and strong performance.  Other changes to the portfolio were less significant.

During the year we have been examining growth prospects within Japan by thinking about growth opportunities in a mature economy and focusing on areas for innovation, disruption or growth from outside Japan.  We view companies in the internet arena as offering innovation and therefore growth that is in the main independent of the state of the economy.  We also believe that growth as a strategy remains very undervalued in Japan, despite being relatively rare.  The portfolio characteristics diagram on page 11 of the Annual Report and Financial Statements demonstrates that despite owning a higher quality portfolio than the benchmark Japan Trust does not pay any valuation premium for faster growing companies.  Our stocks also have higher return characteristics and stronger balance sheets.

Economy and Political Developments

The Japanese economy grew strongly in 2010 as recovery from the Global Financial crisis continued, but the triple disaster in March has led to sharp declines in Japan's expected economic growth for the current year.  The shock to the supply chain, the sharp reduction in power generation capacity and the consequent falls in industrial production led to economic contraction in the economy in the April to June quarter.  Adding to these concerns are the impacts on exports from the strengthening of the yen and the weakening in global demand currently being witnessed.  However, there will be significant reconstruction spending in Tohoku and this will provide the domestic economy with some stimulus in the coming quarters.  Also there are early signs of recovery in the housing and property markets in Japan and after many years of decline housing starts are growing strongly.  Consumers in Japan are also less burdened by debt and unemployment levels are lower than in most other developed economies, whilst some areas within the labour market are tightening.  Confidence levels have recovered from the earthquake and at the moment, Japan is seeing a preponderance of positive rather than negative economic surprises; a situation that compares favourably with other developed countries.

Following the resignation of Prime Minister Kan, Yoshihiko Noda was appointed by the ruling DPJ as the third Prime Minister since they took power in 2009.  The Government's immediate response to the challenges of the earthquake and tsunami was judged positively, but many commentators have been critical since.  There has been much frustration felt in the disaster-affected areas.  There is pressure from some groups for Japan to join the Trans Pacific Partnership (TPP), the broadly based trade agreement that could benefit Japan significantly.  Some currently protected interests could however be impacted and the DPJ's preparedness to rise to the challenge remains uncertain.  The other area on which progress is being signaled is privatisation.  Japan has significant state owned assets, including stakes in quoted companies such as our holdings in Japan Tobacco and Inpex, and the government is discussing the necessary legislative changes to enable sales.  This would both reduce the tax or debt burden for rebuilding and should also free company managements. 

Japanese Corporate Developments

Although the government response to the March disasters was poor, Japanese companies have managed to rebuild their disrupted supply chains much more quickly than was initially expected.  There is now a widespread reassessment of how to build resilience into business models, which include greater geographic diversification of production as well as more intense scrutiny of the entire supply chain.  There have been continued improvements in balance sheets and a record proportion of companies now have no debt.  The strength of the yen, which reflects both currency weakness elsewhere and the role of Japan as a major net creditor nation with domestically owned government debt, is being used as a positive by companies buying businesses abroad.  Capital spending is being increased significantly overseas as well, with the focus on Asia.

The other impact of the currency is to make Japanese exports more expensive and further cost cutting and relocation of production is needed to cope.  For most of the manufacturing and exporting companies in the portfolio we believe that their competitive advantages will allow them to retain business, but that reported profits will be impacted in the short term.

As well as using cash balances to buy other companies there has been a recent pick up in share buy-backs as valuations look cheap to managements.  Banks are willing to fund Management Buy Outs (MBOs) and given the very low valuations that Japanese shares sell on the number of these deals has been steadily increasing.  Dividends are also likely to continue rising and the stock market continues to yield significantly more than bonds, possibly another factor in MBO activity.   Companies are also thinking about how to structure their organisations more globally,  increasing their usage of English and hiring more overseas graduates, particularly Chinese. 

Outlook

The global demand background is uncertain and Japan remains a low growth economy in the medium term.  However, Japan does not have the difficulties of many other developed economies and at the moment has its own recovery dynamic.  Its major export markets are also the other Asian countries where prospects still look encouraging.  We continue to stress the difference between macro economic developments and the prospects for the companies within the portfolio.  We remain focused on finding growth from business models that disrupt outmoded domestic industries, those where innovation delivers strong prospects and those that can benefit from structural demand trends such as increasing automation in Asia.

Portfolio Performance Attribution for the Year to 31 August 2011^†

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	01.09.10	31.08.11	01.09.10	31.08.11	BG Japan	total return		Stock selection	Asset allocation	Gearing
	%	%	%	%	%	%	%	%	%	%
Information, communication and utilities	11.6	9.6	6.3	13.4	50.8	(14.8)	6.2	5.6	0.6	-
Retail	3.6	4.1	10.2	10.7	38.1	13.5	2.9	2.0	0.9	-
Commerce and services	11.9	12.3	26.1	22.5	12.0	5.2	1.8	1.5	0.3	-
Electricals and electronics	14.3	13.9	16.0	14.9	6.6	0.1	1.0	1.0	-	-
Manufacturing and machinery	19.2	19.4	14.9	11.5	13.0	4.3	1.0	1.1	(0.1)	-
Pharmaceuticals and food	7.8	8.4	5.7	7.2	10.3	5.4	0.4	0.3	0.1	-
Chemicals and other materials	13.0	13.8	8.0	8.7	11.7	6.5	0.2	0.4	(0.2)	-
Financials	14.4	13.7	9.4	7.5	(6.7)	(5.0)	0.2	(0.2)	0.4	-
Real estate and construction	4.2	4.8	3.4	3.6	(8.4)	13.3	(0.8)	(0.7)	(0.1)	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	15.0	1.4	13.4	11.3	1.8	-
Impact of gearing					1.2	-	1.2	-	-	1.2
Total (including gearing)**					16.4	1.4	14.8	11.3	1.8	1.2

 

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 15.0% against a benchmark return of 1.4% translates into a relative return of 13.4%, divide the portfolio return of 115.0 by the benchmark return of 101.4, 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 16.4% excludes expenses and, therefore, differs from the NAV return

       (after deducting borrowings at fair value) of 15.3% as a result.

Investment Changes (£'000)

	Valuation at  31 August 2010	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 August 2011
Equities:
Information, communication and utilities	10,103	5,065	6,053	21,221
Retail	14,003	(2,049)	5,009	16,963
Commerce and services	34,603	(2,342)	3,291	35,552
Electricals and electronics	22,051	159	1,290	23,500
Manufacturing and machinery	18,978	(2,959)	2,159	18,178
Pharmaceuticals and food	7,844	2,850	768	11,462
Chemicals and other materials	12,565	-	1,190	13,755
Financials	12,969	-	(1,089)	11,880
Real estate and construction	4,636	1,542	(405)	5,773
Total equity investments	137,752	2,266	18,266	158,284
Net liquid assets	5,889	(1,915)	(40)	3,934
Total assets	143,641	351	18,226	162,218
Bank loans	(27,508)	(113)	(890)	(28,511)
Shareholders' funds	116,133	238	17,336	133,707

TWENTY LARGEST HOLDINGS at 31 August 2011
Name	Business	2011 Value £'000	2011 % of total assets	2010 Value £'000
Itochu	Trading conglomerate	6,401	3.9	5,167
Don Quijote	Discount store operator	5,667	3.5	3,905
Japan Tobacco	Tobacco manufacturer	4,913	3.0	3,762
KDDI	Mobile telecommunications	4,559	2.8	3,125
Start Today	Internet fashion retailer	4,559	2.8	1,490
Rakuten	Internet retailer	4,498	2.8	3,198
Gree	Social network games	3,965	2.4	1,516
Canon	Printers and copiers	3,852	2.4	3,540
Mitsubishi Electric	Industrial electric conglomerate	3,748	2.3	3,188
Misumi Group	Precision machinery parts distributer	3,551	2.2	3,115
Yamada Denki	Major consumer electronics retailer	3,474	2.1	3,136
Inpex	Oil and gas producer	3,400	2.1	2,420
Otsuka Corp	IT solutions for companies	3,386	2.1	3,441
Osaka Securities Exchange	Stock exchange	3,374	2.1	3,244
HIS	Travel agency	3,348	2.1	2,726
Asics	Sports shoes and clothing	3,294	2.0	2,109
Sysmex	Medical equipment	3,269	2.0	2,913
Shimadzu	Environmental testing equipment	3,159	2.0	2,910
Asahi Glass	TV, car and construction glass	3,142	1.9	3,323
So-Net Entertainment	Internet operator and investor	3,084	1.9	-
		78,643	48.4	58,228

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:

	2011 £'000		2010 £'000
Investment management fee	1,331		1,188

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 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.

At 31 August 2010	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	137,752		6,032		(27,508)		95		116,371
Total exposure to currency risk	137,752		6,032		(27,508)		95		116,371
Sterling	-		61		-		(299)		(238)
	137,752		6,093		(27,508)		(204)		116,133

*      Includes net non-monetary assets of £22,000.

Currency Risk Sensitivity

At 31 August 2011, 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 £13,388,000 (2010 - £11,637,000). 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 2011 is shown below. The main change to the interest rate risk profile during the year was the repayment of the ING ¥1,800 million loan facility upon expiry and the draw down of the Scotiabank Europe PLC ¥1,800 million loan.

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:

	2011			2010
	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	28,511	2.2%	31 months	27,508	2.1%	25 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.

118.4% (2010 - 118.6%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2011 would have increased total net assets and net return on ordinary activities after taxation by £15,828,000 (2010 - £13,775,000). 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	2011 £'000	2010 £'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	- 6,023 22,488	13,948 - 13,560
	28,511	27,508

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 and the Bank of New York Mellon 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:

	2011 £'000	2010 £'000
Cash and deposits	4,162	6,093
Debtors and prepayments	191	211
	4,353	6,304

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

Fair Value of Financial Assets and Financial Liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet with the exception of the long term borrowings which are stated at amortised cost in accordance with FRS 26. The fair value of borrowings is shown below.

	2011			2010
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		28,511	28,925	27,508	28,026

* 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 unnecessary compliance burdens on the Company or threaten the viability of the investment company structure.  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

13 October 2011

INCOME STATEMENT

	For the year ended 31 August 2011				For the year ended 31 August 2010
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	18,266	18,266		-	3,640	3,640
Currency losses (note 2)	-	(930)	(930)		-	(3,248)	(3,248)
Income (note 3)	2,664	-	2,664		2,605	-	2,605
Investment management fee	(1,331)	-	(1,331)		(1,188)	-	(1,188)
Other administrative expenses	(313)	-	(313)		(267)	-	(267)
Net return before finance costs and taxation	1,020	17,336	18,356		1,150	392	1,542
Finance costs of borrowings	(596)	-	(596)		(530)	-	(530)
Net return on ordinary activities before taxation	424	17,336	17,760		620	392	1,012
Tax on ordinary activities	(186)	-	(186)		(173)	-	(173)
Net return on ordinary activities after taxation	238	17,336	17,574		447	392	839
Net return per ordinary share (note 5)	0.38p	27.99p	28.37p		0.72p	0.63p	1.35p

 All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

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 2011

	At 31 August 2011		At 31 August 2010
	£'000	£'000	£'000	£'000
Fixed assets Investments		158,284		137,752
Current assets
Debtors	191		211
Cash and deposits	4,162		6,093
	4,353		6,304
Creditors: Amounts falling due within one year	(419)		(14,363)
Net current assets/(liabilities)		3,934		(8,059)
Total assets less current liabilities		162,218		129,693
Creditors: Amounts falling due after more than one year		(28,511)		(13,560)
Total net assets		133,707		116,133
Capital and reserves
Called up share capital		3,097		3,097
Share premium		22,110		22,110
Capital redemption reserve		203		203
Capital reserve		115,553		98,217
Revenue reserve		(7,256)		(7,494)
Shareholders' funds		133,707		116,133

Net asset value per ordinary share	215.2p	186.7p
(after deducting borrowings at fair value)
Net asset value per ordinary share (after deducting borrowings at par value)	215.9p	187.5p
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 13 October 2011.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

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

For the year ended 31 August 2010

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2009	3,097	22,110	203	97,825	(7,941)	115,294
Net return on ordinary activities after taxation	-	-	-	392	447	839
Shareholders' funds at 31 August 2010	3,097	22,110	203	98,217	(7,494)	116,133

* The capital reserve balance as at 31 August 2011 includes investment holding gains of £36,350,000 (2010 - gains of £19,756,000).

 

CASH FLOW STATEMENT
	For the year ended 31 August 2010						For the year ended 31 August 2009
	£'000		£'000				£'000			£'000
Net cash inflow from operating activities			920							1,095
Net cash outflow from servicing of finance	(658)						(511)
Financial investment			(658)							(511)
Acquisitions of investments	(17,954)						(24,026)
Disposals of investments	15,688						23,204
Exchange differences on settlement of investment transactions	26						(87)
Net cash outflow from financial investment			(2,240)							(909)
Net cash outflow before financing			(1,978)							(325)
Financing
Bank loans drawn down	13,651						5,515
Bank loans repaid	(13,538)						(5,516)
Net cash inflow/(outflow) from financing			113							(1)
Decrease in cash			(1,865)							(326)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year			(1,865)							(326)
Net cash (inflow)/outflow from bank loans			(113)							1
Exchange differences on bank loans			(890)							(4,028)
Exchange differences on cash			(66)							636
Movement in net debt in the year			(2,934)							(3,717)
Net debt at 1 September			(21,415)							(17,698)
Net debt at 31 August			(24,349)							(21,415)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation			18,356							1,542
Gains on investments			(18,266)							(3,640)
Other exchange differences			40							(549)
Exchange differences on bank loans			890							4,028
Amortisation of fixed interest book cost			-							(2)
Decrease/(increase) in accrued income			23							(95)
Increase in other debtors			(1)							(7)
Increase/(decrease) in creditors			66							(17)
Overseas tax suffered			(188)							(165)
Net cash inflow from operating activities			920							1,095

NOTES

1.	The financial statements for the year to 31 August 2011 have been prepared on the basis of the same accounting policies set out in the Company's Annual Financial Statements at 31 August 2010. 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 2011 £'000	31 August 2010 £'000
2.	Currency Losses
	Exchange differences on bank loans		(890)	(4,028)
	Other exchange differences		(40)	780
			(930)	(3,248)
3.	Income
	Income from investments and interest receivable		2,664	2,605
4.	No final dividend will be declared.

5.	Net Return per Ordinary Share
		2011				2010
		Revenue	Capital	Total		Revenue	Capital	Total
	Net return on ordinary activities after taxation	0.38p	27.99p	28.37p		0.72p	0.63p	1.35p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £238,000 (2010 - net revenue return of £447,000), 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 £17,336,000 (2010 - £392,000), 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 2010 - £27.5 million (¥3.55 billion)). The ¥1,800 million loan with ING was repaid on 31 May 2011 and was replaced with a new ¥1,800 million loan with Scotiabank Europe PLC which expires on 19 May 2014.

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 £14,000 (2010 - £18,000) and transaction costs on sales amounted to £13,000 (2010 - £17,000).
8.	At 31 August 2011 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 2011. The financial information for 2010 is derived from the statutory accounts for 2010, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2011 and the 2010 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 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at 12.30pm on Tuesday 29 November 2011.
10.	The Report and Accounts will be available on the Company's page on the Managers' website www.japantrustplc.co.uk on or around 26 October 2011‡.
	‡ 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

 

 

FR FEMSAMFFSELS