Annual Financial Report

RNS Number : 4694D

Baillie Gifford Shin Nippon PLC

28 March 2014

 

Baillie Gifford Shin Nippon PLC

Annual financial report

A copy of the Annual Report and Financial Statements for the year ended 31 January 2014 of Baillie Gifford Shin Nippon PLC (the "Company") has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements for the year ended 31 January 2014 including the Notice of Annual General Meeting is also available on the Company's page of the Baillie Gifford website at: www.shinnippon.co.uk and will be posted to shareholders on 4 April 2014.

In order to meet continuing demand for the Company's shares, the Board is considering increasing the Company's capital base by issuing further shares at a premium to net asset value when the Board believes that it would be in the best interests of the Company to do so. To allow such issues, the Company requires to publish a Prospectus and expects to do so in May 2014 on the expiry of the Prospectus published on 21 May 2013.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2014 which require to be published by DTR 4.1 is set out on the following pages.

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

Baillie Gifford & Co

Company Secretaries

28 March 2014

Chairman's Statement

Performance

Your Board reviews performance mainly over rolling three year periods. I am pleased to report that in the three year period to 31 January 2014 Shin Nippon's net asset value per share rose 72.0%, significantly more than the 21.9% increase in the Company's comparative index (MSCI Japan Small Cap Index total return in sterling terms). Our share price rose by 100.9% over this period. Our Yen borrowings were beneficial to performance and stock selection was very strong.

Over the year to 31 January 2014 Shin Nippon's net asset value per share rose 45.5%, also significantly above the 17.3% rise in the Company's comparative index. The share price rose by 46.4% in the year. Stock selection was extremely good in the year and borrowings were helpful to performance. The 13.7% weakening of the yen against GBP was adverse for sterling based investors, but its weakness has improved the margins of Japanese exporters and has encouraged overseas and domestic investors to return to the market.

I am delighted that our strong performance was recognised at the Investment Week Investment Trust of the Year Awards in November where we were voted the 'Best Overseas Smaller Companies Trust'.

Share Issuance

The share price stood at a premium to net asset value throughout most of the year and ended the year at a premium of 6.6%. During this period the opportunity was taken to issue 4.02m shares (12.3% of our share capital at 31 January 2013) raising £11.4m. These shares were all issued at a premium to net asset value, which averaged 4.6%. Over the year this resulted in an enhancement of net asset value of 0.7% per share.  In approving these share issues we are mindful that in increasing the size of the Company our shares are likely to have improved liquidity and to be more attractive to a wider range of shareholders.

Borrowing and Hedging

During the year we reviewed our borrowing arrangements. We have negotiated a new loan facility of ¥3.35bn. This is a 7 year facility from ING expiring in November 2020. Gearing at 31 January 2014 was 11% compared to 10% at January last year. The gearing is likely to be maintained as the Managers continue to find interesting Japanese smaller company investments.

The Company undertook no currency hedging in the period, but we continue to monitor the situation.

Revenue

Although portfolio income continued to benefit from dividend growth this factor was more than offset by higher expenses and finance costs. The Company's revenue earnings per share declined from a loss of 0.07p to a loss of 0.69p. The uplift in net asset value over the year resulted in higher absolute fees payable to the Managers. Finance costs increased due to interest payable on the increased yen borrowings.

It is pleasing to note that a new management fee structure was agreed with Baillie Gifford & Co which was effective from 1 April 2013 (see note 3 for details of the management fee arrangements). Had the former structure been in place for the full year, approximately a further £186,000 would have been payable to the Managers.  The Board continues to monitor the Company's expenses carefully.

AGM

At this year's AGM the Board is seeking to renew the facility to issue new shares (and to reissue any shares held in treasury, of which there are currently none), of up to 25% of the Company's issued share capital for cash, on a pre-emptive basis, but only at a premium to net asset value so enhancing net asset value for existing shareholders.

There has been notable demand for the Company's shares over the past 15 months resulting in them trading at a premium, often substantial, to the underlying net asset value.  To ensure that the premium does not reach a level that dissuades investment from regular savers and those wishing to take a new holding, the Company envisages issuing further shares into the market in an attempt to redress the recent imbalance between supply and demand.  The Board has contemplated more substantive one off issuance events, such as a 'C' Share Issue, but considers supplying natural market demand, as and when it materialises, to be in the best interest of existing shareholders. The Board is also mindful that at current market levels the Managers' investment philosophy and process is not compromised by extensive levels of cash requiring investment.

Approval will also be sought to renew the authority to buy back shares. This would enable the Board to buy back shares if the discount to net asset value is substantial in absolute terms or in relation to its peers, should that be deemed to be desirable. Any such activity would be net asset value enhancing for remaining shareholders.

Governance

Your Board and Manager have spent a very large amount of time during the year ensuring that our processes and procedures will be compliant with the new Alternative Investment Fund Managers Directive to be implemented later this year. We are minded to appoint Baillie Gifford and Co Ltd as our Alternative Investment Fund Manager under this legislation, and will make a formal decision about this later in the year. Personally, I am very doubtful that this legislation will bring any real benefit to our Company or to the Investment Trust sector. However, the requirement to appoint a depositary will provide additional oversight and should mitigate risk in a number of areas, particularly those of custody and cash monitoring.

Over the years we have been very keen to ensure that we refresh your Board in a sensible fashion. With this in mind I have informed my colleagues of my intention to stand down from the Chair and Board at the AGM in 2015. They will identify and recruit my successor in the coming months so that there can be a suitable period of continuity during the transition.

Outlook

In my report to you last year I commented that "The Japanese political environment had a rare positive impact on the market over the last year". I am delighted to be able to report that this has continued. Prime Minister Abe has continued to pursue his growth agenda, and there are encouraging signs that his policies are being implemented gradually and are having an impact. The programme of consumption tax increases is now agreed at least for April 2014; there are signs that monetary easing is stimulating Japan out of its long period of deflation and that the 2% inflation target could be met; exporters are delighted by the weakness in the yen and there are encouraging signs that companies will begin to increase wages. There are some negatives of course, and the principal one is arguably the deteriorating diplomatic relations between Japan and China due mainly to the ongoing altercation about the Senkaku Islands (known as the Diaoyu Islands in China).

This political and economic background has encouraged many international and domestic investors into the Japanese market and contributed to the large market rise we have seen. My point in writing about these developments is to caution that should Abe and his Government falter in these plans then there must be a risk that these inflows could easily reverse. We have no particular insight to believe that this may happen in the short term at least, but I feel it would be remiss not to highlight the pronounced market risk.

However, the more important point I want to stress is that Baillie Gifford Shin Nippon is very much a stock picking fund. The strategy is to identify and invest in smaller companies that have competitive advantage, strong managements and potential for growth. It is not founded on the fundamentals of the Japanese market itself. I am pleased to report that the Managers are still finding attractive companies in which we can invest and, despite the sharp market rise, share price ratings are not excessive. More information about our portfolio is contained in the Managers' detailed report.

Barry M Rose

Chairman

21 March 2014

Past performance is not a guide to future performance.

Managers' Report

Last year's Managers' report noted increased entrepreneurial activity in Japan and suggested that this might lead to greater commercialisation of the undoubted innovation taking place within Japanese research laboratories. Since then there has been further evidence of Japan's ability to generate world leading research, notably in the fields of robotics and biotechnology, while positive signs regarding the monetisation of these breakthroughs has emerged. Google's purchase of a Tokyo University-related humanoid robot company hints that Japan is finally managing to adapt its vast industrial robotics knowledge base to other emerging applications.

Encouragingly, the profile of Japan's leading entrepreneurs, who act as inspirational role-models to the founders of start-ups, also continues to blossom. One of the strands of 'Abenomics', as the current government's growth plan has become known, highlights some of the newer industries (that many of these entrepreneurs' companies dominate) as key growth markets and drivers for the Japanese economy. Several of these role-models have become involved in advising the government on progressive policy changes that could increase growth opportunities for other 'new economy' businesses. It seems like a world away from the 'old' Japan where up-and-coming entrepreneurs with disruptive business practices were regularly stymied by regulators focussed on protecting sleepy incumbents. There is increasing acceptance, and even praise, of successful self-made businesspeople within Japanese society, something we hope will encourage more of Japan's most talented to set up their own companies. The resurgent IPO market should encourage this trend and broadens the choice of potential holdings for Shin Nippon. Last year witnessed the largest number of new listings since 2007 as many companies in new, expanding industries, previously prevented from listing by weak market conditions, finally came to market.  

Most of Shin Nippon's holdings operate in expanding niches that are largely unaffected by the vacillations of the broader economy. Nonetheless, the greater sense of optimism, as the Japanese economy recovers, and the potential increased appetite for measured risk-taking, as inflation returns, should benefit the business start-up environment. Regulatory efforts to reduce personal liability, in the case of a start-up business bankruptcy, may also stimulate new business creation in the long term. The positive impact on national pride and general confidence from winning the 2020 Olympics, after a long period struggling to deal with the rising prowess of China, should not be underestimated.

Performance

The MSCI Japan Small Cap Index (total return in sterling terms) rose by 17.3% over the year while Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose by 45.5%. Japanese markets rose strongly in local currency terms over the year, as investors reacted positively to the Government and Central Bank's concerted efforts to kick-start the economy. These moves contributed to the continued weakening in the yen, reducing moderately sterling based returns. Over the year, the Company's gearing had a positive impact on performance.  

The e-commerce market in Japan, as elsewhere in the world, continues to expand rapidly and several of the best performing holdings benefited from this positive background. Japan's belated shift to a smartphone dominated mobile market has accelerated this trend. Internet advertising company F@N Communications was the largest positive contributor to performance over the year. It provides affiliate marketing services to help big advertisers, particularly e-commerce companies, identify the most productive small specialist websites/blogs on which to place adverts. If a customer clicks through and purchases a product, F@N Communications earns a lucrative commission fee. Profits have been growing because the company has developed a strong presence in the nascent, but rapidly expanding, mobile telephone advertising market. 

GMO Payment Gateway is one of the leading providers of digital payment processing services, facilitating transactions on over 40,000 small websites in Japan. Growth expectations for the company were continually increased over the course of 2013 as more websites signed up to use the services, boosting the outlook for recurring annual fees. In addition, the company collects revenues related to the number of transactions that are processed and its customers' websites appear to have been performing very well. It has also been adding new value-added services to allow customers to analyse the performance of different parts of their websites. 

Start Today, Japan's dominant online apparel retailer, had a much stronger year after struggling a little as Japan transitioned to a smartphone environment. Rather than just offering a simpler version of its PC website, the company has started to improve its mobile offering to take advantage of some of the inherent consumer benefits of mobile internet. The latest Start Today mobile app has proved very popular with fashion conscious users who can now scan the barcodes of clothes in shops to upload images and then visualise how they look with other items. Images can be shared with friends and if the user decides to go ahead and make a purchase, they can do so easily through the app.  

Several holdings that have been building their websites, with the intention of becoming the de facto online marketplace for their particular industry, also performed well. Infomart operates a web-based platform that allows restaurants to order their supplies online from multiple suppliers through one convenient website. Restaurants are able to make significant efficiency gains by not having to phone different suppliers every day with orders. The website has the added advantage of allowing restaurants to monitor food traceability closely, which has been more of a concern since the Fukushima nuclear incident. 

Next's real estate focused website provides the broadest selection of listings for rental apartments and homes to buy in Japan. The revenue model was changed a few years ago and is now aligned more to the number of enquiries generated through the website. Next's profits have been increasing sharply as activity in the property market has picked up, driven by the belief that real estate prices may well have bottomed and in part by people buying new homes ahead of the planned increase in consumption tax later this year. 

After performing strongly in 2012, Endo Lighting, the commercial LED lighting manufacturer, was the worst contributor to performance. Having shifted much of its production to what at the time were low cost manufacturing bases overseas, it has suffered from cost increases as the yen has weakened. 

Portfolio

Annualised turnover within the portfolio was 14.4%, consistent with our long term, patient investment approach. However, several new holdings, in exciting companies with high growth potential, were taken over the course of the year. 

Oisix operates the most popular organic grocery website in Japan. The penetration rate for organic food in Japan has been increasing from a very low rate, a trend that has been accelerated by food contamination scares in recent years. Oisix has a strong first mover advantage thanks to its exclusive relationships with the limited number of organic farmers in Japan. The company's low risk business model means that fruit and vegetables are only picked after an online order has been placed.   

Jeol is a specialist manufacturer of high-powered microscopes and other scientific analysis equipment. The company has strong global market shares for its niche products and demand should rise over the medium term as funding for numerous nanotechnology research projects increases both in Japan and overseas.

Yume No Machi operates several websites, the most interesting of which aggregates takeaway menu information and allows customers to order their meal deliveries online. The popularity of this service has risen sharply since the introduction of the company's mobile phone app. As more users download the app, more takeaway facilities sign up to have their menus included on the site, creating a virtuous circle. Yumo No Machi earns a base fee from the restaurant and then receives a percentage fee from every meal ordered over the service.  

Zuiko is one of the leading manufacturers of diaper manufacturing machines globally. These large scale machines are remarkably difficult to make and Zuiko has strong relationships with the leading diaper makers. The company generally receives orders as their customers expand into Emerging Markets where the outlook for diaper demand is attractive given rising incomes and hygiene standards.  Three quarters of Zuiko's revenues are now from outside Japan, while increasing demand for adult diapers supports demand amongst ageing populations in developed markets.
 

Outlook

Although cognisant that risks exist, economic conditions within Japan are much healthier than they have been in recent years, with positive signs that the Bank of Japan's aggressive actions may be helping to defeat deflation. Shin Nippon's holdings are generally making good progress, in terms of profit growth, and we are encouraged that the choice of businesses that might meet our criteria for high growth potential is broadening. The positive entrepreneurship trends that we have observed in the start-up market are gradually producing more investable, high-growth listed businesses. Given the low turnover within the portfolio, it is interesting to note that we have held eight businesses listed within the last three years. Shin Nippon continues to focus on the most dynamic smaller businesses in Japan; innovative young companies that are creating entirely new markets and disruptive new businesses that are gaining share from pedestrian incumbents.

Baillie Gifford & Co

21 March 2014

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 January 2014^†

Computed relative to the comparative index^††

	Index		Shin Nippon		Performance*		Contribution	Contribution attributable to:
	asset allocation		asset allocation		Shin Nippon	Index	to relative return	Stock selection	Asset allocation	Gearing
	31.01.13	31.01.14	31.01.13	31.01.14
Portfolio Breakdown	%	%	%	%	%	%	%	%	%	%
Consumer   Discretionary	20.2	18.8	23.2	26.5	52.5	16.9	6.5	6.7	(0.2)	-
Consumer Staples	9.9	8.9	8.0	5.2	10.7	4.7	0.8	0.5	0.3	-
Energy	0.5	0.7	1.3	1.5	17.6	12.0	0.1	0.1	-	-
Financials	19.7	18.8	10.3	8.8	21.8	6.9	2.3	1.8	0.5	-
Health Care	5.0	5.4	15.2	13.1	29.2	8.0	1.8	2.2	(0.4)	-
Industrials	22.8	24.7	21.5	17.4	18.9	22.5	(0.7)	(0.5)	(0.2)	-
Information   Technology	10.5	11.4	18.0	24.9	89.5	46.8	8.3	5.8	2.5	-
Materials	11.2	11.1	1.7	1.0	1.1	15.6	-	(0.1)	0.1	-
Telecommunication   Services	-	-	0.8	1.6	232.2	-	1.2	1.3	(0.1)	-
Utilities	0.2	0.2	-	-	-	(9.4)	-	-	-	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	42.4	17.3	21.4	18.7	2.3	-
Impact of gearing					3.4		3.4	-	-	3.4
Total (including gearing) **	100.0	100.0	100.0	100.0	47.3	17.3	25.6	18.7	2.3	3.4

Past performance is not a guide to future performance.

Source: Baillie Gifford & Co/Statpro

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 47.3% against an index return of 17.3% translates into a relative return of 25.6%, divide the portfolio return of 147.3 by the index return of 117.3 and subtract one.

†          The performance attribution table is based on total assets

††        The comparative index for the year to 31 January 2014 was the MSCI Japan Small Cap index, total return and in sterling terms.

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

**       The total return performance of 47.3% excludes expenses and therefore differs from the NAV return (after deducting borrowings at par value) of 46.8% as a result.

Investment Changes (£'000)

	Valuation  at 31.01.13	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31.01.14
Equities:
Consumer Discretionary	17,378	5,796	10,271	33,445
Consumer Staples	6,024	-	559	6,583
Energy	1,020	757	109	1,886
Financials	7,819	1,917	1,322	11,058
Healthcare	11,556	1,700	3,338	16,594
Industrials	16,467	3,340	2,148	21,955
Information Technology	13,613	4,165	13,717	31,495
Materials	1,316	48	(56)	1,308
Telecommunication Services	624	-	1,433	2,057
Total investments	75,817	17,723	32,841	126,381
Net liquid assets	1,257	6,272	(82)	7,447
Total assets	77,074	23,995	32,759	133,828
Bank loans	(7,948)	(13,047)	1,128	(19,867)
Shareholders' funds	69,126	10,948	33,887	113,961

Twenty largest equity holdings at 31 January 2014
		2014		2013
Name	Business	Value £'000	% of total assets	Value £'000
F@N Communications	Internet advertising services	3,904	2.9	992
MonotaRO	Online business supplies	3,413	2.6	3,007
Digital Garage	Internet business incubator	3,358	2.5	1,144
Nihon M&A Center	M&A advisory services	3,233	2.4	1,697
Don Quijote	Discount store chain	2,969	2.2	2,372
Iriso Electronics	Specialist electronic connectors	2,921	2.2	1,058
Cyberagent	Internet advertising and content	2,846	2.1	-
M3	Online medical database	2,812	2.1	1,606
Asahi Intecc	Specialist medical equipment	2,783	2.1	1,391
Start Today	Internet fashion retailer	2,626	2.0	1,438
Next	Online real estate information	2,622	2.0	1,038
Asics	Sports shoes and clothing	2,475	1.8	1,627
GMO Payment Gateway	Online payment processing	2,431	1.8	594
Message	Provides nursing services for the elderly	2,381	1.8	1,989
Japan Exchange Group	Stock exchange operator	2,355	1.8	1,409
Nabtesco	Robotic components	2,277	1.7	2,011
Nakanishi	Dental equipment	2,194	1.6	1,758
SMS	Online nurse recruitment	2,103	1.6	800
Infomart	Internet platform for restaurant supplies	2,059	1.5	328
Wirelessgate	Wireless communication services	2,057	1.5	624
		53,819	40.2	26,883

Management fee arrangements

Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than six months' notice or on shorter notice in certain circumstances. With effect from 1 April 2013 the annual management fee was changed to 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly. The annual fee previously was 1.0% of net assets, calculated and payable quarterly.

The details of the management fees are as follows:

	2014 £'000		2013 £'000
Investment management fee	869		621

Principal risks and uncertainties

As an Investment Trust, the Company invests in small Japanese company securities 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 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 Company may enter into derivative transactions as explained in the Objective and Policy on page 7 of the Annual Report and Financial Statements. No such transactions were undertaken in the year under review.

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 Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 8 of the Annual Report and Financial Statements.

(i) Currency Risk

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

The Investment Managers monitor the Company's yen exposure (and any other overseas currency exposure) and report to the Board on a regular basis. The Investment Managers assess 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 country in which a company is listed is not necessarily where 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 company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company may also use forward currency contracts, although none 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 January 2014	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	126,381		7,546		(19,867)		93		114,153
Total exposure to currency risk	126,381		7,546		(19,867)		93		114,153
Sterling	-		60		-		(252)		(192)
	126,381		7,606		(19,867)		(159)		113,961

*   Includes net non-monetary assets of £11,000.

At 31 January 2013	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	75,817		2,318		(7,948)		(905)		69,282
Total exposure to currency risk	75,817		2,318		(7,948)		(905)		69,282
Sterling	-		60		-		(216)		(156)
	75,817		2,378		(7,948)		(1,121)		69,126

*    Includes net non-monetary assets of £11,000.

Currency Risk Sensitivity

At 31 January 2014, 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 £11,415,000 (2013 - £6,928,000). A 10% weakening of sterling against the yen, with all other variables held constant, would have had a similar but opposite effect on the financial statement amounts.

(ii)   Interest Rate Risk

Interest rate movements may affect directly 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 financial assets and liabilities at 31 January 2014 is shown below. There was no significant change to the interest rate risk profile during the year.

Financial assets
	2014 Fair value £'000	2014 Weighted average interest rate		2013 Fair value £'000	2013 Weighted average interest rate
Cash:
Yen	7,546	Nil		2,318	Nil
Sterling	60	0.01%		60	0.01%
	7,606			2,378

The 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 financial liabilities at 31 January was:

	2014			2013
	Book value £'000	Weighted average interest rate	Weighted average period until maturity	Book value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans:
Yen denominated - fixed rate	19,867	2.5%	82 months	7,948	2.2%	18 months

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

(iii) Other Price Risk

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

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

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 17 to 18 of the Annual Report and Financial Statements. In addition, a list 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 15 and 16 of the Annual Report and Financial Statements.

110.9% of the Company's net assets are invested in Japanese quoted equities (2013 - 109.7%). A 10% increase in quoted equity valuations at 31 January 2014 would have increased total net assets and net return on ordinary activities after taxation by £12,638,000 (2013 - £7,582,000). A decrease of 10% would have had an equal but opposite effect. This analysis does not include the effect on the management fee of changes in quoted equity valuations.

Liquidity Risk

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

The Company's investment portfolio is in Japanese small-cap equities which are typically less liquid than larger capitalisation stocks. The Managers monitor the liquidity of the portfolio on an ongoing basis and relevant guidelines are in place.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Objective and Policy on page 7 of the Annual Report and Financial Statements).

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

	2014 £'000	2013 £'000
In less than one year -      accumulated interest In more than one year, but not more than five years -      repayment of loan -      accumulated interest In more than five years -      repayment of loan -      accumulated interest	510 - 2,040 19,987 929	181 7,948 93 - -
	23,466	8,222

The Company has the power to take out borrowings, which give it access to additional funding when required.

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:

¾ The Company's listed investments are held on its behalf by Mizuho Corporate Bank Ltd and the Bank of New York Mellon as the Company's custodians. Bankruptcy or insolvency of the custodians may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodians' internal control reports and reporting their findings to the Board;

¾ Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. 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;

¾ 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 Managers; and

¾ At 31 January 2014 and 2013, all cash deposits were held with the custodian banks. The credit risk of the custodians is reviewed as detailed above. Cash may also be held at banks that are regularly reviewed by the Managers. If the credit rating of a bank where a cash deposit was held fell significantly, the Managers would endeavour to move the cash to an institution with a superior credit rating.

Credit Risk Exposure

The maximum exposure to credit risk at 31 January was:

	2014 £'000	2013 £'000
Cash and deposits	7,606	2,378
Debtors	191	421
	7,797	2,799

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 the loan is shown below.

		2014		2013
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		19,867	20,945	7,948	7,990

* The fair value of each bank loan is calculated by 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 as detailed in note 11 on page 40 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 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 pages 25 and 26 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:           reflects financial instruments quoted in an active market.

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

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

The valuation techniques used by the Company are explained in the accounting policies on page 36 of the Annual Report and Financial Statements.

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

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the UKLA Listing Rules and the Company's 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. Baillie Gifford's 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.

Operational/Financial Risk

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

Discount/Premium Volatility

The discount/premium at which the Company's shares trade can change. The Board monitors the level of discount/premium and the Company has authority to buy back or issue shares when deemed to be in the best interest of all shareholders.

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The Company's investments are in listed securities that are readily realisable.

Political Risk

The Board is aware that the Scottish Referendum Vote introduces elements of political uncertainty which may have practical consequences; developments will be monitored closely and considered by the Board and Managers.

Statement of directors' responsibilities

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

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

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

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

¾ the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

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

By order of the Board

Barry M Rose

Chairman

21 March 2014

 

Income statement

	For the year ended 31 January 2014				For the year ended 31 January 2013
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments†	-	32,841	32,841		-	9,688	9,688
Currency gains (note 2)‡	-	858	858		-	1,378	1,378
Income	1,259	-	1,259		1,165	-	1,165
Investment management fee (note 3)	(869)	-	(869)		(621)	-	(621)
Other administrative expenses	(301)	-	(301)		(283)	-	(283)
Net return before finance costs and taxation	89	33,699	33,788		261	11,066	11,327
Finance costs of borrowings (note 4)	(231)	(15)	(246)		(201)	-	(201)
Net return on ordinary activities before taxation	(142)	33,684	33,542		60	11,066	11,126
Tax on ordinary activities	(97)	-	(97)		(82)	-	(82)
Net return on ordinary activities after taxation	(239)	33,684	33,445		(22)	11,066	11,044
Net return per ordinary share (note 6)	(0.69p)	96.62p	95.93p		(0.07p)	35.53p	35.46p

† Gains on investments include gains and losses on disposals and holding gains and losses on the investment portfolio resulting from: i) changes in the local currency fair value of the investments and, ii) movements in the yen/sterling exchange rate.

‡   Currency gains include: i) currency exchange gains and losses on yen bank loans, ii) exchange differences on the settlement of investment transactions and iii) other exchange differences arising from the retranslation of cash balances.

The total column of this statement is the profit and loss account of the Company. The revenue and capital return columns are supplementary to this and 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 Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. 

Balance sheet at 31 January 2014

	At 31 January 2014		At 31 January 2013
	£'000	£'000	£'000	£'000
Fixed Assets
Investments		126,381		75,817
Current Assets
Debtors	202		432
Cash and short term deposits	7,606		2,378
	7,808		2,810
Creditors
Amounts falling due within one year (note 7)	(361)		(1,553)
Net Current Assets		7,447		1,257
Total Assets less Current Liabilities		133,828		77,074
Creditors
Amounts falling due after more than one year (note 7)		(19,867)		(7,948)
Net assets		113,961		69,126
Capital and Reserves
Called up share capital		3,668		3,266
Share premium account		21,783		10,795
Capital redemption reserve		21,521		21,521
Capital reserve		71,682		37,998
Revenue reserve		(4,693)		(4,454)
Total shareholders' funds		113,961		69,126
Net Asset Value Per Ordinary Share:
(after deducting borrowings at fair value)		307.8p		211.6p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at par value)		310.7p		211.7p

Reconciliation of movements in shareholders' funds

For the year ended 31 January 2014

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2013	3,266	10,795	21,521	37,998	(4,454)	69,126
Ordinary shares issued (note 9)	402	10,988	-	-	-	11,390
Net return on ordinary activities after taxation	-	-	-	33,684	(239)	33,445
Shareholders' funds at 31 January 2014	3,668	21,783	21,521	71,682	(4,693)	113,961

For the year ended 31 January 2013

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2012	3,110	7,674	21,521	26,932	(4,432)	54,805
Ordinary shares issued (note 9)	156	3,121	-	-	-	3,277
Net return on ordinary activities after taxation	-	-	-	11,066	(22)	11,044
Shareholders' funds at 31 January 2013	3,266	10,795	21,521	37,998	(4,454)	69,126

* Capital reserve as at 31 January 2013 included investment holding gains of £21,361,000

Cash flow statement
	For the year ended    31 January 2014			For the year ended       31 January 2013
	£'000	£'000		£'000	£'000
Net cash inflow from operating activities (note 9)		94			309
Servicing of finance
Interest paid	(180)			(209)
Breakage costs paid	(15)			-
Net cash outflow from servicing of finance		(195)			(209)
Taxation
Overseas tax paid	(89)			(82)
Total tax paid		(89)			(82)
Financial investment
Purchases of investments	(33,513)			(13,173)
Sales of investments	14,767			10,775
Exchange differences on settlement of investment transactions	(188)			(83)
Net cash inflow from financial investment		(18,934)			(2,481)
Financing
Ordinary shares issued	11,390			3,277
Bank loan repaid	(6,882)			-
Bank loan drawn down	19,926			-	814
Net cash inflow from financing		24,434			3,277
Increase in cash		5,310			814

Reconciliation of net cash flow to movement in net debt

		For the year ended 31 January 2014		For the year ended 31 January 2013
			£'000			£'000
Increase in cash			5,310			814
Net inflow from bank loans			(13,044)			1,609
Exchange movements on bank loans			1,128			(148)
Exchange differences on case			(82)			-
Other non-cash changes			(3)
Movement in net debt in the year			(6,691)			2,275
Opening net debt			(5,570)			(7,845)
Closing net debt			(12,561)			(5,570)

Notes

1.	The financial statements for the year to 31 January 2014 have been prepared on the basis of the same accounting policies used for the year to 31 January 2013. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk.  An explanation of these risks and how they are managed is contained in note 19 of the Annual Report and Financial Statements.  The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with loan covenants are reviewed by the Board on a regular basis. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company and its investment manager, who are subject to the UK's regulatory environment, are also UK based.
		31 January 2014 £'000		31 January 2013 £'000
2.	Currency gains/(losses)
	Exchange differences on bank loans	1,128		1,609
	Other exchange differences	(270)		(231)
		858		1,378
		31 January 2014 £'000		31 January 2013 £'000
3.	Investment management fee - all charged to revenue
	Investment management fee	869		621
	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less then six months' notice or on shorter notice in certain circumstances. With effect from 1 April 2013 the annual management fee was changed to 0.95% on the first £50m of net assets of the Company, 0.65% on the remaining net assets, calculated and payable quarterly. The annual fee previously was 1.0% of net assets, calculated and payable quarterly.
4.	The Company paid interest on bank loans of £231,000 (2013 - £201,000) and loan breakage costs of £15,000 (2013 - nil) on the early repayment of a bank loan which have been charged to capital.
5.	No dividend will be declared.

		31 January 2014 £'000		31 January 2013 £'000
6.	Net return per ordinary share
	Revenue return	(239)		(22)
	Capital return	33,684		11,066
	Total return	33,445		11,044
	The returns per ordinary share set out below are based on the above returns and on 34,861,637 ordinary shares (2013 - 31,146,303), being the weighted average number of ordinary shares in issue during the year.  There are no potentially dilutive shares in issue.
	Revenue return	(0.69p)		(0.07p)
	Capital return	96.62p		35.53p
	Total return	95.93p		35.46p
7.	During the year the Company repaid its borrowings with the Royal Bank of Scotland plc and drew down a 7 year loan with ING Bank N.V for ¥3,350 million. The new loan incurred an arrangement fee of £123,000 which has been deducted from the proceeds of the loan and will be amortised over the duration of the loan.
8.	The fair value of the bank loan at 31 January 2014 was £20,945,000 (2013 - £7,990,000).
9.	At 31 January 2014 the Company had authority to buy back 5,089,931 shares. No shares were bought back during the year. Share buy-backs are funded from the capital reserve. During the year the Company issued 4,019,980 shares on a non-pre-emptive basis at a premium to net asset value for proceeds of £11.4m. Between 1 February 2014 and 1 March 2014 the Company issued a further 200,000 shares on a non pre-emptive basis at a premium to net asset value for proceeds of £641,000
10.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sale proceeds, as appropriate. During the period, transaction costs on purchases amounted to £16,000 (2013 - £11,000) and transaction costs on sales amounted to £6,000 (2013 - £8,000).
11.	Reconciliation of Net Return before Finance Costs and Taxation to Net Cash Inflow from Operating Activities	31 January 2014 £'000		31 January 2013 £'000
	Net return before finance costs and taxation	33,788		11,327
	Gains on investments	(32,841)		(9,688)
	Currency gains	(858)		(1,378)
	Increase in accrued income and prepayments	(32)		(6)
	Increase in creditors	37		54
	Net cash inflow from operating activities	94		309
12.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2014.  The financial information for 2013 is derived from the financial statements for 2013, which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2013 and 2014 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2014 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 9 May 2014. 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 Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

- ends -

 

END

 

 

FR SEDFEAFLSEDD