Half Yearly Results
SchroderJapan Growth Fund PLC
31 March 2008
Investment Objective
The Company's principal investment objective is to achieve capital growth from
an actively managed portfolio principally comprising securities listed on the
Japanese stock markets, with the aim of achieving growth in excess of the TSE
First Section Total Return Index over the longer term.
Directors
Jonathan Taylor (Chairman)
Jan Kingzett
Peter Lyon
John Scott
Yoshindo Takahashi
Advisers
Investment Manager and Company Secretary Registrar
Schroder Investment Management Limited Equiniti Limited
31 Gresham Street PO Box 28448
London EC2V 7QA Finance House
Telephone: 020 7658 3206 Orchard Brae
Edinburgh EH4 1WQ
Registered Office
Schroder Investment Management Limited Shareholder Helpline
31 Gresham Street 0871 384 2450
London EC2V 7QA www.shareview.co.uk
Bankers Solicitors
Schroder & Co. Limited Slaughter and May
31 Gresham Street One Bunhill Row
London EC2V 7QA London EC1Y 8YY
ING Bank N.V. Stockbrokers
60 London Wall Landsbanki Securities (UK) Limited
London EC2M 5TQ Beaufort House
15 St. Botolph Street
Custodian London EC3A 7QR
JP Morgan Chase Bank, N.A.
1 Chaseside
Bournemouth BH7 7DB
Independent Auditors
PricewaterhouseCoopers LLP
Hay's Galleria
1 Hay's Lane
London SE1 2RD
Financial Highlights
31 January 2008 31 July 2007 % Change
Total assets (£'000)* 143,558 156,292 (8.1)
Borrowings (£'000) (23,655) (20,666) 14.5
Shareholders' funds (£'000) 119,903 135,626 (11.6)
Shares in issue ('000) 125,008 125,008 -
Net Asset Value 95.92p 108.49p (11.6)
Share price 80.25p 99.25p (19.1)
Share price discount 16.34% 8.52% -
TSE First Section Total Return Index Level (in 7.54 8.30 (9.1)
sterling terms)**
Market capitalisation (£'000) 100,319 124,071 (19.1)
* Calculated in accordance with AIC guidance and comprises shareholders'
funds plus gearing used for investment purposes.
** Source: Thompson Financial Datastream.
Ten Largest Investments
As at 31 January 2008
Market
Value of Percentage of
Holdings Shareholders'
Company and Activities £'000 Funds
Toyota Motor 9,059 7.56
Automobile manufacturer
Mitsui 7,037 5.87
General trading company
Takeda Pharmaceutical 5,706 4.76
Pharmaceutical products
Tachihi Enterprise 5,052 4.21
Real estate investment
Sumitomo Mitsui Financial Group 4,496 3.75
Banking and other financial services
Bridgestone 4,090 3.41
Tyre manufacturer
Ricoh 3,936 3.28
Office equipment manufacturer
East Japan Railway 3,601 3.00
Railway company
Asahi Glass 3,570 2.98
Glass & related products
T&D Holdings 3,092 2.58
Life insurance products and services
Total 49,639 41.40
At 31 July 2007, the ten largest investments represented 35.95% of Shareholders'
Funds.
Sector Analysis
Analysis of the Portfolio Sector Distribution with the TSE First Section Index (%)
as at 31 January 2008
Valuation % of % of
£'000 Portfolio Index
Transportation Equipment 16,156 11.42 9.82
Banks 13,055 9.23 11.45
Electrical Appliances 12,544 8.86 13.90
Wholesale Trade 11,314 8.00 4.72
Chemicals 10,592 7.49 5.35
Real Estate 10,179 7.19 2.90
Machinery 8,045 5.69 4.32
Pharmaceutical 7,644 5.40 4.43
Insurance 6,959 4.92 2.62
Land Transportation 6,892 4.87 3.45
Retail Trade 6,654 4.70 3.11
Glass & Ceramic Products 5,295 3.74 1.22
Information & Communication 4,528 3.20 5.20
Construction 4,448 3.14 1.88
Rubber Products 4,090 2.89 0.53
Other Financing Business 2,990 2.11 1.42
Services 2,785 1.97 1.42
Non-ferrous Metals 2,333 1.65 1.21
Securities & Commodity Futures 2,195 1.55 1.61
Pulp & Paper 1,414 1.00 0.32
Other Products 1,390 0.98 2.79
Electric Power & Gas - - 4.42
Iron & Steel - - 3.28
Foods - - 2.98
Precision Instruments - - 1.40
Textiles & Apparels - - 0.96
Marine Transportation - - 0.87
Oil & Coal Products - - 0.69
Metal Products - - 0.59
Air Transportation - - 0.48
Mining - - 0.37
Warehousing & Harbour Transport - - 0.21
Fishery, Agriculture & Forestry - - 0.08
Total 141,502 100.00 100.00
Chairman's Statement
Performance
The period to 31 January 2008 remained disappointing for investors in Japanese
equities. The Japanese market fell 20.6% during the period in local currency
terms although, for sterling investors, this was partly offset by the
strengthening of the yen against sterling. Measured in sterling terms, the TSE
First Section Total Return Index produced a negative total return of 9.1% over
the period while the Company's net asset value per share decreased by 11.6% over
the same period (from 108.49p per share to 95.92p per share). Performance
measured against the peer group was more encouraging as the NAV out-performed
the AIC Japan peer group average over the period.
The Company's share price fell by 19.1% as the discount widened from 8.5% to
16.3%, reflecting a distinct deterioration in investor sentiment towards
Japanese equities.
Further comment on performance and investment policy may be found in the
Manager's Review.
Gearing Policy
During the period the Company maintained its total borrowing facility of Y6.5
billion while the amount drawn under the facility stood at Y5.0 billion
throughout the period. On expiry in April 2008, the facility will be reduced to
Y5.0 billion. All of the borrowings were obtained via a revolving credit
facility to provide flexibility.
As previously stated, the Directors encourage the Manager to use gearing to
create long-term value for shareholders but do not foresee gearing levels in
excess of 25% of shareholders' funds. 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 13.05%, and this had increased to 17.73% at 31
January 2008.
VAT on Management Fees
As the result of a legal action brought against HM Revenue & Customs (HMRC) it
has recently been resolved by the European Court of Justice that investment
management fees paid to investment managers by investment trust companies should
be exempt from VAT, thereby bringing them into line with unit trusts, open ended
investment companies (OEICs) and similar investment funds.
Following HMRC's acceptance of this decision, new UK legislation is expected to
be introduced specifically exempting UK investment trusts from paying VAT on
management fees. Although some investment trust companies may be entitled to
reclaim significant amounts of VAT paid over a number of years, your Company is
not expected to benefit materially because VAT on management fees paid by it has
already been reclaimed by Schroders and paid back to the Company. Your Board
will continue to monitor the situation.
Electronic Communications
At the Annual General Meeting in November, revised Articles of Association which
allow the Company to send certain information relating to the Company (for
example notices and accounts) by electronic means or by placing this information
on a Website, were adopted by the Company. Shareholders will receive a letter
with this Interim Report, offering them three options;
1. to view shareholder communications on the Company's Website; or,
2. to have notifications sent by email by registering online at
www.shareview.co.uk; or,
3. to continue to receive hard copies of shareholder communications by post. To
receive shareholder communications in this way, you must complete and return the
form by 5 p.m. on 30 April 2008.
We believe that this approach to communication with shareholders will help to
reduce both paper and costs.
Outlook
The Japanese stockmarket is now clearly out of favour and this is reflected in
the current discount at which our shares trade to their underlying asset value.
Japan is not immune from the financial storm that is causing turmoil in world
stock markets making the short term future difficult to read. There are risks of
further weakness from both global economic conditions and internal factors. We
take comfort, however, in our Manager's strategy and the perceived value in
current market prices.
Jonathan Taylor
Chairman
27 March 2008
Investment Manager's Review
Performance
The Company's net asset value fell 11.6% in sterling terms during the six months
to 31 January 2008.
The main cause has been an exceptionally weak stockmarket (down 20.6% in local
currency terms) from a combination of global economic weakness and a
self-inflicted crunch in Japan's housing and construction sectors. Offsetting
part of this for sterling investors has been a sharp rise of the yen, reversing
declines over the last 2-3 years.
Against this background defensive shares such as utilities, pharmaceuticals and
land transport performed relatively well. By contrast global cyclicals, the star
performers earlier in the year, came in at the bottom of the rankings, along
with most small-cap shares.
The decline in the Company's net asset value was 2.5% below that of the market,
primarily because of the Company's gearing. Excluding this, the underlying
investments performed close to the market, with holdings in defensive sectors
(e.g. East Japan Railway, Astellas Pharma and NTT) being offset by the some of
the small cap holdings.
Outlook
In past reviews we have mentioned the weakness of the yen, to levels that made
the currency seem very cheap. As mentioned above, this has partly corrected. The
issue now is whether the stockmarket - as out of favour today as the yen was a
year ago - is now similarly cheap, and capable of rising.
There are grounds for concern. The Japanese economy is flirting with recession,
with a relatively limited range of counter-cyclical options at policy makers'
disposal. The global backdrop remains unhelpful and corporate profit forecasts
for the next 12 months are likely to err on the side of caution. However, some
of this should be in market prices, with expectations for equities already at a
low ebb. In addition a range of valuation measures are at attractive levels.
Even if earnings forecasts are considered to be unreliable at this point in the
cycle, non-earnings related valuation measures such as price to book and
dividend yields are at levels which look cheap.
Whether this cheapness turns into share appreciation in the near future is less
clear. We take comfort from the valuations of the holdings in the portfolio,
however, and the Company remains geared (17.3% at the period end).
Investment Policy
Activity in the portfolio over the last six months has focussed on companies
whose share price has fallen excessively, e.g. Sompo Japan (an insurance company
that disclosed provisions on asset backed securities), and Central Japan
Railway, which fell sharply following an announcement that it would self-fund a
maglev project between Tokyo and Nagoya.
Going forward we expect to see opportunities to switch from defensive sectors to
the more depressed areas such as cyclicals. We also expect to add to the
existing small cap holdings, while buying more stocks with recovery potential
such as Haseko, a condominium developer bought recently on the view that current
housing weakness is mainly supply driven and likely to improve. Throughout, the
emphasis will be on using our Tokyo research department to continue to find
shares selling well below their intrinsic value, in expectation that this will
generate strong absolute returns over time.
Schroder Investment Management Limited
27 March 2008
Income Statement
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year
ended 31 January 2008 ended 31 January 2007 ended 31 July 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Losses on
investments held at
fair value - (12,902) (12,902) - (5,827) (5,827) - (9,138) (9,138)
Other currency
(losses)/gains - (2,742) (2,742) - 2,400 2,400 - 2,861 2,861
Income 2 1,072 - 1,072 920 - 920 2,080 - 2,080
Investment
management fee (728) - (728) (808) - (808) (1,565) - (1,565)
Administrative (201) - (201) (200) - (200) (390) - (390)
expenses
Net return/(losses)
before finance
costs
and taxation 143 (15,644) (15,501) (88) (3,427) (3,515) 125 (6,277) (6,152)
Interest payable
and
similar charges (152) - (152) (125) - (125) (244) - (244)
Net losses on
ordinary activities
before taxation (9) (15,644) (15,653) (213) (3,427) (3,640) (119) (6,277) (6,396)
Taxation on
ordinary
activities (70) - (70) (62) - (62) (142) - (142)
Net losses on
ordinary
activities after
taxation
attributable to
equity
shareholders (79) (15,644) (15,723) (275) (3,427) (3,702) (261) (6,277) (6,538)
Net losses per
ordinary share 4 (0.06)p (12.51)p (12.57)p (0.22)p (2.74)p (2.96)p (0.21)p (5.02)p (5.23)p
The Total column of this statement is the profit and loss account of the
Company. The Revenue and Capital columns are both provided in accordance with
guidance issued by The Association of Investment Companies. The Company has no
recognised gains or losses other than those disclosed in the Income Statement
and the Reconciliation of Movements in Shareholders' Funds. Accordingly no
Statement of Total Recognised Gains and Losses is presented.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued in the period.
The Notes form an integral part of these accounts.
Reconciliation of Movements in Shareholders' Funds
For the six months ended 31 January 2008 (Unaudited)
Called up Share Share Warrant
Share premium purchase exercise Capital Revenue
capital account reserve reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 July 2007 12,501 7 97,205 3 33,847 (7,937) 135,626
Net losses from ordinary
activities - - - - (15,644) (79) (15,723)
At 31 January 2008 12,501 7 97,205 3 18,203 (8,016) 119,903
For the six months ended 31 January 2007 (Unaudited)
Called up Share Share Warrant
Share premium purchase exercise Capital Revenue
capital account reserve reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 July 2006 12,501 7 97,205 3 40,124 (7,676) 142,164
Net losses from ordinary
activities - - - - (3,427) (275) (3,702)
At 31 January 2007 12,501 7 97,205 3 36,697 (7,951) 138,462
For the year ended 31 July 2007 (Audited)
Called up Share Share Warrant
Share premium purchase exercise Capital Revenue
capital account reserve reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 July 2006 12,501 7 97,205 3 40,124 (7,676) 142,164
Net losses from ordinary
activities - - - - (6,277) (261) (6,538)
At 31 July 2007 12,501 7 97,205 3 33,847 (7,937) 135,626
The Notes form an integral part of these accounts.
Balance Sheet
(Unaudited) (Unaudited) (Audited)
At 31 January At 31 January At 31 July
2008 2007 2007
Notes £'000 £'000 £'000
Fixed assets
Investments held at fair value through
profit or loss 141,502 159,838 153,014
Current assets
Debtors 912 404 2,810
Cash at bank and short-term deposits 2,236 2,169 3,015
3,148 2,573 5,825
Current liabilities
Creditors - amounts falling due
within one year 5 (24,747) (23,949) (23,213)
Net current liabilities (21,599) (21,376) (17,388)
Net assets 119,903 138,462 135,626
Capital and reserves
Called up share capital 12,501 12,501 12,501
Share premium account 7 7 7
Share purchase reserve 97,205 97,205 97,205
Warrant exercise reserve 3 3 3
Capital reserves 18,203 36,697 33,847
Revenue reserve (8,016) (7,951) (7,937)
Equity shareholders' funds 119,903 138,462 135,626
Net asset value per ordinary share 6 95.92p 110.76p 108.49p
The Notes form an integral part of these accounts.
Cash Flow Statement
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year ended
ended 31 January ended 31 January 31 July
2008 2007 2007
Net cash inflow/(outflow) from operating activities 144 (100) 129
Net cash outflow from servicing of finance (149) (124) (239)
Total tax paid (68) (63) (142)
Net cash (outflow)/inflow from investment activities (953) 1,342 4,467
Net cash (outflow)/inflow before financing (1,026) 1,055 4,215
Net cash outflow from financing - (3,980) (6,180)
Net cash outflow (1,026) (2,925) (1,965)
Reconciliation of net cash flow to movement in net debt
Net cash outflow (1,026) (2,925) (1,965)
Movement in borrowings - 3,980 6,180
Movement in net debt resulting from cash flows (1,026) 1,055 4,215
Net debt at 1 August (17,651) (24,727) (24,727)
Exchange (losses)/gains on currency, loans and cash (2,742) 2,400 2,861
balances
Net debt carried forward (21,419) (21,272) (17,651)
The Notes form an integral part of these accounts.
Notes to the Accounts
1. Accounting Policies and Responsibility Statement
Directors confirm that, to the best of their knowledge, this set of condensed
financial statements has been prepared in accordance with the United Kingdom
Generally Accepted Accounting Practice (UK GAAP) and with the Statement of
Recommended Practice: Financial Statements of Investment Trust Companies (SORP)
issued in January 2003 and revised in December 2005 and the Interim Management
Report in the form of the Chairman's Statement and Investment Manager's Review
includes a fair review of the information required by DTR 4.2.7 and 4.2.8 of the
FSA's Disclosure and Transparency Rules.
The financial information for each of the six month periods ended 31 January
2008 and 31 January 2007 comprises non-statutory accounts within the meaning of
Section 240 of the Companies Act 1985. The financial information for the year
ended 31 July 2007 has been extracted from published accounts that have been
delivered to the Registrar of Companies and on which the report of the auditors
was unqualified. The interim accounts have been prepared on the same basis as
the annual accounts.
The Company's accounting policies have not varied from those described in the
Report and Accounts for the year to 31 July 2007.
2. Income
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year
ended ended ended
31 January 2008 31 January 2007 31 July 2007
£'000 £'000 £'000
Income from investments:
Overseas dividends 1,006 891 2,025
Interest on deposits 45 29 55
Stock lending fee income 21 - -
1,072 920 2,080
3. Management fees and interest payable
The investment management fee and finance costs on borrowings for investment
purposes are apportioned 100% to the revenue return.
4. Losses per Ordinary share
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year ended
ended ended
31 January 2008 31 January 2007 31 July 2007
Revenue losses (£'000) (79) (275) (261)
Capital losses (£'000) (15,644) (3,427) (6,277)
Total (£'000) (15,723) (3,702) (6,538)
Weighted average number of
ordinary shares in issue 125,008,200 125,008,200 125,008,200
Revenue loss (0.06)p (0.22)p (0.21)p
Capital loss (12.51)p (2.74)p (5.02)p
Total loss (12.57)p (2.96)p (5.23)p
5. Creditors: Amounts falling due within one year
Included within creditors is the following loan:
(Unaudited) (Unaudited) (Audited)
At 31 January 2008 At 31 January 2007 At 31 July 2007
Yen 5,000,000,000 5,550,000,000 5,000,000,000
Equivalent to £23,655,000 £23,441,000 £20,666,000
The Company has a loan facility of Yen 6.5 billion with ING Bank N.V. This
facility has a revolving 364 day term, is chargeable at a floating rate linked
to the Yen LIBOR, and is unsecured.
6. Net asset value per ordinary share
(Unaudited) (Unaudited) (Audited)
At 31 January 2008 At 31 January 2007 At 31 July 2007
Net assets attributable to
ordinary shareholders (£'000) 119,903 138,462 135,626
Ordinary shares in issue at end of 125,008,200 125,008,200 125,008,200
period
Net asset value per ordinary share 95.92p 110.76p 108.49p
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