Annual Financial Report

RNS Number : 2351V

Baillie Gifford Japan Trust PLC

24 October 2014

 



The Baillie Gifford Japan Trust PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 August 2014 of The Baillie Gifford Japan Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements for the year ended 31 August 2014 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 2014 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 Limited

Company Secretaries

24 October 2014

Chairman's Statement

It has been another good year for your Company. Over the year net asset value (after deducting borrowings at fair value) rose by 9.4%, compared with a gain of 3.7% in the benchmark TOPIX index (in sterling terms) total return. The share price increased by 10.8% and the discount narrowed from 1.6% to 0.3%. This builds on an excellent five and ten year record.

Stock selection and gearing contributed positively to the returns with further performance details to be found in the Managers' Report.

Investment income increased 18% over the year reflecting higher dividends and expenses increased slightly.

Overall revenue gain per share was 0.47p. No dividend will be paid as the revenue reserve remains in deficit. Ongoing charges for the year were 0.9% compared to 1.1% in 2013, reflecting a full year of the reduced management fee introduced in 2013, and as a consequence of asset growth through good performance and stock issuance.

Gearing

Gearing amounted to 16% of shareholders' funds at the start of the year and ended the year at 15%. Gross borrowings increased to 7.2bn yen, from 5.4bn yen, following the full utilisation of the ING loan negotiated in August 2013. With the low cost of yen loans we believe that borrowing to invest in Japanese equities is a sensible strategy.

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 2014, 4,300,000 shares were issued at a premium to net asset value raising proceeds of £15,289,000. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting. The Directors will continue to only issue shares at a premium to net asset value. This authority will expire at the conclusion of the Annual General Meeting in November 2015.

Contractual Arrangements

In order to comply with the requirements of the EU Alternative Investment Fund Managers Directive, the Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager ('AIFM') and Company Secretary with effect from 1 July 2014. The Company's existing investment management agreement with Baillie Gifford & Co has been terminated. The new management agreement is made on the same commercial terms as the previous agreement with Baillie Gifford & Co. Under these new arrangements, the Company's portfolio will continue to be managed by Baillie Gifford & Co by way of a delegation agreement between Baillie Gifford & Co Limited and Baillie Gifford & Co. In addition the Company has appointed BNY Mellon Trust & Depositary (UK) Limited as its Depositary. Baillie Gifford & Co are not charging a fee as the AIFM however the Depositary is doing so and, as I explained in my statement last year, although there is no obvious benefit the Company has no alternative.

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 26 November 2014.

Last year the Company received support for its continuance from 99.9% 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.

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 am pleased to report that my fellow Directors agreed to appoint Keith Falconer to the Board with effect from 8 July 2014. As required, his appointment falls to be formally ratified by shareholders at the Annual General Meeting of the Company to be held in November. Keith has considerable investment management and investment trust experience.  In addition, I will be stepping down from the Board at the conclusion of the Annual General Meeting.  The Board has agreed that I will be replaced as Chairman by Nick Bannerman who has been a Director since 2003. I am confident that the Company will benefit from his stewardship. In turn, Nick will relinquish his position as Chairman of the Company's Audit Committee to be replaced by Keith Falconer.

Outlook

After a strong performance from Japanese equities in 2012/2013 the latest year has been a more muted one. The changes being wrought in Japan should be beneficial for the corporate sector and the equity market. Our Managers are still finding interesting companies in which to invest.

Richard A Barfield

9 October 2014

Past performance is not a guide to future performance.

Managers' Report

Performance

Over the past year the NAV per share with borrowings deducted at fair value has risen by 9.4% compared with a 3.7% increase in the benchmark for the Trust.  The stock market has been subject to significant swings during the year; rising sharply last autumn but then falling back in the spring and staging a steady if unspectacular recovery from May 2014.  The NAV therefore finished the year about 3% below the high reached in January 2014, but significantly above the levels reached at previous periods of market strength in Japan in 2000 and 2005.  The stock market overall, as shown by TOPIX total return in sterling terms, is still much lower than the level at either of these peaks; this gap is the result of the cumulative outperformance of the Trust.

The Portfolio Performance Attribution table following this report shows that outperformance came from all but three sectors as returns were strong from a broad spread of stocks.  Gearing was again helpful overall, but the outperformance came predominantly from stock selection as in previous years. The detail of this split is show in the list of investments on pages 16 and 17 of the Annual Report and Financial Statements. There were six individual stock contributors of more than 0.5% to outperformance amongst the holdings, with Iriso Electronics the biggest gainer.  This company makes connectors for cars and is a beneficiary of the long term trend towards higher usage of electronics in all types of engine. Iriso diversified its customer base and now supplies European as well as Japanese makers.  Other strong performers included Toyo Tire, which supplies tyres for pick-up trucks in the US, Japan Exchange Group, which runs the Tokyo Stock Exchange, and Temp Holdings, a staffing agency benefiting from the increasing labour shortage in Japan and the return of women to the workforce.

On the negative side, some of the internet related stocks including GMO Internet and Digital Garage were weak in share price terms although no one holding detracted more than 0.4% from performance. 

Portfolio

Against the more stable background in the last year turnover has remained low at 11%.  This remains consistent with our long term approach.  We buy stocks with a three to five year outlook, whilst this turnover figure implies a nine year average holding period.

We purchased new holdings in eight companies and sold twelve.  The buys range from Sony, the consumer electronics giant, that we believe is finally effectively restructuring, to Broadleaf and Cookpad, two small specialist internet growth companies.  Sony will always be a contentious holding given the long history of serial disappointment but we are encouraged by the appointment of a new effective CFO, the clear success of the Playstation 4 and the cessation of dividend payments which increase the probability of domestic cost cutting.  Sony also has sizeable investments in subsidiaries M3 and Sony Financial which allow for some financial flexibility.  Cookpad, which operates the largest recipe website in the world, has already contributed to portfolio performance as the business potential for opportunities to meld recipes and food purchase burgeon.  CyberAgent is the largest internet advertising company in Japan and also operates in businesses such as gaming and blogs.  We believe the long term potential is obscured by short term losses in one of the divisions. 

This year some of the sales are potentially more interesting to comment on than the purchases as they reveal some of the challenges facing investors.  We sold several companies which had been in the portfolio for very many years.  Canon, the printer and camera company, faces clear threats to both its major products from technological change.  Smartphones are increasingly supplanting cameras for photography as their capabilities increase and the rise of tablet computers and other changes are lessening the need for printed copies.  Canon has been a great company but we struggle to see how it can adapt rapidly enough to flourish again.  Japan Tobacco, which has very successfully globalised its business, is now being threatened in the long term, by the development of e-cigarettes.  This development is not affecting sales significantly yet but as governments toughen smoking regulations and there are more alternatives, volumes are likely to fall steadily.  Another long standing holding was Yamada Denki, Japan's largest consumer electronics retailer.  Here we sold the shares as a combination of loss of market share of Japanese manufacturers and increasing competition from on line suppliers dent growth prospects.  We also sold JR East as its business was exceptionally well positioned to benefit from deflation but may suffer as costs increase but fares do not.

There are longer comments on the new holdings on pages 10 to 12 of the Annual Report and Financial Statements along with notes on the largest ten positions. 

Japanese Corporate Developments

Over the past year there has been a significant improvement in attitudes towards corporate governance in Japan; one of the many aspects of Mr Abe's third arrow is one where carrots and sticks are being wielded enthusiastically.  Along with longer term trends such as the detailed publication of voting at Japanese AGMs there has also been much more emphasis on the appointment of independent external directors to Boards, increasing dividends and a greater exposition by the authorities about the need for all companies to make more in profits than their capital costs.  74% of companies listed on the Tokyo market now have at least one independent director and if they don't, now need to comply or explain why not.  We believe that shortly an explanation will not be enough and it will become mandatory to have an outsider on the Board. 

Dividends are rising and companies are showing a lessening tendency to hoard cash.  For the half year to September 2014 it is likely that payouts will be at a record level in Yen terms.  There is scope for continued growth as the percentage of profits paid out is still low by international standards.  Share buy backs are also at the highest level since the Lehman's shock and show a willingness by companies to raise returns. 

The new JPX 400 index which is likely to be adopted by GPIF, the Japanese government pension fund which is the world's largest, includes qualitative criteria such as Return on Equity as part of the selection process.  Venerable but unprofitable companies which have been left off the list are now feeling excluded.  One has taken direct action to improve in order to be considered and was rewarded with a sharply rising share price.  Japan has also published a stewardship code and this has been adopted by roughly 150 institutional investors, both domestic and foreign.  This encourages investors to have substantive dialogue with companies and to exercise their voting rights, thus increasing pressure on managements to behave more in the interests of shareholders. 

These changes, taken together, are a very positive background to be investing in Japanese companies as managements focus more on shareholders.  We also don't believe that this is to the detriment of the internal stakeholders in companies, as the status quo becomes increasingly less tenable and dangerous.  Change is also driven by rising Asian competition and the labour shortage in Japan.  

Economy and Profits

The past year has seen divergence between certain parts of the economy where the recovery is clear and becoming stronger, notably the labour market and the property market and those where there has been considerable weakness since the increase in the consumption tax in April 2014, such as industrial production.  Mr Abe has passed thirty bills as part of his Third Arrow deregulation reform programme, including the formation of special economic zones where regulation will be substantially relaxed.  Mr Kuroda, at the Bank of Japan, has also continued to expand the monetary base in Japan aggressively.  However the negative effect of the tax rise seems to have had more impact in the short term.  Despite this, reported profits for the three months after the rise were still growing; partly as an increasing proportion originate from overseas whether via exports or foreign subsidiaries. 

The government still has its strong position in the Diet and Mr Abe is remarkably popular for this stage in a premiership.  Further legislation for reform is likely to be passed, whilst Mr Kuroda has pledged to 'do what it takes' to get inflation to 2%.  The government are currently debating the next consumption tax increase from 8% to 10% which is scheduled to happen in September 2015.  Further weak data will make this difficult. 

Although there remains widespread scepticism about any positive effects from Abenomics there are certain areas which have been boosted.  Unemployment is now extremely low and labour shortages are becoming more widespread, whilst visa regulations for foreign workers have been eased.  More women have returned to the workforce and there is increasing recognition of the practical measures, such as improved childcare, that are needed for employment equality.  The property market is rising and vacancy rates and rents improving.  Inbound tourism is booming and some of our retail holdings are direct beneficiaries.  Duty free shopping will be deregulated further in the autumn.  However it seems unlikely that growth in the economy overall is going to be particularly rapid but the link between GDP growth and profits is lessening as shown in the most recent quarter.

Outlook

Although Japan has been reporting inflation rather than deflation for a year, the national mindset has not yet shifted towards investment in riskier assets.  Personal financial assets, which are approximately two and a half times the value of GDP, are still being invested predominantly in cash and companies have record amounts of cash on their balance sheets.  If Abenomics achieves the sustained inflation rate that is one of the targets this is likely to change, which should benefit equities.  The government are leading the way with the reform of the GPIF which is likely to sell its bond holdings and reinvest in equities which have much higher yields. 

However, even without such a shift, profits are rising and valuations remain attractive.  Japanese companies are now more globally minded and more globally competitive in the manufacturing arena and there is increased confidence in the non-manufacturing sector.  Global trends, such as the increase in e-commerce, are reflected within Japan and provide opportunities for investment.  Companies are improving their returns to shareholders and this background encourages us to substantially invest all the gearing in the market. 

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 August 2014*

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

Portfolio breakdown	Benchmark asset allocation		Baillie Gifford Japan asset allocation		Performance†			Contribution attributable to:
					BG Japan %	TOPIX total return %	Contribution to relative return %	Stock selection %	Asset allocation %	Gearing %
	01.09.13 %	31.08.14 %	01.09.13 %	31.08.14 %
Manufacturing and machinery	21.3	21.0	16.6	20.6	12.0	0.8	2.1	2.0	0.1	-
Financials	15.5	13.9	10.5	10.0	7.9	(4.9)	1.8	1.4	0.4	-
Commerce and services	12.0	12.5	21.9	24.9	9.7	4.2	1.4	1.4	-	-
Electricals and electronics	11.3	12.8	13.5	14.2	23.1	18.1	0.7	0.6	0.1	-
Retail	4.3	4.1	6.5	5.5	5.4	(2.2)	0.4	0.5	(0.1)	-
Chemicals and other   materials	11.4	11.6	7.9	7.3	9.8	5.8	0.2	0.3	(0.1)	-
Real estate and   construction	6.2	6.1	5.5	5.7	(8.7)	0.6	(0.5)	(0.5)	-	-
Information,   communication and   utilities	9.4	9.2	14.4	9.1	(3.0)	2.9	(0.5)	(0.5)	-	-
Pharmaceuticals and food	8.6	8.8	3.2	2.7	(11.1)	9.4	(0.7)	(0.4)	(0.3)	-
Total assets	100.0	100.0	100.0	100.0	8.8	3.7	4.9	4.9	0.0	-
Impact of gearing					2.6	-	2.6	-	-	2.6
Total (including gearing)**					11.6	3.7	7.7	4.9	0.0	2.6

Past performance is not a guide to future performance.

Source: Statpro/Baillie Gifford

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of 8.8% against a benchmark return of 3.7% translates into a relative return of 4.9%, divide the portfolio return of 108.8 by the benchmark return of 103.7, 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 11.6% excludes expenses and, therefore, differs from the NAV return (after deducting borrowings at par value) of 10.9% as a result.

Investment Changes (£'000)

	Valuation at  31 August 2013	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 August 2014
Equities:
Manufacturing and machinery	48,039	5,631	5,365	59,035
Financials	25,705	1,420	1,563	28,688
Commerce and services	59,756	5,843	5,812	71,411
Electricals and electronics	29,399	3,931	7,204	40,534
Retail	15,881	(801)	611	15,691
Chemicals and other materials	15,412	3,828	1,606	20,846
Real estate and construction	13,485	4,433	(1,583)	16,335
Information, communication and utilities	30,404	(3,158)	(1,279)	25,967
Pharmaceuticals and food	6,503	1,763	(498)	7,768
Total equity investments	244,584	22,890	18,801	286,275
Net liquid assets	1,370	3,744	(942)	4,172
Total assets	245,954	26,634	17,859	290,447
Bank loans	(35,579)	(11,023)	4,869	(41,733)
Shareholders' funds	210,375	15,611	22,728	248,714

Twenty largest holdings at 31 August 2014
Name	Business	2014 Value £'000	2014 % of total assets*	2013 Value £'000
Fuji Heavy Industries	Subaru cars	8,747	3.0	9,491
Iriso Electronics	Specialist auto connectors	8,589	3.0	4,154
Itochu	Trading conglomerate	8,028	2.8	7,134
Toyo Tire & Rubber	Tyre manufacturer	7,327	2.5	5,226
SoftBank	Telecom operator and internet investor	6,966	2.4	6,530
Don Quijote	Discount store operator	6,825	2.3	7,195
Kubota	Agricultural machinery	6,753	2.3	3,433
HIS	Travel agency and theme parks	6,666	2.3	6,077
Rakuten	Internet retail and financial services	6,664	2.3	5,885
Sysmex	Medical equipment	6,607	2.3	5,327
Japan Exchange Group	Stock Exchange operator	6,580	2.3	4,710
Misumi Group	Precision machinery parts distributor	6,418	2.2	3,913
Inpex	Oil and gas producer	6,332	2.2	2,413
Temp Holdings	Employment and outsourcing services	6,236	2.1	4,222
Otsuka Corp	IT solutions for SMEs	6,158	2.1	6,269
M3	Online pharmaceutical marketing	6,073	2.1	4,879
CyberAgent	Internet advertising and content	5,974	2.1	-
Mazda Motor	Car manufacturer	5,860	2.0	4,344
Yaskawa Electric	Robots and factory automation	5,835	2.0	5,272
Mitsui & Co	Trading conglomerate	5,657	1.9	4,645
		134,295	46.2	101,119

*              Before deduction of bank loans

Related party transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 26 of the Annual Report and Financial Statements. No Director has a contract of service with the Company.

Management Fee Arrangements

In order to comply with the Alternative Investment Fund Managers Directive, with effect from 1 July 2014 the Company has terminated its investment management agreement with Baillie Gifford & Co and has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager and Company Secretary. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The notice periods and management fee are unchanged under these new arrangements. The Management Agreement is terminable on not less than six months' notice. 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:

	2014 £'000		2013 £'000
Investment management fee	1,693		1,566

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 16 and 17 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 2014	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	286,275		5,238		(41,733)		(595)		249,185
Total exposure to currency risk	286,275		5,238		(41,733)		(595)		249,185
Sterling	-		(7)		-		(464)		(471)
	286,275		5,231		(41,733)		(1,059)		248,714

Includes net non-monetary assets of £26,000.

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.

Currency Risk Sensitivity

At 31 August 2014, 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 £27,687,000 (2013 - £23,419,000). 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 £22,653,000 (2013 - £19,161,000).

(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 2014 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:

	2014			2013
	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	41,733	2.5%	72 months	35,579	2.3%	45 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 16 and 17 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 14 and 15 of the Annual Report and Financial Statements.

115.1% (2013 - 116.3%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2014 would have increased total net assets and net return on ordinary activities after taxation by £28,628,000 (2013 - £24,458,000). 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 6 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	2014 £'000	2013 £'000
In less than one year In more than five years	- 41,733	18,448 17,131
	41,733	35,579

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:

¾ 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;

¾ the Company's listed investments are held on its behalf by the Company's custodian, The Bank of New York Mellon SA/NV (acting as agent). Bankruptcy or insolvency of the custodian 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 custodian's internal control reports and reporting its findings to the Board;

¾ 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;

¾ 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

¾ 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:

	2014 £'000	2013 £'000
Cash at bank and in hand	5,231	1,860
Debtors and prepayments	343	1,541
	5,574	3,401

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.

	2014			2013
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		41,733	45,496	35,579	35,914

* 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 on page 40 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 on page 40 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 6 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page 24 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 36 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.

Alternative Investment Fund Managers (AIFM) Directive

In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM's remuneration policy is available from Baillie Gifford & Co Limited on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) will be made available in due course.

The Company's maximum and actual leverage (see Glossary of Terms on page 53 of the Annual Report and Financial Statements) levels at 31 August 2014 are shown below:

Leverage Exposure

	Gross Method	Commitment Method
Maximum limit	2.50:1	2.00:1
Actual	1.17:1	1.17:1

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report or the Company being subject to tax on capital gains.

 Baillie Gifford's Business Risk, Internal Audit and Compliance 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 Risk - risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events.  Baillie Gifford & Co's Internal Audit and Compliance Departments and the AIFM's Business Risk Department provide regular reports to the Audit Committee.  The Board also reviews the Managers' Report on Internal Controls and the reports by other key service providers are reviewed by the Managers on behalf of the Board.  In addition, the Managers have a comprehensive business continuity plan which facilitates continued operations of the business in the event of a service disruption or major disaster.

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 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:

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ 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.

Under applicable laws and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations.

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:

¾ 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;

¾ the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

Richard A Barfield

9 October 2014

Income Statement

	For the year ended 31 August 2014				For the year ended 31 August 2013
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	18,801	18,801		-	60,873	60,873
Currency gains (note 2)	-	3,927	3,927		-	4,711	4,711
Income (note 3)	3,746	-	3,746		3,177	-	3,177
Investment management fee (note 4)	(1,693)	-	(1,693)		(1,566)	-	(1,566)
Other administrative expenses	(386)	-	(386)		(418)	-	(418)
Net return before finance costs and taxation	1,667	22,728	24,395		1,193	65,584	66,777
Finance costs of borrowings	(1,004)	-	(1,004)		(826)	-	(826)
Net return on ordinary activities before taxation	663	22,728	23,391		367	65,584	65,951
Tax on ordinary activities	(341)	-	(341)		(226)	-	(226)
Net return on ordinary activities after taxation	322	22,728	23,050		141	65,584	65,725
Net return per ordinary share (note 6)	0.47p	33.45p	33.92p		0.22p	103.90p	104.12p

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 2014

	At 31 August 2014			At 31 August 2013
	£'000		£'000	£'000		£'000
Fixed assets Investments			286,275			244,584
Current assets
Debtors	369			1,561
Cash at bank and in hand	5,231			1,860
	5,600			3,421
Creditors: Amounts falling due within one year	(1,428)			(20,499)
Net current assets/(liabilities)			4,172			(17,078)
Total assets less current liabilities			290,447			227,506
Creditors: Amounts falling due after more than one year			(41,733)			(17,131)
Net assets			248,714			210,375
Capital and reserves
Called up share capital			3,467			3,251
Share premium			47,092			32,019
Capital redemption reserve			203			203
Capital reserve			203,968			181,240
Revenue reserve			(6,016)			(6,338)
Shareholders' funds			248,714			210,375
Net asset value per ordinary share
(after deducting borrowings at fair value)		353.3p			323.0p
Net asset value per ordinary share (after deducting borrowings at par value)		358.7p			323.5p
Ordinary shares in issue (note 9)		69,331,750			65,031,750

The Financial Statements of The Baillie Gifford Japan Trust PLC (Company registration number SC75954) were approved and authorised for issue by the Board and were signed on 9 October 2014.

Reconciliation of Movements in Shareholders' Funds

For the year ended 31 August 2014

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2013	3,251	32,019	203	181,240	(6,338)	210,375
Shares issued	216	15,073	-	-	-	15,289
Net return on ordinary activities after taxation	-	-	-	22,728	322	23,050
Shareholders' funds at 31 August 2014	3,467	47,092	203	203,968	(6,016)	248,714

For the year ended 31 August 2013

	Called up 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

* The capital reserve balance as at 31 August 2014 includes investment holding gains of £103,632,000 (2013 - £92,369,000).

Cash Flow Statement

	For the year ended 31 August 2014						For the year ended 31 August 2013
	£'000		£'000				£'000			£'000
Net cash inflow from operating activities			1,322							1,119
Net cash outflow from servicing of finance			(884)							(834)
Financial investment:
Acquisitions of investments	(52,638)						(46,783)
Disposals of investments	30,201						24,033
Exchange differences on settlement of investment    transactions	(54)						(271)
Net cash outflow from financial investment			(22,491)							(23,021)
Net cash outflow before financing			(22,053)							(22,736)
Financing
Shares issued	15,289						10,063
Bank loans drawn down	27,410						17,212
Bank loans repaid	(16,387)						(4,962)
Net cash inflow from financing			26,312							22,313
Increase/(decrease) in cash			4,259							(423)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year			4,259							(423)
Net cash inflow from bank loans			(11,023)							(12,250)
Exchange differences on bank loans			4,869							5,215
Exchange differences on cash			(888)							(233)
Movement in net debt in the year			(2,783)							(7,691)
Opening net debt			(33,719)							(26,028)
Closing net debt			(36,502)							(33,719)
Reconciliation of net return before finance costs and taxation   to net cash inflow from operating activities
Net return before finance costs and taxation			24,395							66,777
Gains on investments			(18,801)							(60,873)
Currency gains			(3,927)							(4,711)
(Increase)/decrease in accrued income			(26)							56
Increase in other debtors			(5)							-
Increase/(decrease) in creditors			16							99
Overseas tax suffered			(330)							(229)
Net cash inflow from operating activities			1,322							1,119

Notes

1.	The financial statements for the year to 31 August 2014 have been prepared on the basis of the same accounting policies set out in the Company's Annual Financial Statements at 31 August 2013. 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 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 2014 £'000	31 August 2013 £'000
2.	Currency Gains
	Exchange differences on bank loans		4,869	5,215
	Other exchange differences		(942)	(504)
			3,927	4,711
3.	Income
	Income from investments and interest receivable		3,746	3,177
4.	Investment Management Fee In order to comply with the Alternative Investment Fund Managers Directive, with effect from 1 July 2014 the Company has terminated its investment management agreement with Baillie Gifford & Co and has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager ('AIFM') and Company Secretary. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The notice periods and management fee are unchanged under these new arrangements. The Management Agreement is terminable on not less than six months' notice. With effect from 1 April 2013, the annual management fee was reduced from the 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.
5.	No final dividend will be declared.

6.	Net Return per Ordinary Share
		2014				2013
		Revenue	Capital	Total		Revenue	Capital	Total
	Net return on ordinary activities after taxation	0.47p	33.45p	33.92p		0.22p	103.90p	104.12p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £322,000 (2013 - £141,000), and on 67,942,092 (2013 - 63,125,072) 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 £22,728,000 (2013 - £65,584,000), and on 67,942,092 (2013 - 63,125,072) 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.
7.	At 31 August 2014, the Company had a 7 year ¥7,200 million loan facility maturing 21 August 2020 with ING Bank N.V. During the year, the Company repaid its borrowings of ¥1,800 million with Scotiabank Europe and ¥1,000 million ING Bank N.V. which matured on 19 May 2014 and 11 August 2014 respectively. ¥4,600 million was drawn under the ¥7,200 million loan facility with ING Bank N.V.
8.	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 £32,000 (31 August 2013 - £29,000) and transaction costs on sales amounted to £19,000 (31 August 2013 - £23,000).
9.	At 31 August 2014 the Company had authority to buy back 10,089,281 shares. No shares were bought back during the year. Under the provisions of the Company's Articles share buy-backs are funded from the capital reserve. During the year, 4,300,000 (2013 - 3,096,750) shares were issued at a premium to net asset value raising proceeds of £15,289,000 (2013 - £10,063,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2014. The financial information for 2013 is derived from the statutory accounts for 2013 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2013 accounts, their report was unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2014 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting on 26 November 2014.
11.	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 2014‡.

^‡ 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.

-ends-

 

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