Half Yearly Report

RNS Number : 0624B

Baillie Gifford Japan Trust PLC

28 March 2013

 



RNS Announcement: Preliminary Results

The Baillie Gifford Japan Trust PLC

Results for the six months to 28 February 2013

In the six months to 28 February 2013, The Baillie Gifford Japan Trust's net asset value per share (after deducting borrowings at fair value) increased by 24.6% compared to a 19.8% increase in the TOPIX total return index (in sterling terms). The Company's share price increased by 35.8%.

¾ Outperformance versus the comparative index was due to the positive effect of gearing over the period. Net gearing stood at 14.2% at the period end (31 August 2012 - 19.3%), having reduced naturally due to the market rising.

¾ Although stock selection was a minor negative, good returns were generated by stocks benefitting from a weaker JPY, such as Fuji Heavy Industries and Mazda Motors, and those linked to asset reflation, such as Japan Exchange Group and Tokyo Tatemono.

¾ A shift towards a much looser monetary policy has weakened the yen and enhanced earnings prospects for exporters. Estimates for profits are rising and there is a strong uniformity of purpose throughout Japan about seizing the opportunity to exit deflation. New Prime Minister Shinzo Abe is determined to produce growth with his policies labelled Abenomics.

¾ The Board and Managers are of the opinion that, although still early in the cycle, there are encouraging signs that the policies designed to stimulate economic growth and inflation are serious attempts to address the real issues.

¾ Since the period ended, the Company has issued 800,000 shares at a premium to net asset value.

The Baillie Gifford Japan Trust aims to achieve long term capital growth principally through investment in medium and smaller sized Japanese companies which are believed to have above average prospects for growth, although it invests in larger companies when considered appropriate. At 28 February 2013, the Company had total assets of £192.9m (before deduction of bank loans of £25.3m).

Baillie Gifford & Co, the Edinburgh based fund management group with around £93bn under management and advice as at 27 March 2013, is appointed as investment managers and secretaries to The Baillie Gifford Japan Trust PLC.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at www.japantrustplc.co.uk.

28 March 2013

For further information please contact:

Sarah Whitley, Manager

The Baillie Gifford Japan Trust PLC

Tel: [phone]

Roland Cross, Director

Broadgate Mainland

Tel: [phone]

The following is the unaudited Half-Yearly Financial Report for the six months to 28 February 2013.

Responsibility statement

We confirm that to the best of our knowledge:

a)  the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

b)  the Half-Yearly Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, their impact on the financial statements and a description of principal risks and uncertainties for the remaining six months of the year); and

c)  the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

Richard A Barfield

Chairman

27 March 2013

Half-yearly management report

The past six months have seen a sharp rise in the Japanese stock market and a modest fall in the value of the yen against sterling. The benchmark, TOPIX total return index, rose 34.9% in yen terms, whilst the yen fell 11.2% against sterling over the period. As a result the NAV per share (after deducting borrowings at fair value) has risen by 24.6% which compares with a gain of 19.8% in the benchmark index (in sterling terms). The yen value of assets has risen sharply whilst the borrowings have remained the same and so the net level of gearing was 14.2% at the end of February. The positive effect of the gearing accounts for all the outperformance, with stock selection a minor negative.

The stock market reached a post-Tsunami, post-financial crisis low last autumn, but started to recover from mid-November as optimism increased that the December Lower House election would herald a significant shift towards a looser monetary policy. The LDP, headed by Shinzo Abe, was elected and an inflation target of 2% has been formally adopted by the new Government, along with other policies together labelled Abenomics. The aim is to stimulate growth with three 'arrows of policy' including significant monetary easing, fiscal stimulus, and structural reform (including deregulation and tax reform). The yen has weakened and as a result earnings estimates have been increased, with 40% growth currently expected for the year to March 2014.

Against this background stocks that did well were those linked to the weaker yen, such as Fuji Heavy Industries our new purchase, Mazda Motors, or those linked to asset reflation such as the newly merged stock exchange, Japan Exchange Group, or Tokyo Tatemono, a property leasing company. Those that did badly were mainly on individual news stories. The turnover within the portfolio remained low overall. We bought new holdings in Softbank, an entrepreneurial telecoms operator which is bidding for Sprint, a US company; Japan Airlines, which relisted after a massive restructuring programme. Mazda Motors produces the vast majority of its cars in Japan. To fund these we sold Jupiter Telecom and So-Net Entertainment, both subject to take-over bids, and Otsuka Holdings, a drug company with patent expiry concerns.

There is now a uniformity of purpose in Japan from both the Government and the corporate side to try and solve some of the problems that have been intractable since the notorious Japanese bubble of the late 1980s. Although the intervening period has not really been the much written about 'lost decade', much needs to be done to make Japan more internationally competitive in non-manufacturing segments of the economy, as well as to meet the challenges of an ageing society and high levels of government debt. Abenomics may not be the complete answer, but it is at least addressing the problems.

Obviously with the Government in power for only three months and the new governor of the Bank of Japan yet to hold his first policy meeting, hopes are high and achievements few. However there are a number of encouraging signs being seen. The Government has announced that Japan will join the negotiations for both the formation of a major free trade area, the Trans Pacific Partnership as well as an EU Japan Agreement. This is despite the entrenched opposition of most agricultural interests and should force Japan to become more open. The talk of reflation is itself changing inflation expectations which have now increased. A range of companies are increasing wages and bonuses which should help stimulate consumption. The private investor is becoming more active and the number of IPOs is increasing with successful listings doubling at issue, a welcome return of animal spirits which have been rare in Japan.

On the other hand there remain concerns about regional political tensions and there is also the possibility that inflation leaps rather than reaches the benign level that is targeted. On balance we take the more positive view and are keeping all the gearing invested in the market. The weakening yen has re-priced many Japanese exports and the full economic impact of that will be seen over the next year. Confidence itself breeds confidence and will lead to increased capital spending, particularly in areas where it is long overdue, such as IT systems. The economy in Japan grew 2% in 2012 and is likely to expand further in the current year.

The share price is now at a premium to the net asset value per share and the power to issue shares, at a premium and where there is real demand, is being used.

Past performance is not a guide to future performance.

Income statement (unaudited)

	For the six months ended 28 February 2013			For the six months ended 29 February 2012			For the year ended 31 August 2012
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	383	383	-	284	284	-	765	765
Changes in investment holding gains	-	29,288	29,288	-	2,565	2,565	-	(554)	(554)
Currency gains/(losses) (note 4)	-	2,982	2,982	-	900	900	-	(108)	(108)
Income from investments and interest receivable	1,594	-	1,594	1,374	-	1,374	3,251	-	3,251
Investment management fee	(761)	-	(761)	(662)	-	(662)	(1,325)	-	(1,325)
Other administrative expenses	(151)	-	(151)	(144)	-	(144)	(279)	-	(279)
Net return before finance costs and taxation	682	32,653	33,335	568	3,749	4,317	1,647	103	1,750
Finance costs of borrowings	(280)	-	(280)	(323)	-	(323)	(642)	-	(642)
Net return on ordinary activities before taxation	402	32,653	33,055	245	3,749	3,994	1,005	103	1,108
Tax on ordinary activities	(112)	-	(112)	(96)	-	(96)	(228)	-	(228)
Net return on ordinary activities after taxation	290	32,653	32,943	149	3,749	3,898	777	103	880
Net return per ordinary share (note 6)	0.47p	52.72p	53.19p	0.24p	6.05p	6.29p	1.25p	0.17p	1.42p

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 (unaudited)

	At 28 February 2013 £'000	At 29 February 2012 £'000	At 31 August 2012 £'000
Fixed assets
Investments	190,757	163,200	160,757
Current assets
Debtors	1,111	5,789	1,702
Cash and short term deposits	1,479	3,986	2,516
	2,590	9,775	4,218
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(5,355)	-	(6,030)
Other creditors	(469)	(7,914)	(1,844)
	(5,824)	(7,914)	(7,874)
Net current (liabilities)/assets	(3,234)	1,861	(3,656)
Total assets less current liabilities	187,523	165,061	157,101
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(19,993)	(27,456)	(22,514)
Total net assets	167,530	137,605	134,587
Capital and reserves
Called up share capital	3,097	3,097	3,097
Share premium	22,110	22,110	22,110
Capital redemption reserve	203	203	203
Capital reserve	148,309	119,302	115,656
Revenue reserve	(6,189)	(7,107)	(6,479)
Shareholders' funds	167,530	137,605	134,587
Net asset value per ordinary share (after deducting borrowings at fair value)	270.2p	221.6p	216.9p
Net asset value per ordinary share (after deducting borrowings at par)	270.5p	222.2p	217.3p
Ordinary shares in issue (note 8)	61,935,000	61,935,000	61,935,000

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 28 February 2013

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2012	3,097	22,110	203	115,656	(6,479)	134,587
Net return on ordinary activities after taxation	-	-	-	32,653	290	32,943
Shareholders' funds at 28 February 2013	3,097	22,110	203	148,309	(6,189)	167,530

For the six months ended 29 February 2012

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2011	3,097	22,110	203	115,553	(7,256)	133,707
Net return on ordinary activities after taxation	-	-	-	3,749	149	3,898
Shareholders' funds at 29 February 2012	3,097	22,110	203	119,302	(7,107)	137,605

For the year ended 31 August 2012

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

*      Capital reserve as at 28 February 2013 includes investment holding gains of £65,083,000 (29 February 2012 - £38,915,000; 31 August 2012 - £35,796,000).

Condensed cash flow statement (unaudited)

	Six months to 28 February 2013 £'000	Six months to 29 February 2012 £'000	Year to 31 August 2012 £'000
Net cash inflow from operating activities	501	387	1,479
Net cash outflow from servicing of finance	(291)	(327)	(641)
Total tax paid	(94)	(85)	(216)
Net cash outflow from financial investment	(998)	(248)	(2,455)
Net cash outflow before financing	(882)	(273)	(1,833)
Decrease in cash	(882)	(273)	(1,833)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the period	(882)	(273)	(1,833)
Exchange differences on bank loans	3,196	1,055	(33)
Exchange differences on cash	(155)	97	187
Movement in net debt in the period	2,159	879	(1,679)
Net debt at start of the period	(26,028)	(24,349)	(24,349)
Net debt at end of the period	(23,869)	(23,470)	(26,028)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation	33,335	4,317	1,750
Gains on investments	(29,671)	(2,849)	(211)
Realised exchange differences	214	155	75
Unrealised exchange differences on bank loans	(3,196)	(1,055)	33
Changes in debtors and creditors	(181)	(181)	(168)
Net cash inflow from operating activities	501	387	1,479

Twenty largest holdings at 28 February 2013 (unaudited)

Name	Business	Value £'000	% of total  assets*
Itochu	Trading conglomerate	7,426	3.9
Fuji Heavy Industries	Niche car brand (Subaru)	6,680	3.5
Don Quijote	Discount store operator	5,570	2.9
Tokyo Tatemono	Property leasing and development	5,467	2.8
Otsuka Corp	IT solutions for companies	5,396	2.8
Japan Tobacco	Tobacco manufacturer	5,121	2.7
KDDI	Mobile telecommunications	4,950	2.6
Sysmex	Medical equipment	4,914	2.5
Japan Exchange Group	Stock exchange	4,553	2.4
Industrial & Infrastructure Fund	Logistics REIT	4,283	2.2
Misumi Group	Precision machinery parts distributor	4,153	2.2
Toyo Tire & Rubber	Tyre manufacturer	4,059	2.1
Asics	Sports shoes and clothing	3,951	2.0
Isuzu Motors	Commercial vehicle manufacturer	3,915	2.0
HIS	Travel agency	3,765	2.0
Rakuten	Internet retailer	3,712	1.9
Yaskawa Electric	Robots and factory automation	3,707	1.9
Mitsubishi UFJ Lease & Finance	Leasing company	3,675	1.9
Hamakyorex	Logistics	3,666	1.9
SMC	Pneumatic control equipment	3,353	1.7
		92,316	47.9

*      Before deduction of bank loans

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 28 February 2013 have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 August 2012 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. 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 next continuation vote will be in November 2013. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the Half-Yearly Financial Report has 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.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2012 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006.
3.	The management agreement with Baillie Gifford & Co is terminable on not less than 6 months' notice, or on shorter notice in certain circumstances. The annual fee to 31 March 2013 was 1.0% of the net assets of the Company, calculated on a quarterly basis. With effect from 1 April 2013 this was reduced to 0.95% on the first £50 million of net assets, 0.65% on net assets above £50 million, also calculated on a quarterly basis.
4.	Currency gains/(losses)	Six months to 28 February 2013 £'000	Six months to 29 February 2012  £'000	Year to 31 August 2012 £'000
	Exchange differences on:
	Cash balances	155	97	(187)
	Bank loans	3,196	1,055	33
	Other items	(369)	(252)	46
		2,982	900	(108)
5.	No interim dividend will be declared.

Notes to the condensed financial statements (unaudited) (continued)

6.	Net return per ordinary share	Six months to 28 February 2013 £'000	Six months to 29 February 2012  £'000	Year to 31 August 2012 £'000
	Revenue return on ordinary activities after taxation	290	149	777
	Capital return on ordinary activities after taxation	32,653	3,749	103
	Net return per ordinary share is based on the above totals of revenue and capital and on 61,935,000 (29 February 2012 and 31 August 2012 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.
7.	Bank loans of £25.3 million (¥3.6 billion) have been drawn down under yen loan facilities which are repayable between August 2013 and August 2014 (29 February 2012 - £27.5 million (¥3.6 billion); 31 August 2012 - £28.5 million (¥3.6 billion)).
8.	The Company has the authority to issue shares/sell treasury shares at a premium to net asset value as well as to buy back shares at a discount to net asset value. No shares were issued or bought back during the period under review. On 20 March 2013 the Company issued 800,000 ordinary shares at a premium to net asset value, The proceeds were £2.4m.
9.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sales proceeds, as appropriate. During the period, transaction costs on purchases amounted to £5,000 (29 February 2012 - £6,000; 31 August 2012 - £13,000) and transaction costs on sales amounted to £5,000 (29 February 2012 - £8,000; 31 August 2012 - £14,000).
10.	Principal Risks and Uncertainties The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 19 of the Company's Annual Report and Financial Statements for the year to 31 August 2012. The principal risks and uncertainties have not changed since the publication of the Annual Report and Financial Statements which can be obtained free of charge from Baillie Gifford & Co and is available on the Japan Trust page of the Managers' website www.japantrustplc.co.uk†. Other risks facing the Company include the following: regulatory risk (that the loss of investment trust status or a breach of applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage); operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss); the risk that the discount can widen; and gearing risk (the use of borrowing can magnify the impact of falling markets). Further information can be found on page 18 of the Annual Report and Financial Statements.
11.	The Half-Yearly Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around 18 April 2013.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

†      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.

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