Annual Financial Report

RNS Number : 1361O

Baillie Gifford Japan Trust PLC

02 November 2016

 

The Baillie Gifford Japan Trust PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 August 2016 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 2016 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 2016 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

2 November 2016

Chairman's Statement

I am pleased to report on another good year for your Company with the net asset value (after deducting borrowings at fair value) rising 25.7%, compared to a 21.5% rise in the benchmark TOPIX index total return (in sterling terms). The share price increased by 16.3% although, having traded at a premium for most of the year, the Company's shares are currently trading at a discount to NAV (after deducting borrowings at fair value) of 3.2%. This is a much tighter level than the majority of the investment trusts in the Japanese sector and the overall performance continues to build on impressive five and ten year records for the Japan Trust.

As with recent years, stock selection contributed strongly to the returns (+5.2%) although gearing was a slight drag on performance (-1.5%); further performance details are to be found in the Managers' Report.

Investment income increased by 64% to £7.09m for the year, due in the main to increased dividends coupled with a strengthening yen over the year and sterling weakness post the Brexit vote.  Expenses increased by 17% due mainly to higher management fees (up £0.43m to £2.57m) in line with the substantial increase in net asset value.

Overall revenue gain per share was 2.35p (significantly up on the 0.28p last year) though as in prior years, no dividend will be paid while the revenue reserve remains in deficit. Ongoing charges for the year were 0.9%, the same as in 2015. In recognition of increasing value for shareholders and improving the attractiveness of our Investment Trust management fee structure, your Board is pleased to inform you that we have agreed a fee reduction with the Managers from 1 September 2016 through the introduction of an extra tier (for net assets in excess of £250m) at a lower fee rate of 0.55% (previously 0.65%).

Gearing

Gearing amounted to 14% of shareholders' funds at the start of the year and ended the year at 18%. Gross borrowings remained at Y10.2bn though, due to the significant currency movement post the Brexit vote, the sterling value of these loans in the balance sheet rose to £75.3m at the year end (2015 - £54.7m). Given the very low cost of yen loans, we continue to 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 it is important that the Company retains this power and so, at the Annual General Meeting, 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 2016, 3.6m shares were issued at a premium to net asset value raising proceeds of £16m, continuing the trend of recent years. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting and we will continue to issue shares only when at a premium to net asset value. This authority will expire at the conclusion of the Annual General Meeting in 2017.

Continuation 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 2 December 2016.

Last year the Company received support for its continuation. Your Directors are still of the opinion that there remain attractive opportunities in selected, well-run Japanese companies and given the long term favourable outlook for the Japan Trust, my fellow Directors and I intend where possible to vote our own shareholdings in favour of the resolution and hope that all 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 and so we were delighted to welcome David Kidd on to the Board in late 2015, bringing with him a significant depth and breadth of investment experience.

Outlook

The year to 2016 saw renewed strength in Japanese equities and our Managers are continuing to find extremely interesting companies in which to invest, with their bottom up approach of stock selection adding significant value to the portfolio.

Business sentiment in Japan has improved over the last couple of years but with the slowdown in China, a stronger yen, the impending US Presidential election coupled with uncertainties in Europe post Brexit, the moderate economic growth level in Japan has to some extent been constrained by such factors.

Given these macro economic and political hurdles, your Board sees the Managers' proven ability to outperform through their stock selection methodology as even more important than before in returning strong results for shareholders. We also see ongoing evidence of significant improvements in corporate governance across Japan which the Managers continue to press for with all our holdings.

In summary we continue to believe there are significant opportunities for investment growth among the companies in our portfolio alongside other opportunities under consideration at this time and that the Managers' approach of investing for medium to long term growth can capitalise on these opportunities going forward.

Nick AC Bannerman

Chairman

17 October 2016

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 increased by 25.7% to 534.6p which compares to a rise in the Company's benchmark of 21.5%: another year of outperformance.  Baillie Gifford believes that performance should be measured over longer periods and over five years the NAV has outperformed the benchmark by 8% pa and over ten years by 4% pa demonstrating the benefits to shareholders of an active long term growth orientated stock picking approach.

The Company's total assets increased to just over £500m, a rise of over £100m during the year, owing to the combination of outperformance, strong yen and share issuance.  A larger trust will be of benefit to shareholders as fixed costs are spread over a broader base and it should also be easier to deal in the shares.  The growth in assets over the past year also takes the Trust into the top 100 investment companies by size for the first time. 

The main driver of the strong absolute return was the increase in the value of the yen which was greater than the decline in the TOPIX.  The yen rose 37.6% to ¥135.5 per £1, strengthening to levels against sterling last seen in 2012 before the advent of Abenomics.  The Japanese stock market fell however in yen terms by 18.9% as there were global worries, particularly about Chinese growth, and the impact of a stronger yen also affected projections for earnings.  The combination of these two offsetting moves was positive for sterling investors, the rather counter-intuitive moves in markets after the UK Referendum vote took the Japan Trust NAV and share price to an all-time high.   

Given the long term active stock picking style, performance is driven by individual company share prices rather than positions taken on industrial sectors and we have therefore changed the presentation of both performance and the portfolio in the Annual Report to reflect more closely our decision making process.  The portfolio is grouped into four different styles of growth with each, we believe, offering different risks and opportunities.  Secular growth, the largest part of the portfolio, includes companies that we feel have an opportunity to grow rapidly but where there are a number of potential outcomes.  Growth stalwarts however are companies where growth is less rapid but more predictable, whilst those categorised as special situations are companies whose recent performance has not been good but we see a reason to believe that improvements are underway.  The cyclical growth stocks are those whose earnings do not rise every year but where we expect the earnings to be higher from one cycle to the next. 

Performance is shown by listing the top ten and bottom ten contributors to performance over both one and five years rather than by sector.  As in prior years the Trust's investment in secular growth companies has been helpful, with Misumi, which has been in the portfolio for over ten years, and has successfully developed its business model to be competitive overseas as well as in Japan, contributing the most to performance.  Several internet related companies such as online fashion retailer Start Today, online advertiser CyberAgent and medical portal M3 also performed well over the period.  In terms of holdings that hurt performance, Toyo Tire & Rubber was affected by a quality scandal in a minor division but, despite a poor year, is still amongst the largest contributors to performance over five years.  Other stocks out of favour were Cookpad, the recipe website which suffered management changes, and HIS, which has a theme park near the Kumamoto earthquake region.   

We have split the portfolio by length of time held, with the vast majority of stocks now owned for over five years.  During the year we sold five holdings where prospects were unexciting and bought nine new companies with descriptions of some of these on page 12 of the Annual Report and Financial Statements.  The number of companies held is now 69, but several of the new holdings are in small companies with potentially exciting growth ahead and with this type of holding even a small position could potentially make a difference to overall returns in the long term.  The characteristics of the portfolio compared to the benchmark demonstrates that in aggregate the companies held by the Trust have faster sales growth, better profitability and balance sheets, and tend to be smaller than the average TOPIX stock but that they are valued at a small premium to the market.  We feel that the superior growth prospects of the portfolio more than compensate for the slightly higher valuation. 

 

Corporate Developments 

 

The new corporate governance code that was put in place last year has encouraged further expansion in the number of independent directors across the quoted sector in Japan.  There has even been a significant increase in the number of outside external female directors.  Whilst it is still early on in a long term change in company attitudes, increased dividend payments and share buy backs are positive indicators and we expect long term dividend growth to exceed earnings growth. Gradually boards in Japan will take on more of an oversight function and less of an executive one.

Corporate culture in Japan is probably more diverse than generally understood and the acquisition of ARM Holdings by Softbank is a clear demonstration of this.  Mr Son leads a company of which he is the major shareholder and the founder and he has a long term view of technology developments.  He bought ARM to help develop products for the Internet of Things era.  There are several other companies within the portfolio with founder presidents and we find many of the great growth companies in Japan are led by such entrepreneurs. 

Outlook

Although commentators are almost universally disappointed that Abenomics has not achieved its target of stimulating rapid growth in the Japanese economy, some policies are driving changes that provide a positive investment environment for many of the growth companies that we own. In one case, changes in regulations relating to bio technology have brought Japanese scientists back to Japan from America to list their company.  The stronger yen has had a negative impact on reported profits. However, employment has increased in Japan, wages are rising as the labour shortage deepens and Japan is beginning to re-examine many attitudes from worker immigration to the role of women in the workforce. The number of inbound tourists reached the 2020 target of 20m in 2015 and the aim is now for 40m tourists annually by the Tokyo Olympics. We continue, therefore, to find interesting opportunities for investment in companies with potentially exciting growth prospects.

Past performance is not a guide to future performance.

Equity Portfolio by Growth Category

As at 31 August 2016

Secular Growth	% of total assets			Growth    Stalwarts	% of total assets			Special   Situations	% of total assets			Cyclical  Growth	% of total assets
Rakuten		3.2		Nitori Park24 Mitsubishi UFJ Lease    & Finance Sawai Pharmaceutical Fukuoka Financial Toyo Suisan Kaisha Hamakyorex		1.6 1.5 1.4 1.1 1.0 0.8 0.2		Sony		2.3		Temp Holdings Itochu Takara Leben Toyo Tire & Rubber Sumitomo Mitsui Trust Mazda Motor Nifco Iida Group Suruga Bank Mitsubishi Electric Isuzu Motors Mitsui & Co Advantest Sumitomo Metal   Mining Otsuka Corp Disco Nippon Electric Glass Modec Murata Manufacturing	2.7 2.0 1.7 1.7 1.7 1.6 1.6 1.5 1.3 1.2 1.2 1.2 1.1 1.1 1.1 1.1 0.9 0.8 0.6
SoftBank		3.2						Hikari Tsushin		1.7
Sysmex		2.8						Tokyo Tatemono		1.7
M3		2.6						Rohm		1.1
Misumi Group		2.5
GMO Internet		2.5
Fuji Heavy      Industries		2.3
Japan Exchange   Group		2.2
CyberAgent		2.1
SMC		2.1
Pigeon		2.1
Yaskawa Electric		2.0
Start Today		2.0
Iriso Electronics		2.0
Outsourcing		1.9
Kubota		1.7
Shimadzu		1.7
Don Quijote		1.7
SBI		1.7
Fanuc		1.7
H.I.S.		1.5
Next		1.3
Toyota Tsusho		1.3
Asics		1.2
Recruit Holdings		1.2
Topcon		1.1
Inpex		1.0
Nidec		0.9
Cookpad		0.8
Kakaku.com		0.7
Digital Garage		0.7
Broadleaf		0.6
Wirelessgate		0.5
Line		0.5
Istyle		0.4
Nippon Ceramic		0.4
Infomart Corp		0.4
F@N   Communications		0.3
SanBio		0.3
Total		59.1		Total		7.6		Total		6.8		Total	26.1

Stock Level Contribution

Top Ten Relative Stock Contributors Year to 31 August 2016

Bottom Ten Relative Stock Contributors Year to 31 August 2016

	Name	Trust (average weight) %	Index (average weight) %	Contribution %		Name	Trust (average weight) %	Index (average weight) %	Contribution %
Misumi Group                                           2.9              0.1				1.1		Toyo Tire & Rubber	2.4	-	(1.1)
Outsourcing                                             2.0                 -				0.9		Cookpad	1.9	-	(0.9)
Start Today                                              2.1              0.1				0.8		H.I.S.	2.2	-	(0.7)
Park24 Co Ltd                                           1.8              0.1				0.6		Asics	1.6	0.1	(0.7)
CyberAgent                                              2.3              0.1				0.6		Don Quijote	2.2	0.1	(0.4)
Advantest                                                0.9                 -				0.6		Otsuka Corp	1.9	0.1	(0.3)
M3                                                            2.8              0.1				0.6		Sumitomo Mitsui Trust	2.0	0.4	(0.3)
Mitsubishi UFJ Lease & Finance                  -              2.3				0.5		Keyence	-	0.7	(0.3)
Yaskawa Electric                                    2.1              0.1				0.5		Daikin Industries	-	0.6	(0.2)
Iriso Electronics                                       2.1                 -				0.5		Fukuoka Financial	1.2	0.1	(0.2)

Top Ten Relative Stock Contributors 5 years to 31 August 2016

Bottom Ten Relative Stock Contributors 5 years to 31 August 2016

Name	Trust (average weight) %	Index (average weight) %	Contribution %		Name	Trust (average weight) %	Index (average weight) %	Contribution %
Fuji Heavy Industries	2.9	0.5	4.5		Gree	0.9	-	(2.4)
Sysmex	2.9	0.2	2.6		Yamada Denki	0.8	0.1	(1.3)
Temp Holdings	2.1	-	2.5		Inpex	1.9	0.4	(1.2)
M3	2.3	0.1	2.4		Toyota Motor	-	4.3	(1.2)
Japan Exchange Group	2.7	0.1	2.3		Sumitomo Mitsui Trust	1.4	0.5	(0.8)
Pigeon	1.7	0.1	2.0		Lifenet Insurance	0.2	-	(0.8)
Toyo Tire & Rubber	2.4	-	1.9		Asahi Glass	0.7	0.2	(0.7)
GMO Internet	2.0	-	1.8		Ushio	0.5	-	(0.7)
Tokyo Tatemono	2.3	0.1	1.8		Keihin	0.6	-	(0.6)
Iriso Electronics	2.0	-	1.8		Aeon Mall	1.4	0.1	(0.6)

Source: StatPro. Baillie Gifford Japan Trust relative to TOPIX total return, in sterling terms.

Holding Periods

As at 31 August 2016

>10 years	% of total assets				5-10 years	% of total assets				2-5 years	% of total assets				<2 years	% of total assets
Rakuten	3.2				M3	2.6				SoftBank	3.2				Outsourcing	1.9
Sysmex	2.8				GMO Internet	2.5				Fuji Heavy Industries	2.3				Takara Leben	1.7
Temp Holdings	2.7				Japan Exchange					Sony	2.3				Fanuc	1.7
Misumi Group	2.5				Group	2.2				CyberAgent	2.1				Iida Group	1.5
SMC	2.1				Pigeon	2.1				Sumitomo Mitsui Trust	1.7				Recruit Holdings	1.2
Itochu	2.0				Yaskawa Electric	2.0				Mazda Motor	1.6				Topcon	1.1
Don Quijote	1.7				Start Today	2.0				Park24	1.5				Nidec	0.9
H.I.S.	1.5				Iriso Electronics	2.0				Toyota Tsusho	1.3				Murata Manufacturing	0.6
Mitsubishi UFJ Lease & Finance	1.4				Hikari Tsushin	1.7				Advantest	1.1				Wirelessgate	0.5
Mitsubishi Electric	1.2				Kubota	1.7				Sumitomo Metal Mining	1.1				Line	0.5
Inpex	1.0				Tokyo Tatemono	1.7				Sawai Pharmaceutical	1.1				Istyle	0.4
Modec	0.8				Shimadzu	1.7				Nippon Electric Glass	0.9				Nippon Ceramic	0.4
Hamakyorex	0.2				Toyo Tire & Rubber	1.7				Toyo Suisan Kaisha	0.8				Infomart	0.4
Total	23.1				SBI	1.7				Cookpad	0.8				F@N Communications	0.3
					Nitori	1.6				Kakaku.com	0.7				SanBio	0.3
					Nifco	1.6				Broadleaf	0.6				Total	13.4
					Suruga Bank	1.3				Total	23.1
					Next	1.3
					Isuzu Motors	1.2
					Asics Corp	1.2
					Mitsui & Co	1.2
					Otsuka Corp	1.1
					Rohm	1.1
					Disco	1.1
					Fukuoka Financial	1.0									Stocks bought within
					Digital Garage	0.7									the past year.
					Total	40.0

List of Investments as at 31 August 2016 (unaudited)

Name

Business

Value £'000

% of total assets

Absolute† Performance %

Relative† Performance %

Rakuten	Internet retail and financial services	16,234	3.2	3.8	(14.6)
SoftBank	Telecom operator and technology investor	15,869	3.2	32.5	9.0
Sysmex	Medical equipment	13,944	2.8	25.5	3.3
Temp Holdings	Employment and outsourcing services	13,286	2.7	26.6	4.2
M3	Online medical database	13,160	2.6	51.9	25.0
Misumi Group	Precision machinery parts distributor	12,446	2.5	78.6	46.9
GMO Internet	Internet conglomerate	12,269	2.5	22.2	0.5
Fuji Heavy Industries	Subaru cars	11,695	2.3	35.3	11.4
Sony	Consumer electronics, films and finance	11,241	2.3	45.5	19.7
Japan Exchange Group	Stock Exchange operator	10,975	2.2	20.6	(0.7)
Cyberagent	Internet advertising and content	10,469	2.1	62.0	33.3
SMC	Pneumatic control equipment	10,347	2.1	37.1	12.8
Pigeon	Baby care products	10,313	2.1	19.7	(1.5)
Itochu	Trading conglomerate	10,140	2.0	19.5	(1.7)
Yaskawa Electric	Robots and factory automation	10,125	2.0	53.1	25.9
Start Today	Internet fashion retailer	9,821	2.0	80.5	48.5
Iriso Electronics	Specialist auto connectors	9,787	2.0	54.5	27.1
Outsourcing	Employment placement services	9,633	1.9	96.1	61.3
Hikari Tsushin	Entrepreneurial sales organisation	8,787	1.7	61.5	32.9
Kubota	Agricultural machinery	8,779	1.7	12.6	(7.4)
Tokyo Tatemono	Property leasing and development	8,747	1.7	11.8	(8.0)
Shimadzu	Environmental testing equipment	8,724	1.7	25.9	3.6
Takara Leben	Condominium builder	8,720	1.7	31.8*	11.6*
Toyo Tire & Rubber	Tyre manufacturer	8,602	1.7	(24.0)	(37.5)
Don Quijote	Discount store operator	8,576	1.7	(1.0)	(18.6)
Sumitomo Mitsui Trust	Trust bank and investment manager	8,378	1.7	5.0	(13.6)
SBI	Online broker and venture capital investor	8,360	1.7	18.5	(2.5)
Fanuc	Robotics manufacturer	8,303	1.7	25.8	3.5
Nitori	Furniture retail chain	8,262	1.6	51.1	24.3
Mazda Motor	Car manufacturer	7,847	1.6	14.0	(6.2)
Nifco	Value-added plastic car parts	7,776	1.6	54.4	27.1
H.I.S.	Travel agency and theme parks	7,593	1.5	(13.3)	(28.6)
Park24	Parking, car hire and sharing	7,530	1.5	78.5	46.9
Iida Group	House builder	7,292	1.5	26.6	4.1
Mitsubishi UFJ Lease & Finance
Finance	Leasing company	6,946	1.4	16.4	(4.3)
Suruga Bank	Specialist regional bank	6,847	1.3	46.1	20.2
Next	Real estate website	6,553	1.3	35.8	11.7
Toyota Tsusho	Markets automobiles and other products, Africa focus	6,261	1.3	19.0	(2.1)
Mitsubishi Electric	Industrial electric conglomerate	6,121	1.2	56.7	28.9
Isuzu Motors	Lorries and SUVs	6,049	1.2	21.6	-
Asics	Sports shoes and clothing	5,882	1.2	(17.9)	(32.5)
Recruit Holdings	Property, lifestyle and HR media	5,864	1.2	47.1	21.0
Mitsui & Co	Trading conglomerate	5,850	1.2	25.2	3.0
Advantest	Semiconductor testing devices	5,717	1.1	122.7	83.2

Name

Business

Value £'000

% of total assets

Absolute† Performance %

Relative† Performance %

Sumitomo Metal Mining		Smelting and copper, nickel and gold mining	5,559	1.1	19.8	1.5
Otsuka Corp		IT solutions for small businesses	5,451	1.1	(3.8)	(20.9)
Rohm		Electronic component manufacturer	5,446	1.1	10.6	(9.0)
Sawai Pharmaceutical		Generic pharmaceuticals	5,421	1.1	24.1	2.1
Disco		Specialist cutting for semiconductors	5,303	1.1	81.4	49.2
Topcon		GPS systems	5,291	1.1	17.1*	(10.0)*
Fukuoka Financial		Regional bank	4,992	1.0	2.8	(15.4)
Inpex		Oil and gas producer	4,863	1.0	3.0	(15.3)
Nippon Electric Glass		Flat panel display glass manufacturer	4,682	0.9	37.3	13.0
Nidec		Electronics and electrical equipment	4,549	0.9	37.8*	16.6*
Modec		Designs and leases offshore oil production facilities
		facilities	4,244	0.8	54.4	27.0
Toyo Suisan Kaisha		Noodle maker	3,970	0.8	29.8	6.8
Cookpad		Recipe website	3,864	0.8	(43.1)	(53.2)
Kakaku.com		Price comparison and restaurant review     website	3,604	0.7	24.6	2.5
Digital Garage		Internet business investor	3,562	0.7	41.1	16.0
Broadleaf		Proprietary car repair database	3,272	0.6	25.1	2.9
Murata Manufacturing		Electrical components	3,223	0.6	9.7*	11.2*
Wirelessgate		Wireless communication services	2,569	0.5	37.0*	13.4*
Line		Messaging service	2,350	0.5	28.5*	23.3*
Istyle		Beauty product review website	2,128	0.4	(14.8)*	(16.5)*
Nippon Ceramic		Semiconductor devices	1,936	0.4	17.6*	(0.2)*
Infomart		Software and computer services	1,805	0.4	19.9*	(0.7)*
F@N Communications		Internet advertising services	1,606	0.3	12.4	(7.5)
SanBio		Stem cell based stroke treatment	1,357	0.3	65.6	36.2
Hamakyorex		Logistics	1,252	0.2	9.0	(10.3)
Total Investments			498,419	99.6
Net Liquid Assets			1,872	0.4
Total Assets			500,291	100.0
Bank Loans			(75,294)	(15.1)
Shareholders' Funds			424,997	84.9

†    Absolute and relative performance has been calculated on a total return basis over the period 1 September 2015 to 31 August 2016. For investments held for part of the year, the return is for the period they were held. Absolute performance is in sterling terms; relative performance is against TOPIX total return (in sterling terms).

*     Figures relate to part period returns.

Source: Baillie Gifford/StatPro

Past performance is not a guide to future performance.

Key Performance Indicators

The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:

- the movement in net asset value per ordinary share compared to the benchmark;

- the movement in the share price;

- the discount/premium of the share price to the net asset value per share; and

- the ongoing charges.

In addition to the above, the Board considers peer group comparative performance.

The one, five and ten year records for the KPIs can be found on pages 3 to 5 of the Annual Report and Financial Statements.

Future developments of the company

The outlook for the Company for the next 12 months is set out in the Chairman's Statement and the Managers' Report.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 27 of the Annual Report and Financial Statements. No Director has a contract of service with the Company.

Investment Management Fee

An Investment Management Agreement between the Company and Baillie Gifford & Co Limited sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than 6 months' notice or on shorter notice in certain circumstances. Compensation would only be payable if termination occurred prior to the expiry of the notice period. Careful consideration has been given by the Board as to the basis on which the management fee is charged. The Board considers that maintaining a relatively low ongoing charges ratio is in the best interests of the shareholders. The Board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance. The annual management fee payable for the year to 31 August 2016 is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly. With effect from 1 September 2016, the management fee payable will be 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets, calculated and payable quarterly. The details of the management fee are as follows:

	2016 £'000		2015 £'000
Investment management fee	2,572		2,141

Principal Risks

As explained on page 23 of the Annual Report and Financial Statements there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The principal risks associated with the Company are as follows:

Financial Risk - The Company's assets consist of listed securities and its principal risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 17 to the Financial Statements on pages 44 to 47 of the Annual Report and Financial Statements. To mitigate this risk the Board considers at each meeting various portfolio metrics including individual stock performance, contribution to performance by industrial sector, purchases and sales of investments and the top and bottom contributors to performance. The Manager provides rationale for stock selection decisions. A strategy meeting is held annually.

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, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, 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. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent

review processes, and procedures are in place to ensure adherence to the Transparency Directive with reference to inside information.

Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated.

Smaller Company Risk - the Company has investments in smaller companies which are generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions. To mitigate this risk, the Board reviews the investment portfolio at each meeting and discusses the investment case and portfolio weightings with the Managers. A spread of risk is achieved by holding a minimum of 40 stocks.

Operational Risk - failure of Baillie Gifford's 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. To mitigate this risk, Baillie Gifford 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 Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.

Discount/Premium Volatility - the discount/premium at which the Company's shares trade can change. To mitigate this risk, the Board monitors the level of discount/premium and the Company has authority to buy back or issue shares when deemed to be in the best interest of all shareholders.

Leverage Risk - the Company may borrow money for investment purposes (sometimes known as 'gearing' or 'leverage'). 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. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The Company's investments are in listed securities that are readily realisable. Further information on leverage can be found on page 55 and in the Glossary of Terms on page 56 of the Annual Report and Financial Statements.

Political Risk - political developments are closely monitored and considered by the Board. The Board has noted the results of the UK Referendum on continuing membership of the European Union. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

Viability Statement

Notwithstanding that the continuation vote of the Company is subject to the approval of shareholders annually, the Directors have, in accordance with provision C2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014, assessed the prospects of the Company over a period of five years. The Directors believe this period to be appropriate as it reflects the Company's longer term investment strategy and to be a period during which, in the absence of any adverse change to the regulatory environment and to the tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing the Company nor to the effectiveness of the controls employed to mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a period

of five years.

In considering the viability of the Company, the Directors have conducted a robust assessment of each of the principal risks and uncertainties detailed on pages 6 and 7 of the Annual Report and Financial Statements and in particular the impact of market risk where a significant fall in Japanese equity markets would adversely impact the value of the investment portfolio. The Company's investments are listed and readily realisable and can be sold to meet its liabilities as they fall due, the main liability currently being the bank borrowings. The Directors have also considered the Company's leverage and liquidity in the context of the unsecured fixed term ¥7.2bn loan facility expiring in 2020 and the unsecured revolving ¥4.5bn loan facilities expiring in 2017 and 2020. In addition, all of the key operations required by the Company are outsourced to third party service providers and it is reasonably considered that alternative providers could be engaged at relatively short notice.

Based on the Company's processes for monitoring revenue projections, share price discount/premium, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.

Going Concern

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 17 to the 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, having assessed the principal risks and other matters set out in the Viability Statement on page 7 of the Annual Report and Financial Statements, 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.

Financial Instruments

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 2016	Investments £'000		Cash and cash equivalents £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	498,419		2,414		(75,294)		163		425,702
Total exposure to   currency risk	498,419		2,414		(75,294)		163		425,702
Sterling	-		59		-		(764)		(705)
	498,419		2,473		(75,294)		(601)		424,997

*    Includes net non-monetary assets of £21,000.

At 31 August 2015	Investments £'000		Cash and cash equivalents £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	369,568		8,691		(54,726)		142		323,675
Total exposure to currency risk	369,568		8,691		(54,726)		142		323,675
Sterling	-		51		-		(573)		(522)
	369,568		8,742		(54,726)		(431)		323,153

* Includes net non-monetary assets of £27,000.

Currency Risk Sensitivity

At 31 August 2016, 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 £47,222,000 (2015 - £35,906,000). 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 £38,636,000 (2015 - £29,377,000).

(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 2016 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:

	2016			2015
	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	75,294	2.0%	36 months	54,726	2.1%	43 months

Interest Rate Risk Sensitivity

An increase of 100 basis points in interest rates, with all other variables held constant, would have decreased the Company's total net assets and total return on ordinary activities for the year ended 31 August 2016 by £246,000 (2015 - £161,000). This is mainly due to the Company's exposure to interest rates on its revolving bank loans. A decrease of 100 basis points would have had an equal but opposite effect. The Company does not hold bonds.

(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, various analyses of the portfolio by growth category length of time held, industrial sector and exchange listing are shown on pages 13 to 15 of the Annual Report and Financial Statements.

117.3% (2015 - 114.4%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2016 would have increased total net assets and net return on ordinary activities after taxation by £49,842,000 (2015 - £36,957,000). 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:

	2016 £'000	2015 £'000
In less than one year In more than two years, but not more than five years	22,145 53,149	16,096 38,630
	75,294	54,726

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 Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Depositary has delegated the custody function to Bank of New York Mellon SA/NV London Branch. 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 Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting their 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:

	2016 £'000	2015 £'000
Cash and cash equivalents	2,473	8,742
Debtors	1,909	318
	4,382	9,060

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.

	2016		2015
	Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Yen bank loans	75,294	79,338	54,726	58,336

* 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 42 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 6 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page 20 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 38 of the Annual Report and Financial Statements.

At 31 August 2016, all investments held at fair value through profit or loss are categorised as Level 1 (31 August 2015 - Level 1). None of the financial liabilities are designated at fair value through profit or loss in the Financial Statements.

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, comprising Financial Reporting Standard 102 the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102). 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, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements;

¾ notify the Company's shareholders in writing about the use of disclosure exemptions, if any, in FRS 102 used in the preparation of 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, 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 of the Annual Report and Financial Statements, 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

Nick AC Bannerman

17 October 2016

Income Statement

	For the year ended 31 August 2016			For the year ended 31 August 2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	102,266	102,266	-	45,071	45,071
Currency (losses)/gains (note 2)	-	(18,277)	(18,277)	-	2,700	2,700
Income (note 3)	7,090	-	7,090	4,316	-	4,316
Investment management fee (note 4)	(2,572)	-	(2,572)	(2,141)	-	(2,141)
Other administrative expenses	(523)	-	(523)	(502)	-	(502)
Net return before finance costs and taxation	3,995	83,989	87,984	1,673	47,771	49,444
Finance costs of borrowings	(1,463)	-	(1,463)	(1,042)	-	(1,042)
Net return on ordinary activities before taxation	2,532	83,989	86,521	631	47,771	48,402
Tax on ordinary activities	(709)	-	(709)	(432)	-	(432)
Net return on ordinary activities after taxation	1,823	83,989	85,812	199	47,771	47,970
Net return per ordinary share (note 6)	2.35p	108.24p	110.59p	0.28p	67.17p	67.45p

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

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

Balance Sheet as at 31 August

	2016		2015
	£'000	£'000	£'000	£'000
Fixed assets Investments held at fair value through profit or loss		498,419		369,568
Current assets
Debtors	1,930		345
Cash and cash equivalents	2,473		8,742
	4,403		9,087
Creditors: Amounts falling due within one year (note 7)			(16,872)
	(24,676)
Net current liabilities		(20,273)		(7,785)
Total assets less current liabilities		478,146		361,783
Creditors: Amounts falling due after more than one year (note 7)		(53,149)		(38,630)
Net assets		424,997		323,153
Capital and reserves
Called up share capital		3,937		3,756
Share premium account		89,123		73,272
Capital redemption reserve		203		203
Capital reserve		335,728		251,739
Revenue reserve		(3,994)		(5,817)
Shareholders' funds		424,997		323,153
Net asset value per ordinary share (after deducting borrowings at fair value)		534.6p	425.4p
Net asset value per ordinary share (after deducting borrowings at par value)		539.8p	430.2p
Ordinary shares in issue (note 9)		78,734,925	75,121,750

The Financial Statements of The Baillie Gifford Japan Trust PLC (Company registration number SC075954) were approved and authorised for issue by the Board and were signed on 17 October 2016.

Statement of Changes in Equity

For the year ended 31 August 2016

	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 2015	3,756	73,272	203	251,739	(5,817)	323,153
Shares issued	181	15,851	-	-	-	16,032
Net return on ordinary activities after taxation	-	-	-	83,989	1,823	85,812
Shareholders' funds at 31 August 2016	3,937	89,123	203	335,728	(3,994)	424,997

For the year ended 31 August 2015

	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 2014	3,467	47,092	203	203,968	(6,016)	248,714
Shares issued	289	26,180	-	-	-	26,469
Net return on ordinary activities after taxation	-	-	-	47,771	199	47,970
Shareholders' funds at 31 August 2015	3,756	73,272	203	251,739	(5,817)	323,153

* The capital reserve balance as at 31 August 2016 includes investment holding gains of £235,319,000 (2015 - £140,216,000).

 

Cash Flow Statement

	For the year ended 31 August 2016			For the year ended 31 August 2015
	£'000	£'000		£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	86,521			48,402
Net gains on investments	(102,266)			(45,071)
Currency losses/(gains)	18,277			(2,700)
Finance cost of borrowings	1,463			1,042
Overseas withholding tax	(675)			(429)
Changes in debtors and creditors	(153)			83
Cash from operations		3,167			1,327
Interest paid		(1,407)			(1,030)
Net cash inflow from operating activities		1,760			297
Cash flows from investing activities
Acquisitions of investments	(51,366)			(62,854)
Disposals of investments	25,014			23,906
Exchange differences on settlement of investment transactions	615			(117)
Net cash outflow from investing activities		(25,737)			(39,065)
Shares issued	16,032			26,469
Bank loans drawn down	38,016			24,075
Bank loans repaid	(38,016)			(7,921)
Net cash inflow from financing activities		16,032			42,623
(Decrease)/increase in cash and cash equivalents		(7,945)			3,855
Exchange movements		1,676			(344)
Cash and cash equivalents at start of period		8,742			5,231
Cash and cash equivalents at end of period*		2,473			8,742

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand

Notes to the Condensed Financial Statements (unaudited)

1.	The Financial Statements for the year to 31 August 2016 have been prepared in accordance with The Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102') which the Company must adopt for its financial year ending 31 August 2016. Following the application of the new reporting standard and the AIC's issued Statement of Recommended Practice, there has been no impact on the Company's Income Statement, Balance Sheet or Statement of Changes in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for the period previously reported. The Cash Flow Statement reflects the presentational requirements of FRS 102, which are different to FRS 1. In addition, the Cash Flow Statement reconciles to cash and cash equivalents whereas under previous UK GAAP the Cash Flow Statement reconciled to cash. 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.
							31 August 2016 £'000			31 August 2015 £'000
2.	Currency Gains/(Losses)
	Exchange differences on bank loans						(20,568)			3,161
	Other exchange differences on cash						2,291			(461)
							(18,277)			2,700
3.	Income						31 August 2016 £'000			31 August 2015 £'000
	Income from investments						7,090			4,316
4.	Investment Management Fee - all charged to revenue						31 August 2016 £'000			31 August 2015 £'000
	Investment Management Fee						2,572			2,141
	The annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly. With effect from 1 September 2016, the annual management fee payable will be 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets, calculated and payable quarterly.
5.	No final dividend will be declared.
6.	Net Return per Ordinary Share
		2016						2015
		Revenue		Capital	Total			Revenue	Capital		Total
	Net return on ordinary activities    after taxation	2.35p		108.24p	110.59p			0.28p	67.17p		67.45p

Notes to the Condensed Financial Statements (unaudited) (ctd)

	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £1,823,000 (2015 - £199,000), and on 77,592,006 (2015 - 71,115,407) 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 £83,989,000 (2015 - £47,771,000), and on 77,592,006 (2015 - 71,115,407) 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.	Total borrowings at 31 August 2016 were £75.3m (¥10.2billion), (31 August 2015 - £54.7m (¥10.2billion)). No loan facilities were entered into or repaid during the year other than the rollover of the Scotiabank facilities.
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 £25,000, (31 August 2015 - £30,000) and transaction costs on sales amounted to £15,000 (31 August 2015 - £12,000).
9.	At 31 August 2016 the Company had authority to buy back 11,365,680 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, 3,613,175 (2015 - 5,790,000) shares were issued at a premium to net asset value raising proceeds of £16,032,000 (2015 - £26,469,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2016. The financial information for 2015 is derived from the statutory accounts for 2015 which have been delivered to the Registrar of Companies. The Auditor's have reported on the 2015 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 2016 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.

^‡ 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.

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