Final Results

RNS Number : 3511Q

Schroder Japan Growth Fund PLC

27 October 2021

 

REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its Report and Accounts for the year ended 31 July 2021 , 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 2021 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website  www.schroders.co.uk/japangrowth . Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/3511Q_1-2021-10-26.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 a strong year of returns for shareholders. During the year ended 31 July 2021 the Company's net asset value ("NAV") significantly outperformed its Benchmark, with a total return of 25.7% versus a Benchmark return of 18.0%. The share price performance was even more positive, with a total return of 33.7% over the same period following the implementation of an active buyback programme by the Board and an improvement in investor sentiment towards Japan. As further detailed in the Manager's Review, the Company's investment style and Manager's active investment approach positively impacted the performance of the portfolio. Masaki Taketsumi must be commended on consistently applying his stock-picking strategy and maintaining a focus on quality companies trading at attractive valuations.

Conditional Tender Offer

As outlined in last year's report the Board monitors the Company's performance against its tender performance target each year. To recap, 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 would be contingent on the next continuation vote of the Company at the AGM in November 2024 being successful. It is pleasing to see the Manager has delivered significant outperformance during the first year of the performance target, delivering a net asset value total return of 7.7% above the Benchmark. The Board will continue to keep this under review.

Board Succession

In line with the Board's agreed succession plan, I will be retiring at the AGM in December 2022. The Board believes that it is important to promote regular refreshment and diversity, whilst maintaining stability and continuity of skills and knowledge on the Board. Therefore it was agreed, following a

recommendation from the Nomination Committee, that we would increase the number of Directors from four to five during the year following a rigorous selection process involving an external agency. An announcement relating to my successor will be made in due course. A Director will serve for a period of

more than nine years only in exceptional circumstances. All Directors will be subject to re-election each year at the AGM.

Discount and purchase of shares for cancellation

In September 2020 the Board decided it necessary to implement a more aggressive buy back programme as part of a wider package of measures to address the discount of share price to net asset value. Shortly afterwards the Company began to buyback shares and repurchased a total of 2,633,438 shares for cancellation during the period, in line with the new policy. Pleasingly, the buybacks quickly had an impact on the Company's discount, which narrowed from 14.7% at the beginning of the year to 9.6% at the end.

The Board will be seeking to renew the share buyback authority granted at the Company's AGM in November 2020 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 as it believes that buybacks improve the quality of the market in the Company's shares and enhances net asset value per share.

Gearing

The Company continues to maintain both a term loan and credit facility. The gearing level was 14.7% at the start of the period and ended at 10.7%, with an average gearing level of 11.4%. 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 decreased from 5.00p to 4.38p per share. 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 2021 of 4.30p per share, representing a decrease of 12.2% over the final dividend paid in 2020.

This dividend will be paid on 10 December 2021 to shareholders on the register on 5 November 2021 subject to approval by shareholders at the Annual General Meeting ("AGM") on 7 December 2021.

Outlook

The Company's performance during the year was pleasing on a total return basis, and relative to its Benchmark. The Board continues to believe that the long-term outlook for Japan is favourable and that the Manager has the resources to deliver positive relative performance.

While the political backdrop remains challenging, with a newly elected Prime Minister and a General Election expected later this year, the outlook for Japanese corporates is positive. Earnings continue to recover as the economy reopens and consensus expectations are that this broad recovery is set to to continue as the country gets to grips with its vaccination programme and rebuilds.

The relatively recent introduction of a Stewardship Code and Corporate Governance Code in Japan has enabled the Manager to benefit from its long-established integration of Environment, Social and Governance (ESG) factors into the investment process. This approach, combined with the an intimate knowledge of Japanese companies and a pro-active stance, should produce positive returns.

Our Manager sees a real opportunity to identify businesses that will benefit from economic normalisation with a particular focus on medium and smaller sized companies that should benefit the most. This opportunity will be aided by the ability to once again meet with company management in person, which is a key pillar of the Manager's stock selection and engagement strategy in Japan.

The AGM and shareholder engagement

The AGM will be held at 12.00 pm on Tuesday, 7 December 2021. Shareholders are asked to cast their votes by proxy.

The Manager will be presenting at a webinar separately from the AGM on 3 December 2021 at 3.00 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/SJGAnnualResults  

In light of the circumstances created by the COVID-19 pandemic, the Board is proposing to make amendments to the Articles to give the Company the flexibility to hold general meetings (wholly or partially) by electronic means and to enable members to attend and participate in general meetings at one or more satellite meeting places. In addition, the Board is proposing to amend the Articles to give it certain additional powers in respect of postponing or adjourning meetings in appropriate circumstances and the security arrangements at meetings. The amendments are being proposed in response to

restrictions on social interactions during the pandemic which have, on occasion, made it impossible or impractical for shareholders to attend physical general meetings.

The Board's objective is to make it easier for shareholders to participate in general meetings through introducing electronic access for those not able to travel and to ensure appropriate security measures are in place for the protection and wellbeing of shareholders. I should make it clear that these powers would only be used if the specific circumstances or applicable law and regulation require it and the Board's intention is to always hold a physical AGM provided it is both safe and practical to do so.

The safety of all of the Company's stakeholders must of course remain paramount.

The Board is also proposing to update the Articles to comply with FCA rules regarding restrictions on transfer, and to correct certain typographical errors.

The principal changes proposed to be introduced in the Articles, and their effect, are set out in more detail on pages 57 and 58 of the 2021 Annual Report.

In addition, the Board would like shareholders to get in touch via the Company Secretary with any questions or comments, so that the Board can answer them in advance of the AGM. 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.

Anja Balfour

Chairman

26 October 2021

Manager's Review

Market background

The Company's NAV total return for the year to the end of July was +25.7%, which comfortably outperformed the Benchmark total return of +18.0% (source: Morningstar, net of fees in GBP). This represented a strong reversal from the underperformance seen in the previous year, with no change in the underlying strategy.

In yen terms the Japanese market rose by 27.1% across the 12 month period, but the Japanese currency weakened during the year which led to a lower return from the market in sterling terms. Global equity markets were generally strong during the period as investors gained confidence in the post-COVID economic recovery. This environment also provided support for sentiment in the Japanese stock market, despite several short-term negative events in the domestic economy.

In the first half of this 12 month period, investors continued to favour stable growth stocks as the era of zero interest rates was clearly destined to be extended. Stock markets continued to react to global macroeconomic events, together with announcements of stimulus measures, changes in consumer behaviour and vaccine-related news flow. Against this background, investors generally maintained a focus on a relatively narrow group of stocks. Although many markets did see some change in market leadership towards the end of 2020, this effect initially remained very muted in Japan. In addition, small capitalisation stocks in aggregate also lagged the broader market in the early part of the period, with particularly steep underperformance in November 2020.

Moving into the first quarter of 2021, a more meaningful reversal in market leadership in Japan was seen, and a general trend towards stock performance being driven by company specific factors. This has been particularly evident through recent quarterly results announcements, which have seen a high proportion of companies beating expectations.

Throughout the pandemic, Japan has consistently seen a lower infection rate than most developed countries but faced a much more serious test from mid-2021as infections began to rise rapidly. Although the mortality rate remains low, there were growing concerns over hospital capacity. From its previous position of relative strength, Japan found itself in a much clearer race between infection rates and vaccination rates than was anticipated, even a few weeks before.

Public criticism of the government's response therefore ratcheted up again, and the approval rating of Prime Minister Suga and his cabinet declined precipitously. The inconsistencies in government policy were particularly stark in July with successive extensions in the state of emergency, in an attempt to restrict social activity, while simultaneously hosting the Olympic and Paralympic Games. While there is no obvious link between new infections and the Olympics, the mixed messages from the government may have led to a lower level of compliance with social restrictions this time, compared with the previous declarations of states of emergency.

Following the conclusion of the Olympics, a clearer political timetable seemed to emerge, with the ruling Liberal Democratic Party (LDP) announcing its leadership contest would be held on 29 September, to be followed by a general election in October. However, on 3 September, Prime Minister Suga, in a completely unexpected move, announced his intention to resign without contesting the LDP leadership election, which has inevitably led to some short-term political uncertainty.

Although equity investors were still digesting a very positive set of corporate results for the most recent quarter, sentiment was impacted in August by the announcement from Toyota Motor of production cuts over the next two months. This is mainly due to the global shortage of semiconductors. Although not entirely unexpected, the severity of the cuts and the potential impact on the extensive auto supply chain was taken negatively, although little or no impact is expected on Toyota's full year profits. Elsewhere for corporate Japan, order trends and capital expenditure plans look strong, and the initial estimate of GDP has been revised up. Against the global pick-up in inflation, Japan's CPI is currently distorted by significant reductions in mobile phone charges and a change in the base-year used for calculations.

Separate from the noise around economic and political developments, positive changes on structural issues and, in particular, developments in Japanese corporate governance continue. At the end of March 2021, the latest draft of revisions to Japan's Corporate Governance Code were released. The intention is to extend the focus on Board composition and diversity, together with the functioning of Board committees. The revisions also address improved corporate disclosure on ESG issues. These principles were later incorporated into the governance code in mid-2021. Annual updates to the code will continue, which will help to maintain focus on the improvements being seen in governance at the individual company level.

Following the release of corporate results for the fiscal year ending in March 2021, most Japanese companies held their AGMs in late June. The most eagerly anticipated of these was Toshiba, following an independent investigation that concluded the company had colluded with government agencies to restrict the ability of activist shareholders to exercise their votes at previous meetings. In the event, shareholders delivered a stunning blow at the AGM, with the chairman and one director losing their place on the board. Toshiba itself, which is not held in the Company, is now believed to face either a long and difficult period of internal reform and asset sales, or further shareholder pressure to consider some form of private equity buy-out.

These issues within Toshiba may naturally raise some doubts about the real commitment of Japanese management to corporate governance. For investors, however, there are positive aspects to be found in such an unusually high-profile demonstration of shareholder activism in Japan, and in the use of an independent investigation as a catalyst for change.

Portfolio performance

The Company's bottom-up stock picking approach typically results in a moderate bias towards an overall "value" style (emphasising stocks on below-average valuations). This style remained a moderate headwind for the Company's relative performance until late 2020, but the market environment has gradually reverted to more typical stock-specific drivers in 2021, which has allowed the Company's stock selection to add value.

Although overall market trends in this period have continued to be dominated by global news flow on COVID-19, investors have recognised that companies have entered a strong recovery period and individual stocks have begun to react positively to upward revisions in earnings expectations. While

Japan's exporting companies have participated in the global economic recovery, the anticipated pick-up in many domestic sectors has been delayed by continued restrictions on social activity. Nevertheless, towards the end of the 12 month period there were signs that consumer confidence was gradually improving and we would expect domestic service sectors, in particular, to recover in late 2021.

Net gearing in the Company was 10.4% at the end of July 2021, having been generally in the 10-14% range during the previous 12 months. The gearing had a positive impact on Company performance during the year, which added to the gains made from stock selection.

Among individual stocks in the portfolio, the largest positive contribution came from Ibiden, an electronic component provider, with specialist technology in printed circuit boards and integrated circuit packaging. The stock outperformed consistently throughout the period as investors gradually appreciated the improved earnings outlook for the company. There was also a strong performance from Hitachi, the heavy electric conglomerate, which performed well throughout the 12 months. Investors continue to re-rate the company based on the progress of its group restructuring and its medium term earnings prospects. The Company also benefited from a recovery in many auto and auto-related stocks which have generated a range of slightly smaller individual contributions.

The reversal in market leadership from early 2021 is particularly evident in the performance of Softbank, the telecom and investment conglomerate, which is a significant component of the Benchmark, but is not held in the Company. The stock had been strongly favoured by investors in 2020, resulting in a negative contribution to the Company's relative performance, but all of this has been unwound in 2021, resulting in a positive impact for the Company in the full review period.

Some of these positive impacts on Company performance were offset by Santen Pharmaceutical, which specialises in eye care. The main negative influence on the stock was a decision by the Chinese authorities in late 2020 to move to centralised procurement, which may limit Santen's longer-term potential. The stock has been sold from the Company as a result. There was also weakness in Pan Pacific International, a discount retailer operating under the Don Quijote brand. The company has faced a number of challenges through the pandemic, including the complete absence of inbound tourists in Japan. We have retained this position as we believe the company's plans to restructure its domestic business will ultimately improve shareholder value.

Stock selection impact - 12 months to 31 July 2021

Largest positive contributions to performance

Security	Company (%)	Load difference (%)	Absolute return (%)	Impact (%)
IBIDEN	1.6	1.5	85.9	0.8
Hitach	2.5	1.6	85.5	0.8
Daiichi Sankyo	0.0	-1.0	-35.9	0.6
SoftBank	0.0	-2.5	-5.3	0.5
Recruit Holdings	2.	1.5	57.2	0.5
Total				3.3

Largest negative contributions to performance

Security	Company (%)	Load difference (%)	Absolute return (%)	Impact (%)
Santen
Pharmaceutical	1.1	0.9	-27.0	-0.6
Pan Pacific	1.7	1.5	-13.0	-0.5
Paltac	0.5	0.4	-21.9	-0.4
Nihon Kohden	0.0	-1.6	+34.8	-0.5
Nippon Densetsu Kogyo	0.9	0.9	-17.5	-0.4
Total				-2.3

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

Activity

From mid-2020, the research team was particularly focused on new ideas generated by the market turmoil, leading to the addition of a new position in Toho. This is one of the largest media groups in Japan, engaged in movie production and distribution and the operation of theatres. The company posted over 80% operating profits decline in early 2020, but monthly box-office figures later in the year showed a clear recovery from the worst period. Amada, one of Japan's leading machine tool companies, was added to the Company as the stock price looked significantly undervalued at a time when evidence of more discipline in cost control was seen. It was noted the company's main product line in fibre laser cutting machines, can contribute to CO2 reductions in their end-customer production processes. A position in AEON Financial Services was also initiated, which provides comprehensive financial services, including credit cards and banking. A dividend cut was announced at the time of first quarter 2020 results, which led to a significant share price correction. We viewed this as an opportunity to purchase the stock as we expected the company to restore its dividend payment well in advance of their earnings recovery.

The Company has had no exposure to the utility sector in Japan for several years, but we recently initiated a position in one new small capitalisation stock, Nippon Gas, which supplies gas and related equipment, as it is expected the company will play an important role in the future restructuring of energy supply in Japan.

As noted above, the Company's position in Santen Pharmaceutical, an eye-care specialist, was sold. The outlook for the stock was reviewed, mainly in the light of China's decision to move to centralised drug procurement, and it was felt that the company's long-term growth potential could be limited as a result. The position was replaced by Astellas Pharmaceutical within the same sector.

The Company's holding in Fuji Oil, a food producer, was also sold as it is now believed a full profit recovery will take longer than originally expected after a downward revision was announced by the company in November. Early in 2021 it was also decided to sell Nihon Kohden from the Company after considering the governance implications of possible bribery cases related to the sale of testing equipment to medical practitioners.

Overall, the number of holdings has been reduced slightly from 71 to 69, 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

Through the summer of 2021, the underlying conditions in the Japanese economy continued to be obscured by the successive states of emergency imposed in recent months, with a further short-term impact on consumer confidence from the jump in COVID-19 infections. Nevertheless, the vaccination programme remains on track to deliver a significant level of immunity in the population by late 2021, unless more serious problems emerge with vaccine supply. This should allow the domestic economy to begin to normalise, even if some social restrictions remain in place.

The political timetable has been complicated by the sudden and unexpected announcement on 3 September that Mr Suga would resign as Prime Minister without contesting the LDP leadership election which had been scheduled for 29 September. Four candidates emerged for that contest, and Mr Fumio  Kishida was ultimately elected party leader and therefore becomes Japan's 100th Prime Minister. Although there may be minor changes in priority in the policy agenda, the broad sweep of Japan's monetary and fiscal policies is likely to remain unchanged. Among Mr Kishida's first tasks will be the formulation of an additional stimulus package to offset the ongoing impact of the pandemic, before leading his party into a general election in November. The initial market reaction suggests that the change in Prime Minister has been taken as a positive, despite the short-term uncertainty.

Meanwhile, corporate Japan continues to report strong profit growth leading to upward revisions in consensus expectations and this is expected to continue as the domestic economy rebuilds some momentum. Longer term, we see strong incentives from structural improvements in profitability and return on equity, driven by better corporate governance.

Policy

Although it is often tempting to be carried along with short-term news and momentum in particular stocks, differences in stock performance must ultimately be driven by companies' underlying earnings performance and valuations, and we remain absolutely focused on these factors.

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

Environmental, Social and Governance (ESG) factors and sustainability issues continue to lie at the heart of research on Japanese companies, which also incorporates input from dedicated Sustainable Investment Team, based in London and Singapore. ESG factors are explicitly considered across the 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.

However, in specific cases, maintaining a medium-term holding in a company with an initial weaker ESG position, if there is active engagement with the company's management to help drive the desired change. For example, SMC has historically been rated poorly by the third-party ESG scoring, due, largely, to their poor governance scores. We had a similar view in this respect and have consistently assigned a negative score on governance for this company within our Fair Value framework. However, through our ongoing engagement activities with the company, positive changes in the management driving better governance, including improved shareholder remuneration, financial disclosures and balance sheet management have been seen. As a result, the assessment of governance gradually increased within the valuation model while also adding a positive score for environmental factors as the company's products play a key role in reducing CO2 emissions from factories. Taking all these factors into consideration, SMC is viewed as an appropriate investment for the Company, despite the historically low external ratings. The possibility for these positive developments to drive a re-rating of third-party ESG evaluations for SMC, which could have a further positive impact on the share price was also seen. This has now begun to materialise, with MSCI upgrading their rating of SMC from CCC to B in late 2020.

Conclusion

Overall, the performance of the Company in the early stages of a reversion to a stock-driven market has been encouraging. We believe the Company remains well placed for this more typical 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 corporate behaviour and governance. Over the next 12 months it is expected some of our meetings with management will be conducted face-to-face, rather than online only, but it is not expected to change the process by which conviction of views on individual companies are formed. Increasing opportunities in mid and small-cap stocks continue to be seen, in particular, based on the delayed recovery of the domestic economy. The gearing level is currently 10.4%, a level that reflects both the number of individual opportunities seen in the market and our confidence in the outlook for the overall portfolio.

Schroder Investment Management Limited

26 October 2021

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.

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

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

*The "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, and dashes show risks as stable.

Risk	Mitigation and management	Change*
Strategic The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. The share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.	è
The Company's cost base could become uncompetitive, particularly in light of open-ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against their competitors. Annual consideration of management fee levels.	è
Investment management The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of: the Manager's compliance with its agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. The Manager also reported on the impact of COVID-19 on the Company's portfolio, and the market generally. Annual review of the ongoing suitability of the Manager is undertaken.	è
Financial and currency The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in Japanese equity markets could have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in assets which are denominated in yen, its exposure to changes in the exchange rate between sterling and yen has the potential to have a significant impact on returns.	The risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager. The Board considers overall hedging policy on a regular basis.	è
Custody Safe custody of the Company's assets may be compromised through control failures by the Depositary.	The depositary reports on safe custody of the Company's assets, including cash, and portfolio holdings independently reconciled with the Manager's records. The review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the depositary on its activities, including matters arising from custody operations is received.	è
Gearing and leverage The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored daily and strict restrictions on borrowings are imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of shareholders' funds.	è
Accounting, legal and regulatory In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	The confirmation of compliance with relevant laws and regulations by key service providers is reviewed. Shareholder documents and announcements, including the Company's published annual report, are subject to stringent review processes. Procedures are established to safeguard against the disclosure of inside information.	è
Service provider The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, Depositary and Registrar. Failure of controls, and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting is provided by key service providers and monitoring of the quality of their services provided. The Directors also receive presentations from the Manager, depositary and custodian, and the registrar on an annual basis. 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.	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 51 to 52 of the 2021 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 2021 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 17 and 18 of the accounts 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 expires on 16 January 2022 and the Directors are confident that they will be able to secure replacement financing on similar terms, should they decide to do so. The Company has sufficient liquid assets in order to be in a position to repay the loan upon maturity, should it not be replaced. 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 31 October 2022 which is at least 12 months from the date the financial statements were authorised for issue.

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 20 and 21 of the 2021 Annual Report confirm that, to the best of their knowledge:

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

-    the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Income Statement for the year ended 31 July 2021

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	52,170	52,170	-	(37,752)	(37,752)
Net foreign currency gains		3,073	3,073	-	1,602	1,602
Income from investments	7,308	-	7,308	8,276	-	8,276
Other interest receivable and similar income	-	-	-	4	-	4
Gross return/(loss)	7,308	55,243	62,551	8,280	(36,150)	(27,870)
Investment management fee	(580)	(1,354)	(1,934)	(564)	(1,317)	(1,881)
Administrative expenses	(516)	-	(516)	(552)	-	(552)
Net return/(loss) before finance costs and taxation	6,212	53,889	60,101	7,164	(37,467)	(30,303)
Finance costs	(80)	(186)	(266)	(84)	(196)	(280)
Net return/(loss) before taxation	6,132	53,703	59,835	7,080	(37,663)	(30,583)
Taxation	(731)	-	(731)	(828)	-	(828)
Net return/(loss) after taxation	5,401	53,703	59,104	6,252	(37,663)	(31,411)
Return/(loss) per share	4.38p	43.55p	47.93p	5.00p	(30.13)p	(25.13)p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income and therefore the net return 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 2021

	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 2019	12,501	7	-	3	97,205	157,258	6,838	273,812
Repurchase of the Company's own shares for cancellation	(23)	-	23	-	(398)	-	-	(398)
Net (loss)/return  after taxation	-	-	-	-	-	(37,663)	6,252	(31,411)
Dividend paid in the year	-	-	-	-	-	-	(5,875)	(5,875)
At 31 July 2020	12,478	7	23	3	96,807	119,595	7,215	236,128
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

Statement of Financial Position at 31 July 2021

	2021	2020
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	313,907	268,080
Current assets
Debtors	1,003	1,643
Cash at bank and in hand	9,774	11,814
	10,777	13,457
Current liabilities
Creditors: amounts falling due within one year	(40,825)	(2,172)
Net current (liabilities)/assets	(30,048)	11,285
Total assets less current liabilities	283,859	279,365
Creditors: amounts falling due after more than one year	-	(43,237)
Net assets	283,859	236,128
Capital and reserves
Called-up share capital	12,214	12,478
Share premium	7	7
Capital Redemption reserve	287	23
Warrant exercise reserve	3	3
Share purchase reserve	91,540	96,807
Capital reserves	173,298	119,595
Revenue reserve	6,510	7,215
Total equity shareholders' funds	283,859	236,128
Net asset value per share	232.40p	189.24p

Notes to the Accounts

1.   Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in October 2019. All of the Company's operations are of a continuing nature.

2.  Taxation

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

3.  Dividends

Dividend paid and proposed
	2021	2020
	£'000	£'000
2020 final dividend of 4.90p (2019: 4.70p) paid out of revenue profits	6,106	5,875
	2021	2020
	£'000	£'000
2021 final dividend proposed of 4.30p (2020: 4.90) to be paid out of revenue profits	5,252	6,1141

¹The 2020 final dividend amounted to £6,114,000. However the amount actually paid was £6,106,000 as shares were repurchased and cancelled, after the accounting date, but prior to the dividend Record Date.

The proposed dividend amounting to £5,252,000 (2020: £6,114,000) 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 £5,401,000 (2020; £6,252,000).

4.  Return/(loss) per share

	2021	2020
	£'000	£'000
Revenue return	5,401	6,252
Capital return/(loss)	53,703	(37,663)
Total return/ (loss)	59,104	(31,411)
Weighted average number of ordinary shares in issue during the year	123,317,478	124,998,055
Revenue return per share	4.38p	5.00p
Capital return/(loss) per share	43.55p	(30.13)p
Total return/(loss) per share	47.93p	(25.13)p

5.  Creditors: amounts falling due within one year

	2021	2020
	£'000	£'000
Bank loan	39,321	-
Securities purchased awaiting settlement	859	1,595
Other creditors and accruals	645	577
	40,825	2,172

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

In addition to the term loan detailed above, the Company has a yen 2.0 billion credit facility available from SMBC, which was undrawn at the year end (2020: undrawn). The facility is unsecured but is subject to covenants and restrictions which are customary for a facility of this nature.

The Directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.

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

	2021	2020
	£'000	£'000
Bank loan	-	43,237

7.  Called-up share capital

	2021	2020
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Opening balance of 124,776,700 (2020: 125,008,200) ordinary shares of 10p each	12,478	12,501
Repurchase and cancellation of 2,633,438 (2020: 231,500) shares	(264)	(23)
Closing balance of 122,143,262 (2020: 124,776,700) shares	12,214	12,478

During the year, the Company purchased 2,633,438 of its own shares, nominal value £263,344, for cancellation, for a total consideration of £5,267,000, representing 2.11% 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

	2021	2020
Net assets attributable to shareholders (£'000)	283,859	236,128
Shares in issue at the year end	122,143,262	124,776,700
Net asset value per share	232.40p	189.24p

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 2021 Annual Report.

At 31 July 2021, all investments in the Company's portfolio are categorised as Level 1 (2020: same).

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

	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
Investments allocated to Level 2 are valued using unadjusted quoted prices, but in markets which are less active.
	2020
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments	268,080	-	-	268,080

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

10. Status of announcement

2021 Financial Information

The figures and financial information for 2021 are extracted from the Report and Accounts for the year ended 31 July 2021 and do not constitute the statutory accounts for the year. The 2021 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 2021 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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