Half Yearly Report

RNS Number : 2095B

SchroderJapan Growth Fund PLC

28 March 2013

 

Half Yearly Report

Schroder Japan Growth Fund plc (the "Company") hereby submits its Half Yearly Report for the period ended 31 January 2013 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

The Half Yearly 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 http://www.schroderjapangrowthfund.com. Please click on the following link to view the document:

The Company has submitted the hard copy format of its Half Yearly Report to the National Storage Mechanism and it will shortly be available for inspection at www.Hemscott.com/nsm.do.

Enquiries:

John Spedding

Schroder Investment Management Limited                                    

Tel: [phone]

28 March 2013

Chairman's Statement

Performance

The six-month period to 31 January 2013 was a very positive one for the Japanese market which rose by 29.1% in local currency terms. The return for sterling investors was reduced by a significant depreciation of the yen compared with sterling during the period so that the net effect was that, measured in sterling terms, the TSE First Section Total Return Index produced a return of 8.7% over the period. The Company's net asset value again out-performed the Index, increasing by 10.8% (from 100.62p per share to 111.48p per share).

The Company's share price increased by 16.9%, the discount narrowing from 14.5% to 9.8% as sentiment towards Japan markedly improved during the period.

Gearing Policy

During the period the Company maintained its borrowings at ¥3 billion. All of the borrowings were obtained via a revolving secured credit facility to provide flexibility. The gearing continues to be operated within the limits agreed by the Board. At the beginning of the period, the effective gearing ratio (borrowings less cash and short-term deposits as a percentage of net assets) was 10.9% and the level had slightly decreased to 10.4% at 31 January 2013.

Outlook

After the sharp spike in the market, the crucial judgement today has to be whether the new administration under Prime Minister Abe is capable of making structural improvements in Japan's long-term growth path. If it can, the potential for the market to rise further is substantial, with one possible catalyst being that most domestic and foreign investors have room in their portfolios for more Japanese equities.

Having said that, the market has had many false dawns over the last 20 years, and the challenge facing the administration should not be underestimated. Even on the most optimistic view it will take a long time to see how successful the new policies are. In the meantime, shareholders at least have the reassurance that the Investment Manager believes that the portfolio holdings - despite the bounce in share prices - remain attractively valued.

Jonathan Taylor

Chairman

28 March 2013

Investment Manager's Review

Market Background

The Japanese stock market rose 29.1% in yen terms during the six months ended January 2013. The yen depreciated significantly over the period with the result that in sterling terms the return was a more modest 8.7%.

The sharp rise in the market occurred in the second half of the period with trading prior to then subdued. The election of the opposition Liberal Democratic Party and Mr Abe as prime minster in December on an explicitly reflationary economic platform changed that. Since then the market has begun to discount a more reflationary policy agenda and, partly as a consequence, a weaker yen. Sentiment also benefitted from a more benign external backdrop and avoidance of tail risks surrounding the euro and the fiscal cliff in the US.

Sector trends in the market largely reflected this shift in economic policy and market sentiment. The top performers were the market-sensitive (and previous laggard) sectors such as financials, steel and property. By contrast more defensive areas such as retail and telecoms lagged the market. Larger cap tended to outperform small and mid sized companies.

The Company's NAV rose 10.8% over the period, 2.1% outperformance against the benchmark. Net gearing averaging around 11% was beneficial given the strong environment. There were strongly positive stock selection contributions in chemicals, telecoms and services, with selection in the latter two benefitting from bid activity in Jupiter Telecom and Accordia Golf. This was offset mainly by being overweight retail and by stock selection within that sector. Stock selection within the auto sector also detracted through not owning the most currency sensitive names.

Outlook

Given where it started the market's valuation is by no means stretched, notwithstanding the sharp rally. The coincidence of his own election, the change of leadership at the Bank of Japan and the Upper House election in the summer make the chances of Mr Abe being able to implement his policies significantly greater than his recent predecessors. In the short term the market is likely to continue to respond positively. Longer term the success of what is now being called "Abenomics" hinges more on his preparedness to grasp the opportunity to effect meaningful structural change. Some of this change is controversial in a domestic context but ultimately necessary if Japan's underlying rate of economic growth is to accelerate.

Investment Policy

Policy is moderately pro-cyclical but given the recovery in share prices, additions recently have only been to laggards, e.g. trading houses and selected technology stocks. Within financials additions have been made to the insurance holdings where valuations are attractive and catalysts for re-rating exist. Exposure to currency movements is broadly neutral, with overweight positions in autos offset by underweight positions in consumer electronics. We have added to existing positions in retail. The sector has been out of favour but should eventually benefit if inflationary expectations do take hold. We have taken some profits in areas where the market's response to the perceived benefits of "Abenomics" seemed excessive, such as construction.

Net gearing was 10.4% at the end of January 2013, broadly unchanged compared to July 2012.

Schroder Investment Management Limited

28 March 2013

Interim Management Report

Principal Risks and Uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: financial risk; gearing; strategic risk and accounting, legal and regulatory risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on page 11 of the Company's published Annual Report and Accounts for the year ended 31 July 2012. These risks and uncertainties have not materially changed during the six months ended 31 January 2013.

Going Concern

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

Related Party Transactions

Details of transactions with the manager can be found on page 32 of the Company's published Annual Report and Accounts for the year ended 31 July 2012. There have been no transactions with related parties during the six months ended 31 January 2013.

Directors' Responsibility Statement

The Directors confirm that, to the best of their knowledge, this condensed set of 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 January 2009. The Interim Management Report as set out above in the form of the Chairman's Statement and Investment Manager's Review include a fair review of the information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.

Ten Largest Investments

As at 31 January 2013 Company and Activities	Market value of holding £'000	% of shareholders' funds
Toyota Motor	8,809	6.32
Automobile manufacturer
Mitsui	5,965	4.28
General trading company
SK Kaken	5,499	3.95
Paint manufacturer for construction
East Japan Railway	4,869	3.49
Railway company
Bridgestone	4,747	3.41
Automobile tyre manufacturer
Sumitomo Mitsui Financial	4,616	3.31
Banking and other financial services provider
Hi-Lex	4,388	3.15
Automobile cables manufacturer
NKSJ Holdings	3,718	2.67
Life and non-life insurance provider
KDDI	3,666	2.63
Telecommunication services provider
Seven & I Holdings	3,538	2.54
Retail store operator
Total	49,815	35.75
At 31 July 2012, the ten largest investments represented 35.77% of shareholders' funds.

Income Statement

	(Unaudited)			(Unaudited)			(Audited)
	For the six months ended 31 January 2013			For the six months ended 31 January 2012			For the year ended 31 July 2012
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss
	-	10,756	10,756	-	(2,035)	(2,035)	-	(5,796)	(5,796)
Net foreign currency gains/(losses)
	-	2,461	2,461	-	(745)	(745)	-	(438)	(438)
Income from investments	1,555	-	1,555	1,591	-	1,591	3,707	-	3,707
Gross return/(loss)	1,555	13,217	14,772	1,591	(2,780)	(1,189)	3,707	(6,234)	(2,527)
Investment management fee
	(219)	(511)	(730)	(681)	-	(681)	(1,376)	-	(1,376)
Administrative expenses	(225)	-	(225)	(199)	-	(199)	(409)	-	(409)
Net return/(loss) before finance costs and taxation
	1,111	12,706	13,817	711	(2,780)	(2,069)	1,922	(6,234)	(4,312)
Finance costs	(39)	(91)	(130)	(154)	-	(154)	(298)	-	(298)
Net return/(loss) on ordinary activities before taxation
	1,072	12,615	13,687	557	(2,780)	(2,223)	1,624	(6,234)	(4,610)
Taxation (note 3)	(109)	-	(109)	(111)	-	(111)	(259)	-	(259)
Net return/(loss) on ordinary activities after taxation
	963	12,615	13,578	446	(2,780)	(2,334)	1,365	(6,234)	(4,869)
Return/(loss) per share (note 4)
	0.77p	10.09p	10.86p	0.36p	(2.22)p	(1.86)p	1.09p	(4.99)p	(3.90)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 Total column includes all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ("STRGL"). For this reason a STRGL has not been presented.

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

Reconciliation of Movements in Shareholders' Funds

For the six months ended 31 January 2013 (unaudited)

	Called-up		Share	Warrant
	share	Share	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2012	12,501	7	97,205	3	20,378	(4,309)	125,785
Net return on ordinary
activities	-	-	-	-	12,615	963	13,578
At 31 January 2013	12,501	7	97,205	3	32,993	(3,346)	139,363

For the six months ended 31 January 2012 (unaudited)

	Called-up		Share	Warrant
	share	Share	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2011	12,501	7	97,205	3	26,612	(5,674)	130,654
Net (loss)/return on
ordinary activities	-	-	-	-	(2,780)	446	(2,334)
At 31 January 2012	12,501	7	97,205	3	23,832	(5,228)	128,320

For the year ended 31 July 2012 (audited)

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

Balance Sheet

		(Unaudited)	(Unaudited)	(Unudited)
		At 31 January	At 31 January	At 31 July
		2013	2012	2012
		£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		154,724	143,330	139,932
Current assets
Debtors		619	365	203
Cash and short-term deposits		6,261	10,307	10,763
		6,880	10,672	10,966
Current liabilities
Creditors: amounts falling due within one year		(22,241)	(25,682)	(25,113)
Net current liabilities		(15,361)	(15,010)	(14,147)
Net assets		139,363	128,320	125,785
Capital and reserves
Called-up share capital		12,501	12,501	12,501
Share premium		7	7	7
Share purchase reserve		97,205	97,205	97,205
Warrant exercise reserve		3	3	3
Capital reserves		32,993	23,832	20,378
Revenue reserve		(3,346)	(5,228)	(4,309)
Total equity shareholders' funds		139,363	128,320	125,785
Net asset value per share (note 5)		111.48p	102.65p	100.62p

Cash Flow Statement

		(Unaudited)	(Unaudited)	(Audited)
		For the six months	For the six months	For the year
		ended 31 January	ended 31 January	ended 31 July
		2013	2012	2012
		£'000	£'000	£'000
Net cash inflow from operating activities (note 6)		583	344	1,533
Net cash outflow from servicing of finance		(140)	(152)	(303)
Taxation paid		(110)	(110)	(257)
Net cash outflow from investment activities		(3,514)	(833)	(1,159)
Net cash outflow in the period		(3,181)	(751)	(186)
Reconciliation of net cash flow to movement in net debt
Net cash outflow in the period		(3,181)	(751)	(186)
Exchange movements		2,461	(745)	(438)
Changes in net debt arising from cash flows		(720)	(1,496)	(624)
Net debt at the beginning of the period		(13,753)	(13,129)	(13,129)
Net debt at the end of the period		(14,473)	(14,625)	(13,753)
Represented by:
Cash and short-term deposits		6,261	10,307	10,763
Bank loan		(20,734)	(24,932)	(24,516)
Net debt		(14,473)	(14,625)	(13,753)

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 2012 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

(a) 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 in January 2009.

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

The accounting policies applied to these interim accounts are consistent with those applied in the accounts for the year ended 31 July 2012.

(b) Accounting estimates

In order better to reflect the increasing significance of income as part of total return, the Board has, with effect from 1 August 2012, adopted an allocation policy whereby a proportion of indirect costs are allocated to the capital account. Based on the Board's expected long-term split of returns in the form of capital gains and income respectively, from the Company's investment portfolio, it has determined that 70% of the management fee and finance costs will be allocated to capital and the remaining 30% to revenue. The effect of this change on the Income Statement for the half-year ended 31 January 2013, is to increase net revenue return after taxation by £602,000 and to reduce net capital return by the same amount. Total net return after taxation is unaffected by the change. The comparative figures have not been restated.

3. Taxation

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)	(Unaudited)	(Audited)
	For the six months ended	For the six months ended	For the year ended
	31 January 2013	31 January 2012	31 July 2012
	£'000	£'000	£'000
Revenue return	963	446	1,365
Capital return/(loss)	12,615	(2,780)	(6,234)
Total return/(loss)	13,578	(2,334)	(4,869)
Weighted average number of Ordinary shares in issue during the period
	125,008,200	125,008,200	125,008,200
Revenue return per share	0.77p	0.36p	1.09p
Capital return/(loss) per share	10.09p	(2.22)p	(4.99)p
Total return/(loss) per share	10.86p	(1.86)p	(3.90)p

5. Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 January 2013 of 125,008,200 (31 January 2012 and 31 July 2012: same).

6. Reconciliation of net return/(loss) on ordinary activities before finance costs and taxation to net cash inflow from operating activities           

	(Unaudited)	(Unaudited)	(Audited)
	For the six months ended	For the six months ended	For the year ended
	31 January 2013	31 January 2012	31 July 2012
	£'000	£'000	£'000
Total return/(loss) on ordinary activities before finance costs and taxation	13,817	(2,069)	(4,312)
Less capital (return)/loss on ordinary activities before finance costs and taxation	(12,706)	2,780	6,234
Less management fee charged to capital	(511)	-	-
Decrease/(increase) in accrued dividends and interest receivable	16	(9)	(35)
(Increase)/decrease in other debtors	(24)	1	(2)
Decrease in accrued expenses	(9)	(359)	(352)
Net cash inflow from operating activities	583	344	1,533

 

END

 

 

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