Annual Financial Report

RNS Number : 2331F

Baillie Gifford Japan Trust PLC

03 November 2022

 

The Baillie Gifford Japan Trust PLC ('BGFD')

Legal Entity Identifier: 54930037AGTKN765Y741

Regulated Information Classification: Annual Financial and Audit Reports

Annual Report and Financial Statements

Further to the preliminary statement of audited annual results announced to the Stock Exchange on 19 October 2022, The Baillie Gifford Japan Trust PLC ("the Company") announces that the Company's Annual Report and Financial Statements for the year ended 31 August 2022, including the Notice of Annual General Meeting, has been posted to shareholders and submitted electronically to the National Storage Mechanism where it will shortly be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism

It is also available on the Company page of the Baillie Gifford website at: japantrustplc.co.uk (as is the preliminary statement of audited annual results announced by the Company on19 October 2022).

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

Each of the Directors, whose names and functions are listed within the Directors and Managers section of the Annual Report and Financial Statements, confirm that, to the best of their knowledge:

¾ the Financial Statements, which have been prepared in accordance with applicable law and United Kingdom  Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾ 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; and

¾ the Strategic 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 (as also set out below).

Principal and Emerging Risks relating to the Company

 

As explained on pages 30 and 31 of the Annual Report and Financial Statements there is an ongoing process for identifying, evaluating and managing the risks, including emerging risks, faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. Baillie Gifford's Business Risk Department provides regular updates covering the Company's principal and emerging risks. A description of these risks and how they are being managed or mitigated is set out below.

The Board considers the Covid-19 pandemic and Brexit to be factors which exacerbate existing risks, rather than new emerging risks. Their impact is considered within the relevant risks.

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 19 to the Financial Statements on pages 53 to 56 of the Annual Report and Financial Statements . The Board has, in particular, considered the impact of heightened market volatility resulting from the ongoing Covid-19 pandemic and the Russian invasion of Ukraine. To mitigate this risk the Board considers 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.  The value of the Company's investment portfolio would be affected by any impact, positively or negatively, on sterling but such impact would be partially offset by the effect of exchange movements on the Company's yen denominated borrowings. This risk is seen as increasing due to increased volatility as a result of the Russian invasion of Ukraine, increasing energy prices and inflation rates. The Covid-19 pandemic continues to have an impact on the global economic environment.

Investment Strategy Risk - Pursing 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.  This risk is seen as stable as controls are working effectively with no change during the current year.

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 issue new shares or buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.

This risk is seen as increasing as the Company's shares from a premium to a discount during the year.

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. This risk is seen as increasing due to increased market volatility resulting from the Russian invasion of Ukraine share prices may be subject to greater volatility.

Environmental, Social and Governance (ESG) Risk - Any failure by the Investment Manager to identify potential future problems on ESG matters in an investee company could lead to the Company's shares being less attractive to investors as well as potential valuation issues in the underlying investee company. This is mitigated by the Investment Manager's ESG stewardship and engagement policies application, which is integrated into the investment process, as well as the extensive upfront and ongoing due diligence which the Investment Manager undertakes on each investee company. This includes the risk inherent in climate change (see page 23 of the Annual Report and Financial Statements ). This risk is seen as stable as the Investment Manager continues to employ strong ESG stewardship and engagement policies.

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 has a maximum equity gearing level of 30% of shareholders' funds. The Company's investments are in listed securities that are readily realisable. Further information on leverage can be found on page 65 and in the Glossary of Terms and Alternative Performance Measure on pages 57 and 58 of the Annual Report and Financial Statements . This risk is seen as increasing due to global falls in company valuations.

Regulatory Risk - Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the FCA 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. Changes to the regulatory environment could negatively impact the Company. 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. This risk is seen as stable as all control procedures are working effectively. There have been no material regulatory changes that have impacted the Trust during the year.

Political and Associated Economic Risk - Political change in areas in which the Company invests or may invest may have practical consequences for the Company. To mitigate this risk developments are closely monitored and considered by the Board and are regularly discussed at Board meetings. This risk is increasing as Governments and consumers around the world continue to assess the impact of the Russian invasion of Ukraine, including sanctions applied in response, increasing energy prices as well as the ongoing assessment of the longer term impacts of the Covid-19 pandemic.

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 Business Risk 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. This risk is seen as stable as all control procedures are working effectively. During the pandemic the Depositary and Custodian moved seamlessly to working remotely and all regulatory and administrative tasks continued uninterrupted.

Reliance on Third party Service Provider 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 (including any disruption resulting from the Covid-19 pandemic) 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. In the year under review, the other key third party service providers have not experienced significant operational difficulties affecting their respective services to the Company. This risk is seen as stable as control procedures are working effectively. During the pandemic the Depositary and Custodian moved seamlessly to working remotely and all regulatory and administrative tasks continued uninterrupted.

Cyber Security Risk - A cyber attack on Baillie Gifford's network or that of a third party service provider could impact the confidentiality, integrity or availability of data and systems. To mitigate this risk, the Audit Committee reviews reports on Internal Controls published by Baillie Gifford and other third party service providers. Baillie Gifford's Business Risk Department reports to the Audit Committee on the effectiveness of information security controls in place at Baillie Gifford and its business continuity framework. Cyber security due diligence is performed by Baillie Gifford on third party service providers which includes a review of crisis management and business continuity frameworks. This risk is increasing due to recent indications that developments relating to the

Russian invasion of Ukraine could lead to cyber attacks. Also, due to the ongoing Covid-19 pandemic, service providers continue to use a hybrid approach of remote and office working, thereby retaining a higher potential of a cyber security threat.

Emerging Risks - as explained on pages 30 to 31 of the Annual Report and Financial Statements the Board has regular discussions on principal risks and uncertainties, including any risks which are not an immediate threat but could arise in the longer term. The Board considers emerging risks at each board meeting and discusses any mitigations required.

Baillie Gifford & Co Limited

Company Secretaries

03 November 2022

 

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