Annual Financial Report

RNS Number : 7080C

Schroder Japan Growth Fund PLC

21 October 2020

 

  21 October 2020

ANNUAL REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its Annual Report for the year ended 31 July 2020 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 July 2020 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.schroders.co.uk/japangrowth .  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/7080C_1-2020-10-20.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

Performance

It is disappointing to report another poor year of returns for shareholders. During the year ended 31 July 2020 the Company's net asset value ("NAV") underperformed the Benchmark, producing a negative total return of -11.7% compared with -6.1% produced by the Benchmark. The share price produced a negative total return of -13.1% over the same period. As further detailed in the Manager's Review, the weakening of the yen, the COVID-19 pandemic, gearing and the Company's style bias towards value all affected the performance of the net asset value.

Schroders is an active manager and the positioning of the portfolio has resulted in under-performance against the Benchmark for the second year in a row. The board believes that Schroders has the expertise and resources to deliver long-term outperformance, however this has clearly not been the case for the last two financial years.

Investment in actively managed funds can result in periodic underperformance as investment styles can move in and out of favour, however in the longer term this level of under-performance is not acceptable. The board has engaged with the Manager and has resolved to bring forward a table of measures, described below, designed to create value for shareholders while giving the Manager the time and the opportunity to deliver the investment outperformance they believe their strategy can deliver.

Conditional Tender Offer

The board has reviewed the Company's performance, and the share price discount to NAV, and has consulted with the Company's advisers and its largest shareholders. The directors believe that the long-term outlook for Japan is favourable, and that the Manager has the resources to deliver favourable outperformance against the Company's Benchmark in view of its deep resources in both London and Japan. Whilst the Manager's investment style has been out of favour, the directors do not believe that it would be appropriate to change this style to a material degree at this point in the cycle. However, the board feels that it is also important to support investors with a structure that allows for a partial return of capital in the event that performance falls short of expectations over the next few years.

Accordingly, the directors have agreed that, should the Company not deliver net asset value total return performance of at least 2% per annum above the Benchmark over the next four financial years, starting on 1 August 2020 and ending on 31 July 2024, the board will put forward to shareholders proposals for a tender offer of up to 25% of the issued share capital at a price equal to the then prevailing net asset value less costs. This would be contingent upon the next continuation vote of the Company, at the AGM in November 2024, being successful.

Discount control and purchase of shares for cancellation

During the year under review, the Company began to purchase shares for cancellation as part of its wider package of measures to address the discount of the share price to net asset value. A total of 231,500 shares were purchased for cancellation during the year, and a further 170,666 shares have been purchased since the end of the year. The average discount for the year was 14.4%, widening from 13.0% at the start of the year to 14.7% at the end of the year.

The board will be seeking to renew the share buy-back authority granted at the Company's AGM in November 2019 to purchase up to 14.99% of the Company's issued share capital for cancellation.

The board believes that the share buyback facility will be utilised more extensively over the coming months.  The Company's discount to NAV is approximately 16%. Repurchasing shares at such discounts creates significant excess return for all shareholders and also improves liquidity.

Management fee

As initially announced in October 2019, during the year the board engaged with the Manager on the level of management fees and agreed that the management fee would be charged on net assets, which does not include any cash which has been borrowed for investment purposes. This change has significantly reduced costs to shareholders and the ongoing charges figures has reduced from 1.03% in the previous year to 0.92% for the year ended 31 July 2020.

In addition, the board has agreed with the Manager that the notice period under the AIFM agreement should be amended to reflect current market rates, and with effect from the start of the current financial year on 1 August 2020, the notice period will be reduced to 6 months.

Gearing

The Company continues to maintain a term loan and credit facility, as detailed in the notes to the accounts. The average gearing level was 12.3%, although the gearing level increased slightly beginning and ending the year at 12.3% and 13.3%, respectively. This had a small negative effect on performance. 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.

Revenue and dividend

Revenue per share increased during the year, from 4.79p to 5.00p, reflecting the fact that many Japanese companies, unlike in various other parts of the world, continued to pay and in some cases increase their dividends, despite the pandemic. Taking this into consideration, the directors have declared a final dividend for the year ended 31 July 2020 of 4.9p per share, representing an increase of 4.3% over the final dividend paid in 2019. This dividend will be paid on 26 November 2020 to shareholders on the register on 6 November 2020 subject to approval by shareholders at the Annual General Meeting ("AGM") on 23 November 2020.

COVID-19

As noted in the Company's half year report, the COVID-19 pandemic has had profound impact on the world. The effects on the Company are detailed in the Manager's Report, the board's consideration of risk, going concern and viability in the Strategic Report, and in the Audit and Risk Committee Report. The board has been reassured to note that the Manager and other service providers have been able to operate on a business as usual basis, with some adaptations, despite the restrictions and guidelines set by government.

Outlook

There have been few moments to enjoy in the last 12 months. There has obviously been the pandemic, but also our share price has fallen for the second year in a row, and since the year end Prime Minister Abe, the man most associated with the long attempt to transform the Japanese economy, has stepped down. Many of the portfolio holdings have demonstrated all the resilience we would hope for during the global lockdown (Japan itself has been less affected, but many of its export markets clearly have been), but the attention of the stock market has been elsewhere.

Closing the discount at which the trust trades offers significant potential upside to shareholders.  It is the board's view that such discounts reflect a lack of demand for the company's shares which reflects the poor investment performance of the Company and the limited appetite of investors for Japan as a market. The board and the Manager believe that better relative performance, of the scale envisaged in the tender condition, offers the prospect of a narrower discount. Should it become apparent that such outperformance is not possible, the board will consider taking other measures to preserve shareholder value before the end of the performance period.

I have mentioned our plans to seek to improve the discount that our own shares trade on, but behind this is the belief that the portfolio holdings will recover.  The portfolio has been under the new portfolio manager for just over a year and we have every expectation that outperformance against the Benchmark can be delivered. We take comfort from the Manager's confidence that the Company's portfolio looks cheap relative to the rest of the market, and that investor attention will broaden to see that value. The pandemic has introduced a new degree of uncertainty, but the board remains optimistic in the long-term future of your Company.

The AGM and shareholder engagement

The AGM will be held at 12.00 pm on Monday, 23 November 2020. Due to the continuing restrictions relating to meetings due to the COVID-19 pandemic, shareholders are asked to cast their votes by proxy. To ensure the safety and security of our shareholders, service providers, officers and guests, shareholders will not be able to attend the meeting in person.

The Manager will be presenting at a webinar on 23 November at 1.00 pm and all shareholders are encouraged to sign up on the Company's website, to hear the portfolio manager's view, and to ask questions. Shareholders can also sign up using this link: https://www.brighttalk.com/webcast/1184/448611?utm_ source=Schroder+Investments+Limited&utm_medium=brightt alk&utm_campaign=448611.

In addition, the board would like shareholders to get in touch via the Company Secretary with any questions or comments, so that the board can answer them in advance of the AGM. The board will be providing answers to commonly asked questions on the Company's webpages, as well as the answers to questions received from shareholders before the AGM. To email, please use: [e-mail] or write to us at the Company's registered office address (Company Secretary, Schroder Japan Growth Fund plc, 1 London Wall Place, London EC2Y 5AU).

For regular news about the trust, shareholders are also encouraged to sign up to the Manager's investment trusts update by visiting the Company's website https://www.schroders.com/en/uk/private-investor/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/never-miss-an-update/.

Anja Balfour

Chairman

20 October 2020

Manager's Review

Market background

The Company's NAV total return for the year to the end of July was -11.7%, which underperformed the Benchmark total return of -6.1% (source: Morningstar, net of fees in GBP). Even allowing for an extraordinary economic and market environment, this is a disappointing performance.

In yen terms the market declined by just 1.9% across the 12 month period, but there was a weakening of the yen which led to a lower return for the market in sterling terms. However, these relatively small overall moves disguise the huge dislocations seen in both equity and currency markets in February and March at the height of the COVID-19 pandemic.

Within Japan's negative interest rate environment, defensive sectors, with steady growth rates, continued to perform relatively well in the first half of the period and these trends accelerated dramatically in February and March triggered by the initial global spread of COVID-19. At the same time, economically sensitive, or cyclical, areas and stocks with low valuations fell more sharply than the overall market.

Portfolio performance

The Company's bottom-up stock picking approach typically results in a moderate bias towards an overall "Value" style (emphasising stocks on below-average valuations). This has generated a headwind for the Company's relative performance throughout the period. This was especially true during the market sell-off in the first quarter of 2020, with the main performance impact occurring in March. Overall market trends in this period were clearly exacerbated by the global spread of COVID-19, and this provided some additional negative impact for the portfolio performance. While few companies could escape a significant earnings impact from the unprecedented speed of the economic downturn, this factor alone did not have a disproportionate impact on the Company's holdings.  Indeed many of the Company's holdings reported positive earnings surprises in the quarter to June, although these were not necessarily reflected in stock valuations.

Net gearing in the Company was 13.3% at the end of July 2020, having generally been in the range of 11-14% during the previous 12 months. Since the market showed only a small negative return in yen, the overall impact of the gearing was fairly modest for the year, but there was a more significant negative impact during the market sell-off in February and March.

There were also negative contributions from both sector allocation and stock selection, but there were few large stock contributions. Instead, the bulk of the underperformance was generated from small negative contributions from a wide range of stocks, reflecting our view that style characteristics, rather than stock-specific factors, have continued to have a disproportionate influence on relative performance in this period. Elsewhere in the market, a relatively narrow range of stocks continued to see strong momentum, which has pushed valuations to further extremes.

Among individual stocks in the portfolio, the largest negative contribution came from Sankyu, a specialist in logistics and plant engineering. The stock underperformed from February to end-July, on fears that order flow from industrial clients could decline in the short term due to the sudden economic slowdown. Mitsui Fudosan, a major property developer, also had a negative impact on performance but, in this case, the underperformance was more concentrated in March as investors moved to discount the impact of COVID-19 related social restrictions on the company's hotel and leasing businesses.

The strong momentum seen in a relatively narrow range of stocks continues to generate unusual attribution results for the portfolio, with relatively large contributions coming from stocks that are not held. This was again evident in the 12 months to July, with both Sony and Keyence among the largest negative contributors, despite not being held in the Company. While we recognize the quality in these stocks we do not believe their current valuations justifies inclusion in the Company.

Some of these negative influences were offset by the strong performance of TDK, a major electronic component supplier. Having been sold off sharply in March, the stock price subsequently recovered and there was a particularly strong move on the last day of July when the company released robust quarterly earnings. These results were driven partly by demand for high-value batteries for notebooks and tablets, as a result of changes in consumer behaviour driven by COVID-19.

There was also a positive contribution from SMC, which produces precision pneumatic equipment used, in particular, in factory automation. The stock price fell by far less than the market in March and has continued to perform strongly since.

Stock selection impact - 12 months to 31 July 2020

Five largest contributors

	Portfolio weight (%)	Load difference (%)	Absolute performance (%)	Impact (%)
TDK	2.4	+2.2	+34.8	+0.7
SMC	2.5	+1.8	+33.5	+0.6
Disco	2.5	+2.3	+21.6	+0.6
Pan Pacific	1.4	+1.2	+33.0	+0.5
Asahi Holdings	0.3	+0.3	+63.4	+0.4

Five largest detractors

	Portfolio weight (%)	Load difference (%)	Absolute performance (%)	Impact (%)
Sankyu	2.3	+2.3	-39.0	-0.9
Sony	0.0	-2.0	+26.3	-0.6
Mitsui Fudosan	1.8	+1.2	-34.8	-0.5
Keyence	0.0	-1.6	+34.8	-0.5
East Japan Railway	2.2	-2.9	-40.8	-0.5

Source: Schroders using FactSet. Contributions are indicative as FactSet uses unaudited data. Stock weights are average over the period and returns are in GBP.

Activity

During the year we sold some positions where our level of conviction had been reduced. These included IHI, a heavy machinery maker, and Central Japan Railway, both of which we see being driven primarily by the economic cycle. Most recently we have also taken decisions where our long‑term views have been materially altered by the changes in consumer behaviour sparked by the pandemic. As a result, both Japan Air Lines and H20, a department store operator, have been sold.

We continue to find particularly attractive opportunities in mid and small cap stocks. Fukushima Galilei, which supplies commercial refrigeration units, and Asahi Holdings, a specialist recycler of precious metals, have both been added to the portfolio recently.

Overall, the number of holdings has been reduced to 71 from 85 during the year, with an emphasis on higher weightings in stocks where we have the greatest conviction.

Outlook

Shinzo Abe announced his resignation as prime minister of Japan on 30 August, due to the resurgence of a long-standing health problem, just four days after he recorded the longest continuous term of any Japanese prime minister. Although Mr Abe's health has clearly deteriorated, his popularity has also recently declined, primarily due to his handling of Japan's response to the pandemic. As a result the approval rate for the current cabinet had fallen to 35%, the lowest level since Mr Abe came to power in 2012, although still above the 30% level at which Japanese leaders generally become untenable.

Despite the public's very poor perception of the authorities' response, Japan's virus data, both in terms of incidence and mortality, remains significantly better than most other developed countries. In recent weeks, an uptick in new infections cases, albeit from a very low base, has led to further criticism of perceived policy inconsistencies.

Even prior to Mr Abe's announcement, expectations on the political timetable were already complicated by the pandemic and the postponement of the Tokyo Olympics to July/August 2021, just ahead of the next general election which is due in October 2021. Nevertheless, the precise timing of the announcement surprised us.

In the event, the LDP opted for the simplest method to elect their next party president. Yoshihide Suga, the Chief Cabinet Secretary,  duly won the leadership election on 14 September. His position as the new prime minister was then confirmed in a special Diet session on 16 September.

We recognise that the change in political leadership may cause some short-term nervousness in financial markets, especially among foreign investors, as Mr Abe has been so closely identified with his government's economic plans under the banner of "Abenomics". There may be additional uncertainty if Mr Suga decides to call an early general election to reinforce his position with a stronger mandate.

In reality, since Mr Suga has been a staunch supporter of Mr Abe throughout his tenure, and since the LDP remain the dominant party, we would expect little to change. In fact, this may be a good opportunity for a new leader to refresh the cabinet and refocus the pandemic response.

Mr Suga may provide some differences in emphasis on the various structural reform programmes underway but, overall, we would expect continuity of fiscal policy. This is particularly true at present, since fiscal policy remains at the forefront of the pandemic response for all countries.

We would also expect that monetary policy, under Bank of Japan Governor Haruhiko Kuroda, will continue unchanged. However, we must acknowledge that the close association between Mr Abe and Mr Kuroda, and the consequent policy coordination, may be harder to replicate for any new prime minister.

One other feature of Mr Abe's tenure has been a relatively stable relationship with the current leaders of both the US and China, despite the escalating tension between those two countries. We will watch closely whether Mr Suga can adopt a similar stance, especially as we approach the US presidential election

Overall, we feel that the departure of Mr Abe should not distract investors from other positive factors, including structural improvements in corporate governance, profitability and return on equity. Japan has outperformed many other countries in dealing with the virus so far, but in our view these positives are yet to be reflected in share prices. However, with equity market valuations at reasonable levels, short-term sentiment could still be driven primarily by data on domestic and global virus incidence, and any renewed restrictions on economic activity.

Policy

Although it is often tempting to be carried along with short-term news and momentum in particular stocks, differences in stock performance must ultimately be driven by companies' underlying earnings performance and valuations, and we remain absolutely focused on these factors. This is especially true this year as a relatively small group of stocks have continued to lead the market while many stocks that we already regarded as undervalued actually suffered most in the virus-driven sell-off in the first quarter.

Our internal research continues to produce a number of opportunities in exciting companies on cheap valuations, from which we aim to generate outperformance without taking large 'style' positions. Ongoing portfolio changes in the last 12 months have been incrementally positive and did mitigate some of the underperformance when 'value' stocks fell sharply this year.

Environmental, Social and Governance ("ESG") factors and sustainability issues continue to lie at the heart of our research on Japanese companies, which also incorporates input from our dedicated Sustainable Investment Team in London. We explicitly consider ESG factors across our investment universe in Japan, without making any specific exclusions in particular sectors.

However, in specific cases, we can maintain a medium-term holding in a company with an initial weaker ESG position, if we are actively engaging with the company's management to help drive the desired change. For example, SMC, a pneumatic equipment maker, tends to be rated poorly by the third-party ESG providers largely due to their poor governance scores. We have a similar view and therefore apply a valuation discount on governance for this company within our valuation framework. However, through our ongoing engagement with the company, we have seen positive changes in the management driving better governance, including improved shareholder remuneration, financial disclosures and balance sheet management. On this basis we continue to view SMC as an appropriate investment, despite its superficially weak ESG rating.

Conclusion

Overall, we believe the Company remains well placed for a more typical valuation-driven environment, and therefore anticipate no change in the strategy. While we must acknowledge the impact of our style biases, we are not relying on a simple reversal of style factors to drive future performance. Instead, our research team's access to company management continues to generate ideas for investment in individual stocks and insights into changes in corporate behaviour and governance. All our company meetings are now being conducted online rather than face-to-face, but we do not feel this has led to any overall deterioration in our ability to access company management. Within the market we are now seeing increasing opportunities in mid and small-cap stocks, in particular, which has historically been an area that has added value to performance. The gearing currently is 12%, a level that reflects both the number of opportunities we see in the market and our confidence in the outlook for the portfolio.

Sector positions vs. Benchmark as at 31 July 2020

Portfolio weight (%)		Load difference(%)
11.9	Precision Instruments	9.3
5.4	Construction	3.0
8.3	Machinery	2.9
7.0	Wholesale Trade	2.5
1.6	Other Financing Business	0.5
6.0	Pharmaceutical	-0.9
3.4	Banks	-1.4
3.6	Services	-1.6
1.7	Foods	-2.1
9.3	Electric Appliances	-6.5

Source: Schroders

Schroder Investment Management Limited

20 October 2020

Securities named are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the audit and risk committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust assessment at least annually. The last assessment took place in September 2020.

Although the board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

Actions taken by the board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Emerging risks and uncertainties

During the year, the board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were political risk, climate change risk and the impact of the COVID-19 pandemic. The board has determined they are not currently, as detailed below, sufficiently material for the Company to be categorised as independent principal risks. The board receives updates from the Manager, Company Secretary and other service providers on other potential risks that could affect the Company.

Political risk includes Brexit, trade wars and regional tensions. The board continues to monitor developments for the UK's departure from the European Union and to assess the potential consequences for the Company's future activities, but believes that the Company's portfolio of Japanese assets positions the Company to be suitably insulated from Brexit related risks. Currency rate and borrowings drawn down by the Company may be affected by geopolitical developments particularly in relation to movements in sterling versus the yen. Note 20 of the financial statements of the 2020 annual report provides more information on the effect of currency and market price movements. The board is also mindful that changes to public policy in the UK, or in Japan, could impact the Company in the future.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The board  notes the Manager has integrated ESG considerations, including climate change, into the investment process as detailed in the Strategic Report. The board will continue to monitor this.

The board also reviewed the risks arising from the COVID-19 pandemic and how it impacted the Company's principal risks and uncertainties. The board considers that the pandemic will likely continue to affect the Company with respect to investment management and service provider risks, due to the uncertainty caused by the pandemic, affecting the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The board notes the Manager's investment process is unaffected by the pandemic and it continues to focus on long-term company fundamentals and detailed analysis of current and future investments. COVID-19 also affected the Company's service providers, who implemented business continuity plans in line with government guidelines. All service providers continue to operate on a business as usual basis.

*The "Change" column on the right highlights at a glance the board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as stable or increased.

Risk	Mitigation and management	Change*
Strategic The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. The share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.	è
The Company's cost base could become uncompetitive, particularly in light of open-ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against their competitors. Annual consideration of management fee levels.	è
Investment management The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of: the Manager's compliance with its agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. The Manager also reported on the impact of COVID-19 on the Company's portfolio, and the market generally. Annual review of the ongoing suitability of the Manager is undertaken.	è
Financial and currency The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in Japanese equity markets could have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in assets which are denominated in yen, its exposure to changes in the exchange rate between sterling and yen has the potential to have a significant impact on returns.	The risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager. The board considers overall hedging policy on a regular basis.	è
Custody Safe custody of the Company's assets may be compromised through control failures by the Depositary.	The depositary reports on safe custody of the Company's assets, including cash, and portfolio holdings independently reconciled with the Manager's records. The review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the depositary on its activities, including matters arising from custody operations is received.	è
Gearing and leverage The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored daily and strict restrictions on borrowings are imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of shareholders' funds.	è
Accounting, legal and regulatory 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. 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.	The confirmation of compliance with relevant laws and regulations by key service providers is reviewed. Shareholder documents and announcements, including the Company's published annual report, are subject to stringent review processes. Procedures are established to safeguard against the disclosure of inside information.	è
Service provider The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, Depositary and Registrar. Failure of controls, and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting is provided by key service providers and monitoring of the quality of their services provided. The directors also receive presentations from the Manager, depositary and custodian, and the registrar on an annual basis. This included reporting on the arrangements for working during the COVID-19 pandemic lockdown. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, and follow up of remedial actions as required.	è
Cyber The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information or disrupt operations.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack. In addition, the board received presentations from the Manager, depositary and custodian, and the registrar on cyber risk, and the additional steps those companies were taking during the COVID-19 pandemic and the need for employees to work from home.	é

Risk assessment and internal controls review by the board

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the audit and risk committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

No significant control failings or weaknesses were identified from the audit and risk committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company is set out in note 20 to the accounts on pages 50 to 54 of the 2020 annual report.

Viability statement

The directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 July 2020 and the potential impacts of the principal risks and uncertainties it faces for the review period. They have also reviewed the impact of the COVID-19 pandemic on the Company as further detailed in the Chairman's Statement, Portfolio Managers' Review and Emerging Risks sections of this report. The directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively, following the implementation of their business continuity plans.

A period of five years has been chosen as the board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 16 and 17 of the 2020 annual report and in particular the impact of a significant fall in Japanese equity markets on the value of the Company's investment portfolio. Whilst the Company's articles of association require that a proposal for the continuation of the Company be put forward at the AGM in 2024, the directors have no reason to believe such a resolution will not be passed by shareholders.

The directors have considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period.

The directors also considered a stress test in which the Company's NAV dropped by 50%, and noted that, based on the assumptions in the test, the Company would continue to be viable over a five year period.

Based on the Company's processes for monitoring operating costs, the board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

Going concern

Having assessed the principal risks, the impact of the COVID-19 pandemic and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' Responsibilities

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", 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 the financial statements, the directors are required to:

-  select suitable accounting policies and then apply them consistently;

-  state whether applicable United Kingdom Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

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

-  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.

The directors 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 Manager is responsible for the maintenance and integrity of the webpage dedicated to the Company. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Each of the directors, whose names and functions are listed in the board of directors on pages 19 and 20 of the 2020 annual report confirm that, to the best of their knowledge:

-  the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

-  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.

Income Statement for the year ended 31 July 2020

	2020			2019
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Losses on investments held at fair value through profit or loss	-	(37,752)	(37,752)	-	(13,985)	(13,985)
Net foreign currency gains/(losses)	-	1,602	1,602	-	(3,751)	(3,751)
Income from investments	8,276	-	8,276	8,157	-	8,157
Other interest receivable and similar income	4	-	4	7	-	7
Gross return/(loss)	8,280	(36,150)	(27,870)	8,164	(17,736)	(9,572)
Investment management fee	(564)	(1,317)	(1,881)	(642)	(1,497)	(2,139)
Administrative expenses	(552)	-	(552)	(619)	-	(619)
Net return/(loss) before finance costs and taxation	7,164	(37,467)	(30,303)	6,903	(19,233)	(12,330)
Finance costs	(84)	(196)	(280)	(93)	(217)	(310)
Net return/(loss) on ordinary activities before taxation	7,080	(37,663)	(30,583)	6,810	(19,450)	(12,640)
Taxation on ordinary activities	(828)	-	(828)	(816)	-	(816)
Net return/(loss) on ordinary activities after taxation	6,252	(37,663)	(31,411)	5,994	(19,450)	(13,456)
Return/(loss) per share	5.00p	(30.13)p	(25.13)p	4.79p	(15.56)p	(10.77)p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

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

Statement of Changes in Equity for the year ended 31 July 2020

	Called-up		Capital	Warrant	Share
	share	Share	redemption	exercise	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2018	12,501	7	-	3	97,205	176,708	5,844	292,268
Net (loss)/return on ordinary activities	-	-	-	-	-	(19,450)	5,994	(13,456)
Dividend paid in the year	-	-	-	-	-	-	(5,000)	(5,000)
At 31 July 2019	12,501	7	-	3	97,205	157,258	6,838	273,812
Repurchase of the Company's own shares for cancellation	(23)	-	23	-	(398)	-	-	(398)
Net (loss)/return on ordinary activities	-	-	-	-	-	(37,663)	6,252	(31,411)
Dividend paid in the year	-	-	-	-	-	-	(5,875)	(5,875)
At 31 July 2020	12,478	7	23	3	96,807	119,595	7,215	236,128

Statement of Financial Position at 31 July 2020

	2020	2019
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	268,080	307,753
Current assets
Debtors	1,643	1,108
Cash at bank and in hand	11,814	11,414
	13,457	12,522
Current liabilities
Creditors: amounts falling due within one year	(2,172)	(1,331)
Net current assets	11,285	11,191
Total assets less current liabilities	279,365	318,944
Creditors: amounts falling due after more than one year	(43,237)	(45,132)
Net assets	236,128	273,812
Capital and reserves
Called-up share capital	12,478	12,501
Share premium	7	7
Capital Redemption reserve	23	-
Warrant exercise reserve	3	3
Share purchase reserve	96,807	97,205
Capital reserves	119,595	157,258
Revenue reserve	7,215	6,838
Total equity shareholders' funds	236,128	273,812
Net asset value per share	189.24p	219.04p

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"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", 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 October 2019. All of the Company's operations are of a continuing nature.

2.  Taxation on ordinary activities

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises irrecoverable overseas withholding tax.

3.  Dividends

Dividend paid and proposed
	2020	2019
	£'000	£'000
2019 final dividend of 4.70p (2018: 4.00p) paid out of revenue profits	5,875	5,000
	2020	2019
	£'000	£'000
2020 final dividend proposed of 4.90p (2019: 4.70p) to be paid out of revenue profits	6,114	5,875

The proposed dividend amounting to £6,114,000 (2019: £5,875,000) is the amount used for the basis of determining whether the Company has satisfied the distribution requirements of Section 1158 of the Corporation Tax Act 2010. The revenue available for distribution by way of dividend for the year is £6,252,000 (2019: £5,994,000).

4.  Return/(loss) per share

	2020	2019
	£'000	£'000
Revenue return	6,252	5,994
Capital loss	(37,663)	(19,450)
Total loss	(31,411)	(13,456)
Weighted average number of ordinary shares in issue during the year	124,998,055	125,008,200
Revenue return per share	5.00p	4.79p
Capital loss per share	(30.13)p	(15.56)p
Total loss per share	(25.13)p	(10.77)p

5.  Creditors: amounts falling due after more than one year

	2020	2019
	£'000	£'000
Bank loan	43,237	45,132

The bank loan comprises a yen 6.0 billion three-year term loan from SMBC, expiring in January 2022, carrying a fixed rate of interest of 0.64% per annum. The loan is unsecured but is subject to certain undertakings and restrictions, all of which have been complied with. The directors consider that the carrying amount of the loan approximates to its fair value.

6.  Called-up share capital

	2020	2019
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Opening balance of 125,008,200 (2019: same) shares of 10p each	12,501	12,501
Purchase and cancellation of 231,500 (2019: nil) shares	(23)	-
Closing balance of 124,776,700 (2019: 125,008,200) shares	12,478	12,501

During the year, the Company purchased 231,500 of its own shares, nominal value £23,150, for cancellation, for a total consideration of £398,000, representing 0.19% of the shares outstanding at the beginning of the year. The reason for these share repurchases was to seek to manage the volatility of the share price discount to net asset value per share.

7.  Net asset value per share

	2020	2019
Net assets attributable to shareholders (£'000)	236,128	273,812
Shares in issue at the year end	124,776,700	125,008,200
Net asset value per share	189.24p	219.04p

8.   Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio. The Company currently holds no derivative financial instruments.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 43 of the 2020 annual report.

The following table sets out the fair value measurements using the FRS 102 hierarchy at 31 July:

	2020
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments	268,080	-	-	268,080
	2019
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments	297,076	10,677	-	307,753

Investments allocated to Level 2 are valued using unadjusted quoted prices, but in markets which are less active.

9. Status of announcement

2019 Financial Information

The figures and financial information for 2019 are extracted from the published annual report and accounts for the year ended 31 July 2019 and do not constitute the statutory accounts for that year. The 2019 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.

2020 Financial Information

The figures and financial information for 2020 are extracted from the annual report and accounts for the year ended 31 July 2020 and do not constitute the statutory accounts for the year. The 2020 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 2020 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

 

END

 

 

FR FLFFAIELIFII