Annual Financial Report

RNS Number : 5043G
Baillie Gifford Japan Trust PLC
06 November 2018
 

The Baillie Gifford Japan Trust PLC

 

Legal Entity Identifier: 54930037AGTKN765Y741

Regulated Information Classification: Annual Financial and Audit Reports

 

Annual Financial Report

 

This is the Annual Financial Report of The Baillie Gifford Japan Trust PLC as required to be published under DTR 4 of the UKLA Listing Rules.

The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for the years ended 31 August 2017 or 31 August 2018 but is derived from those accounts. The Company's Auditors have reported on the Annual Report and Financial Statements for 2017 and 2018; their reports were unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under 498(2) or 498(3) of the Companies Act 2006. Statutory accounts for the year ended 31 August 2017 have been filed with the Registrar of Companies and the statutory accounts for the year ended 31 August 2018 will be delivered to the Registrar in due course.

The Annual Report and Financial Statements for the year ended 31 August 2018, including the Notice of Annual General Meeting, has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM and is also available on Baillie Gifford Japan's page of the Baillie Gifford website at www.japantrustplc.co.uk 

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 Limited

Company Secretaries

6 November 2018


Chairman's Statement

 

This has been another good year for the Japan Trust with net asset value (after deducting borrowings at fair value) rising 22.2%, significantly ahead of the 7.8% rise in the benchmark TOPIX index total return (in sterling terms). The share price increased by 20.2%, breaking through 800p for the first time, while the Company's shares traded at a premium to NAV (after deducting borrowings at fair value) of 2.5% at 31 August 2018. The Company was promoted into the FTSE 250 in March 2018.

Our emphasis remains on the long-term strategy however and so it is particularly pleasing to note this strong performance builds on impressive five and ten year records for the Japan Trust.

The Managers' track record of successful stock selection (+10.5%) was a major contributor to the returns with additional benefit from gearing (+1.7%); further performance details are to be found in the Managers' Report.

Investment income rose by £2.39m to £10.87m for the year, due in the main to the continuing increase in dividends. Expenses rose by £1.26m, due mostly to higher management fees (up £1.17m to £4.35m), in line with the substantial increase in net asset value.

Overall revenue gain per share was 2.54p (2017 - 2.80p) while ongoing charges for the year reduced slightly to 0.73% (2017 - 0.78%).

 

Portfolio Management Responsibilities

 

As noted in our last Annual Report, Sarah Whitley was due to retire from Baillie Gifford on 30 April 2018 after managing the Company's portfolio since 1991 and has been succeeded by Matthew Brett as the Company's portfolio manager assisted by Praveen Kumar as deputy manager.

The promise of a smooth management transition was delivered and the Board has been more than satisfied with the manner in which this milestone was passed and how Matthew Brett is managing the Japan Trust.

Gearing

 

Gearing amounted to 13% of shareholders' funds at the start of the year and ended the year at 11%. Gross borrowings increased to ¥16.5bn (2017 - ¥11.7bn), while the sterling value of these loans in the balance sheet rose to £114.5m at the year end (2017 - £82.5m). Given the very low cost of yen loans and the positive contribution of gearing to performance during the year, we continue to believe that borrowing to invest in Japanese equities is a sensible strategy.

 

Dividend

 

The Company's objective has always been, and will remain, to achieve long term capital growth and investors should not expect to receive any income. This year the revenue reserve deficit has been extinguished by the net revenue return creating a revenue reserve surplus of £475,000. To ensure investment trust status is maintained, the revenue reserve surplus will be distributed in full supplemented by a small distribution from realised capital reserves, as permitted by the Company's Articles. In future, the intention is not to make distributions from capital as the Board is firmly of the view that capital growth remains the focus of the Company. A final dividend of 0.60p per share will be put to shareholders for approval at the Annual General Meeting to be held on 6 December 2018 and, if approved, will be paid on 14 December 2018 to shareholders on the register at the close of business on 30 November 2018.

 

Share Capital

 

The Company did not exercise its share buy back powers during the year; however, your Board believes it is important that the Company retains this power and so, at the Annual General Meeting, is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury for cash on a non-pre-emptive basis. Shares are issued/reissued only at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders.

During the year to 31 August 2018, 6.6m shares were issued at a premium to net asset value raising proceeds of £53.1m, continuing the trend of recent years. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting and we will continue to issue shares only when at a premium to net asset value. This authority will expire at the conclusion of the Annual General Meeting in 2019.

 

Continuation Vote

 

Our shareholders have the right to vote annually on whether the Company should continue in business and will have the opportunity to do so again at the Annual General Meeting to be held on 6 December 2018.

Last year, the Company again received support for its continuation. Your Directors still believe there remain attractive opportunities in selected, well-run Japanese companies benefiting the long-term favourable outlook for the Japan Trust. To that end, my fellow Directors and I intend, where possible, to vote our own shareholdings in favour of the resolution and hope that all 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, all of which forms part of our succession planning discussions during Nomination Committee meetings. Given the above, it also believes that membership of the Board should be refreshed over time and to that end, after 12 years of excellent service, Paul Dimond CMG is standing down at the AGM. Following a robust recruitment process earlier in the year, we were delighted to welcome Joanna Pitman to the Board. Her Japanese experience and knowledge will undoubtedly be of great benefit to the Company in the years ahead.

 

 Outlook

 

As in previous years, our Managers have continued to find interesting companies operating in both domestic and export markets in which to invest. The ongoing success of their 'bottom up' approach to stock picking adds significantly to the value of the portfolio. As a Board, we believe there remain numerous opportunities for investment in Japanese companies able to capitalise on the changes within the wider economy.

Although the Trust concentrates more on micro than macro issues, it is worth reflecting on some of the latter given that Prime Minister Shinzo Abe recently won the leadership contest in the ruling Liberal Democratic Party by a wide margin. This prospectively leaves him in office until 2021 as Japan's longest serving Prime Minister. Debate about his likely legacy focuses on an expansionist economic strategy (known as Abenomics) and on constitutional reform covering the role of the Self-Defence Forces. The Prime Minister has expressed his firm intention to go ahead with the previously delayed increase in the sales tax from 8% to 10%, in October 2019. A further notable event is set for May with the Imperial succession when Crown Prince Naruhito takes over on the abdication of His Majesty Emperor Akihito.

Against the background of an ageing population and low birthrate, the labour market is extremely tight thus stimulating labour market related innovation among companies in which the Trust has invested.

Corporate governance remains an important pillar of the Government's economic programme. Under the revised Stewardship Code, disclosure, fiduciary responsibility, increased return on equity and reform of cross-shareholding are all highlighted and we have been pleased to see something of a watershed in corporate leaders' prioritisation of shareholder interests. Your Trust continues to examine attitudes to corporate governance in the companies considered for investment.

The economy has grown for six successive years and, despite some distressing and damaging natural disasters this year, the signs are encouraging for 2019. There also remain some political tensions in the region, especially over US-China trade relations; however we remain positive on the outlook for investments in the Baillie Gifford Japan Trust portfolio.

 

Nick AC Bannerman

Chairman

24 October 2018

 

 

For a definition of terms see Glossary of Terms at the end of this announcement.

 

Past performance is not a guide to future performance.

 

Managers' Report

 

Philosophy

As noted by the Chairman, this year we have had a change of portfolio manager for the first time in many years. Consequently, we thought it would be opportune briefly to restate our philosophy.

We believe in genuinely long-term growth investing. This means maximising returns by only investing in companies in which we have real conviction rather than being distracted by an index. It means investing where there are opportunities regardless of the size of the company; resulting in a bias towards smaller companies, which often have the best growth prospects, but being open-minded to larger ones where they meet our criteria. It also means holding companies for long time periods so that our clients benefit from the significant increases in business value that can occur over many years in growth companies.

Baillie Gifford is a partnership with a sole focus on asset management. This structure means that we are resilient to external pressures and answerable only to our clients. It provides the stability that we need to be able to invest for the long haul. Baillie Gifford Japan Trust launched in 1981 and in all those years there have been only two previous portfolio managers.

We believe in the investment trust structure. The permanent capital, ability to use gearing over the long-term, investment flexibility afforded by the mandate and Board oversight combine to give an excellent vehicle for compounding wealth. Furthermore, we remain committed to sharing the benefits of scale with shareholders over the long-term.

 

Performance

Over the past year the NAV per share with borrowings deducted at fair value has increased by 22.2% to 834.0p which compares very favourably to the rise in the Company's benchmark of 7.8%. Baillie Gifford believes that performance should be measured over longer periods and over five years the NAV has outpaced the benchmark by 8.0% p.a. and over ten years by 8.1% p.a., demonstrating the benefit to shareholders of an active, long-term, growth orientated approach.

The Company's total assets increased to just over £870m, a rise of over £200m during the year, due to a combination of outperformance, a strong TOPIX and share issuance. A larger trust will be of benefit to shareholders as fixed costs are spread over a broader base and due to the tiered fee structure a larger proportion of the assets are charged a lower fee. Consequently ongoing charges fell from 0.78% last year to 0.73% this year.

The main driver of returns was stock picking. The Company also borrows in yen to invest in stocks and this decision was helpful given the strong absolute performance in yen. Finally, the rise in the TOPIX in yen terms contributed positively. The yen weakened a little (1.6%) against sterling to ¥144.1 per £1, fractionally reducing the return in sterling.

As in last year's report, the portfolio is grouped into four different styles of growth to reflect our process. Each of these styles offers different risks and opportunities. Secular growth, the largest part of the portfolio, includes companies that we feel have an opportunity to grow rapidly but where there are a number of potential outcomes. Growth stalwarts are companies where growth is less rapid but more predictable, whilst those categorised as special situations are companies whose recent performance has not been good but where we see a reason to believe that improvements are underway. The cyclical growth stocks are those whose earnings do not rise every year but where we expect the earnings to be higher from one cycle to the next. The mix of the four different styles of growth will change somewhat over the years but it seems inevitable that our positive approach to investing will result in a high weighting towards secular growth.

Performance is primarily driven by individual company share prices so we think it is most meaningful to list the top ten and bottom ten contributors to performance over one and five years. Once again we can see the asymmetric nature of stock returns; which means that a good idea can do much more to help returns than a bad idea can hinder them. Over the last year the largest contributor to performance (SBI) delivered more than double the performance that the worst (Rakuten) subtracted. Over five years each of the top ten contributors individually delivered more performance than the worst subtracted. Therefore we continue to believe that it is important for us to focus on the upside potential of individual stocks and stay the course when we have found a good idea.

We have had a number of successes in the Internet area this year including SBI (online broker and venture capital investor), CyberAgent (internet advertising and content) and Digital Garage (internet investor). However, we also had successes in diverse areas including Katitas (real-estate), Outsourcing (staffing) and SanBio (stem-cell treatment). None of these companies are currently well-known outside Japan, reflecting our philosophy of investing where the opportunities are.

At all times we strive to pay attention to the long-term prospects of businesses rather than paying undue attention to share prices. Last year both Rakuten and Suruga Bank were disappointing in share price terms. During the year we reviewed Rakuten; noting that the opportunity available to the company is large and the probability of success significant we concluded that increasing the holding was appropriate. In contrast, significant deficiencies in the management of Suruga Bank came to light during the year and since we no longer have conviction in the company's prospects we sold the shares.

In total we bought eight new holdings during the year and sold eight holdings. Turnover was 15.6% during the year. The continued issuance of shares also allowed an element of reshaping the portfolio without needing to sell anything.

We continue to back entrepreneurialism in Japan. Two of the new holdings, Katitas and Mercari, were bought in their IPO (Initial Public Offering) during the year. Meanwhile another three, Noritsu Koki, Rizap and JAFCO, are companies that have been transformed by more dynamic management.

We also continue to favour businesses with solid franchises and a long growth runway. Zenkoku Hosho, Sato Holdings and Shimano are each leaders in their respective niches and companies where we believe that there are many years of growth to come.

 

Investment Environment

 

The over-arching theme domestically is a normalising of the investment environment as many historic issues have been improved.

Japanese corporate governance has continued to progress and a concrete output of this is that shareholder returns through dividends and buybacks have continued to rise. While areas for improvement remain, especially regarding cash hoarding, we should also acknowledge that the absence of scrip dividends, very low options issuance and lack of excessive pay for managers are helpful for minority shareholders. Meanwhile the political situation is quiet as Mr Abe continues his journey to become Japan's longest serving Prime Minister.

We have also observed that conversations with the word 'deflation' seem to have become vanishingly rare. While there continues to be lively debate around whether the Bank of Japan will be able to achieve 2% inflation we think that the most important thing is to have moved beyond the destructive effects of deflation. Wages are rising, unemployment is very low, land prices in the major urban areas are rising, and bank lending is growing. Meanwhile corporate confidence is strong, evidenced by strong rises in capital expenditure.

Where might the challenges come from? The most obvious today are changes to established international norms. Up to a point a rise in populism is part of normal functioning democracy; beyond that it can lead to difficulties, trade wars and worse. Another risk is that of recession. Since the Global Financial Crisis of a decade ago we have enjoyed a largely synchronous global economic expansion creating significant opportunities for Japanese businesses. Cycles are difficult to predict but inevitable.

 

Outlook

 

While volatility and set-backs from time to time will happen, the most important thing for us is to have access to quality growth companies. Many of the companies that we own are still nearer the start than the end of their growth. The Internet continues to allow companies to compete against incumbents with a powerful combination of a lower cost-base and better service. Robotics and automation businesses listed in Japan have world-leading competitiveness and a very large growth opportunity as they enter new industries. Finally, new categories of growth companies continue to appear - emerging healthcare being a recent example.

We continue to be excited about the opportunities for growth stock-picking in Japan and believe that a well-executed strategy can deliver results. Your Company is positioned to benefit from long-term technology changes and we will strive to build on its heritage of success.

 

Baillie Gifford

24 October 2018

 

 

For a definition of terms see Glossary of Terms at the end of this announcement.

 

Past performance is not a guide to future performance.

 

Equity Portfolio by Growth Category

As at 31 August 2018

 

 

Secular

Growth*

% of

total assets


 

  Growth

  Stalwarts*

% of

total assets


 

Special

 Situations*

% of

total

assets


 

Cyclical

Growth*

% of

total assets

SBI

3.6

Nitori

Zenkoku Hosho

Park24

Fukuoka Financial

Mitsubishi UFJ Lease

  & Finance

Asics

Sawai

  Pharmaceutical

Secom

1.4

1.4

1.3

0.9

 

0.6

0.6

 

0.5

0.5

SoftBank

5.7

Persol Holdings

Itochu

Sumitomo Mitsui Trust

Disco

Murata Manufacturing

Nifco

Mitsubishi Electric

Toyo Tire & Rubber

Advantest

Sumitomo Metal Mining

Iida Group

Isuzu Motors

Invincible Investment

Katitas

Mazda Motor

2.2

1.7

1.7

1.5

1.5

1.5

1.4

1.4

1.1

1.1

1.0

0.9

0.8

0.6

0.6

Outsourcing

3.0

Sony

2.3

CyberAgent

2.8

Tokyo Tatemono

1.3

Start Today

2.7

Renesas Electronics

0.7

M3

2.5

JAFCO

0.5

Sysmex

2.5

Colopl

0.3

Rakuten

2.5



Inpex

2.3



Kubota

2.2



Misumi Group

2.1



Recruit Holdings

2.1



Yaskawa Electric

2.1



GMO Internet

2.0



Nidec

2.0



Shimadzu

1.9



Don Quijote

1.9



Fanuc

1.7



H.I.S.

1.6



SMC

1.4



Digital Garage

1.3



MonotaRO

1.3



Sato

1.3



iStyle

1.2



SanBio

1.2



Toyota Tsusho

1.1



Broadleaf

1.0



Subaru

1.0



Topcon

0.8



Infomart

0.7



Lifull

0.7



IRISO Electronics

0.6



Keyence

0.6



Noritsu Koki

0.6



Peptidream

0.6



Nippon Ceramic

0.5



Rizap

0.5



Shimano

0.5



Cyberdyne

0.4



Pigeon

0.4



Mercari

0.3



Healios K.K.

0.2



 




 




Total

59.7

Total

7.2

Total

10.8

Total

19.0

 

*A definition of growth categories can be found in the Managers' Report above.

 

 

 

 

 

 

Stock Level Attribution

 

Top Ten Relative Stock Contributors

Year to 31 August 2018



Bottom Ten Relative Stock Contributors

Year to 31 August 2018


 

 

 

 

 

Name

Portfolio (average weight)

%

Index

(average

weight)

%

 

 

Contribution

%


 

 

 

Name

 

Portfolio (average weight)

%

Index

(average weight)

%

 

 

Contribution

%

SBI

3.2

0.1

1.9


Rakuten

1.9

0.2

(0.7)

Katitas

1.1

0.0

1.4


Suruga Bank

0.7

0.1

(0.5)

CyberAgent

2.6

0.1

1.2


Cyberdyne

0.6

0.0

(0.4)

M3

2.5

0.2

1.0


Lifull

1.1

0.0

(0.4)

Digital Garage

2.0

0.0

0.9


Toyo Tire & Rubber

1.8

0.0

(0.4)

Outsourcing

3.3

0.0

0.9


Renesas Electronics

0.9

0.0

(0.4)

Shimadzu

2.0

0.1

0.7


Kubota

2.1

0.4

(0.3)

SanBio

0.8

0.0

0.7


Takara Leben

0.5

0.0

(0.2)

iStyle

1.2

0.0

0.7


Mazda Motor

0.9

0.2

(0.2)

MonotaRO

0.8

0.1

0.7


Subaru

1.4

0.4

(0.2)

 

Top Ten Relative Stock Contributors

5 years to 31 August 2018



Bottom Ten Relative Stock Contributors

5 years to 31 August 2018


 

 

 

 

Name

Portfolio (average weight)

%

Index

(average

weight)

%

 

 

Contribution

%


 

 

 

Name

 

Portfolio (average weight)

%

Index (average weight)

%

 

Contribution

%

Outsourcing

1.6

0.0

3.5


Rakuten

2.7

0.3

(1.4)

Start Today

2.2

0.1

2.8


Mazda Motor

1.8

0.3

(1.1)

CyberAgent

2.3

0.1

2.3


Tokyo Tatemono

2.0

0.1

(1.1)

IRISO Electronics

2.4

0.0

2.2


Modec

0.7

0.0

(0.9)

Yaskawa Electric

2.6

0.1

2.2


Aeon Mall

0.6

0.1

(0.8)

Misumi

2.7

0.1

2.2


Sumitomo Mitsui Trust

1.9

0.4

(0.8)

SBI

2.3

0.1

2.0


Takara Leben

0.7

0.0

(0.6)

Persol Holdings

2.7

0.1

1.9


Inpex

1.9

0.3

(0.5)

M3

2.5

0.1

1.9


Kakaku.com

0.8

0.1

(0.5)

Sysmex

2.9

0.2

1.8


Nintendo

0.0

0.7

(0.5)

Source: StatPro and relevant underlying index providers. Baillie Gifford Japan Trust relative to TOPIX total return, in sterling terms. See disclaimer at the end of this announcement.


Holding Period

As at 31 August 2018

 

 

 

 

>10 years

%

of total

assets



 

 

5-10 years

%

of total

assets



 

 

2-5 years

%

of total

assets



 

 

<2 years

%

of total

assets

Sysmex

2.5



SoftBank

5.7



Outsourcing

3.0



Zenkoku Hosho*

1.4

Rakuten

2.5



SBI

3.6



CyberAgent

2.8



MonotaRO

1.3

Inpex

2.3



Start Today

2.7



Sony

2.3



Sato*

1.3

Persol Holdings

2.2



M3

2.5



Recruit Holdings

2.1



Invincible Investment

0.8

Kubota

2.2



Yaskawa Electric

2.1



Nidec

2.0



Renesas Electronics

0.7

Misumi Group

2.1



GMO Internet

2.0



Fanuc

1.7



Peptidream

0.6

Shimadzu

1.9



Sumitomo Mitsui Trust

1.7



Murata Manufacturing

1.5



Noritsu Koki*

0.6

Don Quijote

1.9



Nifco

1.5



Park24

1.3



Keyence

0.6

Itochu

1.7



Disco

1.5



SanBio

1.2



Katitas*

0.6

H.I.S.

1.6



Toyo Tire & Rubber

1.4



iStyle

1.2



Secom

0.5

Mitsubishi Electric

1.4



Nitori

1.4



Broadleaf

1.0



JAFCO*

0.5

SMC

1.4



Digital Garage

1.3



Iida Group

1.0



Rizap*

0.5

Tokyo Tatemono

1.3



Toyota Tsusho

1.1



Topcon

0.8



Shimano*

0.5

Mitsubishi UFJ Lease & Finance

0.6



Sumitomo Metal Mining

1.1



Infomart

0.7



Cyberdyne

0.4

IRISO Electronics

0.6



Advantest

1.1



Sawai Pharmaceutical

0.5



Colopl

0.3

Total

26.2



Subaru

1.0



Nippon Ceramic

0.5



Mercari*

0.3





Fukuoka Financial

0.9



Total

23.6



Healios K.K.

0.2





Isuzu Motors

0.9







Total

11.1





Lifull

0.7













Asics

0.6













Mazda Motor

0.6













Pigeon

0.4






*

Stocks bought within the past year.





Total

35.8









 

 

 


List of Investments as at 31 August 2018

 

 

 

Name

 

 

Business

 

Value

£'000

 

% of

 total assets

Absolute

Performance†

%

Relative

Performance†

%

14.0  

5.7  

 

103.2  

88.4  

 

43.5  

33.1  

 

61.9  

 

11.2  

3.2  

 

40.8  

30.6  

 

68.9  

56.7  

 

(35.8) 

(40.5) 

 

15.0  

6.7  

 

44.8  

34.2  

 

(8.9) 

(15.5) 

 

10.2  

2.2  

 

0.6  

(6.7) 

 

53.3  

42.1  

 

11.9  

3.8  

 

27.8  

18.5  

 

34.3  

24.6  

 

61.8  

50.1  

 

27.9  

18.6  

 

10.0  

2.0  

 

2.4  

(5.0) 

 

18.7  

10.1  

 

(1.8) 

(8.9) 

 

12,939

1.5

0.7  

(6.6) 

 

(3.4) 

(10.4) 

 

14.0  

5.7  

 

(1.8) 

(8.9) 

 

(12.9) 

(19.2) 

 

(2.7) 

(9.7) 

 

(7.4) 

(14.1) 

 

2.2* 

(2.5)*

 

84.5  

71.1  

 

73.4  

60.8  

 

24.3  

15.3  

 

0.8  

(6.5) 

 

10,905

14.6* 

15.5* 

 

177.7  

157.6  

 

106.4  

91.4  

 

(4.8) 

(11.7) 

 

12.7  

4.5  

 

Advantest

Semiconductor testing devices

1.1

44.6  

34.1  

 

11.0  

3.0  

 

(12.8) 

(19.1) 

 

77.3  

64.4  

 

30.2  

20.8  

 

12.1  

4.0  

 

9.9  

1.9  

 

(0.7) 

(7.9) 

 

61.7  

50.0  

 

(24.8) 

(30.2) 

 

List of Investments as at 31 August 2018 (Ctd)

 

 

Name

 

 

Business

 

   Value

   £'000

 

% of

total assets

Absolute†

Performance

%

Relative†

Performance

%

 

(26.0) 

(31.4) 

 

13.4  

5.2  

 

Mazda Motor

Car manufacturer

0.6 

(20.0) 

(25.8) 

 

IRISO Electronics

Specialist auto connectors

0.6 

14.8  

6.4  

 

Peptidream

Drug discovery and development platform

0.6 

11.4  

3.3  

 

Noritsu Koki

Holding company with interests in biotech and

  agricultural products

0.6 

12.2* 

11.6* 

 

Keyence

Manufacturer of sensors

0.6 

8.2  

0.4  

 

141.2* 

132.5* 

 

0.6 

1.5  

(5.8) 

 

(3.3)*

(2.2) 

 

(0.8) 

(8.0) 

 

2.2  

(5.2) 

 

4,099 

0.5 

12.2  

4.1  

 

JAFCO

Forms venture capital groups

4,051 

0.5 

4.6* 

4.3* 

 

12.6* 

9.3* 

 

25.4  

16.3  

 

(40.3) 

(44.7) 

 

24.5* 

26.3* 

 

(46.9) 

(50.8) 

 

20.8  

12.0  

 

Total Investments


842,045 

96.7 



 

Net Liquid Assets


28,545 

3.3 



 

Total Assets


870,590 

100.0 



 

Bank Loans


(114,486)

(13.2)



 

Shareholders' Funds


756,104 

86.8 



 







†    Absolute and relative performance have been calculated on a total return basis over the period 1 September 2017 to 31 August 2018. For investments held for part of the year, the return is for the period they were held. Absolute performance is in sterling terms; relative performance is against TOPIX total return (in sterling terms).

*     Figures relate to part period returns.

Source: Baillie Gifford/StatPro and relevant underlying index providers. See disclaimer at the end of this announcement.

 

Past performance is not a guide to future performance.

 

Key Performance Indicators

 

The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:

 

- the movement in net asset value per ordinary share compared to the benchmark;

- the movement in the share price;

- the premium/discount of the share price to the net asset value per share; and

- the ongoing charges.

 

An explanation of these measures can be found in the Glossary of Terms at the end of this announcement.

The one, five and ten year records for the KPIs can be found on pages 4 to 6 of the Annual Report and Financial Statements.

In addition to the above, the Board considers peer group comparative performance.

 

Future Developments of the Company

 

The outlook for the Company for the next 12 months is set out in the Chairman's Statement and the Managers' Report above.

 

Related Party Transactions

 

The Directors' fees for the year and Directors' shareholdings at 31 August 2018 are detailed in the Directors' Remuneration Report on pages 28 and 29 of the Annual Report and Financial Statements respectively. No Director has a contract of service with the Company.

The management fee due to Baillie Gifford and Co Limited is set out in note 3 below and the amount accrued at 31 August 2018 is set out in note 11 on page 43 of the Annual Report and Financial Statements. Details of the Investment Management Agreement are set out below.

 

Investment Management Fee

 

The Investment Management Agreement between the AIFM and the Company sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than 6 months' notice or on shorter notice in certain circumstances. Compensation would only be payable if termination occurred prior to the expiry of the notice period. Careful consideration has been given by the Board as to the basis on which the management fee is charged. The Board considers that maintaining a relatively low ongoing charges ratio is in the best interests of the shareholders. The Board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance. The annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets, calculated and payable quarterly.

 

The details of the management fee are as follows:

 

2018

£'000


2017

£'000

Investment management fee

4,354


3,179

 

Principal Risks

 

As explained on page 24 of the Annual Report and Financial Statements there is an ongoing process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below:

 

Financial Risk - The Company's assets consist of listed securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 18 to the Financial Statements on pages 45 to 48 of the Annual Report and Financial Statements. To mitigate this risk the Board considers at each meeting various portfolio metrics including individual stock performance, the composition and diversification of the portfolio by growth category, purchases and sales of investments, the holding period of each investment and the top and bottom contributors to performance. The Manager provides rationale for stock selection decisions. A strategy meeting is held annually.

 

Investment Strategy Risk - pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or the ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their Net Asset Value. To mitigate this risk, the Board regularly reviews and monitors: the Company's objective and investment policy and strategy; the investment portfolio and its performance; the level of premium/discount to Net Asset Value at which the shares trade; and movements in the share register.

 

Discount Risk - the premium/discount at which the Company's shares trade relative to its net asset value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. The Board monitors the level of premium/discount at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.

 

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments 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. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.

 

Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber security incidents. To mitigate this risk, the Audit Committee receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.

 

Smaller Company Risk - the Company has investments in smaller companies which are generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions. To mitigate this risk, the Board reviews the investment portfolio at each meeting and discusses the investment case and portfolio weightings with the Managers. A spread of risk is achieved by holding a minimum of 40 stocks.

 

Operational Risk - failure of Baillie Gifford's 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. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Audit Committee reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.

 

Leverage Risk - the Company may borrow money for investment purposes (sometimes known as 'gearing' or 'leverage'). 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. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The Company's investments are in listed securities that are readily realisable. Further information on leverage can be found below and in the Glossary of Terms at the end of this announcement.

 

Political Risk - political developments are closely monitored and considered by the Board. The Board has noted the Government's intention that the UK will leave the European Union on 29 March 2019. Whilst there remains considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

 

The Company's maximum and actual leverage levels, (see Glossary of Terms at the end of this announcement) at 31 August 2018 are shown below:

 



Gross

method

Commitment

method

Maximum limit



2.50:1

2.00:1

Actual



1.15:1

1.15:1

 

Viability Statement

 

Notwithstanding that the continuation vote of the Company is subject to the approval of shareholders annually, the Directors have, in accordance with provision C2.2 of the 2016 UK Corporate Governance Code, assessed the prospects of the Company over a period of five years from the Balance Sheet date. The Directors continue to believe this period to be appropriate as it reflects the Company's longer term investment strategy and to be a period during which, in the absence of any adverse change to the regulatory environment and to the tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing the Company nor to the effectiveness of the controls employed to mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a period of five years.

In considering the viability of the Company, the Directors have conducted a robust assessment of each of the principal risks and uncertainties detailed above and in particular the impact of market risk where a significant fall in Japanese equity markets would adversely impact the value of the investment portfolio. The Company's investments are listed and readily realisable and can be sold to meet its liabilities as they fall due, the main liability currently being the bank borrowings. The Directors have also considered the Company's leverage and liquidity in the context of the unsecured fixed term loan facilities of ¥7.2bn and ¥9.3bn expiring in 2020 and 2024 respectively. Specific leverage and liquidity stress testing was conducted during the year. In addition, all of the key operations required by the Company are outsourced to third party service providers and it is reasonably considered that alternative providers could be engaged at relatively short notice.

Based on the Company's processes for monitoring revenue projections, share price premium/discount, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.

 

Going Concern

 

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 below. 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, having assessed the principal risks and other matters set out in the Viability Statement above, that the Company will continue in operational existence for a period of at least twelve months from the date of approval of the Financial Statements. 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.

 

Financial Instruments

 

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 above.

 

(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 has the authority to use forward currency contracts to limit the Company's exposure if it so chooses to anticipated future changes in exchange rates so that the currency risks entailed in holding the assets are mainly eliminated. No forward currency contracts have been used in the current or prior year.

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 2018

 

 

 

Investments

£'000


 

Cash and cash equivalents

£'000


 

 

Bank

loans

£'000


 

 

Other debtors and creditors*

£'000


 

 

Net

exposure

£'000

Yen

842,045


27,728


(114,486)


1,933 


757,220 

Total exposure to   

  currency risk

842,045


27,728


(114,486)


1,933 


757,220 

Sterling

-


60


- 


(1,176)


(1,116)


842,045


27,788


(114,486)


757 


756,104 

* Includes net non-monetary assets of £37,000.

 

 

 

 

 

At 31 August 2017

 

 

 

Investments

£'000


 

Cash and cash equivalents

£'000


 

 

Bank

loans

£'000


 

Other debtors and creditors*

£'000


 

 

Net

exposure

£'000

Yen

652,597


9,789


(82,500)


(4,556)


575,330 

Total exposure to

  currency risk

652,597


9,789


(82,500)


(4,556)


575,330 

Sterling

-


796


- 


(905)


(109)


652,597


10,585


(82,500)


(5,461)


575,221 

*    Includes net non-monetary assets of £29,000.

 

Currency Risk Sensitivity

At 31 August 2018, 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 £75,722,000 (2017 - £63,926,000). A 10% weakening of sterling against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have had a similar 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 2018 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:

 

2018

2017


 

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

114,486

2.0%

53 months

82,500

1.9%

24 months

 

Interest Rate Risk Sensitivity

An increase of 100 basis points in interest rates, with all other variables held constant, would have decreased the Company's total net assets and total return on ordinary activities for the year ended 31 August 2018 by £156,000 (2017 - £293,000). This is mainly due to the Company's exposure to interest rates on its revolving bank loans. A decrease of 100 basis points would have had an equal but opposite effect. The Company does not hold bonds.

 

(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 9 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 above. In addition, various analyses of the portfolio by growth category, length of time held, industrial sector and exchange listing are shown on pages 14 to 16 of the Annual Report and Financial Statements.

111.4% (2017 - 113.5%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2018 would have increased total net assets and net return on ordinary activities after taxation by £84,205,000 (2017 - £65,260,000). 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 7 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 12 of the Annual Report and Financial Statements.

 

 

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

 

 

2018

£'000

2017

£'000

In less than one year

-

31,731

In more than one year, but not more than five years

49,958

50,769

In more than five years

64,528

-


114,486

82,500

 

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 Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Depositary has delegated the custody function to Bank of New York Mellon (International) Limited. Bankruptcy or insolvency of the custodian 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 custodian's 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 Investment Manager.

 

Credit Risk Exposure

The exposure to credit risk at 31 August was:

2018

£'000

2017

£'000

Cash and cash equivalents

27,788

10,585

Debtors

4,647

759


32,435

11,344

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.

 

2018

2017


Book

Value

£'000

Fair*

Value

£'000

Book

Value

£'000

Fair*

Value

£'000

Yen bank loans

114,486

116,111

76,051

82,500

 

* 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 12 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 13 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 7 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page pages 21 and 22 of the Annual Report and Financial Statements.

 

Fair Value of Financial Instruments

The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement.

 

Level 1 - using unadjusted quoted prices for identical instruments in an active market;

Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly  

observable (based on market data); and

Level 3 - using inputs that are unobservable (for which market data is unavailable).

 

The valuation techniques used by the Company are explained in the accounting policies on page 39 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.

 

Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements

 

The Directors are responsible for preparing the Annual 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 are required to prepare the Financial Statements in accordance with applicable law and United Kingdom Accounting Standards, including FRS 102. The Financial Reporting Standard Applicable in the UK and Republic of Ireland. 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 United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;

- assess the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern; and

¾  use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable laws and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the Company's page on the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

 

Responsibility Statement of the Directors in Respect of the Annual Financial Report

 

We confirm to the best of our knowledge:

 

- the Financial Statements, prepared in accordance with applicable law and United Kingdom Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

- the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that the issuer and business faces; and

¾ we consider the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

 

On behalf of the Board

Nick AC Bannerman

24 October 2018

Income Statement

 

For the year ended 31 August 2018

For the year ended 31 August 2017


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Gains on investments

- 

124,982 

124,982 

- 

111,160 

111,160 

Currency gains

- 

581 

581 

- 

2,997 

2,997 

Income (note 2)

10,874 

- 

10,874 

8,480 

- 

8,480 

Investment management fee (note 3)

(4,354)

- 

(4,354)

(3,179)

- 

 (3,179)

Other administrative expenses

(678)

- 

(678)

(592)

- 

(592)

Net return before finance costs and taxation

5,842 

125,563 

131,405 

4,709 

114,157 

118,866 

Finance costs of borrowings

(2,521)

- 

(2,521)

(1,626)

- 

(1,626)

Net return on ordinary activities before taxation

3,321 

125,563 

128,884 

3,083 

114,157 

117,240 

Tax on ordinary activities

(1,087)

- 

(1,087)

(848)

- 

(848)

Net return on ordinary activities after taxation

2,234 

125,563 

127,797 

2,235 

114,157 

Net return per ordinary share (note 4)

2.54p

142.51p

145.05p

2.80p

142.75p

145.55p

Note:

Dividends payable in respect of the year (note 5)

 

0.60p



Nil



 

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.

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

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

 

Balance Sheet as at 31 August

 

2018

2017


£'000

£'000 

£'000

£'000

Fixed assets

Investments held at fair value through profit or loss


842,045 


652,597 

Current assets





Debtors

4,700 


788 


Cash and cash equivalents

27,788 


10,585 



32,488 


11,373 


Creditors

Amounts falling due within one year (note 6)

(3,943)


(37,980)







Net current assets/(liabilities)


28,545 


(26,607)

Total assets less current liabilities


870,590 


625,990 

 

Creditors

Amounts falling due after more than one year (note 6)


(114,486)


(50,769)

Net assets


756,104 


575,221 

 

Capital and reserves





Share capital


4,523 


4,194 

Share premium account


175,455 


122,698 

Capital redemption reserve


203 


203 

Capital reserve


575,448 


449,885 

Revenue reserve


475 


(1,759)

Shareholders' funds


756,104 


575,221




Net asset value per ordinary share

(after deducting borrowings at par value)

835.8p

685.8p

 

Ordinary shares in issue (note 8)

90,459,925

83,879,925

 

 

Statement of Changes in Equity

 

 

For the year ended 31 August 2018

 

Share capital

£'000

 

Share premium

£'000

Capital redemption reserve

£'000

 

Capital reserve*

£'000

 

Revenue reserve

£'000

 

Shareholders' funds

£'000

Shareholders' funds at 1 September 2017

4,194

122,698

203

449,885

(1,759)

575,221

Shares issued

329

52,757

-

-

- 

53,086

Net return on ordinary activities after taxation

-

-

-

125,563

2,234 

127,797

Shareholders' funds at 31 August 2018

4,523

175,455

203

575,448

475 

756,104

 

For the year ended 31 August 2017

 

Share capital

£'000

 

Share premium

£'000

Capital redemption reserve

£'000

 

Capital reserve*

£'000

 

Revenue reserve

£'000

 

Shareholders' funds

£'000

Shareholders' funds at 1 September 2016

3,937

89,123

203

335,728

(3,994)

424,997

Shares issued

257

33,575

-

-

- 

33,832

Net return on ordinary activities after taxation

-

-

-

114,157

2,235 

116,392

Shareholders' funds at 31 August 2017

4,194

122,698

203

449,885

(1,759)

575,221

 

* The capital reserve balance as at 31 August 2018 includes investment holding gains of £393,653,000 (2017 - £334,842,000).

 

Cash Flow Statement

 

For the year ended

31 August 2018

For the year ended

31 August 2017


£'000

   £'000


£'000

£'000

Cash flows from operating activities






Net return on ordinary activities before taxation

128,884 



117,240 


Net gains on investments

(124,982)



(111,160)


Currency gains

(581)



(2,997)


Finance costs of borrowings

2,521 



1,626 


Overseas withholding tax

(1,051)



(834)


Changes in debtors and creditors

(76)



(3)


Cash from operations


4,715 



3,872 

Interest paid


(2,292)



(1,611)

Net cash inflow from operating activities


2,423 



2,261 

Cash flows from investing activities






Acquisitions of investments

(183,574)



(73,979)


Disposals of investments

112,702 



35,795 


Exchange differences on settlement of investment transactions

791 



(46)


Net cash outflow from investing activities


(70,081)



(38,230)

Cash flows from financing activities






Shares issued

53,086 



33,832 


Bank loans drawn down

62,873 



10,360 


Bank loans repaid

(30,402)



- 


Net cash inflow from financing activities


85,557 



44,192 

Increase in cash and cash equivalents


17,899 



8,223 

Exchange movements


(696)



(111)

Cash and cash equivalents at start of period


10,585 



2,473 

Cash and cash equivalents at end of period*


27,788 



10,585 

 

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

 


Notes to the Condensed Financial Statements (unaudited)

 

1.

The Financial Statements for the year to 31 August 2018 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. The accounting policies adopted are consistent with those of the previous financial year. 






2.

Income


31 August 2018

£'000

31 August 2017

£'000


Income from investments


10,874

8,480






3.

Investment Management Fee - all charged to revenue


31 August 2018

£'000

31 August 2017

£'000


Investment management fee


4,354

3,179







Details of the Investment Management Agreement are disclosed above. The annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets, calculated and payable quarterly.

 

4.

Net Return per Ordinary Share






2018

2017



Revenue

Capital

Total

Revenue

Capital

Total


Net return on ordinary activities 

  after taxation

 

2.54p

142.51p

145.05p

 

2.80p

 

142.75p

 

145.55p


Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £2,234,000 (2017 - £2,235,000), and on 88,108,377 (2017 - 79,968,404) ordinary shares, being the weighted average number of ordinary shares in issue during each year.

Capital return per ordinary share is based on the net capital return for the financial year of £125,563,000 (2017 - £114,157,000), and on 88,108,377 (2017 - 79,968,404) ordinary shares, being the weighted average number of ordinary shares in issue during each year

There are no dilutive or potentially dilutive shares in issue.

 

5.

Ordinary Dividends

2018

2017

2018

£'000

2017

£'000

Dividends Payable in respect of the year:

Current year's proposed final dividend

(payable 14 December 2018)

 

 

0.60p

 

 

-

 

 

547

 

 

-

If approved, the recommended final dividend will be paid on 14 December 2018 to shareholders on the register at close of business on 30 November 2018. The ex-dividend date is 29 November 2018. Further information can be found in the Dividend section of the Chairman's Statement.

6.

Total borrowings at 31 August 2018 were £114,486,000 (¥16.5billion), (31 August 2017 - £82,500,000 (¥11.7billion)). Under the Scotiabank Europe plc ¥3.0 billion loan facility, ¥1.5 billion was repaid on 12 December 2017 and the remaining ¥1.5 billion tranche was repaid on 31 August 2018.

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 £88,000 (31 August 2017 - £34,000) and transaction costs on sales amounted to £69,000 (31 August 2017 - £21,000).

8.

At 31 August 2018 the Company had authority to buy back 12,764,723 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. During the year, 6,580,000 (2017 - 5,145,000) shares were issued at a premium to net asset value raising proceeds of £53,086,000 (2017 - £33,832,000).  Between 1 September 2018 and 1 October 2018, the Company issued a further 490,000 shares at a premium to net asset value raising proceeds of £4,115,000.

 

 

Notes to the Condensed Financial Statements (unaudited) (ctd)

 

9.

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2018. The financial information for 2017 is derived from the statutory accounts for 2017 which have been delivered to the Registrar of Companies. The Auditor has reported on the 2017 accounts, their report was unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2018 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

10.

The Annual Report and Financial Statements will be available on the Company's page of the Managers' website www.japantrustplc.co.uk‡ on or around 6 November 2018.

11.

Glossary of Terms


Total Assets

Total assets less current liabilities, before deduction of all borrowings.

 

Net Asset Value

Net Asset Value (NAV) is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue.

 

Net Asset Value (Borrowings at Fair Value)#

Borrowings are valued at an estimate of their market worth.

 

Net Asset Value (Borrowings at Par Value)#

Borrowings are valued at their nominal par value. Par value approximates amortised cost.

 

Net Asset Value (Reconciliation of NAV at par to NAV at Fair)

31 August 2018

£'000

31 August 2017

£'000

Shareholder's Funds (borrowings at par value)

756,104 

575,221 

Add: par value of borrowings

114,486 

82,500 

Less: fair value of borrowings

(116,111)

(85,352)

Shareholders' funds (borrowings at fair value)

754,479

572,369

Shares in issue

90,459,925

83,879,925

Net asset value per ordinary share (borrowings at fair value)

834.0p

682.4p

 

Net Liquid Assets

Net liquid assets comprise current assets less current liabilities excluding borrowings.

 

Premium/Discount#

As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.

 

Total Return

The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex dividend.


Notes to the Condensed Financial Statements (unaudited) (ctd)

 

Glossary of Terms (Ctd)


Ongoing Charges#

The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value).

 

Gearing

At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. The level of gearing can be adjusted through the use of derivatives which affect the sensitivity of the value of the portfolio to changes in the level of markets.

Gearing is the Company's borrowings at par less cash and cash equivalents expressed as a percentage of shareholders' funds.

Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds.

 

Leverage

For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.

 

Active Share#

Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.

 

# Alternative performance measure which is considered to be a known industry standard.

‡ 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.

 

Third Party Data Provider Disclaimer

 

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data.

No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.

 

-ends-


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