Half-year Report

RNS Number : 8267I

Baillie Gifford Japan Trust PLC

26 March 2018

 

RNS Announcement

The Baillie Gifford Japan Trust PLC

Results for the six months to 28 February 2018

Legal Entity Identifier: 54930037AGTKN765Y741

Regulated Information Classification: Interim Financial Report.

The following is the unaudited Interim Financial Report for the six months to 28 February 2018.

Interim Management Report

The six months to the end of February 2018 have seen further gains in the share prices of growth companies in Japan and as a result the NAV of your Company, after deducting borrowings at fair value, has increased by 18% to 805.4p whilst the share price has risen by 18.3%.  The TOPIX rose by 6.4% in sterling terms during the same period.  Over the longer term, which we believe is a fairer way of looking at performance, the Company's benchmark is up by 55.2% and the NAV and share price by 89.1% and 98.1% respectively over the past three years. 

The recent outperformance has been driven by gains in a wide range of companies rather than one specific theme or area.  The largest contributor was Yaskawa Electric, the robot manufacturer, which has continued to see strong order growth and record profitability.  SBI Holdings, Japan's largest online brokerage, which is developing its fintech businesses,  rose strongly, whilst iStyle, the cosmetic review website, has seen business growth reaccelerate.  Most startling is the contribution from Katitas, a company which only listed in December, and which refurbishes existing homes and sells them at affordable prices.  The share price has more than doubled since the IPO.  SanBio, one of the cluster of healthcare companies that we hold, and which has stem cell technology to repair brain injury, also was a top ten contributor to outperformance as confidence grows that they will be able to successfully commercialise their technology. 

The benign economic conditions that have existed in Japan over the past few years have continued with further expansion in the last two quarters of 2017.  Growth estimates continue to be revised up and early indications are that wage rises for 2018 will be higher than in the recent past.  Employment remains strong, with the numbers of both female and foreign workers at record levels.   Despite this deployment of additional pools of staff, to which must be added the increase in those working after the age of 65, the labour shortage is deepening.  We expect that this will lead to positive change by corporate Japan as companies are forced to adopt new strategies.  They can no longer solve problems by simply hiring people and there are already signs that investment in labour saving technology in the service sectors is accelerating.  There will be fundamental mindset changes within traditional companies about how many business divisions are appropriate.  It is one thing to have a substandard business area that continues to employ people as part of a social contract, but there is no need for its existence when labour is short and may be better deployed in core divisions of the company.  It is interesting in this context that return on equity figures for Japan in 2018 will be over 10%, an all-time high reflecting the early stages of this trend along with the strong demand conditions that corporate Japan is experiencing.  There will of course be some companies that suffer though and some reductions in holdings have already been made as a result. 

During the period we have sold five holdings either of companies that had achieved what we initially expected or where the holding size had become small and we did not wish to add.  We have bought one new holding in our healthcare cluster, Noritsu Koki, which has undergone a transition from minilab manufacturer to biotech innovator.  There have also been purchases in Katitas, the house renovator, Shimano, the global leader in cycle gears and Zenkoku Hosho which guarantees mortgages and is expanding its market share. 

This is the last report that I will be writing as portfolio manager of Baillie Gifford Japan Trust after a very enjoyable career managing the portfolio for your Company.  It is pleasing that the long term returns from Japanese growth companies, as embodied in Baillie Gifford Japan Trust, have more than kept up with those from global investment over five and ten years.  I retire from Baillie Gifford at the end of April and leave the management of the Trust in the very capable hands of my colleagues Matthew Brett and Praveen Kumar.  I remain optimistic about the prospects for further growth as the number of good companies to choose from is greater than when I started investing in Japan in the 1980s, their growth is reliant on global trends not mature domestic demand and Japan is still a very underappreciated market. 

Past performance is not a guide to future performance

Total return information sourced from Thomson Reuters/Baillie Gifford. See disclaimer at end of this document.

See Glossary of Terms, Note 13.

 

Responsibility statement

We confirm that to the best of our knowledge:

a)  the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b)  the Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, their impact on the Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)  the Interim Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein).

On behalf of the Board

Nick AC Bannerman

Chairman

23 March 2018

 

Equity Portfolio by Growth Category as at 28 February 2018

Secular Growth	%*		Growth Stalwarts	%*			Special Situations		%*		Cyclical Growth	%*
SoftBank	3.7		Nitori		1.5		Sony		2.0		Persol Holdings	2.4
Yaskawa Electric	3.3		Zenkoku Hoshi Co Ltd		1.2		Tokyo Tatemono		1.6		Disco	1.9
Outsourcing	3.1		Mitsubishi UFJ Lease & Finance		1.1		Renesas Electronics		0.8		Nifco	1.9
SBI	2.9		Park24		0.9		Hikari Tsushin	0.3			Itochu	1.9
IRISO Electronics	2.6		Fukuoka Financial		0.8		Oolopl	0.2			Sumitomo Metal Mining	1.6
Misumi Group	2.3		Sawai Pharmacuetical		0.4						Toyo Tire & Rubber	1.6
Sysmex	2.3		Secom		0.4						Mitsubishi Electric	1.6
Nidec	2.2										Katitas	1.4
Fanuc	2.2										Sumitomo Mitsui Trust	1.4
M3	2.1										Iida Group	1.0
Start Today	2.1										Isuzu Motors	0.9
Don Quijote	2.1										Advantest	0.9
GMO Internet	2.1										Murata Manufacturing	0.9
CyberAgent	2.1										Invincible Investment	0.8
Inpex	2.0										Mazda Motor	0.8
Digital Garage	1.9										Suruga Bank	0.7
H.I.S.	1.8										Takara Leben	0.7
Pigeon	1.8
SMC	1.7
Shimadzu	1.6
Recruit Holdings	1.6
Kubota	1.5
iStyle	1.5
Rakuten	1.3
Subaru	1.2
Toyota Tsusho	1.2
Lifull	1.0
Topcon	1.0
SanBio	0.9
Broadleaf	0.8
MonotaRO	0.7
Cyberdyne	0.7
Peptidream	0.7
Keyence	0.6
Asics	0.6
Infomart	0.5
Noritsu Koki	0.5
Nippon Ceramic	0.5
Shimano	0.4
Healios K.K.	0.3
Total	63.4		Total		6.3		Total	4.9			Total	22.4

* Percentage of total assets

A definition of growth categories can be found in the Managers' Report on page 10 of the Annual Report and Financial Statements at 31 December 2017.

Twenty Largest Holdings at 28 February 2018 (unaudited)

Name	Business	Value £'000	% of total  assets*
SoftBank	Telecom operator and technology investor	31,013	3.7
Yaskawa Electric	Robots and factory automation	27,278	3.3
Outsourcing	Employment placement services	25,591	3.1
SBI	Online financial services	24,541	2.9
IRISO Electronics	Specialist auto connectors	22,098	2.6
Persol Holdings	Employment and outsourcing services	20,399	2.4
Misumi Group	Online distributor of precision machinery parts	19,685	2.3
Sysmec	Medical equipment	19,623	2.3
Nidec	Specialist motors	18,619	2.2
Fanuc	Robotics manufacturer	18,222	2.2
M3	Online medical database	18,054	2.1
Start Today	Internet fashion retailer	18,036	2.1
Don Quijote	Discount store chain	18,019	2.1
GMO Internet	Internet conglomerate	17,484	2.1
CyberAgent	Internet advertising and content	17,478	2.1
Inpex	Oil and gas producer	16,966	2.0
Sony	Consumer electronics, films and finance	16,953	2.0
Digital Garage	Internet business investor	16,141	1.9
Disco	Specialist cutting for semiconductors	16,084	1.9
Nifco	Value-added plastic car parts	15,942	1.9
		398,226	47.2

* Before deduction of bank loans.

 

Income Statement (unaudited)

	For the six months ended 28 February 2018			For the six months ended 28 February 2017
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	26,651	26,651		-	5,902	5,902
Changes in investment holding gains	-	74,391	74,391		-	46,759	46,759
Currency gains	-	2,046	2,046		-	1,588	1,588
Income from investments and interest receivable	4,908	-	4,908		4,075	-	4,075
Investment management fee	(2,097)	-	(2,097)		(1,477)	-	(1,477)
Other administrative expenses	(305)	-	(305)		(262)	-	(262)
Net return before finance costs and taxation	2,506	103,088	105,594		2,336	54,249	56,585
Finance costs of borrowings	(1,238)	-	(1,238)		(802)	-	(802)
Net return on ordinary activities before taxation	1,268	103,088	104,356		1,534	54,249	55,783
Tax on ordinary activities	(490)	-	(490)		(407)	-	(407)
Net return on ordinary activities after taxation	778	103,088	103,866		1,127	54,249	55,376
Net return per ordinary share (note 5)	0.90p	119.32p	120.22p		1.43p	68.90p	70.33p

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

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 (unaudited)

	At 28 February 2018 £'000	At 31 August 2017 £'000
Fixed assets
Investments held at fair value through profit or loss (note 6)	818,358	652,597
Current assets
Debtors	3,416	788
Cash and cash equivalents	23,630	10,585
	27,046	11,373
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(10,202)	(31,731)
Other creditors	(1,598)	(6,249)
	(11,800)	(37,980)
Net current liabilities	15,246	(26,607)
Total assets less current liabilities	833,604	625,990
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(112,227)	(50,769)
Net assets	721,377	575,221
Capital and reserves
Share capital	4,458	4,194
Share premium	164,724	122,698
Capital redemption reserve	203	203
Capital reserve	552,973	449,885
Revenue reserve	(981)	(1,759)
Shareholders' funds	721,377	575,221
Net asset value per ordinary share* (after deducting borrowings at fair value)	805.4p	682.4p
Net asset value per ordinary share* (after deducting borrowings at par value)	809.1p	685.8p
Ordinary shares in issue (note 8)	89,154,925	83,879,925

*See Glossary of Terms at the end of this document.

 

Statement of Changes in Equity (unaudited)

For the six months ended 28 February 2018

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2017	4,194	122,698	203	449,885	(1,759)	575,221
Shares Issued	264	42,026	-	-	-	42,290
Net return on ordinary activities after taxation	-	-	-	103,088	778	103,866
Shareholders' funds at 28 February 2018	4,458	164,724	203	552,973	(981)	721,377

For the six months ended 28 February 2017

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2016	3,937	89,123	203	335,728	(3,994)	424,997
Net return on ordinary activities after taxation	-	-	-	54,249	1,127	55,376
Shareholders' funds at 28 February 2017	3,937	89,123	203	389,977	(2,867)	480,373

*      The Capital Reserve balance as at 28 February 2018 includes investment holding gains on investments of £409,233,000 (28 February 2017 - gains of £282,078,000).

 

Condensed Cash Flow Statement (unaudited)

	Six months to 28 February 2018 £'000	Six months to 28 February 2017 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	104,356	55,783
Net gains on investments	(101,042)	(52,661)
Currency gains	(2,046)	(1,588)
Finance costs of borrowings	1,238	802
Overseas withholding tax	(427)	(350)
Changes in debtors and creditors	(2,178)	(559)
Cash from operations	(99)	1,427
Interest paid	(1,027)	(764)
Net cash (outflow)/inflow from operating activities	(1,126)	663
Cash flows from investing activities
Acquisitions of investments	(117,343)	(27,528)
Disposals of investments	47,249	21,166
Exchange differences	269	(115)
Net cash outflow from investing activities	(69,825)	(6,477)
Shares issued	42,290	-
Bank loans drawn down	62,873	10,360
Bank loans repaid	(20,045)	-
Net cash inflow from financing activities	85,118	10,360
Increase in cash and cash equivalents	14,167	4,546
Exchange movements	(1,122)	82
Cash and cash equivalents at 1 September	10,585	2,473
Cash and cash equivalents at 28 February*	23,630	7,101

* 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 condensed Financial Statements for the six months to 28 February 2018 comprise the statements set out on the previous pages together with the related notes below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014, updated in January 2017 with consequential amendments and have not been audited or reviewed by the Auditor pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Financial Statements for the six months to 28 February 2018 have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 August 2017. Going Concern Having considered the Company's principal risks and uncertainties, as set out in the inside front cover, together with its current position, investment objective and policy, its assets and liabilities, and projected income and expenditure, it is the Directors' opinion that the Company has adequate resources to continue in operational existence for the foreseeable future. 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 next continuation vote will be in December 2018. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements and confirm that they are not aware of any material uncertainties which may affect the Company's ability to do so over a period of at least twelve months from the date of approval of these Financial Statements.
2.	The financial information contained within this Interim Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2017 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006.
3.	Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed by the Company as its Alternative Investment Fund Manager and Company Secretary. The investment management function has been delegated to Baillie Gifford & Co. The management agreement can be terminated on not less than 6 months' notice, or on shorter notice in certain circumstances. The annual management fee is 0.95% on the first £50 million of net assets and 0.65% on the next £200 million of net assets and 0.55% the remaining net assets, calculated and payable quarterly.
4.	No interim dividend will be declared.
5.	Net return per ordinary share		Six months to 28 February 2018 £'000	Six months to 28 February 2017  £'000
	Revenue return on ordinary activities after taxation		778	1,127
	Capital return on ordinary activities after taxation		103,088	54,249
	Net return per ordinary share is based on the above totals of revenue and capital and on 86,399,787 ordinary shares (28 February 2017 - 78,734,925), being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.

Notes to the condensed financial statements (unaudited) (continued)
6.	Fair Value The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement. Level 1 -  using unadjusted quoted prices for identical instruments in an active market; Level 2 -  using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and Level 3 -  using inputs that are unobservable (for which market data is unavailable). The fair value of listed investments is the last traded price which is equivalent to the bid price on Japanese markets. 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. All of the Company's investments fall into Level 1 for the periods reported.
7.	Bank loans of £122.4million (¥18.0 billion) have been drawn down under yen loan facilities which are repayable between August 2020 and November 2024 (31 August 2017 - £82.5 million (¥11.7 billion)). The revolving loan facilities are shown under short term creditors as the current drawn downs are repayable within one year.
8.	The Company has the authority to issue shares/sell treasury shares at a premium to net asset value as well as to buy back shares at a discount to net asset value. During the period, 5,275,000 shares (28 February 2017 - nil) were issued at a premium to net asset value raising net proceeds of £42,290,043 (28 February 2017 - £nil). Between 1 March 2018 and 23 March 2018, the Company issued a further 125,000 shares at a premium to net asset value raising proceeds of £1,048,000).
9.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sales proceeds, as appropriate. During the period, transaction costs on purchases amounted to £54,000 (28 February 2017 - £9,000) and transaction costs on sales amounted to £29,000 (28 February 2016 - £12,000)
10.	Related Party Transactions
	There have been no transactions with related parties during the first six months of the current financial year that have materially affected the financial position or the performance of the Company during that period and there have been no changes in the related party transactions described in the last Annual Report and Financial Statements that could have had such an effect on the Company during that period
11.	Principal Risks and Uncertainties The principal risks facing the Company are financial risk, investment strategy risk, discount risk, regulatory risk, custody and depositary risk, smaller company risk, operational risk, leverage risk and political risk. An explanation of these risks and how they are managed is set out on page 8 of the Company's Annual Report and Financial Statements for the year to 31 August 2017 and is available on the Company's website www.japantrustplc.co.uk†. The principal risks and uncertainties have not changed since the date of that report.
12.	The Interim Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around 6 April 2018.

 

13.

Glossary of Terms Total Assets Total assets less current liabilities, before deduction of all borrowings. Net Asset Value Net Asset value (NAV) is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue. Net Asset Value (Borrowings at Fair Value) Borrowings are valued at an estimate of their market worth. Net Asset Value (Borrowings at Par Value) Borrowings are valued at their nominal par value. Net Liquid Assets Net liquid assets comprise current assets less current liabilities, excluding borrowings. Premium/Discount As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium. Total Return The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend. Ongoing Charges The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value). Gearing At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. The level of gearing can be adjusted through the use of derivatives which affect the sensitivity of the value of the portfolio to changes in the level of markets. Gearing is the Company's borrowings at par less cash and cash equivalents expressed as a percentage of shareholders' funds. Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds.

Leverage For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other. Active Share Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.

The Baillie Gifford Japan Trust aims to achieve long term capital growth principally through investment in medium and smaller sized Japanese companies which are believed to have above average prospects for growth, although it invests in larger companies when considered appropriate. At 28 February 2018, the Company had total assets of £843.8m (before deduction of bank loans of £122.4m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £177bn under management and advice as at 23 March 2018.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at www.japantrustplc.co.uk.^†

23 March 2018

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director

Four Broadgate

Tel: [phone] 

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

†      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.

 

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- Ends -

 

END

 

 

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