Half-year Report

RNS Number : 7320B

SchroderJapan Growth Fund PLC

06 April 2017

 

6 April 2017

Half Year Report

Schroder Japan Growth Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 January 2017 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document 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/7320B_-2017-4-5.pdf 

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Ria Vavakis

Schroder Investment Management Limited                                    

Tel: [phone]

LEI number: 549300SSPK3AXNJOC673

Half Year Report and Accounts for the six months ended 31 January 2017

Interim Management Report

Chairman's Statement

Performance

The six-month period to 31 January 2017 has seen improved performance from the Japanese stock market, with the benchmark producing a total return of 11.7%. In addition, the Company comfortably outperformed the benchmark during the period, producing a total return of 17.6%. As investor sentiment towards Japan improved, the discount narrowed from 10.7% at the start of the period to 8.7% at its close and the share price produced a total return of 20.5%.

Further performance details are set out in the Manager's Review on page 3 of the Half Year Report and Accounts for the six months ended 31 January 2017.

Gearing policy

The Company has in place a ¥6 billion term loan expiring in 2019 and a ¥1 billion revolving credit facility, the latter which remained undrawn as at 31 January 2017. The gearing continues to be operated within the limits agreed by the Board. At the beginning of the period, the gearing (borrowings less cash expressed as a percentage of net assets) stood at 12.1% and the level had decreased to 10.7% at 31 January 2017.

Outlook

The Company achieved a small but historically important moment last month, when the share price hit £2 for the first time. That it has taken over two decades for the price to double is hardly a triumph for Japan's stock market; the Manager has added value relative to the local index, but otherwise it is a reminder of how long the economy has been entangled in the after-effects of the 1980-90s boom/bust.

How long will it take for the share price to double again? So much of the appeal of the market now lies in the word 'potential' - what could happen to profits if inflation and economic growth return to more 'normal' levels, what could happen to returns on equity if companies continue with their newfound enthusiasm for 'shareholder value', or what could happen if local investors commit material amounts to the market? Not all of these will happen soon, if at all, and there are obvious challenges internationally, but Japan's appeal today is that much of its potential is in its own hands.

Jonathan Taylor

Chairman

5 April 2017

Manager's Review

Market background

The market rose a healthy 16.2% in local currency as it gradually recovered from the macro shocks of the first half of 2016 (negative interest rates and Brexit) and then received additional impetus from the US presidential election, which engendered optimism about global growth. Events in the US also served as a trigger to stem the rise in the yen against sterling and the small depreciation of the currency meant that the market's sterling return was a lower 11.7%.

The economic backdrop improved internationally and domestically. Economic policy was also largely supportive with announcements of a fiscal package by the government and a new monetary policy framework by the Bank of Japan. This framework has at its core "yield curve control" which fixes 10 year bond yields at around 0%. The fact that negative short term interest rates (an unpopular policy) were not taken deeper into negative territory was positive for sentiment. At the same time fixing long term interest rates at a time of rising US dollar yields had the effect of reversing the yen's appreciation and, as a result, improving prospects for corporate profits.

The turnaround in economic and interest rate expectations had a marked impact on sector and style preferences within the market over the six months. Specifically, having lagged over the previous 12 months as "risk off" sentiment dominated, cyclicals and financials rebounded strongly and the previously popular domestic defensive sectors reversed course. This was also reflected in value outperforming growth and the broader market. For example energy, financial and shipping sectors were amongst the best performing sectors and pharmaceuticals and food were amongst the worst.

The Company's NAV total return was 17.6% in sterling, significantly ahead of the benchmark's 11.7% rise. Gearing contributed to outperformance given the strong underlying market. Stock selection was also beneficial, especially holdings in financials and energy, which more than offset negative contributions in telecoms and pharmaceuticals.

Activity

Profits were taken in some cyclicals and technology holdings such as Nitto Denko, Hitachi Hi-Tec and Sumitomo Heavy Industries. Within the trading company sector, where the exposure is overweight, we switched the holding in Sumitomo Corporation into Itochu. Valuations were similarly cheap but Itochu had less risk of impairment losses. A small position in Topcon was sold off and new positions started in Recruit Holdings (operator of staffing and marketing websites), Jafco (venture capital specialist) and HIS (travel agent).

Outlook

An upturn in global growth is historically positive for the Japanese stock market. This time round seems no different with the important caveat that improved sentiment is in part due to President Trump's policies, implementation of which carries above average uncertainty. More tantalising for long term investors in Japan is the prospect of a sustained emergence from deflation which four years of Abenomics has still failed to achieve. There are grounds for cautious optimism here given developments in the labour market. Economic policy is broadly supportive of the stock market and its direction is characterised by greater consistency than is apparent in other developed economies. Meanwhile company profits are benefiting from the manufacturing cycle and weaker yen after a challenging 2016. The direction of corporate governance is positive notwithstanding a few high profile examples of the opposite. By and large Japan's stock market rally has been matched by improved profits with the result that valuations, whilst not outstandingly cheap in aggregate, cannot be described as especially stretched either. So whilst risks exist in terms of the evolution of President Trump's policies, their impact on the exchange rate and possible policy errors in Japan, on balance prospects appear favourable and, reflecting this, the Company is moderately geared (10.7% at the end of January 2017).

Investment policy

In last year's interim review we wrote that we were finding most attractive valuations in cyclical parts of the market, without having a clear view of what the catalyst might be for these areas to outperform. It remains the case that we prefer cyclicals although they are less cheap and more widely recognised as benefiting from current developments. However, whereas last year we found it near impossible to find attractive valuations in low volatility, domestic defensive areas, this is less so now and we are making some additions to holdings in pharmaceuticals and retail. Within cyclicals we have taken profits in some of the internationally exposed high flyers where we are less confident of the quality of the businesses long term and are favouring higher quality cyclicals or more domestically facing names. Real Estate is an example of the latter and a sector which has continued to lag. We are maintaining our overweight position in financials, favouring insurance, in the belief that evolution of the slope of the yield curve will be beneficial.

Schroder Investment Management Limited

5 April 2017

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following risk categories: strategic; investment management; financial and currency; gearing and leverage; accounting, legal and regulatory; custody; and service provider. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 14 and 15 of the Company's published Annual Report and Accounts for the year ended 31 July 2016. These risks and uncertainties have not materially changed during the six months ended 31 January 2017.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 16 of the published Annual Report and Accounts for the year ended 31 July 2016, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 January 2017.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and updated in January 2017 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Income Statement

for the six months ended 31 January 2017 (unaudited)

	(Unaudited) for the six months ended 31 January 2017			(Unaudited) for the six months ended 31 January 2016			(Audited) for the year ended 31 July 2016
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments held at fair value through profit or loss	-	37,784	37,784	-	(6,912)	(6,912)	-	25,692	25,692
Net foreign currency gains/(losses)	-	953	953	-	(3,698)	(3,698)	-	(11,102)	(11,102)
Income from investments	2,763	-	2,763	2,138	-	2,138	5,588	-	5,588
Other interest receivable and similar income	-	-	-	-	-	-	1	-	1
Gross return/(loss)	2,763	38,737	41,500	2,138	(10,610)	(8,472)	5,589	14,590	20,179
Investment management fee	(312)	(729)	(1,041)	(254)	(593)	(847)	(514)	(1,198)	(1,712)
Administrative expenses	(265)	-	(265)	(289)	-	(289)	(531)	-	(531)
Net return/(loss) before finance costs and taxation	2,186	38,008	40,194	1,595	(11,203)	(9,608)	4,544	13,392	17,936
Finance costs	(56)	(131)	(187)	(36)	(84)	(120)	(87)	(203)	(290)
Net return/(loss) on ordinary activities before taxation	2,130	37,877	40,007	1,559	(11,287)	(9,728)	4,457	13,189	17,646
Taxation on ordinary activities (note 3)	(276)	-	(276)	(213)	-	(213)	(559)	-	(559)
Net return/(loss) on ordinary activities after taxation	1,854	37,877	39,731	1,346	(11,287)	(9,941)	3,898	13,189	17,087
Return/(loss) per share (note 4)	1.48p	30.30p	31.78p	1.08p	(9.03)p	(7.95)p	3.12p	10.55p	13.67p

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 items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.

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

Statement of Changes in Equity

for the six months ended 31 January 2017 (unaudited)

	Called-up share capital £'000	Share premium £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 July 2016	12,501	7	3	97,205	112,881	4,091	226,688
Net return on ordinary activities	-	-	-	-	37,877	1,854	39,731
Dividend paid in the period (note 5)	-	-	-	-	-	(3,500)	(3,500)
At 31 January 2017	12,501	7	3	97,205	150,758	2,445	262,919

for the six months ended 31 January 2016 (unaudited)

	Called-up share capital £'000	Share premium £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 July 2015	12,501	7	3	97,205	99,692	2,693	212,101
Net (loss)/return on ordinary activities	-	-	-	-	(11,287)	1,346	(9,941)
Dividend paid in the period (note 5)	-	-	-	-	-	(2,500)	(2,500)
At 31 January 2016	12,501	7	3	97,205	88,405	1,539	199,660

for the year ended 31 July 2016 (audited)

	Called-up share capital £'000	Share premium £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 July 2015	12,501	7	3	97,205	99,692	2,693	212,101
Net return on ordinary activities	-	-	-	-	13,189	3,898	17,087
Dividend paid in the year (note 5)	-	-	-	-	-	(2,500)	(2,500)
At 31 July 2016	12,501	7	3	97,205	112,881	4,091	226,688

Statement of Financial Position

at 31 January 2017 (unaudited)

	(Unaudited) At 31 January 2017 £'000	(Unaudited) At 31 January 2016 £'000	(Audited) At 31 July 2016 £'000
Fixed assets
Investments held at fair value through profit or loss	291,316	229,615	254,114
Current assets
Debtors	579	1,039	1,077
Cash at bank and in hand	14,235	5,301	16,565
	14,814	6,340	17,642
Current liabilities
Creditors: amounts falling due within one year	(847)	(1,357)	(973)
Net current assets	13,967	4,983	16,669
Total assets less current liabilities	305,283	234,598	270,783
Creditors: amounts falling due after more than one year (note 6)	(42,364)	(34,938)	(44,095)
Net assets	262,919	199,660	226,688
Capital and reserves
Called-up share capital (note 7)	12,501	12,501	12,501
Share premium	7	7	7
Warrant exercise reserve	3	3	3
Share purchase reserve	97,205	97,205	97,205
Capital reserves	150,758	88,405	112,881
Revenue reserve	2,445	1,539	4,091
Total equity shareholders' funds	262,919	199,660	226,688
Net asset value per share (note 8)	210.32p	159.72p	181.34p

Notes to the Accounts

1.         Financial statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31 July 2016 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in November 2014 and updated in January 2017.

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

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 July 2016.

3.         Taxation on ordinary activities

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

4.         Return/(loss) per share

	(Unaudited) Six months ended 31 January 2017 £'000	(Unaudited) Six months ended 31 January 2016 £'000	(Audited) Year ended 31 July 2016 £'000
Revenue return	1,854	1,346	3,898
Capital return/(loss)	37,877	(11,287)	13,189
Total return/(loss)	39,731	(9,941)	17,087
Weighted average number of shares in issue during the period	125,008,200	125,008,200	125,008,200
Revenue return per share	1.48p	1.08p	3.12p
Capital return/(loss) per share	30.30p	(9.03)p	10.55p
Total return/(loss) per share	31.78p	(7.95)p	13.67p

5.         Dividends paid

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	31 January	31 January	31 July
	2017	2016	2016
	£'000	£'000	£'000
2016 final dividend paid of 2.80p (2015: 2.00p)	3,500	2,500	2,500

No interim dividend has been declared in respect of the year ending 31 July 2017 (2016: nil).

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

	(Unaudited)	(Unaudited)	(Audited)
	31 January	31 January	31 July
	2017	2016	2016
	£'000	£'000	£'000
Bank loan	42,364	34,938	44,095

The bank loan is a yen 6.0 billion three year term loan with Scotiabank, expiring on 18 January 2019, and carrying a fixed interest rate of 0.82% per annum.

7.         Called-up share capital

	(Unaudited)	(Unaudited)	(Audited)
	31 January	31 January	31 July
	2017	2016	2016
	£'000	£'000	£'000
Ordinary shares allotted, called up and fully paid: 125,008,200 ordinary shares of 10p each	12,501	12,501	12,501

8.         Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue of 125,008,200 (31 January 2016 and 31 July 2016: same).

9.         Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 January 2017, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (31 July 2016 and 31 January 2016: same).

10.       Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the end of the half year and have not noted any significant events which have not been reflected in the financial statements.

 

END

 

 

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