Final Results

Schroder Japan Trust PLC

29 September 2023

 

REPORT AND ACCOUNTS

Schroder Japan Trust plc (the "Company") hereby submits its Report and Accounts for the year ended 31 July 2023, 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 2023 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.com/japantrust. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/0652O_1-2023-9-28.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:

Schroder Investment Management Limited

Augustine Chipungu (Press)                                                                020 7658 6000

Paula Lockwood (Company Secretary)                                               020 7658 6000

John Spedding                                                                                       020 7658 6000

Schroder Japan Trust plc

Chairman's Statement

Performance

For my first annual statement as Chairman, I am pleased to report that for the year under review our Manager's investment strategy has again generated superior returns to the Japanese stock market.  During the year ended 31 July 2023, the Company's net asset value ("NAV") produced a total return of 11.7%, outperforming its benchmark index which ended the year with a total return of 9.4%. Meanwhile, the Company's share price produced a total return of 18.7%, as its discount to NAV narrowed on the back of this encouraging performance and improving sentiment towards the Japanese stock market. The Company's discount averaged 11.5% over the year, compared to 11% in the year ended 31 July 2022.

Our Portfolio Manager, Masaki Taketsume, has remained disciplined within a rising market and has positioned the portfolio to exploit opportunities in under-valued companies. The execution of this investment strategy has now resulted in three years of outperformance against the Company's benchmark.

Further details about the Company's investment strategy and portfolio activity during the year can be found in the Portfolio Manager's review.

During the year, the Company changed its name to Schroder Japan Trust plc. The Board decided to remove 'Growth' from the Company's name, to reflect more accurately the investment approach of the Manager.

Continued action taken by the Board has begun to show signs of bearing fruit. The Manager has produced excellent relative performance over each of the last three financial years when market conditions have remained challenging. He has achieved this by adopting a clear, well defined investment strategy centred on his disciplined bottom-up stock picking approach which utilises Schroders' resources on the ground in Japan. At the same time, Schroders has concentrated its promotional efforts on increasing the Manager's profile and in helping to raise awareness of his investment strategy and approach to a wider audience.

The Board supported the Company by introducing a conditional tender offer mechanism three years ago and has continued to manage an active buy-back programme, with the aim of assisting the reduction of volatility in the discount. The sharp re-rating of the share price during the year, which is reflected in an 18.7% total return, is indicative of the progress that has been made.

Conditional Tender Offer

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

The Manager has continued to deliver strong outperformance during the third year of the performance target, delivering a net asset value total return of 2.3% above the benchmark. As a result, over three years, the Company has now returned 12.4% on an annualised basis, which compares favourably to the annualised 8.2% return from the TOPIX Total Return Index. 

Discount and purchase of shares for cancellation

The Board monitors the discount of the share price to net asset value and, when necessary, implements a buyback programme. During the year, the Company repurchased a total of 2,096,597 shares for cancellation in line with this policy. The Board will continue to monitor the discount and will buy back shares when required. It is therefore seeking to renew the share buyback authority granted at the Company's AGM in December 2022 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.

Gearing

The Company continues to maintain both a term loan and revolving credit facility. The gearing level was 11.1% at the start of the period and ended at 9.5%, with an average gearing level of 11.6%. 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.

Proposed change to the Investment Policy to allow for the use of Contracts for Difference

The Company is able to utilise traditional forms of bank debt to finance investment but, in current conditions in the lending markets, funding is more expensive to obtain. The Board believes that it is in the best interests of Shareholders for the Company to have the ability to employ alternative gearing through the use of Contracts for Difference (CFDs). The cost of using CFDs to increase investment exposure is currently lower than the cost of traditional borrowing.

CFDs are defined as a contract between two parties which stipulates that the buyer will receive from the seller, or the seller will pay to the buyer, the difference between the value of an asset at the time the parties enter into the contract and the value at the time the contract is closed, depending on whether the price of such asset increases or falls. The amount due under the contract is held in cash within a collateral account, which is updated on a daily basis. The Investment Manager already uses CFDs for other accounts which it manages.

A resolution to amend the Company's investment policy to allow for investment in CFDs will be included in the Notice of the Annual General Meeting.

Revenue and dividend

Revenue during the year increased from 4.97p to 5.41p 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 2023 of 5.40p per share, representing an increase of 10% over the final dividend paid in 2022. This dividend will be paid on 8 December 2023 to shareholders on the register on 3 November 2023 subject to approval by shareholders at the Annual General Meeting ("AGM") on 5 December 2023.

Ten years ago, the Board highlighted the growing contribution from the yield paid by Japanese companies to the Company's own total return. At that time, it took action to ensure that it could pay out to its shareholders substantially all the income it received for each financial year.

Growth in yield has indeed been a feature of the market in recent years and dividend income paid out to shareholders, while still modest in terms of yield, has increased by 64.2% over the 10 years to 31 July 2023.

Outlook

I have been involved in the Japanese equity market for over forty years and have seen many false dawns when market performance has failed to match up to investor expectations. Over the last year, foreign investors have shown growing interest in Japan and the market has performed well. Inevitably, therefore, the question arises whether this performance will continue. In other words, will it be different this time?

My fellow Directors and I continue to be excited about the Company's prospects, because we see two major developments which should continue to drive equity performance over the medium to long term. Firstly, corporate governance and stock market reforms in recent years have stimulated a tectonic shift in the attitude of many Japanese companies towards improving returns for shareholders. Secondly, the reappearance of inflation could signal the end of the deflationary spiral which has, for example, constrained consumer spending in Japan over the last two decades. The country's central bank, the Bank of Japan, has explicitly stated that its accommodative monetary policy is being pursued to achieve sustained, stable 2% inflation.

Against this macroeconomic background, there remain significant opportunities for our high conviction, bottom-up strategy to identify and exploit market opportunities and drive positive relative performance.

AJ Bell Investment Awards winner

I am very pleased to announce that the Company has recently been notified that it is the winner of the 2023 AJ Bell Investment Awards in the Japan Equity - Active category. Recognition of the Company by a major provider of platform services to retail clients should help to further increase our profile within the retail investor community. 

The AGM and shareholder engagement

The AGM will be held at 1.00 pm on Tuesday, 5 December 2023. Shareholders are asked to cast their votes by proxy. The Manager will be presenting at a webinar separately from the AGM on 5 December 2023 at 1p.m. and all shareholders are encouraged to sign up on the Company's website so that they can hear the portfolio manager's view and ask questions. Shareholders can also sign up using this link: https://www.schroders.events/sjg23. The Board would like shareholders to get in touch via the Company Secretary with any questions or comments, so that the Board can address 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 Trust 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.

Philip Kay

Chairman

28 September 2023

Investment Manager's Review

For the financial year to 31 July 2023, the Company's net asset value increased by 11.7%, while its benchmark rose by 9.4%.¹ Before we delve more deeply into the drivers of performance, we would like to explain the investment philosophy and approach that sits behind our decision-making. This should provide some important context to help you understand why the portfolio is positioned the way it is, and what you should expect in terms of future performance.

Our investment approach

We believe the Japanese equity market ultimately acts efficiently in reflecting the intrinsic value of companies. In the short to medium-term, however, considerable inefficiencies are frequently evident in individual stocks. These inefficiencies provide repeatable opportunities to identify and invest in undervalued stocks, with the aim of delivering a better return than the market as a whole on a rolling three-to-five year view.

Our investment resource is entirely devoted to this aim, focusing on individual company fundamentals to understand the true worth of a stock and investing in a portfolio of 60-70 of the highest conviction ideas. These then tend to be held for the long term, with value being realised as the market gradually reflects their true value more efficiently.

Portfolio holdings tend to fall into three categories of inefficiency:

1.         Market misperception - companies with self-improving credentials, with management initiatives to sustainably enhance operational performance, being under-appreciated by other investors.

2.         Market oversight - undervalued companies, especially among small and mid caps where research coverage is less widespread, with strong and defendable business franchises in niche product areas.

3.         Short-term overreaction - ideas arising from abrupt but transitory events which push valuations of quality companies temporarily to unsustainably low levels.

Outside these three categories, the balance of the portfolio represents "best in class" stocks with reasonable valuations. The weighting given to each of these segments evolves over time, but a reasonable exposure to each category ensures a good level of diversification for the portfolio as a whole. Meanwhile, the approach tends to result in a bias towards value stocks² and smaller companies, as well as an overall focus on quality.

The portfolio tends to exhibit a high "active share", which means that its constituents deviate significantly from the benchmark index. Gearing (financial leverage) typically ranges between 10% and 17.5%,3 allowing shareholders to potentially benefit even more as the inefficiencies we have identified become more appropriately priced by the market.

Portfolio strategy

So, what does this mean for current portfolio strategy and positioning? Currently, the biggest category within the portfolio is market misperception which accounts for almost 40% of assets. This includes companies such as Hitachi, Seven & I and Toyota Motors, where we see the prospect of sustainable improvements in returns from management efforts that are not yet reflected in valuations.

In the case of Toyota, the market views the business as a "dinosaur" in an industry that is rapidly shifting towards electric vehicles (EV). We believe this to be a market misperception, however, because the market underestimates Toyota's capabilities in EV. It has been accumulating knowledge and technologies in EV since launching its first hybrid vehicle, the Prius, in 1997. It is already profitable across its hybrid (HEV), plug-in (PHEV) and battery (BEV) powered vehicle range and, as it continues to reveal further details of its EV strategy, we expect investors gradually to re-evaluate its competitive strengths in EV, which should ultimately result in a deservedly higher market multiple.

Almost 30% of the portfolio is in market oversights, such as Fukushima Galilei and Hosokawa Micron, where we find highly competitive smaller businesses trading at a significant discount to their large cap and global peers. As the leading global provider of high-quality powder manufacturing machines, Hosokawa Micron is an excellent example of the type of market oversights we are able to find in Japan. It dominates its niche and is also benefiting from growing demand for its high-quality powders, which are used in fast growing product areas such as lithium-ion batteries. Nevertheless, its shares trade at an unwarranted discount to the shares of similar businesses elsewhere in the world.

14% of the portfolio is invested in short-term overreactions, including out-of-favour technology opportunities such as Nomura Research Institute (NRI) and Ibiden. These businesses are beneficiaries of long-term structural tailwinds but their shares were sold down aggressively - in our view, too aggressively - last year. NRI is one of the highest quality IT service companies in Japan. With its strong consulting capabilities, it is well positioned to capture rising demand from Japanese companies that are looking to digitally transform their business models. Its growth prospects therefore continue to look positive, but its valuation contracted significantly in 2022, during the widespread sell-off in technology and "growth stocks" more generally. This looks like a classic short-term overreaction to us, which we took advantage of by adding the shares to the portfolio.

The remaining portfolio is invested in what we consider to be best-in-class operators, such as Sumitomo Mitsui Financial Group, Asahi Group Holdings, Orix, and NTT.

From a sector perspective, this results in a bias towards Machinery, Glass & Ceramic Products, Other Financing Business, and Information & Communication. As is typical, the portfolio is also overweight towards small and mid cap stocks, where valuations look particularly attractive as the domestic Japanese economy recovers.

Recent performance drivers

Despite some weakness during the early months of the period under review, the Japanese stock market has performed strongly during 2023, reaching new 33-year highs in recent months. In sterling terms, however, the market's return was reduced somewhat by yen weakness. Value stocks outperformed growth stocks, but smaller companies generally lagged against larger caps. Meanwhile, there was a beneficial impact from the Company's gearing, and helpful contributions to relative performance also came from a range of individual stocks as we explain below. On balance, these factors were helpful to performance during the period, as reflected in the positive NAV return and the modest outperformance of the benchmark. Over three years, the Company has now returned 12.4% on an annualised basis, which compares favourably to the 8.2% return from the TOPIX Total Return Index.³

The strongest market influence came from developments in monetary policy, with resilient inflation data and stronger wage growth allowing the Bank of Japan (BOJ) to commence a process of "policy normalisation", which effectively marks the end of a prolonged period of ultra-low interest rates and yield curve control. This year's market rally has been driven by greater interest from foreign investors, attracted by positive momentum in the Japanese macroeconomy and ongoing expectations of corporate governance reforms.

Financial stocks generally performed well in this environment, with the portfolio's holdings in "mega bank" Sumitomo Mitsui Financial Group and insurance company T&D Holdings contributing positively. General trading companies also performed well, perhaps buoyed by news that Warren Buffett was building stakes in them. The portfolio holds a position in Mitsui & Co, which contributed strongly to performance and is, in our view, the most attractive of the general trading companies, thanks to its more favourable shareholder remuneration policy.

The biggest positive contribution to performance, however, came from a short-term overreaction stock. Ibiden is a mid cap electronic component maker, which specialises in providing foundational materials used in the construction of powerful central and graphics processing units (CPUs and GPUs). These are heavily used in cloud computing and artificial intelligence data centres. The exponential growth in these markets has driven stronger-than-expected results from Ibiden, leading to significant share price growth and a full recovery from last year's weakness which had allowed us to build a position in the shares.

Meanwhile, Disco Corporation, which sits within the market oversight category, also added value. Disco has a dominant market share in providing equipment for integrated circuit (IC) packaging, which is a process of enclosing semiconductors in protective, high-performance casements. The added value of IC packaging is becoming increasingly apparent in the semiconductor industry and, as a result, Disco is currently enjoying very significant volume growth as well as commanding higher prices.

By contrast, Mitsui Fudosan, one of Japan's largest property groups, disappointed amid concern about how the change in monetary policy may impact the Japanese property market. Meanwhile, Kureha, a small cap speciality chemicals company, and Aeon Financial Services, a small cap non-bank financial, also detracted due to weaker earnings progress.

¹ Source: Morningstar, cum-income NAV with dividends reinvested, 31 July 2023 data, net of fees. Past performance is not a guide to future performance and may not be repeated.

² The term "value stocks" refers to shares that appear to trade at a lower price than justified by company fundamentals, such as dividends, earnings, sales and book value.

³ Source: Morningstar, cum-income NAV with dividends reinvested, 31 July 2023 data, net of fees. Past performance is not a guide to future performance and may not be repeated.

Attribution - stock selection

12 Months to 31 July 2023

Top 5 contributors	Portfolio weight	Benckmark1 weight	Portfolio return	Benchmark1 return	Total effect
Ibiden Co Ltd	1.8	0.1	99.2	99.2	+1.14
Mitsui & Co	2.8	1.1	75.4	75.4	+0.88
Sumitomo Mitsui Fg	3.7	1.3	52.7	52.7	+0.84
Disco Corporation	1.0	0.2	125.2	125.2	+0.59
T&D Holdings Inc	1.8	0.2	43.2	43.2	+0.48

Top 5 detractors	Portfolio weight	Benckmark1 weight	Portfolio return	Benchmark1 return	Total effect
Mitsubishi Corp	0.0	1.1	0.0	70.5	-0.57
Mitsubishi Ufj Fin	0.0	1.8	0.0	42.8	-0.55
Mitsui Fudosan Co	1.6	0.4	-10.3	-10.3	-0.47
Kureha Corporation	1.2	0.0	-22.5	-22.5	-0.44
Aeon Financial Ser	1.2	0.0	-18.5	-18.5	-0.39

Past performance is not a guide to future performance and may not be repeated. The value of investment can go down as well as up and is not guaranteed.

The return may increase or decrease as a result of currency fluctuations.

Source: FactSet, GBP, Gross. 1. Stocks mentioned are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

Portfolio activity

Our research team has continued to focus on individual stock ideas where we can identify positive, company-specific drivers for future performance. During the period, there were a number of changes to the portfolio that reflect our ongoing efforts to maintain an appropriate portfolio balance that provides exposure to our highest conviction ideas.

One new idea that was introduced to the portfolio during the year is Kyoritsu Maintenance, a small cap service company that operates reasonably-priced hotels under the Dormy Inn brand. We view the company as a key beneficiary of economic reopening and the return of inbound tourists to Japan. This bodes well for volume increases and potential price rises. The Dormy Inn brand has a strong competitive position and the company is maintaining higher occupancy and utilisation ratios in its hotels. We do not believe the market fully acknowledges the company's existing strengths, nor does it appreciate its growth prospects. Consequently, we initiated a position in June as a new market oversight idea.

We also initiated a position in Mitsui Chemicals, a mid cap diversified chemical company. For some time now, Mitsui Chemicals has been engaged in the process of transforming its business model and portfolio with the aim of improving profitability and better insulating its financial performance from the impact of the commodity cycle. We believe the company's strategy is sensible and comprehensive, and it is now beginning to realise the benefits of this transformation. During the current cyclical slowdown in its end markets, Mitsui's earnings have been much more resilient when compared to both history and its peers. Nevertheless, the shares remain considerably undervalued. A single digit price-earnings ratio and a price-to-book ratio of less than one suggest the market has not yet reflected the company's positive transformation, making this a new market misperception idea.

In terms of exits, we decided to take profits in Itochu and shift the portfolio towards stocks that we view as more attractively valued. Itochu has performed well for the portfolio, in part perhaps thanks to the news that Warren Buffet had added to his position in the shares.

We also sold out of East Japan Railway. We continue to view it as a best-in-class stock in the Transportation & Logistics sector, which is well-positioned to benefit from the reopening of the domestic economy. However, the pace of its earnings recovery has been held back by cost increases and regulatory headwinds. In combination with a relatively solid share price performance, we have concluded that its near-term earnings recovery prospects are already reflected in the share price. Meanwhile, we have several other positions that are more directly exposed to the domestic reopening theme, so we decided to reallocate capital towards those other positions in which we have stronger conviction.

Outlook

We believe that the Japanese equity market currently provides one of the most attractive opportunities, particularly for long-term investors. Several developments that are unique to Japan should combine to support sustained corporate earnings growth and increasing valuation multiples in the years ahead.

From an economic perspective, we should see a continued cyclical recovery following the lifting of Covid restrictions. More importantly, after more than two decades of deflationary pressure, the emergence of "positive" inflation, led by wage growth, is immensely encouraging. Not all inflation can be viewed as positive, but Japan is experiencing lower rates of inflation than in many other parts of the world. This suggests that the re-emergence of inflation in Japan can be viewed as an opportunity rather than a threat. 

Indeed, the implications of this positive inflation should not be under-estimated for corporate Japan. This is an environment in which Japanese companies can regain pricing power (the ability to raise prices in response to inflation) which, when coupled with improved consumer purchasing power through wage increases, should drive healthy levels of corporate earnings growth. An element of these higher profits can then be recycled back into the economy through further wage increases, driving a positive cycle of broader economic progress that has been largely absent from Japan for a generation.

Meanwhile, corporate governance reforms are likely to remain a structural driver of the Japanese equity market in the years ahead. Historically, the structure of corporate Japan has been dominated by the keiretsu system of cross-shareholdings and close relationships between customers, suppliers, their banks and competitors. This system has been increasingly criticised from a governance perspective because it can lead to inefficient capital allocation and poor decision-making. In recent years, however, we have begun to see meaningful change, with companies, investors and regulators such as the Tokyo Stock Exchange, working together to raise corporate governance standards, with the aim of improving returns and growth prospects. The success of these initiatives is reflected in the level of dividends and share buybacks from Japanese companies. These have been rising steadily in recent years and currently stand at record levels, but there remains scope for considerable further positive progress as the corporate governance revolution unfolds.

The Japanese stock market has reached multi-decade highs in recent months in response to these positive domestic developments. Nevertheless, the equity market as a whole looks attractively valued when compared to other regions' markets and in the context of history. Many listed Japanese companies continue to trade below their book value despite the ongoing corporate governance movement. This suggests the market is not yet fully reflecting the progress that many businesses are making to improve returns. We are confident we can continue to find selective opportunities for businesses to transform both their growth prospects and their market rating through better capital allocation and by considering the needs of all their stakeholders, shareholders included. These opportunities remain concentrated at the lower end of the market cap spectrum, where valuations are also even more attractive, despite the high quality of many businesses and their superior growth potential.

To conclude, there are many reasons to believe that we may be entering a period of sustained outperformance from the Japanese stock market. We are seeing renewed appetite for Japanese equity from global investors and this demand should continue to grow as the positive domestic story becomes better understood. This represents a fertile environment for active, high conviction stock pickers, and we are excited at the opportunity that lies ahead for investors in the company.

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 September 2023.

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

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

Emerging risks and uncertainties

During the year, the Board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were political risk and climate change risk. The Board has determined they are not currently, as detailed below, sufficiently material for the Company to be categorised as independent principal risks. The Board receives updates from the Manager, Company Secretary and other service providers on other potential risks that could affect the Company. The Board were mindful of emerging risks during the year including the escalation or expansion of the conflict in Ukraine, rising inflation, the threat of a global recession and energy prices although they are not factors which explicitly impacted the Company's performance.

Political risk includes the impact of geopolitical risk, regional tensions, trade wars and sanctions against companies. Currency rates and borrowings drawn down by the Company, as well as markets generally, may be affected by geopolitical developments. Currency rate and borrowings drawn down by the Company may be affected by geopolitical developments particularly in relation to movements in sterling versus the yen. Note 20 of the financial statements provides more information on the effect of currency and market price movements.

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

*The "Change" column on the right highlights at a glance the Board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show if the risks increased, decreased or remained the same.

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

Risk assessment and internal controls review by the board

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

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

A full analysis of the financial risks facing the Company is set out in note 20 to the accounts on pages 57 to 61 of the 2023 report and accounts.

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 2023 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 23 and 24 of the 2023 report and accounts and in particular the impact of a significant fall in Japanese equity markets on the value of the Company's investment portfolio.  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 2024 which is at least 12 months from the date the financial statements were authorised for issue.

By order of the Board

Schroder Investment Management Limited

Company Secretary

28 September 2023

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 26 and 27 of the 2023 report and accounts confirm that, to the best of their knowledge:

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

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

On behalf of the Board

Philip Kay

Chairman

28 September 2023

Income Statement for the year ended 31 July 2023

		2023			2022
		Revenue	Capital	Total	Revenue	Capital	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	2	-	22,484	22,484	-	(3,439)	(3,439)
Net foreign currency gains		-	3,920	3,920	-	2,076	2,076
Income from investments	3	8,766	-	8,766	8,208	-	8,208
Other interest receivable and similar income	3	20	-	20	3	-	3
Gross return/(loss)		8,786	26,404	35,190	8,211	(1,363)	6,848
Investment management fee	4	(607)	(1,416)	(2,023)	(599)	(1,399)	(1,998)
Administrative expenses	5	(653)	-	(653)	(637)	-	(637)
Net return/(loss) before finance costs and taxation		7,526	24,988	32,514	6,975	(2,762)	4,213
Finance costs	6	(86)	(200)	(286)	(81)	(189)	(270)
Net return/(loss) before taxation		7,440	24,788	32,228	6,894	(2,951)	3,943
Taxation	7	(877)	-	(877)	(821)	-	(821)
Net return/(loss) after taxation		6,563	24,788	31,351	6,073	(2,951)	3,122
Return/(loss) per share	8	5.41p	20.45p	25.86p	4.97p	(2.42)p	2.55p

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/(loss) 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.

The notes on pages 49 to 62 of the 2023 report and accounts form an integral part of these accounts.

Statement of Changes in Equity for the year ended 31 July 2023

		Called-up		Capital	Warrant	Share
		share	Share	redemption	exercise	purchase	Capital	Revenue
		capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2021		12,214	7	287	3	91,540	173,298	6,510	283,859
Repurchase of the Company's own shares for cancellation		(14)	-	14	-	(303)	-	-	(303)
Net (loss)/return after taxation		-	-	-	-	-	(2,951)	6,073	3,122
Dividend paid in the year	9	-	-	-	-	-	-	(5,249)	(5,249)
At 31 July 2022		12,200	7	301	3	91,237	170,347	7,334	281,429
Repurchase of the Company's own shares for cancellation		(210)	-	210	-	(4,359)	-	-	(4,359)
Net return after taxation		-	-	-	-	-	24,788	6,563	31,351
Dividend paid in the year	9	-	-	-	-	-	-	(5,961)	(5,961)
At 31 July 2023		11,990	7	511	3	86,878	195,135	7,936	302,460

The notes on pages 49 to 62 of the 2023 report and accounts form an integral part of these accounts.

Statement of Financial Position at 31 July 2023

		2023	2022
	Note	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	10	331,756	313,454
Current assets
Debtors	11	1,113	1,113
Cash at bank and in hand		4,081	5,626
		5,194	6,739
Current liabilities
Creditors: amounts falling due within one year	12	(1,669)	(1,872)
Net current assets		3,525	4,867
Total assets less current liabilities		335,281	318,321
Creditors: amounts falling due after more than one year	13	(32,821)	(36,892)
Net assets		302,460	281,429
Capital and reserves
Called-up share capital	14	11,990	12,200
Share premium	15	7	7
Capital redemption reserve	15	511	301
Warrant exercise reserve	15	3	3
Share purchase reserve	15	86,878	91,237
Capital reserves	15	195,135	170,347
Revenue reserve	15	7,936	7,334
Total equity shareholders' funds		302,460	281,429
Net asset value per share	16	252.25p	230.68p

These accounts were approved and authorised for issue by the Board of Directors on 28 September 2023 and signed on its behalf by:

Philip Kay

Chairman

The notes on pages 49 to 62 of the 2023 report and accounts form an integral part of these accounts.

Registered in England and Wales

Company registration number: 02930057

Notes to the Accounts

1.             Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in July 2022. All of the Company's operations are of a continuing nature.

2.             Income

	2023	2022
	£'000	£'000
Income from investments:
Overseas dividends	8,766	8,208
Other interest receivable and similar income
Deposit interest	20	3
Total income	8,786	8,211

3.             Investment management fee

	2023			2022
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	607	1,416	2,023	599	1,399	1,998

The basis for calculating the investment management fee is set out in the Report of the Directors on page 28 of the 2023 report and accounts and details of all amounts payable to the Manager are given in note 17 on page 56 of the 2023 report and accounts.

4.             Return/(loss) per share

	2023	2022
	£'000	£'000
Revenue return	6,563	6,073
Capital return/(loss)	24,788	(2,951)
Total return	31,351	3,122
Weighted average number of ordinary shares in issue during the year	121,214,425	122,078,782
Revenue return per share	5.41p	4.97p
Capital return/(loss) per share	20.45p	(2.42)p
Total return per share	25.86p	2.55p

5.             Dividends

Dividend paid and proposed
	2023	2022
	£'000	£'000
2022 final dividend of 4.90p (2021: 4.30p) paid out of revenue profits	5,9611	5,249
	2023	2022
	£'000	£'000
2023 final dividend proposed of 5.40p (2022: 4.90p) to be paid out of revenue profits	6,475	5,978

^1The 2022 final dividend amounted to £5,978,000. However the amount actually paid was £5,961,000 as shares were repurchased and cancelled, after the accounting date, but prior to the dividend Record Date.

The proposed dividend amounting to £6,475,000 (2022: £5,978,000) is the amount used for the basis of determining whether the Company has satisfied the distribution requirements of Section 1158 of the Corporation Tax Act 2010. The revenue available for distribution by way of dividend for the year is £6,563,000 (2022; £6,073,000).

6.             Creditors: amounts falling due within one year

	2023	2022
	£'000	£'000
Securities purchased awaiting settlement	951	1,177
Other creditors and accruals	718	695
	1,669	1,872

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

	2023	2022
	£'000	£'000
Bank loan	32,821	36,892

The bank loan is a yen 6.0 billion three-year term loan from SMBC Bank International plc (formerly Sumitomo Mitsui Banking Corporation Europe Limited), expiring in January 2025 and carrying a floating interest rate, calculated at the daily Compounded Risk Free Rate, plus a margin. The loan is unsecured, but is subject to certain undertakings and restrictions, all of which have been complied with. The Directors consider that the carrying amount of the loan approximates to its fair value.

In addition to the term loan detailed above, the Company has a yen 2.0 billion credit facility available from Sumitomo Mitsui Banking Corporation, London Branch, which was undrawn at the year end (2022: undrawn). Further details of the facility are given in note 20 on page 59 of the 2023 report and accounts.

8.             Called-up share capital

	2023	2022
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Opening balance of 122,000,562 (2022: 122,143,262) ordinary shares of 10p each	12,200	12,214
Repurchase and cancellation of 2,096,597 (2022: 142,700) shares	(210)	(14)
Closing balance of 119,903,965 (2022: 122,000,562) shares	11,990	12,200

During the year, the Company purchased 2,096,597 of its own shares, nominal value £209,660, for cancellation, for a total consideration of £4,359,000, representing 1.72% 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.

9.             Net asset value per share

	2023	2022
Net assets attributable to shareholders (£'000)	302,460	281,429
Shares in issue at the year end	119,903,965	122,000,562
Net asset value per share	252.25p	230.68p

10.          Transactions with the Manager

Under the terms of the AlFM Agreement, the Manager is entitled to receive a management fee, a marketing support fee and a company secretarial fee. Details of the AIFM agreement are given in the Report of the Directors on page 28 of the 2023 report and accounts. Any investments in funds managed or advised by the Manager or any of its associated companies are excluded from the assets used for the purpose of the management fee calculation and therefore incur no fee.

The management fee payable in respect of the year ended 31 July 2023 amounted to £2,023,000 (2022: £1,998,000), of which £535,000 (2022: £502,000) was outstanding at the year end. The marketing support fee payable to the Manager amounted to £50,000 (2022: £50,000) of which £13,000 (2022: £13,000) was outstanding at the year end. The company secretarial fee payable to the Manager amounted to £90,000 (2022: £90,000) of which £23,000 (2022: £23,000) was outstanding at the year end. Outstanding amounts to the Manager are short-term in nature, these amounts are unsecured and not subject to interest charges.

11.          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 49 of the 2023 report and accounts.

At 31 July 2023, all investments in the Company's portfolio are categorised as Level 1 (2022: same).

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:

	2023
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments	331,756	-	-	331,756
	2022
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments	313,454	-	-	313,454

Status of announcement

2022 Financial Information

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

2023 Financial Information

The figures and financial information for 2023 are extracted from the Annual Report and Accounts for the year ended 31 July 2023 and do not constitute the statutory accounts for the year. The 2023 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 2023 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

 

END