Final Results

RNS Number : 2108O

SchroderJapan Growth Fund PLC

08 October 2012

 



8 October 2012

Annual Report and Accounts

Schroder Japan Growth Fund plc (the "Company") hereby submits its Annual Report and Accounts for the year ended 31 July 2012 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1.  Please click on the following link to view the document:

 http://www.rns-pdf.londonstockexchange.com/rns/2108O_-2012-10-8.pdf

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

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

Enquiries:

John Spedding

Schroder Investment Management Limited                                        Tel: [phone]

Chairman's Statement

Performance

The year to 31 July 2012 was a less positive year for investors in Japanese equities, albeit partially mitigated for those based in Sterling by currency movements. Measured in local currency terms, the benchmark index produced a total return of -10.4% during the year but the continued strength of the Yen again meant that, in Sterling terms, the total return was reduced to -7.2%. The Company's NAV continued to out-perform the benchmark Index, producing a total return of -3.7% in Sterling terms over the year. 

Gearing

During the year under review, the Company maintained a borrowing facility of Yen 3 billion. At the beginning of the year, the net effective gearing was 10.0%, and this had increased to 10.9% at 31 July 2012. All of the borrowings were obtained via a revolving credit facility in order to provide flexibility and the facility was renewed on an unsecured basis in May 2012.

The Directors do not envisage net effective gearing exceeding 25% of shareholders' funds and the gearing continues to be operated within the limits agreed by the Board.

Dividend Policy

In my half-yearly report, I reported that the Directors had agreed that net revenue earned by the portfolio for the year ending 31 July 2013 onwards should be paid out to investors in the form of dividends. As a result, the Board would be seeking shareholder approval to proposals to extinguish the accumulated brought forward loss on revenue reserve so that this would not inhibit the Company from paying dividends in the future. Since that time, changes to UK law relating to investment trusts allow for the objective of paying out the net revenue earned by the portfolio each year to be achieved without the need to seek sanction by the Court for a reallocation of the Company's capital reserves, by allowing distributions to be made from capital reserves. However, the Articles must first be amended to remove the prohibition of the payment of distributions from capital, which was required under the old law.

Furthermore, as previously indicated, in order better to reflect the increasing significance of income as part of total return, the Directors have, with effect from 1 August 2012, also adopted an allocation policy whereby management fees and finance costs will be charged 70% to the capital account and 30% to the revenue account.

A circular is therefore being sent to shareholders with this Annual Report seeking shareholder approval to a change in the Company's Articles, at a General Meeting of the Company to be held at 3.00 p.m. on 7 November 2012, following the Annual General Meeting.

Purchase of Shares for Cancellation

The Board will be seeking to renew the share buy-back authority to purchase up to 14.99% of the Company's issued share capital for cancellation, granted to the Company at the Company's Annual General Meeting on 2 November 2011. During the year ended 31 July 2012, the Directors did not use the authority given to them and no purchases for cancellation were undertaken. However, the share buy-back facility is one of a number of tools that may be used to enhance shareholder value and to reduce the discount volatility and it is therefore proposed that the authority be renewed at the forthcoming Annual General Meeting.

Annual General Meeting

The Annual General Meeting, which will include a presentation on the prospects for the Japanese economy and investment strategy, will be held at 2.30 p.m. on Wednesday, 7 November 2012 and shareholders are invited to attend.

Outlook

Japanese corporate profits are higher than a year ago, and likely to increase further, but share prices have reduced by a tenth. This decline in valuations - to levels that have rarely been lower in the last quarter of a century - emphasises how out of favour the Japanese market is. Most investors' attention is on other issues (for example the Euro crisis and Chinese growth), and the Manager's review does not suggest many short-term catalysts that might turn round sentiment towards Japanese shares. A valuation argument for Japanese equities, however, is becoming more relevant.

Turning this into higher stock prices requires more evidence that Japanese companies can increase their profits on a sustainable basis, and for investors to agree that valuations are too low. Both may require time, but either would lead to good returns from the portfolio.

Jonathan Taylor

Chairman

4 October 2012

Investment Manager's Review

Market Background

The Japanese stock market fell by -10.4% in Yen terms during the year ended 31 July 2012, a decline that was reduced to -7.2% for Sterling investors by further appreciation of the Yen.

The stock market traded in volatile fashion over the year, finishing towards the lower end of a 25% trading range and not far off the lows of the post Lehman crisis era. Sentiment was dominated by generally negative global economic forces, initially the Eurozone sovereign debt crisis and increasingly by evidence of a slowdown in the US and China. The market had a 3 month surge between January and March driven by the ECB's LTRO, and a belief (mistaken as it turned out) that the Bank of Japan had finally turned a page in its conduct of monetary policy, but was generally weak either side of this brief rally.

The market's performance was disappointing given relatively robust Japanese economic performance, supported by a recovery from the previous year's supply side disruptions and reconstruction expenditure following the earthquake.

The impact of global economic concerns was apparent in the market's sectoral performance. The best 3 sectors were domestic and defensive-food, railways and retail. The worst were global and cyclical-shipping, steel and glass.

The Company's NAV fell 3.7% in Sterling terms. This was 3.5% better than the benchmark return. Holdings in two small cap real estate stocks, which were the subject of buyout activity at a premium to the prevailing share price made the largest positive contribution. Not holding consumer electronics stocks was also beneficial. These positives were partially offset by not owning food companies and by some of the cyclical positions in machinery and glass. The Company's net gearing, which was generally between 10-12%, also detracted over the period.

Outlook

Slower global growth and a peaking out of Japanese economic momentum have clouded the profits outlook, although a year of fairly robust improvement still appears in prospect. The market has significantly lagged global stock market performance and valuations are historically low, both of which suggest a significant rally could ensue if there are signs of improvement in global economic sentiment. Domestic policy developments look set to have a greater than usual impact over the next 6 months with a general election looking imminent and leadership change at the Bank of Japan set for spring next year.

Investment Policy

With the exception of the market's rally during the first quarter of this year, cyclical and technology sectors have generally sold off. We have used this opportunity to add slowly to these parts of the market on weakness. We have also added to the retail exposure in reflection of attractive opportunities in specialty operators. We are underweight the most defensive sectors such as food, which have performed well as risk aversion has risen and which look expensive. The overweight position in small companies remains in place but it is lower than it was last year.

Net gearing was 11% at the end of July 2012, slightly higher than last year and in line with the level at the interim stage.

Schroder Investment Management Limited

4 October 2012

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and a robust framework of internal control which is designed to monitor those risks to enable the Directors to mitigate them as far as possible and which assists in determining the nature and extent of the significant risks the Board is willing to take in achieving its strategic objectives. A full analysis of the Directors' system of internal control and its monitoring system is set out in the Corporate Governance Statement of the Annual Report.  The principal risks are considered to be as follows:

Financial Risk

The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in Japanese equity markets would have an adverse impact on the value of the Company's underlying investments. The Board considers the portfolio's risk profile at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact of substantial changes in markets.

The Company invests predominantly in underlying assets which are denominated in Yen and therefore has an exposure to changes in the exchange rate between Sterling and Yen which has the potential to have a significant effect on returns. While the Directors consider the Company's hedging policy on a regular basis, the Company did not engage in currency hedging to reduce the risk of currency fluctuations and the volatility of returns which might result from such currency exposure during the current or prior year.

The Company utilises a credit facility, currently in the amount of Yen 3 billion, which increases the funds available for investment through borrowing ("gearing"). Therefore, in falling markets, any reduction in the net asset value and, by implication, the consequent share price movement is amplified by the gearing. The Directors keep the Company's gearing under constant review and impose strict restrictions on borrowings to mitigate this risk. The Company's gearing continues to operate within pre-agreed limits so that net gearing does not represent more than 25% of shareholders' funds.

A full analysis of the financial risks facing the Company is set out in note 19 to the accounts on pages 33 to 37 of the Annual Report and Accounts.

Strategic Risk

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

Accounting, Legal and Regulatory Risk

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

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

The Board's system of internal control seeks to mitigate the potential impact of these risks and it also relies on its advisers to assist it in ensuring continued compliance.

Statement of Directors' Responsibilities

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

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

•        select suitable accounting policies and then apply them consistently;

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

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

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

Under applicable law and regulations, the Directors are also responsible for preparing a Report of the Directors, Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

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

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

•        the Report of the Directors 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.

Going Concern

The Directors believe that, having considered the Company's investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Income Statement

for the year ended 31 July 2012

			2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000
―――――――――――――――――――――――――――――
(Losses)/gains on investments held at
fair value through profit or loss	2	-	(5,796)	(5,796)		15,588	15,588
Net foreign currency losses		-	(438)	(438)	-	(816)	(816)
Income from investments	3	3,707	-	3,707	3,342	-	3,342
Other interest receivable and
similar income	3	-	-	-	1	-	1
――――――――――――――――――――――――――――――
Gross return/(loss)		3,707	(6,234)	(2,527)	3,343	14,772	18,115
Investment management fee	4	(1,376)	-	(1,376)	(1,385)	-	(1,385)
Administrative expenses	5	(409)	-	(409)	(468)	-	(468)
――――――――――――――――――――――――――――――
Net return/(loss) before finance costs
and taxation		1,922	(6,234)	(4,312)	1,490	14,772	16,262
Finance costs	6	(298)	-	(298)	(345)	-	(345)
――――――――――――――――――――――――――――――
Net return/(loss) on ordinary activities
before taxation		1,624	(6,234)	(4,610)	1,145	14,772	15,917
Taxation on ordinary activities	7	(259)	-	(259)	(234)	-	(234)
――――――――――――――――――――――――――――――
Net return/(loss) on ordinary
activities after taxation		1,365	(6,234)	(4,869)	911	14,772	15,683
――――――――――――――――――――――――――――――
Return/(loss) per share	8	1.09p	(4.99)p	(3.90)p	0.73p	11.82p	12.55p

The "Total" column of this statement is the profit and loss account of the Company, and the "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Total column includes all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ("STRGL"). For this reason a STRGL has not been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the year ended 31 July 2012

	Called-up		Share	Warrant
	share	Share	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
――――――――――――――――――――――――――――――
At 31 July 2010	12,501	7	97,205	3	11,840	(6,585)	114,971
Net return on ordinary
activities	-	-	-	-	14,772	911	15,683
――――――――――――――――――――――――――――――
At 31 July 2011	12,501	7	97,205	3	26,612	(5,674)	130,654
Net (loss)/return on ordinary
activities	-	-	-	-	(6,234)	1,365	(4,869)
――――――――――――――――――――――――――――――
At 31 July 2012	12,501	7	97,205	3	20,378	(4,309)	125,785
――――――――――――――――――――――――――――――

Balance Sheet

at 31 July 2012

		2012	2011
		£'000	£'000
―――――――――――――――――――――――――――――――――――――
Fixed assets
Investments held at fair value through profit or loss		139,932	144,885
―――――――――――――――――――――――――――――――――――――
Current assets
Debtors		203	158
Cash and short-term deposits		10,763	10,548
――――――――――――――――――――――――――――――――――――――
		10,966	10,706
――――――――――――――――――――――――――――――――――――――
Current liabilities
Creditors: amounts falling due within one year		(25,113)	(24,937)
――――――――――――――――――――――――――――――――――――――
Net current liabilities		(14,147)	(14,231)
――――――――――――――――――――――――――――――――――――――
Total assets less current liabilities		125,785	130,654
――――――――――――――――――――――――――――――――――――――
Net assets		125,785	130,654
――――――――――――――――――――――――――――――――――――――
Capital and reserves
Called-up share capital		12,501	12,501
Share premium		7	7
Share purchase reserve		97,205	97,205
Warrant exercise reserve		3	3
Capital reserves		20,378	26,612
Revenue reserve		(4,309)	(5,674)
――――――――――――――――――――――――――――――――――――――
Total equity shareholders' funds		125,785	130,654
――――――――――――――――――――――――――――――――――――――
Net asset value per share		100.62p	104.52p

Cash Flow Statement

for the year ended 31 July 2012

		2012	2011
		£'000	£'000
――――――――――――――――――――――――――――――――――――――
Net cash inflow from operating activities		1,533	1,828
Servicing of finance
Interest paid		(303)	(359)
―――――――――――――――――――――――――――――――――――――――
Net cash outflow from servicing of finance		(303)	(359)
―――――――――――――――――――――――――――――――――――――――
Taxation
Overseas tax paid		(257)	(232)
――――――――――――――――――――――――――――――――――――――――
Investment activities
Purchases of investments		(19,304)	(17,379)
Sales of investments		18,145	17,892
――――――――――――――――――――――――――――――――――――――――
Net cash (outflow)/inflow
from investment activities		(1,159)	513
Net cash (outflow)/inflow before financing		(186)	1,750
――――――――――――――――――――――――――――――――――――――――
Financing		-	-
――――――――――――――――――――――――――――――――――――――――
Net cash (outflow)/inflow in the year		(186)	1,750

――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――

Notes to the Accounts

for the year ended 31 July 2012

1. Accounting Policies

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

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

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

2. Income

	2012	2011
	£'000	£'000
――――――――――――――――――――――――――――――――――――――――――
Income from investments:
Overseas dividends	3,707	3,342
―――――――――――――――――――――――――――――――――――――――――――
	3,707	3,342
―――――――――――――――――――――――――――――――――――――――――――
Other interest receivable and similar income
Deposit interest	-	1
―――――――――――――――――――――――――――――――――――――――――――
	-	1
―――――――――――――――――――――――――――――――――――――――――――
Total income	3,707	3,343
―――――――――――――――――――――――――――――――――――――――――――
3. Investment management fee
	2012	2011
	£'000	£'000
――――――――――――――――――――――――――――――――――――――――――――
Management fee	1,376	1,385
――――――――――――――――――――――――――――――――――――――――――――

The basis for calculating the investment management fee is set out in the Report of the Directors in the Accounts.

4. Return/(loss) per share

	2012	2011
	£'000	£'000
――――――――――――――――――――――――――――――――
Revenue return	1,365	911
Capital (loss)/return	(6,234)	14,772
――――――――――――――――――――――――――――――――
Total (loss)/return	(4,869)	15,683
――――――――――――――――――――――――――――――――
Weighted average number of Ordinary shares in issue during the year	125,008,200	125,008,200
Revenue return per share	1.09p	0.73p
Capital (loss)/return per share	(4.99p	11.82p
―――――――――――――――――――――――――――――――――――――――
Total (loss)/return per share	(3.90p	12.55p
―――――――――――――――――――――――――――――――――――――――
5. Net asset value per share
	2012	2011
――――――――――――――――――――――――――――――――――――――――
Net assets attributable to shareholders (£'000)	125,785	130,654
Shares in issue at the year end	125,008,200	125,008,200
――――――――――――――――――――――――――――――――――――――――
Net asset value per share	100.62p	104.52p

――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――――

6. Transactions with the Manager

The Company has appointed Schroder Investment Management Limited (the "Manager"), a wholly owned subsidiary of Schroders plc, to provide investment management, accounting, secretarial and administration services. If the Company invests in funds managed or advised by the Manager or any of its associated companies, those funds are excluded from the assets used for the purposes of the management fee calculation and therefore attract no fee. Under the terms of the Investment Management Agreement, the Manager is also entitled to receive a secretarial fee.

The management fee payable in respect of the year ended 31 July 2012 amounted to £1,376,000 (2011: £1,385,000), of which £349,000 (2011: £682,000) was outstanding at the year end. The secretarial fee payable to the Manager amounted to £90,000 (2011: £90,000) and £71,000 (2011: £93,000) was outstanding at the year end.

Mr Kingzett was an employee of Schroders throughout the year.

7. Status of announcement

2011 Financial Information

The figures and financial information for 2011 are extracted from the published Annual Report and Accounts for the year ended 31 July 2011 and do not constitute the statutory accounts for that year. The 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.

2012 Financial Information

The figures and financial information for 2012 are extracted from the Annual Report and Accounts for the year ended 31 July 2012 and do not constitute the statutory accounts for the year. The 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 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

 

END

 

 

FR FSMFMAFESESS