Final Results

RNS Number : 9094P

SchroderJapan Growth Fund PLC

07 October 2013

 



7 October 2013

ANNUAL REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 31 July 2013 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 July 2013 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]

Schroder Japan Growth Fund plc

 

Chairman's Statement

Performance

The year to 31 July 2013 was very positive for investors in the Company, both in absolute terms as Japanese markets posted substantial gains, and as a result of the Company's continued out-performance against the market. In local currency terms, the Japanese market rose 57.2% during the year but this was accompanied by a sharp fall in the Yen. As a result, when measured in Sterling terms, the benchmark index produced a total return of 29.0% during the year. The Company's net asset value produced a total return of 37.5%. Sentiment towards Japan also markedly improved and the share price produced a total return of 44.8% as the discount narrowed from 14.5% to 10.0%.

Further details on market performance, background, activity and investment policy may be found in the Investment Manager's Review.

Gearing

During the year under review, the Company's borrowing facility was increased from Yen 3 billion to Yen 5 billion. At the beginning of the year, the net effective gearing was 10.9%, and this remained largely unchanged as at 31 July 2013. All of the borrowings were obtained via a revolving credit facility in order to provide flexibility.

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.

Allocation Policy

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, adopted an allocation policy whereby management fees and finance costs will be charged 70% to the capital account and 30% to the revenue account.

Earnings and Dividend Policy

Shareholders voted in November 2012 to remove the prohibition previously contained in the Articles of Association on distributing capital profits by way of dividend or otherwise than by way of repurchase of the Company's issued share capital.

As previously indicated, the Board intends that future net revenue earned by the portfolio is substantially paid out to investors in the form of dividends in line with the new dividend policy. Earnings for the year to 31 July 2013 amounted to 1.88p per share and the Directors therefore propose that a final dividend of 1.75p per share be declared payable out of capital to shareholders on 11 November 2013, subject to approval by shareholders at the Annual General Meeting to be held on 7 November 2013.

Changes to Board Composition

As part of the Board's planned refreshment, I am pleased to report that Mrs Anja Balfour was appointed as a non-executive Director of the Company, effective from 1 May 2013.

Mrs Balfour spent 22 years as a fund manager running Japanese, Far Eastern and International equity portfolios for Stewart Ivory, Baillie Gifford and, latterly, Axa Framlington. She is a non-executive director of Martin Currie Pacific Trust plc and is a trustee of Venture Scotland, a charity specialising in personal development for young people. She is a member of the CFA Society of the UK and Archangel Informal Investment, a business angel syndicate.

We recommend that shareholders vote in favour of the resolution to elect Mrs Balfour at the forthcoming Annual General Meeting, Notice for which is set out on page 39.

In addition, Mr Peter Lyon will retire from the Board at the Annual General Meeting and is therefore not seeking re-election from shareholders. Mr Lyon has served as a Director of your Company since its launch in 1994 and the Directors have been the beneficiaries of his immeasurable knowledge and experience of the Japanese market. We thank him for his invaluable contribution to the Board's deliberations for nearly 20 years.

Purchase of Shares for Cancellation

The Board will be seeking to renew the share buyback 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 7 November 2012. During the year ended 31 July 2013, the Directors did not use the authority given to them and no purchases for cancellation were undertaken. However, the share buyback 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 includes a presentation on the prospects for the Japanese economy and investment strategy, will be held at 2.30 p.m. on Thursday 7 November 2013 and shareholders are invited to attend.

Outlook

Pleasing as the increase in the Japanese stock market has been, the underlying cause has been a flood of buying in the belief that the new government policies will change Japan's long-term prospects. Even if the political will remains, there will be a long while before a judgement can be made on this, probably bringing more stock market volatility as expectations swing from optimism to pessimism.

In the meantime, the Manager remains confident that, despite the increase in prices, the holdings are still priced attractively. We hope that this value will underpin the Company's future performance, while the market waits to see how successful the new policies turn out to be.

Jonathan Taylor

Chairman

4 October 2013

 

Investment Manager's Review

Performance

The Company's NAV rose 37.5% in Sterling over the year, significantly out-performing the benchmark, which produced a total return of 29.0%. Stock selection was slightly positive but maintaining average gearing at just over 10% made the largest contribution to outperformance. At the stock level the share prices of two small cap ink producers (Sakata and T&K Toka) more than doubled whilst weak Yen beneficiaries Ricoh and Bridgestone did almost as well. This was partly offset by adverse stock selection in retail and being overweight trading companies.

Market Background

The market continued its drift for the first three months but activity was subsequently dominated by economic policy changes ushered in by the LDP's election victory in December and subsequent ratification of Mr Abe as prime minister. Mr Abe's election was followed by his appointment of an extremely dovish Bank of Japan Governor in the spring and by a victory for the LDP in the Upper House of the Diet in the summer, which seems likely to herald a period of much needed political stability. In its initial phases at least, this policy shift (now known as "Abenomics") has been viewed as Yen negative and stock market positive. This has led to a strong rally in the equity market, driven largely by foreign investors.

Sector trends largely mirrored the shift in economic policy with weak Yen beneficiaries and market-sensitive stocks performing strongly, such as securities houses, real estate and auto companies. More defensive areas such as pharmaceuticals or commodity price sensitive sectors such as trading companies generally lagged, the latter reflecting the impact of weaker Chinese growth.

Activity

During the year we took profits in some of the more strongly performing small cap positions such as Sakata Inx, T&K Toka (both ink manufacturers) and Accordia Golf (golf course operator which was the subject of a hostile takeover bid). New additions to the portfolio included Japan Airlines which returned to the market via an IPO following a government led-rehabilitation and Konica Minolta (copier manufacturer). We also added to existing positions which had lagged the rise in the market such as the trading companies and exporters, Canon and Honda.

Outlook

Market volatility has risen since the spring, and this seems likely to continue as markets react to the perceived success or failure of the government's supply-side growth measures. At a more micro level we are encouraged that, despite the market's strong rise over the last nine months, valuations do not yet appear stretched and profits momentum remains positive.

Investment Policy

Policy is moderately pro-cyclical but given the recovery in share prices, additions have been focussed on laggards amongst the technology, auto and trading company sectors. The portfolio is overweight domestic cyclical areas such as financials, transport and retail and underweight more staple areas such as food and utilities. The exposure to currency movements is broadly neutral relative to the benchmark, with overweight positions in autos offset by underweight positions in consumer electronics. The market impact of "Abenomics" has seen some individual stocks become over-extended and we have reduced positions in some construction and real estate companies reflecting this.

Net gearing was 11% at the end of July 2013, broadly unchanged compared to the previous year end.

Schroder Investment Management Limited

4 October 2013

 

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. 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 5 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 20 to the accounts on pages 34 to 38 of the Annual Report.

Strategic Risk

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

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 this 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 profit 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 (see inside front cover), risk management policies (see note 20 to the accounts on pages 34 to 38 of the Annual report), capital management policies and procedures (see note 21 to the accounts on page 38 of the Annual Report), expenditure projections and the fact that the Company's assets comprise readily realisable securities which can be sold to meet funding requirements if necessary, 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 2013		Revenue	2013 Capital	Total	Revenue	2012 Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss		-	43,180	43,180	-	(5,796)	(5,796)
Net foreign currency gains/(losses)		-	2,911	2,911	-	(438)	(438)
Income from investments		3,645	-	3,645	3,707	-	3,707
Gross return/(loss)		3,645	46,091	49,736	3,707	(6,234)	(2,527)
Investment management fee		(496)	(1,158)	(1,654)	(1,376)	-	(1,376)
Administrative expenses		(466)	-	(466)	(409)	-	(409)
Net return/(loss) before finance costs and taxation		2,683	44,933	47,616	1,922	(6,234)	(4,312)
Finance costs		(70)	(164)	(234)	(298)	-	(298)
Net return/(loss) on ordinary activities before taxation		2,613	44,769	47,382	1,624	(6,234)	(4,610)
Taxation on ordinary activities		(259)	-	(259)	(259)	-	(259)
Net return/(loss) on ordinary activities after taxation		2,354	44,769	47,123	1,365	(6,234)	(4,869)
Return/(loss) per share		1.88p	35.81p	37.69p	1.09p	(4.99)p	(3.90)p

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 2013

	Called-up share capital	Share premium	Share purchase reserve	Warrant exercise reserve	Capital reserves	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
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
Net return on ordinary activities	-	-	-	-	44,769	2,354	47,123
At 31 July 2013	12,501	7	97,205	3	65,147	(1,955)	172,908

Balance Sheet

at 31 July 2013

		2013 £'000	2012 £'000
Fixed assets
Investments held at fair value through profit or loss		192,647	139,932
Current assets
Debtors		189	203
Cash and short-term deposits		1,023	10,763
		1,212	10,966
Current liabilities
Creditors: amounts falling due within one year		(20,951)	(25,113)
Net current liabilities		(19,739)	(14,147)
Total assets less current liabilities		172,908	125,785
Net assets		172,908	125,785
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		65,147	20,378
Revenue reserve		(1,955)	(4,309)
Total equity shareholders' funds		172,908	125,785
Net asset value per share		138.32p	100.62p

 

Cash Flow Statement

for the year ended 31 July 2013

		2013 £'000	2012 £'000
Net cash inflow from operating activities		1,611	1,533
Servicing of finance
Interest paid		(252)	(303)
Net cash outflow from servicing of finance		(252)	(303)
Taxation
Overseas tax paid		(256)	(257)
Investment activities
Purchases of investments		(26,997)	(19,304)
Sales of investments		17,640	18,145
Net cash outflow from investment activities		(9,357)	(1,159)
Net cash outflow in the year		(8,254)	(186)

Notes to the Accounts

for the year ended 31 July 2013

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

	2013 £'000	2012 £'000
Income from investments:
Overseas dividends	3,645	3,707

3. Investment management fee

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	496	1,158	1,654	1,376	-	1,376

The basis for calculating the investment management fee is set out in the Report of the Directors on page 13 of the Annual Report.

4. Return/(loss) per share

	2013	2012
	£'000	£'000
Revenue return	2,354	1,365
Capital return/(loss)	44,769	(6,234)
Total return/(loss)	47,123	(4,869)
Weighted average number of ordinary shares in issue during the year	125,008,200	125,008,200
Revenue return per share	1.88p	1.09p
Capital return/(loss) per share	35.81p	(4.99)p
Total return/(loss) per share	37.69p	(3.90)p

5. Net asset value per share

	2013	2012
Net assets attributable to shareholders (£'000)	172,908	125,785
Shares in issue at the year end	125,008,200	125,008,200
Net asset value per share	138.32p	100.62p

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. Details of the Investment Management Agreement are given in the Report of the Directors on page 13 of the Annual Report.

The management fee payable in respect of the year ended 31 July 2013 amounted to £1,654,000 (2012: £1,376,000), of which £473,000 (2012: £349,000) was outstanding at the year end. The total secretarial fee, including VAT, payable to the Manager amounted to £90,000 (2012: £90,000) of which £45,000 (2012: £71,000) was outstanding at the year end.

Mr Kingzett was an employee of Schroders throughout the year.

7. Status of announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31 July 2012 and do not constitute the statutory accounts for that year. The 2012 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.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31 July 2013 and do not constitute the statutory accounts for the year. The 2013 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

 

 

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