Annual Financial Report

RNS Number : 8628C

Schroder Japan Growth Fund PLC

14 October 2022

 

REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its Report and Accounts for the year ended 31 July 2022 , as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Report and Accounts for the year ended 31  July 2022 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website  https://www.schroders.com/en-gb/uk/individual/funds-and-strategies/investment-trusts/schroder-japan-growth-fund-plc/ . Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/8628C_1-2022-10-13.pdf

The Company has submitted its 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:

Paula Lockwood

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

Performance

 I am pleased to report that despite challenging market conditions relative performance remained strong this year, building on the strong absolute and relative returns achieved in 2021.

During the year ended 31 July 2022 the Company's net asset value ("NAV") achieved a total return of 1.0%, outperforming its Benchmark which produced a negative total return of -1.9% over the year. The share price fell -2.0% on a total return basis, with the discount averaging 11.0% over the year.

 Conditional Tender Offer

 The Board continues to monitor the Company's performance against its tender performance target each year. The Company has a target to deliver net asset value total return performance of at least 2% per annum above the benchmark over a four year period starting from 1 August 2020. Should this target not be met, the Board will put to shareholders a proposal for a tender offer of 25% of the issued share capital at a price equal to the prevailing net asset value less costs. This tender is contingent on the next continuation vote of the Company at the AGM in November 2024 being passed.

The Manager has delivered an annualised net asset value total return of 12.7% over the first two years of the four year period, compared with 7.6% from the benchmark.

 Board Succession

 As outlined in the last annual report I will be retiring at the AGM. Following a recommendation from the Nomination Committee, the Board has appointed two new directors following a rigorous selection process involving an external agency. I am pleased to report that Dr Philip Kay will succeed me as Chairman and we also welcomed Helena Coles to the Board. Both Dr Kay and Ms Coles will be put forward for election by shareholders at the AGM and their biographical details may be found on pages 21 and 22 of the 2022 annual report.

 Discount and purchase of shares for cancellation

 The Board monitors the discount of the share price to net asset value and when necessary implements a buyback programme as part of a wider package of measures to address this. During the year the Company repurchased a total of 142,700 shares for cancellation, in line with this policy. Whilst the number of shares repurchased was small the discount is actively monitored by the Board, who will be seeking to renew the share buyback authority granted at the Company's last AGM to purchase up to 14.99% of the Company's issued share capital for cancellation. Should permission be granted, the Board will continue to use these buyback powers when appropriate.

In addition to the buyback programme and performance related tender offer, the Board continues to implement other measures to address the NAV discount and share price performance. Among these are a focus on refining the marketing message to communicate the excellent performance produced by Masaki Taketsume and his team. Masaki has made concrete progress in creating a more focused high conviction, yet balanced portfolio of large and smaller companies. The highly experienced team, based in Tokyo, has a differentiated approach investing in the best quality, but undervalued companies in Japan.

Gearing

 The Company continues to maintain both a term loan and revolving credit facility. The gearing level was 10.4% at the start of the period and ended at 11.1%, with an average gearing level of 10.9%. Gearing had a positive effect on performance during the year. The Company's gearing continues to operate well within its pre-agreed limit of 25% of net asset value.

Revenue and dividend

 Revenue during the year increased from 4.38p to 4.97p per share, a rise of 13.5%. In line with its stated policy the Board will continue to pay out substantially all income to shareholders. The Board has therefore declared a final dividend for the year ended 31 July 2022 of 4.90p per share, representing a increase of 14% over the final dividend paid in 2021. This dividend will be paid on 9 December 2022 to shareholders on the register on 4 November 2022, subject to approval by shareholders at the Annual General Meeting ("AGM") on 5 December 2022.

Outlook

 While the difficult global economic picture will continue to present challenges to our Manager, we are encouraged by the performance of the Company's portfolio during the last year. We echo his view that his bottom up conviction approach to investing, whilst also increasingly seeking opportunities in mid and smaller cap stocks based on the anticipated recovery of the domestic economy, is well suited to the current environment.

 AGM and shareholder engagement

 The AGM will be held at 12.00 p.m. on Monday, 5 December 2022. The Shareholders are asked to cast their votes by proxy. The Manager will be presenting at a webinar separately from the AGM on 25 October 2022 at 2 p.m. 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://registration.duuzra.com/form/SJGAnnualResults2022. 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. 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.

Finally, on a personal note, as this is my last Chairman's statement, I would like to say how much I have enjoyed working with my fellow directors and the Schroders team. I will continue to pay a close interest in the performance of the Company and have every confidence as I make the transition from Board Chair to shareholder that the journey will be rewarding.

Anja Balfour

Chairman

 13 October 2022

 Investment Manager's Review

Market background

 The Company's Net Asset Value recorded a small positive total return for the year to the end 31 July 2022 of +1.0%, whereas the benchmark declined slightly, with a negative total return of -1.9% (source: Morningstar, net of fees in GBP, NAV to NAV cum income return). This extended the period of outperformance seen in the previous year, with no change in the underlying strategy.

In Yen terms the Japanese market rose by 4.5% in the 12 months, but the Japanese currency weakened across the period, which led to a lower return from the market in sterling terms.

Following the Tokyo Olympics in July 2021, the Japanese government extended Covid-related restrictions throughout August and September. Public dissatisfaction with the government's approach ratcheted up again and the approval rate for Prime Minister Suga and his cabinet fell to the lowest levels seen during his 12 months in office. On 3 September 2021, the Prime Minister unexpectedly announced his intention to resign without contesting the LDP leadership election scheduled for later that month. This inevitably led to a brief period of political uncertainty before Mr Kishida ultimately emerged victorious in the party leadership election.

As the new LDP leader, Mr Kishida became Japan's 100th prime minister and was essentially seen as a safe, if unexciting, choice to guide Japan through its post-Covid recovery. Mr Kishida also inherited a stronger position in the vaccination programme which sustained strong momentum in the second half of 2021 after the very slow start.

Under Mr Kishida's leadership, the expectations for the LDP's performance in the subsequent general election in October 2021 were modest at best but, in the event, the party retained a solid majority.

With the election out of the way, and the Covid related state of emergency lifted, the political focus shifted to a substantial fiscal stimulus package, details of which became clearer in November. However, Japan imported its first known case of Omicron in December, followed by a sharp pick-up in infections from January 2022. While we must continue to emphasise that the absolute number of infections in Japan has remained remarkably low throughout the pandemic, the emergence of new variants again demonstrated a higher level of risk aversion, and each wave of infections has led to renewed concerns about hospital capacity. In late May 2022, Mr Kishida did finally announce that the government would relax some Covid border measures and resume acceptance of overseas tourists from 10 June, for the first time in around two years. Although this generated lots of media attention, in reality the practical constraints on travel will remain significant for some time and we will probably need to wait until at least the fourth quarter of the year to see any real impact from inbound tourism.

In the first half of 2022, aside from the ongoing human tragedy unfolding in Ukraine, Japan's equity market was primarily driven by news flow on monetary policy and currency markets, together with concerns over the growing possibility of a US recession. Comments from the US Federal Reserve ahead of April's interest rate increase clearly pointed to a widening interest rate differential with Japan materialising earlier than expected. This view was reinforced by the results of the Bank of Japan's own policy meeting on 18 April, which confirmed no change in policy and the maintenance of the existing target of +/- 25bps for the 10-year bond yield. There was some surprise in the degree of commitment to this target shown by Governor Kuroda when he announced more details around the central bank's operation of fixed-rate bond purchases. Prior to March, these operations had been extremely rare, and generally only deployed at specific moments of significant market stress. However, Mr Kuroda stated that these fixed-rate operations would be conducted every day throughout May, virtually guaranteeing no rise in bond yields, which quickly pushed the yen through the key psychological 130 level against the US dollar.

Although the sharp weakening of the yen has prompted several public statements, the Bank of Japan's room for manoeuvre on the exchange rate is, in reality, very limited. Shortly after the end of the review period, however, the Ministry of Finance did intervene directly in currency markets to support the yen. While such action could yield short-term results it is unlikely to create a long-term trend change in the absence of a fundamental shift in policy from the Bank of Japan. Throughout Japan's two decades of deflation, investors have generally viewed yen weakness as positive for Japan since the benefits for exporters were seen to outweigh any potential inflationary impact, and it seems that Bank of Japan Governor Kuroda clearly remains very much in favour of this view. Since May 2022, however, the yen's weakness has coincided with a reversal of several other factors, especially mobile telecom charges, which had been suppressing the year-on-year inflation rate in the previous 12 months. This soon became evident in the headline inflation numbers, which showed core CPI (excluding only fresh food) jumping to 2.2% in June as the significant reduction in mobile phone charges finally dropped out of the year-on-year numbers. Although this level is slightly above the Bank of Japan's 2% target, the real question remains whether longer-term inflation expectations move higher in response, leading to more substantial wage growth as part of Japan's normalisation after decades of deflation. Nevertheless, underlying inflationary pressure in Japan does now appear to be creeping up, and the year-on-year increase in producer prices continues to run well ahead of consumer prices.

In July, market events were overshadowed by the shocking assassination of former Prime Minister Shinzo Abe on 8 July. Mr Abe, who resigned in August 2020 as Japan's longest serving prime minister, was shot while delivering a campaign speech in Nara, two days ahead of nationwide Upper House elections. Although Japan has had two Prime Ministers since Mr Abe, he remained a hugely influential figure within the ruling Liberal Democratic Party (LDP) and his absence will alter the internal dynamics of the party. In the immediate aftermath, however, the resulting strong support shown for the LDP in the Upper House elections on 10 July has solidified the position of current Prime Minister Kishida and has improved political stability.

Despite successive delays in Japan's domestic economic recovery, and heightened global uncertainty, Japanese corporations appear to be performing well and quarterly results announced during the fiscal year ended March 2022 were consistently ahead of expectations. This has been particularly true for manufacturing sectors that have benefitted from the global recovery, but non-manufacturing and service sector profits have also held up despite the successive restrictions imposed on domestic activity in this period. Around the end of the fiscal year, there was a further pick-up in global uncertainty so it was not surprising to see some companies making overly conservative forecasts for the new fiscal year. Overall, however, the tone of results and guidance was still slightly better than expected.

Portfolio performance

 The Fund's bottom-up stock picking approach typically results in a moderate bias towards an overall "value" style (emphasising stocks on below-average valuations). This style has generally supported performance of the fund in the last 12 months as the market environment has typically responded to stock-specific drivers, which has allowed the Fund's stock selection to add value.

Although overall market trends in this period have been dominated by global news flow on monetary policy and Russia's invasion of Ukraine, investors have also begun to recognise the earnings potential for many Japanese companies and individual stocks have reacted positively to upward revisions in earnings expectations.

Net gearing in the Fund was 11.1% at the end of July 2022, having been in a range from 10.4% to 12.1% during the previous 12 months. The gearing has had a modest positive impact on Fund performance during the year, which has added to the gains made from stock selection.

Among individual stocks in the portfolio, the largest positive contribution came from Tokio Marine, one of Japan's major insurers. The stock price has performed consistently well throughout the last 12 months, reflecting the company's improved Return on Equity and higher shareholder remuneration. There was also a strong performance from NTT, Japan's largest telecom service provider. The company is typically seen as defensive, due to its relatively predictable earnings, but performance was very strong in the first six months of 2022, following some restructuring of group companies that was announced in late 2021.

The Fund's relative performance in this period also benefited from the weakness of Softbank Group, the telecom and investment conglomerate, which is a significant component of the benchmark, but is not held in the Fund. The stock had been strongly favoured by investors in 2020, but then underperformed throughout 2021, resulting in a positive impact for the Fund in this review period.

Some of these positive impacts on Fund performance were offset by the underperformance of Ibiden a ceramics producer specialised in semiconductor packaging. This was mainly influenced by weakness across the technology sector in the first half of 2021, especially for stocks related to semiconductor production.

There was also weakness in Trusco Nakayama, a mid/small-cap distributor of industrial tools and related supplies. The share price has reflected the company's weaker top-line growth due to the slower than expected recovery of domestic industrial production, as well as the overall underperformance of mid/small-cap stocks in the first half of the period. The Fund maintains no holding in this stock as the real value of Softbank's investment holdings is difficult to predict.

 Stock selection impact - 12 months to 31 July 2022

Largest positive contributions to performance

Security	 Company Fund (%)	Load difference (%)	Absolute return (%)	Impact (%)
 Tokio Marine	2.9	2.1	44.4	0.8
 Nippon Telegraph and Telephone	3.5	2.1	31.2	0.6
 NGK Spark Plug	1.2	1.1	58.8	0.6
 Hitachi Transport System	0.7	0.6	87.0	0.5
 Kureha Chemical	1.3	1.3	34.5	0.4
Total				 3.0

 Largest negative contributions to performance

Security	 Company Fund (%)	Load difference (%)	Absolute return (%)	Impact (%)
 Ibiden	1.5	1.4	-36.3	-0.5
Trusco Nakayama	1.1	-1.1	-37.7	-0.5
Mitsubishi UFJ	0.0	-1.6	24.9	-0.4
Dalichi Sankyo	0.0	-0.8	54.3	-0.4
 Koito Manufacturing	0.9	-1.0	-38.3	-0.3
Total				-2.0

 Past performance is not a guide to future performance and may not be repeated.

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

Source: FactSet. Contributions are purely indicative as FactSet uses unaudited data. Stock weights are average weights over the period an returns are expressed in GBP.

Activity

 During the 12 month period we added a new position in Rinnai, which manufactures water heaters. The company's near-term earnings have been pressured by the combination of component shortages and material cost increases, which resulted in meaningful share price underperformance. However, the company is now implementing price increases to offset these higher costs and component shortages should gradually ease towards the second half of this fiscal year. Thanks to the ongoing structural shift in US & China towards more energy efficient tankless boilers, order backlog has been increasing, which should accelerate their earnings growth once component shortages improve. The recent share price underperformance has brought valuations down to low levels. The forecast Price/Earnings ratio reduces to around 10x, if we exclude cash of around 45% of market cap. We therefore concluded that the recent share price weakness is a short-term overreaction to current conditions and we added a new position in May.

A new position was added in Nitto Denko. Investors tend to view the company's  earnings as highly dependent on the LCD market which has been benefiting from "stay at home" demand (for LCD TVs, PCs, etc.), which has already matured. This has left the valuations at a discount against other electric component and material stocks. However, we believe this is a misperception, as we see their businesses as more diversified, with several solid growth drivers such as nucleic acid medicine CDMO, high-density flexible PCBs as well as profitability improvements in industrial tapes through product reshuffling. As a result, we expect Nitto Denko to sustain solid earnings growth over the mid-term, which should lead to a revaluation of the share price.

We initiated a position in Yokogawa Electric, which supplies measurement and control equipment used in factory automation, especially in industries such as chemicals, food and oil & gas. The stock looks particularly undervalued against its global peers given the near-term industry dynamics and the longer term growth potential from expanding autonomous solutions.

We also added Ricoh, as we believe other investors have not yet appreciated the company's transition towards a full IT service vendor for small and mid-sized businesses. The current valuation has been pushed down by shorter-term factors, including a slower than expected return to office working post-Covid, which has created an attractive entry point.

A new position in NEC Networks & System Integration was also added to the portfolio. The company's main businesses are IT service and telecommunication engineering and they are transforming themselves to move up the value chain in both these areas. In IT service, the company has traditionally been a subcontractor but they now are more engaged in valued-added IT service/solutions, including work from home solutions. In telecommunication engineering, they are improving their value propositions from simply installing hardware, such as wireless  base stations, to upper-layer services. These management-led transformations should improve gross margins and lead to share price revaluation.

An initial position was added in Kohoku Kogyo at its Initial Public Offering (IPO). This small-cap company is not yet closely followed by other investors, but has a dominant global market share in two niche electronic businesses: lead terminals for aluminium electrolytic capacitors and optical isolators for undersea optical cables. Valuations at the IPO looked attractive against other niche technology providers.

Meanwhile, we exited the position in Nabtesco. The original investment thesis was that Nabtesco, with its dominant market share in precision reduction gears for industrial robots, would show a solid earnings growth along with the ongoing expansion of the market for factory automation. However, through its new mid-term plan, the company is planning aggressive growth in spending in all of its business segments. Given the relatively lacklustre track record in realising benefits in areas other than the precision reduction gear business, we are increasingly concerned about its weakening capital discipline. We therefore  concluded that there are better alternatives to give exposure to the growth in factory automation, so we decided to sell out of the position.

We sold the position in Pan Pacific International, a retailer operating under the Don Quijote brand. While we acknowledge that their earnings may hit a cyclical bottom, we have become more concerned about their future growth prospects. We feel their discount store format may be losing some of its attractiveness to (younger) consumers, who tend to make a search online to decide on potential purchases, rather than visiting stores just to find interesting items, which has been the benefit of Don Quijote's unique store experience. In addition, while the recent management changes look reasonable we wonder if this may hinder the competitiveness of their bottom-up management where each store manager has a high level of authority. We decided to sell the position as we felt our concerns over long-term competitiveness may put further pressure on the stock's valuation, which remained at a premium to the market average.

The position in Miroku Jyoho Service was also sold. The company is a software and IT service provider which we expected to benefit from the growth in IT spending by small/mid-size businesses. However, the earnings recovery has been slower than expected, which may reflect some market share losses against emerging cloud-based vendors. We now have lower confidence about their competitiveness and management execution, so we have sold out of the position.

Two positions were sold as a result of corporate actions. One small position was sold in AT Group, which operates Toyota car dealerships in Aichi prefecture. The company is a classic example of a "traditional" small-cap value stock in Japan and saw a 78% gain in February after the announcement of a management buy-out. The position in Hitachi Transport System was sold after a steep rise in the share price, triggered by a buyout proposal from KKR.

Overall, the number of holdings has been further reduced to 66, continuing the trend seen over the last couple of years, as we look to place more emphasis on higher weightings in stocks where we have the greatest conviction.

Outlook

 The recent rebound in Japan's industrial production, after some Shanghai-lockdown induced weakness, has underlined the relative strength of manufacturing sectors in Japan. The successive delays in a domestic consumption recovery has mainly impacted non-manufacturing sectors, although we would still look for Japan to grow above its long-term trend rate this year as the large fiscal package, agreed in late 2021, is implemented. However, we still need to carefully watch the development of Covid infections as the high level of risk aversion in Japan could still dictate a more cautious approach than that seen in Europe. This is likely to be particularly evident in the very gradual approach to the reopening of Japan's borders to foreign travellers.

The strong result for the ruling LDP in July's Upper House elections has reinforced the position of Prime Minister Kishida but, beyond the election, the government faces a range of key long-term policy decisions. These include fundamental, and constitutional, questions on defence and a particularly difficult balancing act on energy policy. The war in Ukraine has thrown into sharp relief Japan's dependence on imported energy and its relative lack of energy security over the long-term, with almost all nuclear plants remaining offline since the Fukushima earthquake in 2011. Although Tokyo has narrowly avoided power cuts during record high temperatures in the early summer 2022, Mr Kishida has nevertheless felt empowered to open up a public discussion on the restarting of nuclear plants.

Looking further ahead, equity investors will need to adjust gradually to the change in governor at the Bank of Japan as Mr Kuroda's term comes to an end in March 2023. With Mr Kuroda so closely associated with the current policy of yield curve control, it is hard to envisage any substantive changes in the near-term. However, before the end of 2022 we could see technical changes in the way the policy is implemented, which could indicate more clearly the direction of travel likely to be seen under his successor.

The main upward pressure on prices in Japan comes from a combination of higher imported energy costs, coupled with the sharp weakening of the yen so far this year. Although these factors could gradually fade from the year-on-year inflation rate going into 2023, Japan does seem to be heading into a period of moderate but sustainably positive inflation. While producer prices have been rising for some time, we have recently seen more anecdotal evidence of companies looking to pass on these increases to end-product prices, but consumers remain very price sensitive after two decades of deflation. Although some particular sectors may struggle in this environment, overall margins do appear to be resilient so far and we are comfortable that aggregate corporate profits for the listed sector continue to grow. In the immediate future, however, the heightened global uncertainty may mean that relative market valuations remain at a discount against this longer-term outlook for corporate profits. We are also very positive on the ongoing improvements in corporate governance and the scope for this to generate real value for investors. Although this is partly a qualitative assessment through our discussions with company managements, there are also measurable impacts such as improving return on equity and a record level of share buybacks announced in the early part of the current fiscal year. 

Policy

 With Japan heading into a period of moderate but sustainably positive inflation, we are particularly focused on the ability of Japanese companies to re-establish pricing power in order to protect margins after such a long deflationary period. The interplay between higher commodity prices, productivity gains and potential wage increases varies across sectors but, in general, we are comfortable that margins remain reasonably resilient, allowing aggregate corporate profits for the listed sector to continue to grow.

Our internal research continues to produce a range of opportunities in exciting companies on low valuations, from which we aim to generate outperformance without building excessive 'style' positions in the Fund. As a result, Fund performance should continue to be driven by stock-specific factors.

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, based in London and Singapore. We explicitly consider ESG factors across our investment universe in Japan, which has a direct impact on our valuation methodology, although we do not restrict our investment universe by applying any specific exclusions in particular sectors.

Conclusion

 Overall, we have been encouraged by the performance of the Fund which has continued to respond well as market conditions in this period generally reflected stock specific factors, despite significant developments in the global macro background. We believe the Fund remains well placed for this type of valuation-driven environment, and therefore anticipate no change in the strategy. Our research team's access to company management continues to generate ideas for investment in individual stocks across the market cap spectrum, together with insights into changes in management behaviour and corporate governance. We do not expect any change in the process by which we form our conviction views on individual companies and we continue to see increasing opportunities in mid and small-cap stocks, in particular, based on the anticipated recovery  of the domestic economy.

The Company's gearing level is currently 11.2% which reflects both the number of individual opportunities we see in the market and our confidence in the outlook for the overall portfolio.

Strategic Report

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 October 2021.

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 and climate change risk. 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. The Board were mindful of emerging risks during the year including the conflict in Ukraine, rising inflation, the threat of a global recession and increasing energy prices although they are not factors which explicitly impacted the Company's performance.

Political risk includes the impact of geopolitical risk, regional tensions, trade wars and sanctions against companies. Currency rates and borrowings drawn down by the Company, as well as markets generally, may be affected by geopolitical developments. During the year, the Board noted that the invasion of Ukraine impacted political tensions, and impacted supply chains and interest rates. The Board is also mindful that changes to public policy in the US, UK, or in the Asia Pacific region, could impact the Company in the future. 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 provides more information on the effect of currency and market price movements.

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 "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 increased or decreased.

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. 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 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. 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. The Board noted that following the invasion of Ukraine by Russia, cyber risk was assessed to be higher, and the Board sought further assurance from its service providers that they were able to manage the heightened threat.	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 52 to 57 of the 2022 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 2022 and the potential impacts of the principal risks and uncertainties it faces for the review period. 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 18 and 19 of the 2022 annual report and in particular the impact of a significant fall in Japanese equity markets on the value of the Company's investment portfolio. The Company's yen 6.0 billion term loan with Sumitomo Mitsui Banking Corporation Europe Limited that expired on 16 January 2022 was renewed on similar terms for a further three years. The Directors also considered the beneficial tax treatment the Company is eligible for as an investment trust. If changes to these taxation arrangements were to be made it would affect the viability of the Company to act as an effective investment vehicle.

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 of 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

 The Directors have assessed the principal risks, the impact of the emerging risks and uncertainties and the matters referred to in the viability statement. Based on the work the Directors have performed, they have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the period assessed by the Directors, being the period to 30 November 2023 which is at least 12 months from the date the financial statements were authorised for issue.

By order of the Board

Schroder Investment Management Limited

Company Secretary

 13 October 2022

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 21 and 22 of the 2022 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.

On behalf of the Board

Anja Balfour

Chairman

 13 October 2022

 Income Statement for the year ended 31 July 2022

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
 (Losses)/gains on investments held at fair value through profit or loss	-	(3,439)	(3,439)	-	52,170	52,170
 Net foreign currency gains	-	2,076	2,076	-	3,073	3,073
 Income from investments	8,208	-	8,208	7,308	-	7,308
 Other interest receivable and similar income	3	-	3	-	-	-
 Gross return/(loss)	8,211	(1,363)	6,848	7,308	55,243	62,551
Investment management fee	(599)	(1,399)	(1,998)	(580)	(1,354)	(1,934)
 Administrative expenses	(637)	-	(637)	(516)	-	(516)
 Net return/(loss) before finance costs and taxation	6,975	(2,762)	4,213	6,212	53,889	60,101
 Finance costs	(81)	(189)	(270)	(80)	(186)	(266)
 Net return/(loss) before taxation	6,894	(2,951)	3,943	6,132	53,703	59,835
 Taxation	(821)	-	(821)	(731)	-	(731)
 Net return/(loss) after taxation	6,073	(2,951)	3,122	5,401	53,703	59,104
 Return/(loss) per share	4.97p	(2.42)p	2.55p	4.38p	43.55p	47.93p

 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 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 2022

	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 2020	12,478	7	23	3	96,807	119,595	7,215	236,128
 Repurchase of the Company's own shares for cancellation	(264)	-	264	-	(5,267)	-	-	(5,267)
 Net return after taxation	-	-	-	-	-	53,703	5,401	59,104
 Dividend paid in the year	-	-	-	-	-	-	(6,106)	(6,106)
 At 31 July 2021	12,214	7	287	3	91,540	173,298	6,510	283,859
 Repurchase of the Company's own shares for cancellation	(14)	-	14	-	(303)	-	-	(303)
 Net (loss)/return after taxation	-	-	-	-	-	(2,951)	6,073	3,122
 Dividend paid in the year	-	-	-	-	-	-	(5,249)	(5,249)
 At 31 July 2022	12,200	7	301	3	91,237	170,347	7,334	281,429



 Statement of Financial Position at 31 July 2022

	2022	2021
	£'000	£'000
 Fixed assets
Investments held at fair value through profit or loss	313,454	313,907
Current assets
Debtors	1,113	1,003
 Cash at bank and in hand	5,626	9,774
	 6,739	10,777
Current liabilities
 Creditors: amounts falling due within one year	(1,872)	(40,825)
 Net current assets/(liabilities)	4,867	(30,048)
 Total assets less current liabilities	318,321	283,859
 Creditors: amounts falling due after more than one year	(36,892)	-
 Net assets	281,429	283,859
 Capital and reserves
Called-up share capital	12,200	12,214
Share premium	7	7
Capital Redemption reserve	301	287
Warrant exercise reserve	3	3
Share purchase reserve	91,237	91,540
Capital reserves	170,347	173,298
 Revenue reserve	7,334	6,510
 Total equity shareholders' funds	281,429	283,859
 Net asset value per share	230.68p	232.40p

 These accounts were approved and authorised for issue by the Board of Directors on 13 October 2022 and signed on its behalf by:

Anja Balfour

Chairman



Registered in England and Wales

Company registration number: 02930057

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 April 2021. All of the Company's operations are of a continuing nature.

2.  Taxation

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

3.  Return/(loss) per share

	2022	2021
	£'000	£'000
 Revenue return	6,073	5,401
 Capital (loss)/return	(2,951)	53,703
 Total return	3,122	59,104
 Weighted average number of ordinary shares in issue during the year	122,078,782	123,317,478
Revenue return per share	4.97p	4.38p
 Capital (loss)/return per share	(2.42)p	43.55p
 Total return per share	2.55p	47.93p

4.  Dividends

Dividend paid and proposed
	2022	2021
	£'000	£'000
 2021 final dividend of 4.30p (2021: 4.80p) paid out of revenue profits	5,2491	6,106
	2022	2021
	£'000	£'000
 2022 final dividend proposed of 4.90p (2021: 4.30) to be paid out of revenue profits	5,978	5,252

¹  The 2021 final dividend amounted to £5,252,000. However the amount actually paid was £5,249,000 as shares were repurchased and cancelled, after the accounting date, but prior to the dividend Record Date.

The proposed dividend amounting to £5,978,000 (2021: £5,252,000) 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 £6,073,000 (2021; £5,401,000).

5.  Creditors: amounts falling due within one year

	2022	2021
	£'000	£'000
 Bank loan	-	39,321
Securities purchased awaiting settlement	1,177	859
 Other creditors and accruals	695	645
	 1,872	40,825

 The bank loan at the prior year end comprised a yen 6.0 billion three-year term loan from Sumitomo Mitsui Banking Corporation Europe Limited, and which carried a fixed rate of interest of 0.64% per annum. This loan expired in January 2022 and was replaced by a floating rate term loan, detailed in note 6 below.

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

	2022	2021
	£'000	£'000
 Bank loan	36,892	-

 The bank loan is a yen 6.0 billion three-year term loan from SMBC Bank International plc (formerly Sumitomo Mitsui banking Corporation Europe Limited), expiring in January 2025 and carrying a floating interest rate, calculated at the daily Compounded Risk Free Rate, plus a margin. 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.

In addition to the term loan detailed above, the Company has a yen 2.0 billion credit facility available from Sumitomo Mitsui Banking Corporation, London Branch, which was undrawn at the year end (2021: undrawn). Further details of the facility are given in note 20(a)(ii) on page 54 of the 2022 annual report.

7.  Called-up share capital

	2022	2021
	£'000	£'000
 Ordinary shares allotted, called-up and fully paid:
Opening balance of 122,143,262 (2021: 124,776,700) ordinary shares of 10p each	12,214	12,478
 Repurchase and cancellation of 142,700 (2021: 2,633,438) shares	(14)	(264)
 Closing balance of 122,000,562 (2021: 122,143,262) shares	12,200	12,214

 During the year, the Company purchased 142,700 of its own shares, nominal value £14,270, for cancellation, for a total consideration of £302,000, representing 0.11% 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.

8.  Net asset value per share

	2022	2021
 Net assets attributable to shareholders (£'000)	281,429	283,859
 Shares in issue at the year end	122,000,562	122,143,262
 Net asset value per share	230.68p	232.40p

9.   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 44 of the 2022 annual report.

At 31 July 2022, all investments in the Company's portfolio are categorised as Level 1 (2021: same).

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

	2022
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
 Financial instruments held at fair value through profit or loss
 Equity investments	313,454	-	-	313,454
 Investments allocated to Level 2 are valued using unadjusted quoted prices, but in markets which are less active.
	2021
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
 Financial instruments held at fair value through profit or loss
 Equity investments	313,907	-	-	313,907



10. Status of announcement

2022 Financial Information

The figures and financial information for 2022 are extracted from the Report and Accounts  for the year ended 31 July  2022  and do not constitute the statutory accounts for the year. The 2022 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 2022 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

 

 

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