Annual Financial Report

RNS Number : 2214T

SchroderJapan Growth Fund PLC

02 October 2014

 



2 October 2014

ANNUAL REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 31 July 2014 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 July 2014 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderjapangrowthfund.com.  Please click on the following link to view the document:

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

Louise Richard

Schroder Investment Management Limited               

Tel: [phone]

Chairman's Statement

 

Performance

 

After such a good year in 2013, market performance slowed during the year ended 31 July 2014. Whilst the Japanese market rose almost 16% in local currency terms during the year ended 31 July 2014, returns to investors were once again impacted by the strength of sterling, with the net result being that the benchmark index produced a negative total return of 0.2% in sterling terms. The portfolio continued to out-perform the benchmark and the NAV produced a positive total return in sterling of 1.6% over the year.

 

Between the end of the year and 26 September 2014, the market has risen by 4% in local currency terms, whilst the NAV has produced a positive total return of 2.14%, the yen having weakened relative to sterling.

 

Further comment on performance and investment policy may be found in the Manager's Review.

 

Revenue and Dividends

 

In line with its dividend policy, the Board intends that net revenue earned by the portfolio is substantially paid out to investors in the form of dividends. Revenue return for the year increased from 1.88p to 1.92p per share and the Directors have declared a final dividend of 1.80p per share for the year ended 31 July 2014, an increase of 2.9% over the 1.75p per share paid in respect of the previous year. This dividend will be paid on 7 November 2014 to shareholders on the Register on 10 October 2014, subject to approval by shareholders at the Annual General Meeting on 5 November 2014.

 

Alternative Investment Fund Managers (AIFM) Directive

 

In accordance with the AIFM Directive, the Company has, with effect from 17 July 2014, become an Alternative Investment Fund and has appointed Schroder Unit Trusts Limited ("SUTL"), a wholly owned subsidiary of Schroders plc, as the Alternative Investment Fund Manager (the "Manager") to provide portfolio management, risk management, accounting and company secretarial services to the Company in accordance with an Alternative Investment Fund Manager Agreement. SUTL has delegated investment management, accounting and company secretarial services to another wholly owned subsidiary of Schroders plc, Schroder Investment Management Limited.

 

Notwithstanding that the Manager's costs have risen due to the requirements of the AIFM Directive, fees paid to the Manager have been cut substantially with effect from 31 July 2014 to ensure that the Company remains competitive when compared both with peer group companies as well as open-ended funds specialising in Japanese equities. Further details of the reduced management fees may be found in the Report of the Directors in the 2014 Annual Report.

 

In addition, the Company has appointed HSBC Bank plc as its Depositary, also with effect from 17 July 2014. An additional fee of one basis point of net assets will be payable for Depositary Services.

 

Further details of both the AIFM Agreement and the Depositary Agreement may be found in the Report of the Directors in the 2014 Annual Report.

 

Gearing Policy and AIFM Directive Leverage Limit

 

During the year, the Company extended its Yen 5 billion revolving credit facility for a further twelve months and increased drawings from Yen 3 billion to Yen 5 billion.

 

The net effective gearing level (which takes account of the borrowings as well as any cash held by the Manager) at the beginning of the year was 11.0% and had increased to 12.8% by the end of the year. The average net effective gearing level during the year under review was 12.3%. The Company's gearing continues to operate within pre-agreed limits so that net effective gearing does not represent more than 25% of shareholders' funds.

 

The AIFM Directive has introduced a requirement for the Manager to set maximum levels of leverage, using a wider definition than borrowing and including the use of derivatives.

 

Full details of this leverage limit may be found on the Manager's website at www.schroders.co.uk/its and in the Strategic Report in the 2014 Annual Report.

 

Purchase of Shares for Cancellation

 

The Directors did not use the authority given to them to purchase shares for cancellation during the financial year ended 31 July 2014.  Nevertheless, as the ability to buy back shares is one of a number of tools that may be used to enhance shareholder value and to reduce the discount volatility, the Board will be seeking to renew the share buy back authority granted at the Company's Annual General Meeting on 7 November 2013 to purchase up to 14.99% of the Company's issued share capital for cancellation.

 

Board Composition

 

As part of its discussions on planned refreshment, Mr Kingzett will retire from the Board at the Annual General Meeting and will not seek re-election as a Director of the Company. I would like to take this opportunity to thank him for his invaluable contribution to the Company over many years.

 

Continuation Vote

 

The Notice of the Annual General Meeting contains an ordinary resolution proposing that the Company should continue as an investment trust for a further five year period.

 

The Board has reviewed the Company's investment objective and policy, as well as the Manager and its resources.  The Board believes that Japan remains an attractive proposition for investors and that the investment strategy and process utilised by the Manager, which is well known to investors and has been laid out in the Strategic Report, provides a suitable platform to produce superior returns over the longer term.

 

As a result, the Board recommends that the Company should continue as an investment trust for a further five year period. The Directors will be voting their shares accordingly and wish to encourage all other shareholders likewise to vote in favour of continuation.

 

Outlook

 

Japan is not the only part of the investment world at the moment where there is a divergence between what is happening in the economy and what is happening in the stock market. Take home pay is still falling in real terms and companies are not seeing much volume growth domestically, but the stock market is up by more than a half in local currency terms since the end of 2012.

 

The factor pulling the two together is of course Abenomics, and the hope that the Prime Minister's policies will reinvigorate Japan. The policies have certainly changed stock market sentiment, but 20 months after the policy changes started it is still too early to say how much they will change the economic environment. While waiting to see if enough has been done, your Board takes comfort from the Manager's belief in the value of each holding in the portfolio.

 

Annual General Meeting

 

The Annual General Meeting will be held at 12.00 noon on Wednesday, 5 November 2014, and shareholders are encouraged to attend. I hope as many of you as possible will be able to come along. The meeting, as in previous years, will include a presentation by the Manager on the prospects for the Japanese market and the Company's investment strategy.

 

Jonathan Taylor

Chairman

 

1 October 2014

Manager's Review

Market Background

The Company's NAV produced a total return of 1.6% in sterling over the year, outperforming the benchmark which declined slightly in sterling terms.

The virtually flat return in sterling over the period disguises a more impressive positive return in yen terms of 15.8%. This relied disproportionately on a rally towards the end of the 12 months, allowing the market to finish almost in line with its recent high at the end of 2013. Key drivers of sentiment in both directions continued to be market perceptions surrounding the success or otherwise of Abenomics, monetary policy and the yen. Generally supportive were trends in company profits and steady progress towards better corporate governance, while the most negative consequence of Abenomics for sterling investors has been the weakness of the yen.

Stock selection contributed positively, as did maintaining gearing. Two smaller companies SK Kaken (paint manufacturer) and Hi-Lex (control cables) made the largest positive contributions to performance, whilst stock selection in the technology sectors Nidec (small precision motors) and Fujitsu (semiconductor, computers and communications equipment) was also supportive. This was partly offset by stock selection in the retail and machinery sectors.

Beneficiaries of a weak yen occupied the upper echelons of the sector performance, as did sectors tied into domestic construction and capital spending, whilst large cap financials were firmly rooted to the other end of the table. The latter suffered from ultra-low long term interest rates, regulatory concern and market perceptions that they were attractively valued but lacking in share price catalysts. Smaller companies generally outperformed and the weakest sub-index was the Topix Core 30, which represents the largest 30 companies by market value.

Activity

We increased exposure to companies likely to benefit from a pick-up in domestic capital spending, with new holdings in Nabtesco (the leading global manufacturer of precision motors for robots), Disco (precision industrial machinery) and Mitsubishi Electric (electronic equipment). Within consumer sensitive areas we took profits on the position in Asics (sports equipment) and reinvested in a new holding in department store H2O Retail Group. We have added to the financials exposure given share price weakness, while taking partial profits on some of the small cap positions which had performed particularly well, such as SK Kaken.

Outlook

Whilst concerns remain that the impact of the consumption tax increase in April may be deeper and more prolonged than originally envisaged, it remains probable that the economy is past the point of maximum strain. In addition, it seems more likely than not that the Bank of Japan will embark on additional easing. Together with attractive valuations and greater incentives to improve corporate governance, this represents a generally supportive backdrop for the stock market.

Investment Policy

We have not made many changes to policy, which remains moderately pro-cyclical. We have used weakness in financials to add to positions in banks and insurance. We have reduced the office equipment exposure and added to beneficiaries of recovery in domestic corporate spending such as Nabtesco. We added to the position in Honda, whose share price lagged the market and its sector but whose profits look set to catch up over the next few years.

Net gearing was 12.8% at the end of July 2014, slightly higher than at the previous year end.

Schroder Investment Management Limited

1 October 2014

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and has put in place a robust framework of internal control which is designed to monitor those risks and to enable the Directors to mitigate them as far as possible. The matrix and the monitoring system, which have been in place throughout the year and which are reviewed annually by the Board, assist in determining the nature and extent of the risks the Board is willing to take in achieving its strategic objectives. The principal risks are considered to be as follows:

Investment activity and performance

An inappropriate investment strategy (for example in terms of asset allocation or the level of gearing) may result in underperformance against the market and the companies in the peer group. The Board monitors at each Board meeting the Manager's compliance with the Company's Investment Restrictions.

Financial Risk

The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in Japanese equity markets would have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in underlying assets which are denominated in Yen, an exposure to changes in the exchange rate between Sterling and Yen has the potential to have a significant impact on returns. The Board considers the portfolio's risk profile at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact of substantial changes in markets or currency.

The Company utilises a credit facility, currently in the amount of Yen 5 billion, which increases the funds available for investment through borrowing. Therefore, in falling markets, any reduction in the net asset value and, by implication the consequent share price movement, is amplified by the gearing. The Directors keep the Company's gearing under constant review and impose strict restrictions on borrowings to mitigate this risk. The Company's gearing continues to operate within pre-agreed limits so that gearing does not exceed 25% of shareholders' funds.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 36 to 40 of the 2014 Annual Report.

Strategic Risk

Over time investment vehicles and asset classes can become out of favour with investors or may fail to meet their investment objectives. This may be reflected in a wide discount of the share price to underlying asset value. Directors periodically review whether the Company's investment remit remains appropriate and continually monitor the success of the Company in meeting its stated objectives.

Accounting, Legal and Regulatory Risk

In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Should the Company not comply with these requirements, it might lose investment trust status and capital gains within the Company's portfolio could, as a result, be subject to Capital Gains Tax.

Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes and damage the Company's reputation. Breaches of controls by service providers, including the Manager, could also lead to reputational damage or loss.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report, the Strategic Report, the Report of the Directors, the Corporate Governance Statement, the 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 prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

•          select suitable accounting policies and then apply them consistently;

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

•          state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

•          prepare the financial statements on a 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 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.

Each of the Directors, whose names and functions are set out in the inside front cover of the 2014 Annual Report, confirms that, to the best of their knowledge:

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

•          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; and

•          the Annual Report and Accounts, 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.

Going Concern

The Directors believe that, having considered the Company's investment objective (see inside front cover of the 2014 Annual Report), risk management policies (see note 20 to the accounts on pages 36 to 40 of the 2014 Annual Report), capital management policies and procedures (see note 21 to the accounts on page 40 of the 2014 Annual Report), expenditure projections and the fact that the Company's investments comprise readily realiseable securities which can be sold to meet funding requirements if necessary, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements. The ongoing validity of the going concern basis depends on the outcome of the continuation vote, on which the Board is recommending that shareholders vote in favour. In particular, no provision has been made for the costs of winding-up the Company or liquidating its investments in the event that the resolution is not passed.

Income Statement

for the year ended 31 July 2014

			2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss		-	(1,383)	(1,383)	-	43,180	43,180
Net foreign currency gains		-	3,168	3,168	-	2,911	2,911
Income from investments		3,793	-	3,793	3,645	-	3,645
Other interest receivable and similar income		1	-	1	-	-	-
Gross return		3,794	1,785	5,579	3,645	46,091	49,736
Investment management fee		(551)	(1,285)	(1,836)	(496)	(1,158)	(1,654)
Administrative expenses		(432)	-	(432)	(466)	-	(466)
Net return before finance costs and taxation
		2,811	500	3,311	2,683	44,933	47,616
Finance costs		(71)	(166)	(237)	(70)	(164)	(234)
Net return on ordinary activities before taxation
		2,740	334	3,074	2,613	44,769	47,382
Taxation on ordinary activities		(339)	-	(339)	(259)	-	(259)
Net return on ordinary activities after taxation		2,401	334	2,735	2,354	44,769	47,123
Return per share		1.92p	0.27p	2.19p	1.88p	35.81p	37.69p

The "Total" column of this statement is the profit and loss account of the Company, and the "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no recognised gains and losses other than those included in the results above and therefore no separate statement of total recognised gains and losses has been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the year ended 31 July 2014

	Called-up		Share	Warrant
	share	Share	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2012	12,501	7	97,205	3	20,378	(4,309)	125,785
Net return on ordinary activities	-	-	-	-	44,769	2,354	47,123
At 31 July 2013	12,501	7	97,205	3	65,147	(1,955)	172,908
Net return on ordinary activities	-	-	-	-	334	2,401	2,735
Dividend paid in the year	-	-	-	-	(2,188)	-	(2,188)
At 31 July 2014	12,501	7	97,205	3	63,293	446	173,455

Balance Sheet

at 31 July 2014

		2014	2013
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		196,932	192,647
Current assets
Debtors		571	189
Cash at bank and in hand		6,575	1,023
		7,146	1,212
Current liabilities
Creditors: amounts falling due within one year		(30,623)	(20,951)
Net current liabilities		(23,477)	(19,739)
Total assets less current liabilities		173,455	172,908
Net assets		173,455	172,908
Capital and reserves
Called-up share capital		12,501	12,501
Share premium		7	7
Share purchase reserve		97,205	97,205
Warrant exercise reserve		3	3
Capital reserves		63,293	65,147
Revenue reserve		446	(1,955)
Total equity shareholders' funds		173,455	172,908
Net asset value per share		138.75p	138.32p

Cash Flow Statement

for the year ended 31 July 2014

		2014	2013
		£'000	£'000
Net cash inflow from operating activities		1,482	1,611
Servicing of finance
Interest paid		(267)	(252)
Net cash outflow from servicing of finance		(267)	(252)
Taxation
Overseas tax paid		(335)	(256)
Investment activities
Purchases of investments		(18,631)	(26,997)
Sales of investments		13,643	17,640
Net cash outflow from investment activities		(4,988)	(9,357)
Dividend paid		(2,188)	-
Net cash outflow before financing		(6,296)	(8,254)
Financing
Loan drawn down		12,489	-
Net cash inflow from financing		12,489	-
Net cash inflow/(outflow) in the year		6,193	(8,254)

Notes to the Accounts

1.         Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value through profit or loss.

The policies applied in these accounts are consistent with those applied in the preceding year.

2.         Income

	2014	2013
	£'000	£'000
Income from investments:
Overseas dividends	3,793	3,645
Other interest receivable and similar income
Deposit interest	1	-
Total income	3,794	3,645

3.         Investment management fee

		2014			2013
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	551	1,285	1,836	496	1,158	1,654

The basis for calculating the investment management fee is set out in the Report of the Directors on page 15 of the 2014 Annual Report.

4.         Dividends

	2014	2013
Dividends paid and proposed	£'000	£'000
2013 final dividend paid of 1.75p (2012: nil)	2,188	-
	2014	2013
	£'000	£'000
2014 final dividend proposed of 1.80p (2013: 1.75p)	2,250	2,188

The net revenue return on ordinary activities after taxation for the year is £2,401,000 (2013: £2,354,000). Due to the small accumulated balance on its revenue reserve of £446,000 (2013: negative balance of £1,955,000) the Company is not required to pay a dividend under the investment trust qualifying rules in section 1158 of the Corporation Tax Act 2010. However in line with its dividend policy, the Company is proposing to pay out substantially all of its net revenue. This will be paid out of revenue to the extent of the balance available in the reserve, with the remainder paid out of capital.

5.         Return per share

	2014	2013
	£'000	£'000
Revenue return	2,401	2,354
Capital return	334	44,769
Total return	2,735	47,123
Weighted average number of ordinary shares in issue during the year	125,008,200	125,008,200
Revenue return per share	1.92p	1.88p
Capital return per share	0.27p	35.81p
Total return per share	2.19p	37.69p

6.         Net asset value per share

	2014	2013
Net assets attributable to shareholders (£'000)	173,455	172,908
Shares in issue at the year end	125,008,200	125,008,200
Net asset value per share	138.75p	138.32p

7.         Transactions with the Manager

The Company has appointed Schroder Unit Trusts Limited (the "Manager"), in place of Schroder Investment Management Limited ("SIML"), both wholly owned subsidiaries of Schroders plc, to provide investment management, accounting, secretarial and administration services. If the Company invests in funds managed or advised by the Manager or any of its associated companies, those funds are excluded from the assets used for the purposes of the management fee calculation and therefore attract no fee. Under the terms of the AIFM Agreement, the Manager is also entitled to receive a marketing fee (with effect from 31 July 2014) and secretarial fee. Details of the AIFM Agreement are given in the Report of the Directors on page 15 of the 2014 Annual Report.

The management fee payable in respect of the year ended 31 July 2014 amounted to £1,836,000 (2013: £1,654,000), of which £482,000 (2013: £473,000) was outstanding at the year end. The total secretarial fee, including VAT, payable to the Manager amounted to £90,000 (2013: £90,000) of which £23,000 (2013: £45,000) was outstanding at the year end.

Mr Kingzett was an employee of SIML throughout the year.

8. Status of announcement

2013 Financial Information

The figures and financial information for 2013 are extracted from the published Annual Report and Accounts for the year ended 31 July 2013 and do not constitute the statutory accounts for that year. The 2013 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2014 Financial Information

The figures and financial information for 2014 are extracted from the Annual Report and Accounts for the year ended 31 July 2014 and do not constitute the statutory accounts for the year. The 2014 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2014 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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.

 

END

 

 

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