Annual Financial Report

RNS Number : 3076R

Baillie Gifford Japan Trust PLC

24 October 2013

 

THE BAILLIE GIFFORD JAPAN TRUST PLC

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 August 2013 of The Baillie Gifford Japan Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.

The Annual Report and Financial Statements for the year ended 31 August 2013 including the Notice of Annual General Meeting is also available on Baillie Gifford Japan's page of the Baillie Gifford website at:

www.japantrustplc.co.uk 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 August 2013 which require to be published by DTR 4.1 is set out on the following pages.

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

Baillie Gifford & Co

Company Secretaries

24 October 2013

THE BAILLIE GIFFORD JAPAN TRUST PLC

Chairman's Statement

It has been an excellent year for your Company. Over the year net asset value (after deducting borrowings at fair value) rose by 48.9%, compared with a gain of 26.7% in the benchmark TOPIX index (in sterling terms) total return and the share price increased by 61.4%.

Stock selection was excellent and gearing contributed to the returns. Further performance details can be found in the Managers' Report.

Investment income was slightly lower over the year and expenses increased, largely because of the legal costs and arrangement fee for the new loan facility referred to below.

Overall revenue gain per share was 0.22p. No dividend will be paid.

It is also pleasing to note that the Managers have managed to achieve five consecutive years of net asset growth, with compound annual returns of 12.5% versus 4.6% for the benchmark. Ten year relative and absolute performance figures remain excellent.

Management Fee

Earlier this year, the Company was able to agree a reduced management fee with Baillie Gifford. With effect 1 April 2013, the Company's annual management fee payable to its Investment Managers and Secretaries, Baillie Gifford & Co, was reduced from a flat rate of 1% of net assets to 0.95% on the first £50m of net assets and 0.65% on the remainder. It is important to ensure that potential investors are not deterred from investing based on cost. The new fee structure ensures that the Company compares favourably versus other open and closed ended funds.

Gearing

Net gearing amounted to 19% of shareholders' funds at the start of the year and ended the year at 16%. A new fixed rate term loan facility was arranged. A tranche of this replaced a maturing loan and increased the outstanding debt. Further tranches are due to be drawn down as detailed in note 6. Longer term loans than hitherto have become available and combined with the low cost of yen loans means we believe that borrowing to invest in Japanese equities is a sensible strategy. Gross borrowings increased to 5.4bn yen.

Currency Hedging

As I stated two years ago, it is extremely difficult to predict currency movements and currencies can appear cheap or dear for long periods of time.  Your Board has therefore decided that it will not engage in currency hedging.

Share Capital

The Company did not exercise its share buy back powers during the year; however, your Board believes that it is important that the Company retains this power and so, at the Annual General Meeting, it is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury for cash on a non-pre-emptive basis. Shares are only issued/reissued at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders.

During the year to 31 August 2013, 3,096,750 shares were issued at a premium to net asset value raising £10,063,190. The Directors are seeking 10% share issuance authority at the Annual General Meeting. The Directors will only issue shares at a premium to net asset value. This authority will expire at the conclusion of the Annual General Meeting in November 2014.

Continuance Vote

Our shareholders have the right to vote annually on whether the Company should continue in business, and will again have the opportunity to do so at the Annual General Meeting to be held on 27 November 2013.

Last year the Company received support for its continuance from 95.2% of those voting. Your Directors are of the opinion that there remain attractive opportunities in selected, well-run companies.

Given the long-term favourable outlook, my fellow Directors and I intend where possible to vote our own shareholdings in favour of the resolution and hope that shareholders will feel disposed to do likewise.

Regulation

The Board has been in discussions with the Managers on how best to address the requirements of the EU Alternative Investment Fund Managers Directive. This came into law in July 2013 although the Company has until July 2014 to comply fully with the legislation. The Directive requires the Company to appoint an Alternative Investment Fund Manager (AIFM) who will be responsible for portfolio and risk management and will be regulated under the Directive. Having taken external advice, the Board is currently of the view that Baillie Gifford is best positioned to act as the Company's AIFM. One of the consequences of the Directive is that the Company will have to appoint a depositary. I am afraid that this will cost the Company money with no obvious benefit in return but there is no alternative.

Board

Your Board is committed to high standards of corporate governance. In particular it recognises the need to have a balance of skills, experience and length of service. It also believes that membership of the Board should be refreshed over time. I plan to stand down from the Board in November next year and the Directors have agreed that Nick Bannerman will take over from me as Chairman. In the course of 2014 we will recruit a new Director to replace Nick as Chairman of the Audit Committee.

Outlook

The major changes being made by the Government of Shinzo Abe and the Bank of Japan are likely to stimulate growth and inflation in the Japanese economy. In spite of the rise in the equity market Japanese equities still look reasonably valued against other world markets and there are many attractive companies in which our Managers can invest.

Richard A Barfield

9 October 2013

Past performance is not a guide to future performance.

THE BAILLIE GIFFORD JAPAN TRUST PLC

Managers' Report

Performance

After an extraordinary period of strength in the Japanese stock market, the NAV per share, with borrowings deducted at fair value, has risen by 48.9% over the year and the share price by 61.4%. The benchmark index, TOPIX total return in sterling terms, increased by 26.7% over the same period as expectations for growth in Japan improved markedly. The portfolio outperformed the stock market significantly and this was the fifth consecutive year of above benchmark performance. The yen weakened by 18% during the year, but the strength of share prices still enabled good returns to be made by sterling based investors.

As can be seen by the Portfolio Performance Attribution table following this Report, there were good returns from all the sectors except financials. The gearing, which was fully invested at the start of the Company's year, was also helpful. It remains the view of the Managers that the positive returns to the Company from gearing when markets rise outweigh negative impacts when markets are weak. Interestingly, the two biggest contributors on an individual stock basis demonstrate two distinct themes in the market, currency sensitivity and domestic recovery. Fuji Heavy Industries, the maker of Subaru cars, is one of the most currency sensitive manufacturers in Japan and the share price has increased by 282% over the year, contributing significantly to performance. The next biggest contributor was Tokyo Tatemono, a property developer in Tokyo, where the recovery in the property market and hopes for domestic reflation has boosted valuations. Some of the companies that had done well in previous years were the main underperformers, such as Endo Lighting and Gree.

Portfolio

The long term outlook of our investment approach continued and turnover was again low at 11.8% during the year. Some turnover was forced upon us with Jupiter Telecom and So-Net Entertainment being sold after bids. In total we bought ten new holdings and sold nine. Significant new purchases, in terms of their impact on performance, were made in Softbank, the entrepreneurially run mobile telecom operator and internet investor, and in Mazda Motor, a car manufacturer that produces predominantly in Japan. We purchased Softbank after it bid for Sprint, the US operator, as we believe that it can make large improvements to Sprint's business. Softbank's holding in Alibaba, a leading Chinese e-commerce business, is also a key attraction. Mazda Motor has developed a technology to increase fuel efficiency and reduce manufacturing costs which is being rolled out across their product range, significantly boosting profits. The company has benefitted enormously from yen weakness and the share price more than tripled from purchase.

The companies we sold were those where we were less confident about the long term prospects, such as Otsuka Holdings the pharmaceutical company or Hitachi High-Technologies, where revival in the parent Hitachi is changing their attitude to the opportunities they allow their subsidiaries and may not be helpful for minority shareholders.

The portfolio has a balance between overseas earners and domestic stocks and we continue to find growth businesses in both areas of the market. The internet arena remains interesting, given the structural growth prospects, and this makes up a significant portion of the portfolio, not all of which is categorised in one industry sector. Automation, whether in factories or fields, is an area where Japanese companies have competitive advantages and can grow their market share and is a significant part of the portfolio. The overall style characteristics of the portfolio demonstrate that high quality growth companies still command no valuation premium in Japan.

Economy

According to consensus estimates of growth the prospects for the Japanese economy have drastically improved over the past year. Growth in 2013 was expected to be 0.7% and is now anticipated to be 1.9%. This is mainly down to the policies of Mr Abe, who was elected Prime Minister in December 2012. Abenomics has three 'arrows', monetary stimulus, fiscal stimulus and deregulation and reform. The aim is to revive the economy, reduce excessive yen strength and escape deflation. Mr Kuroda was appointed as the Governor of the Bank of Japan in April 2013 and has aggressively increased monetary stimulus. The fiscal position is more mixed with the planned rise in the consumption tax coming in Spring 2014, whilst spending on other areas is increased and debate about cutting the corporate tax rate continues. The reform programme is a broad range of developments but includes Japan's negotiations about joining the Trans Pacific Partnership, a large Free Trade Area, reducing labour market restrictions, encouraging female participation in the workforce and allowing new initiatives such as casinos.

GDP growth has already been strong in the first half of 2013 as confidence rose and there are signs that 'animal spirits' have returned to Japan after many years of absence. Exports are recovering and consumer spending is seeing some positive impact from wealth effects as asset markets recover and increased confidence as incomes recover. The CPI is showing positive inflation and, whilst it is likely that the consumption tax rise will impact growth in 2014, the recovery from the global financial crisis that was delayed in Japan now seems clearly to be underway. It will also be supported by global growth. If Japan does tackle some of the longer term structural issues under the guise of the third arrow of Abenomics, then longer term prospects for growth will be improved.

Political Developments

The LDP returned to power in December last year and won a further election victory in July, giving them a majority in both houses of the Diet. This is the first time in five years that a government can act decisively as the so-called 'twisted Diet' is ended and there are no more general elections until 2016. Mr Abe's clear focus on economic revival as his primary policy aim is helpful in changing the mindset of both consumers and corporates and we have been struck in our many company visits by the unanimity of the support for Abenomics. It is also interesting that leading members of the New Economy in Japan, notably Mr Mikitani the President of Rakuten, are members of a key Government Committee on Competitiveness.

The dispute over the Senkaku islands remains a source of tension with China and Japanese brand sales there have been hit. However Japan has also been improving relations with Russia and there is even talk of extending the Trans-Siberian railway across the sea to Japan.

Japanese Corporate Developments

There has been a shift in the focus of Japanese company investment overseas after the Chinese reaction to the Senkaku dispute and the rising wage levels there. Other Asian countries, such as Thailand and Indonesia, are seeing rising investment from Japan and there is a broadening of the geographic focus. The longer term implications of the worsening of relations with China are difficult to judge; so far areas like factory automation equipment have been least affected and widely felt in consumer brands.

Recently a major Japanese semiconductor equipment company, Tokyo Electron, accepted an offer to merge from, Applied Materials, an American peer. This signals a significant shift in attitudes towards mergers and acquisitions in Japan as there was no crisis to precipitate action and the balance sheet was strong. The detailed disclosure of voting at AGMs in Japan, that is now in its third year, is already putting pressure on managements to focus more on shareholders and we expect this sea-change to be very positive for returns from the stock market in the medium term.

Outlook

Although share prices have risen dramatically in the last year they were starting from extremely cheap valuation levels and remain in line with global peers. In fact the wider adoption of international accounting standards in the medium term should boost reported earnings and make them more comparable. The government is considering cutting the rate of corporate tax and this would also increase reported earnings. Along with the weakening of the yen it seems likely therefore that Japanese companies will have very strong earnings growth over the next couple of years. We expect this to be followed by significant sustained increases in dividend payments.

Whilst it is too early to tell whether Abenomics will be successful, particularly in the inflation targeting, there are clear signs that Japan is now thinking and acting more positively. Tokyo has been awarded the 2020 Olympics and this, along with the possible entry in the Trans Pacific Partnership, will catalyse further positive change. The Baillie Gifford Japan Trust has seen faster NAV growth than the FTSE World index over the past five years and performed better than many of the global trusts reflecting the many attractive companies that we are able to invest in. The gearing is invested in the market reflecting this.

Portfolio Performance Attribution for the Year to 31 August 2013^†

Computed relative to the benchmark (TOPIX total return (in sterling terms)) with net income reinvested.

	Benchmark asset allocation		Baillie Gifford Japan asset allocation		Performance*                     TOPIX		Contribution to relative return	Contribution attributable to:
Portfolio breakdown	01.09.12	31.08.13	01.09.12	31.08.13	BG Japan	total return		Stock selection	Asset allocation	Gearing
	%	%	%	%	%	%	%	%	%	%
Manufacturing and machinery	19.7	21.3	13.9	16.6	80.2	37.3	4.4	4.7	(0.3)	-
Information, communication and utilities	9.6	9.4	13.1	14.4	46.7	29.2	2.0	1.7	0.3	-
Commerce and services	13.0	12.0	21.9	21.9	29.3	13.6	1.7	2.6	(0.9)	-
Real estate and construction	5.2	6.2	6.2	5.5	74.9	46.8	1.6	1.3	0.3	-
Electricals and electronics	12.2	11.3	14.1	13.5	30.5	20.4	0.8	0.9	(0.1)	-
Pharmaceuticals and food	9.9	8.6	6.9	3.2	(1.3)	8.1	0.3	(0.4)	0.7	-
Retail	4.6	4.3	7.8	6.5	23.4	15.6	0.1	0.3	(0.2)	-
Chemicals and other materials	11.9	11.4	7.4	7.9	20.1	22.7	-	(0.2)	0.2	-
Financials	13.9	15.5	8.7	10.5	36.9	40.6	(0.8)	(0.1)	(0.7)	-
Total	100.0	100.0	100.0	100.0	39.9	26.7	10.4	11.3	(0.9)	-
Impact of gearing					7.3	-	7.3	-	-	7.3
Total (including gearing)**					50.1	26.7	18.5	11.3	(0.9)	7.3

 

Past performance is not a guide to future performance.

Source: Statpro/Baillie Gifford & Co

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of 26.7% against a benchmark return of 26.7% translates into a relative return of 10.4%, divide the portfolio return of 139.9 by the benchmark return of 126.7, subtract one and multiply by 100.  In addition, the total contribution figures include a residual element that relates to changes in weightings mid-month, which cannot be attributed to individual sectors.  Consequently, the contributions for the individual sectors do not sum to the total contribution figures.

^†        The performance attribution table is based on total assets.

*    The returns are total returns (net income reinvested), calculated on a monthly linked method.

**  The total return performance of 50.1% excludes expenses and, therefore, differs from the NAV return

       (after deducting borrowings at fair value) of 48.9% as a result.

Investment Changes (£'000)

	Valuation at  31 August 2012	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 August 2013
Equities:
Manufacturing and machinery	24,894	(1,339)	16,949	40,504
Information, communication and utilities	21,056	4,083	10,143	35,282
Commerce and services	35,143	8,604	9,784	53,531
Real estate and construction	9,905	(3,557)	7,137	13,485
Electricals and electronics	20,093	5,209	7,842	33,144
Pharmaceuticals and food	11,095	(2,895)	(350)	7,850
Retail	12,621	474	2,786	15,881
Chemicals and other materials	11,926	5,162	2,114	19,202
Financials	14,024	7,213	4,468	25,705
Total equity investments	160,757	22,954	60,873	244,584
Net liquid assets	2,374	(500)	(504)	1,370
Total assets	163,131	22,454	60,369	245,954
Bank loans	(28,544)	(12,250)	5,215	(35,579)
Shareholders' funds	134,587	10,204	65,584	210,375

TWENTY LARGEST HOLDINGS at 31 August 2013
Name	Business	2013 Value £'000	2013 % of total assets	2012 Value £'000
Fuji Heavy Industries	Subaru cars	9,491	3.9	3,398
Don Quijote	Discount store operator	7,195	2.9	4,899
Itochu	Trading conglomerate	7,134	2.9	6,206
Softbank	Telecom operator and internet investor	6,530	2.6	-
Otsuka Corp	IT solutions for companies	6,269	2.5	4,455
KDDI	Telecom operator	6,162	2.5	4,485
HIS	Travel agency	6,077	2.5	3,209
Rakuten	Internet retailer	5,885	2.4	3,945
Tokyo Tatemono	Property leasing and development	5,705	2.3	3,084
GMO Internet	Internet infrastructure	5,589	2.3	2,293
Sysmex	Medical equipment	5,327	2.2	4,087
Yaskawa Electric	Robots and factory automation	5,272	2.1	2,562
Toyo Tire & Rubber	Tyre manufacturer	5,226	2.1	2,536
M3	Online pharmaceutical drug marketing service	4,879	2.0	3,199
Kyocera	Electronic equipment and components	4,875	2.0	-
Isuzu Motors	Commercial vehicle manufacturer	4,728	1.9	3,086
Japan Exchange Group	Stock Exchange operator	4,710	1.9	-
Mitsui & Co	Trading conglomerate	4,645	1.9	2,328
SMC	Pneumatic control equipment	4,633	1.9	2,886
Mitsubishi UFJ Lease & Finance	Leasing company	4,495	1.8	3,250
		114,827	46.6	59,908

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 6 months notice, or on shorter notice in certain circumstances. With effect from 1 April 2013, the annual management fee was reduced from a flat rate of 1% of net assets to a rate of 0.95% on the first £50m of net assets and 0.65% on the balance. Management fees are calculated on a quarterly basis.   The details of the management fee are as follows:

	2013 £'000		2012 £'000
Investment management fee	1,566		1,325

PRINCIPAL RISKS AND UNCERTAINTIES

The Company invests in medium to smaller sized Japanese companies and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager assesses the exposure to market risk when making individual investment decisions as well as monitoring the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown on pages 14 and 15 of the Annual Report and Financial Statements.

(i) Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

The Investment Manager monitors the Company's yen exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the currency in which a company's share price is quoted is not necessarily the one in which it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the share price of the company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company has the authority to use forward currency contracts to limit the Company's exposure if it so chooses to anticipated future changes in exchange rates so that the currency risks entailed in holding the assets are mainly eliminated. No forward currency contracts have been used in the current or prior year.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 August 2013	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	244,584		1,802		(35,579)		(37)		210,770
Total exposure to currency risk	244,584		1,802		(35,579)		(37)		210,770
Sterling	-		58		-		(453)		(395)
	244,584		1,860		(35,579)		(490)		210,375

*    Includes net non-monetary assets of £20,000.

At 31 August 2012	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	160,757		2,455		(28,544)		212		134,880
Total exposure to currency risk	160,757		2,455		(28,544)		212		134,880
Sterling	-		61		-		(354)		(293)
	160,757		2,516		(28,544)		(142)		134,587

*      Includes net non-monetary assets of £23,000.

Currency Risk Sensitivity

At 31 August 2013, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £23,419,000 (2012 - £14,987,000). If there had been a 10% weakening of sterling against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have increased by £19,161,000 (2012 - £12,262,000).

(ii) Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

The interest rate risk profile of the Company's interest bearing financial assets and liabilities at 31 August 2013 is shown below.

Financial Assets

Cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.

Financial Liabilities

The interest rate risk profile of the Company's loans at 31 August was:

	2013			2012
	Book value £'000	Weighted average interest rate	Weighted average period until maturity	Book value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans
Yen denominated - fixed rate	35,579	2.3%	45 months	28,544	2.2%	19 months

Interest Rate Risk Sensitivity

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 8 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 14 and 15 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 10 and 11 of the Annual Report and Financial Statements.

116.3% (2012 - 119.4%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2013 would have increased total net assets and net return on ordinary activities after taxation by £24,458,000 (2012 - £16,076,000). A decrease of 10% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on page 16 of the Annual Report and Financial Statements).

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 11 of the Annual Report and Financial Statements.

The maturity profile of the Company's financial liabilities at 31 August was:

Financial Liabilities	2013 £'000	2012 £'000
In less than one year In more than one year, but not more than two years In more than five years	18,448 - 17,131	6,030 22,514 -
	35,579	28,544

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·     where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

·     the Company's listed investments are held on its behalf by Mizuho Corporate Bank, Ltd as the Company's custodians. Bankruptcy or insolvency of the custodians may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodians' internal control reports and reporting its findings to the Board;

·    investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager; and

·    cash is only held at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The exposure to credit risk at 31 August was:

	2013 £'000	2012 £'000
Cash at bank and in hand	1,860	2,516
Debtors and prepayments	1,541	1,702
	3,401	4,218

None of the Company's financial assets are past due or impaired.

Fair Value of Financial Assets and Financial Liabilities

The Company's investments are stated at fair value and the Directors are of the opinion that the reported values of the Company's other financial assets and liabilities approximate to fair value with the exception of the long term borrowings which are stated at amortised cost. The fair value of borrowings is shown below.

	2013			2012
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		35,579	35,914	28,544	28,820

* The fair value of each bank loan is calculated with reference to a Japanese government bond

 of comparable yield and maturity.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants detailed in note 11 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 16 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on pages 21 and 22 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:   reflects financial instruments quoted in an active market

Level 2:   reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

Level 3:   reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

The valuation techniques used by the Company are explained in the accounting policies on page 30 of the Annual Report and Financial Statements.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy.  None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.  The Managers monitor compliance with provisions of section 1158. Baillie Gifford's Business Risk & Internal Audit and Regulatory Risk Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose disproportionate compliance burdens on the Company.  In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Discount/Premium Volatility

The discount/premium at which the Company's shares trade can change. The Board monitors the level of discount/premium and the Company has authority to buy back or issue its own shares when deemed to be in the best interest of all shareholders.

Gearing Risk

The Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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 these financial statements, the Directors are required to:

·    select suitable accounting policies and then apply them consistently;

·    make judgements and accounting estimates that are reasonable and prudent;

·    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; 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. They 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 Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

·    the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

·    the Directors' 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.

By order of the Board

Richard A Barfield

9 October 2013

INCOME STATEMENT

	For the year ended 31 August 2013				For the year ended 31 August 2012
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	60,873	60,873		-	211	211
Currency (gains)/losses (note 2)	-	4,711	4,711		-	(108)	(108)
Income (note 3)	3,177	-	3,177		3,251	-	3,251
Investment management fee	(1,566)	-	(1,566)		(1,325)	-	(1,325)
Other administrative expenses	(418)	-	(418)		(279)	-	(279)
Net return before finance costs and taxation	1,193	65,584	66,777		1,647	103	1,750
Finance costs of borrowings	(826)	-	(826)		(642)	-	(642)
Net return on ordinary activities before taxation	367	65,584	65,951		1,005	103	1,108
Tax on ordinary activities	(226)	-	(226)		(228)	-	(228)
Net return on ordinary activities after taxation	141	65,584	65,725		777	103	880
Net return per ordinary share (note 5)	0.22p	103.90p	104.12p		1.25p	0.17p	1.42p

 All revenue and capital items in this statement derive from continuing operations.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BALANCE SHEET

at 31 August 2013

	At 31 August 2013		At 31 August 2012
	£'000	£'000	£'000	£'000
Fixed assets Investments		244,584		160,757
Current assets
Debtors	1,561		1,702
Cash at bank and in hand	1,860		2,516
	3,421		4,218
Creditors: Amounts falling due within one year	(20,499)		(7,874)
Net current liabilities		(17,078)		(3,656)
Total assets less current liabilities		227,506		157,101
Creditors: Amounts falling due after more than one year		(17,131)		(22,514)
Total net assets		210,375		134,587
Capital and reserves
Called up share capital		3,251		3,097
Share premium		32,019		22,110
Capital redemption reserve		203		203
Capital reserve		181,240		115,656
Revenue reserve		(6,338)		(6,479)
Shareholders' funds		210,375		134,587

Net asset value per ordinary share	323.0p	216.9p
(after deducting borrowings at fair value)
Net asset value per ordinary share (after deducting borrowings at par value)	323.5p	217.3p
Ordinary shares in issue (note 8)	65,031,750	61,935,000

The Financial Statements of The Baillie Gifford Japan Trust PLC (company registration number SC75954) were approved and authorised for issue by the Board and signed 9 October 2013.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 August 2013

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2012	3,097	22,110	203	115,656	(6,479)	134,587
Shares issued	154	9,909	-	-	-	10,063
Net return on ordinary activities after taxation	-	-	-	65,584	141	65,725
Shareholders' funds at 31 August 2013	3,251	32,019	203	181,240	(6,338)	210,375

For the year ended 31 August 2012

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2011	3,097	22,110	203	115,553	(7,256)	133,707
Net return on ordinary activities after taxation	-	-	-	103	777	880
Shareholders' funds at 31 August 2012	3,097	22,110	203	115,656	(6,479)	134,587

* The capital reserve balance as at 31 August 2013 includes investment holding gains of £92,369,000 (2012 - £35,796,000).

 

CASH FLOW STATEMENT
	For the year ended 31 August 2013						For the year ended 31 August 2012
	£'000		£'000				£'000			£'000
Net cash inflow from operating activities			1,119							1,263
Net cash outflow from servicing of finance	(834)						(641)
Financial investment			(834)							(641)
Acquisitions of investments	(46,783)						(14,934)
Disposals of investments	24,033						12,741
Exchange differences on settlement of investment transactions	(271)						(262)
Net cash outflow from financial investment			(23,021)							(2,455)
Net cash outflow before financing			(22,736)							(1,833)
Financing
Shares issued	10,063
Bank loans drawn down	17,212						-
Bank loans repaid	(4,962)						-
Net cash inflow from financing			22,313							-
Decrease in cash			(423)							(1,833)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year			(423)							(1,833)
Net cash inflow from bank loans			(12,250)							-
Exchange differences on bank loans			5,215							(33)
Exchange differences on cash			(233)							187
Movement in net debt in the year			(7,691)							(1,679)
Net debt at 1 September			(26,028)							(24,349)
Net debt at 31 August			(33,719)							(26,028)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation			66,777							1,750
Gains on investments			(60,873)							(211)
Currency(gains)/losses			(4,711)							108
Decrease/(increase) in accrued income			56							(158)
Increase/(decrease) in creditors			99							(10)
Overseas tax suffered			(229)							(216)
Net cash inflow from operating activities			1,119							1,263

NOTES

1.	The financial statements for the year to 31 August 2013 have been prepared on the basis of the same accounting policies set out in the Company's Annual Financial Statements at 31 August 2012. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 19 to the financial statements within the Annual Report and Financial Statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. If the continuation resolution is not passed, the Articles provide that the Directors shall convene a General Meeting within three months at which a special resolution will be proposed to wind up the Company voluntarily. If the Company is wound up, its investments may not be realised at their full market value. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
			31 August 2013 £'000	31 August 2012 £'000
2.	Currency Losses
	Exchange differences on bank loans		5,215	(33)
	Other exchange differences		(504)	(75)
			4,711	(108)
3.	Income
	Income from investments and interest receivable		3,177	3,251
4.	No final dividend will be declared.

5.	Net Return per Ordinary Share
		2013				2012
		Revenue	Capital	Total		Revenue	Capital	Total
	Net return on ordinary activities after taxation	0.22p	103.90p	104.12p		1.25p	0.17p	1.42p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £141,000 (2012 - £777,000), and on 63,125,072 (2012 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during each year.  Capital return per ordinary share is based on the net capital return for the financial year of £65,584,000 (2012 - £103,000), and on 63,125,072 (2012 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue.
6.	During the year, the Company drew down ¥2.6 billion under a new ¥7.2 billion loan facility with ING which expires on 21 August 2020. The remaining ¥4.6 billion of this facility will be drawn down in four tranches during the year to 31 August 2014, two of these tranches will be used to repay the Scotiabank Europe and ING facilities expiring in May and August respectively. The ¥750 million loan facility with The Royal Bank of Scotland plc matured on 6 August 2013 and the amount drawn down of ¥750 million was repaid in full.
7.	Transaction costs incurred on the purchase and sale of investments are added to the purchase costs or deducted from the sales proceeds, as appropriate.  During the year, transaction costs on purchases amounted to £29,000 (2011 - £13,000) and transaction costs on sales amounted to £23,000 (2011 - £14,000).
8.	At 31 August 2013 the Company had authority to buy back 9,284,056 shares. No shares were bought back during the year. Under the provisions of the Company's Articles of Association share buy-backs are funded from the capital reserve. During the year to 31 August 2013, 3,096,750 (2012 - nil) shares were issued at a premium to net asset value raising proceeds of £10,063,000 (2012 - nil).  Between 1 September 2013 and 8 October 2013, the Company issued a further 1,200,000 shares at a premium to net asset value raising proceeds of £4,228,000.
9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2013. The financial information for 2012 is derived from the statutory accounts for 2012, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2013 and the 2012 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2013 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at 12.30pm on Wednesday 27 November 2013.
10.	The Report and Financial Statements will be available on the Company's page on the Managers' website www.japantrustplc.co.uk on or around 24 October 2013‡.
	‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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