Half Yearly Report

RNS Number : 4914P

Baillie Gifford Japan Trust PLC

26 March 2009

 



THE BAILLIE GIFFORD JAPAN TRUST PLC

Results for the six months to 28 February 2009

In the six months to 28 February 2009, The Baillie Gifford Japan Trust's net asset value per share and share price declined by 23.3% and 31.7% respectively.  The TOPIX (in sterling terms) declined by 14.4% over the same period.

	Underperformance was due to poor stock selection and the employment of gearing.  The worst performing stocks were those with weak balance sheets, those related to the oil industry and those exposed to the global economic cycle.  Equity gearing, although reduced over the period, was not eliminated and stood at 4% at the period end.
	The best performing stocks were domestic companies with strong business positions and those companies that benefit from a strengthening Yen.
	Although Japan has not experienced a debt-fuelled consumer boom in recent years it has suffered significantly from the global slowdown in economic activity.
	However, there are some reasons for optimism.  The balance sheets of companies are much repaired since the 1990s, with much of the market having no net debt, and consumers have significant savings.  Bank lending is increasing and the lending rates are not punitive.  Many companies are looking to buy assets overseas to grow their businesses and capture market share.  Stimulative policy in China, Japan's largest trading partner, is showing tentative signs of success.
	Valuations such as cyclically adjusted p/e ratios are at record lows and much of the market is trading below book.  Whilst the immediate outlook is not clear, the Managers have been finding more companies to buy than sell.

• 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 can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at www.japantrustplc.co.uk

The Baillie Gifford Japan Trust aims to achieve long term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth. At 28 February 2009, the Company had total assets of £113m (before deduction of bank loans of £27m).  

Baillie Gifford & Co, the Edinburgh based fund management group with around £41 billion under management and advice as at 25 March 2009, is appointed as investment managers and secretaries to The Baillie Gifford Japan Trust PLC. 

25 March 2009

For further information please contact:

Sarah Whitley, Manager,

The Baillie Gifford Japan Trust PLC                0131 275 2000

Roland Cross, Director,

Broadgate Marketing                                      020 7726 6111

The following is the unaudited Half-Yearly Financial Report for the six months 

to 28 February 2009

THE BAILLIE GIFFORD JAPAN TRUST PLC

Half-Yearly Financial Report 28 February 2009

Responsibility Statement

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

• the Half-Yearly 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 and description of principal risks and uncertainties for the remaining six months of the year); and

• the Half-Yearly 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 see note 3 at the end of this document).

By order of the Board

Richard A Barfield 

Chairman

25 March 2009

THE BAILLIE GIFFORD JAPAN TRUST PLC

Half-Yearly Management Report

Performance

The six months to the end of February 2009 have been an extremely difficult period for equity markets globally and the Japanese market has been as affected as others. Overall the net asset value per share has fallen by 23.3% which compares with a decline of 14.4% in the TOPIX in sterling terms; a very disappointing outcome. The Company had net gearing of 15% at the beginning of the period and although this was reduced to 1.5% by the end of January, there was a substantial negative effect on performance from the gearing that was invested. The yen strengthened by over 40% during the period, which supported values in sterling although such a sharp appreciation has lead to weaker profits for many companies.  

Overall stock selection was poor. In terms of individual company holdings the worst performing were those with weaker balance sheets where financing has become more difficult, those related to the oil industry and those exposed to the global economic cycle. We have reduced exposure to all these areas during the period. The best performing stocks were domestic companies with strong business positions such as Tsumura and Kamigumi, whilst HIS, a travel agency, which saw overseas bookings pick up after the yen appreciated has done well.  

Economic Background

Although Japan has not experienced a debt-fuelled consumer boom in recent years it has suffered significantly from the global slowdown. Exports have nearly halved, industrial production is down by a third and GDP contracted sharply in the last quarter of 2008. Most of these trends seem to be continuing in the first quarter of 2009 and the typical caution of both consumers and the corporate sector has not helped. The government has been slow to act and ameliorate the situation, partly because of the political paralysis in Japan. A weak and unpopular government is looking for any opportunity to gain a quick advantage and call a general election. A change in administration could improve sentiment.

There are some signs that the worst point of the cycle could be near, although no rapid rebound is expected. As production has been cut so much faster than demand, inventories are now falling and some companies are talking about raising output in the next couple of months. A variety of sentiment indicators, both consumer and corporate, are picking up from low levels. Other governments have taken substantial steps to reflate and the Bank of Japan has announced efforts to buy bonds and other assets and directly inject capital into the banks.  

Many Japanese companies have announced new management teams for the next fiscal year beginning in April and these will be empowered to undertake the restructuring measures that are now necessary. Several domestic industries are consolidating and it also looks likely that there will be major reorganisations in the large electronics companies.  

GDP is likely to fall in both the current fiscal year and the next ending in March 2010. The outlook after that depends on both efforts by global authorities to reflate and efforts in Japan to improve policy. Interest rates are low globally and several governments are now taking the sort of measures that were used in Japan in the 1990s and early years of this decade, although perhaps adopting them more aggressively.  

Outlook

The pace and scale of the falls in both economic activity and stock markets have been quite shocking in the past six months and the future trends in both are unclear. However Japanese companies have improved their balance sheets substantially over the past ten years and Japanese banks are increasing lending at the fastest pace since the early 1990s, principally to larger companies, so that major equity financing has not been required; nor has large scale government intervention in companies. Sentiment remains very poor within Japan and globally about Japan despite its having the largest pool of individual savings in the world and also being a large net creditor nation. But the prevailing concerns seem to us to have created opportunities in many stocks and the stock market is now back to the levels of the early 1980s. Valuations have fallen significantly and whilst the outlook is far from clear we have been finding many more companies to buy than to sell. As a result, gearing rose from 1.5% at the end of January to 4% at the end of February.

By Order of the Board

Baillie Gifford & Co

25 March 2009

THE BAILLIE GIFFORD JAPAN TRUST PLC

INCOME STATEMENT

(unaudited)

		For the six months ended 28 February 2009				For the six months ended 29 February 2008				For the year ended 31 August 2008
		Revenue £'000	Capital £'000	Total   £'000		Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Losses on investments		-	(22,301)	(22,301)		-	(17,018)	(17,018)		-	(22,157)	(22,157)
Currency losses (note 4)		-	(4,029)	(4,029)		-	(2,355)	(2,355)		-	(2,866)	(2,866)
Income from investments and interest receivable		1,317	-	1,317		762	-	762		2,083	-	2,083
Stocklending fee income		56	-	56		70	-	70		112	-	112
Investment management fee		(451)	-	(451)		(619)	-	(619)		(1,057)	-	(1,057)
Other administrative expenses		(137)	-	(137)		(124)	-	(124)		(247)	-	(247)
Net return before finance costs and taxation		785	(26,330)	(25,545)		89	(19,373)	(19,284)		891	(25,023)	(24,132)
Finance costs of borrowings		(292)	-	(292)		(252)	-	(252)		(513)	-	(513)
Net return on ordinary activities before taxation		493	(26,330)	(25,837)		(163)	(19,373)	(19,536)		378	(25,023)	(24,645)
Tax on ordinary activities		(85)	-	(85)		(53)	-	(53)		(132)	-	(132)
Net return on ordinary activities after taxation		408	(26,330)	(25,922)		(216)	(19,373)	(19,589)		246	(25,023)	(24,777)
Net return per ordinary share (note 6)	0.66p		(42.51p)	(41.85p)		(0.35p)	(31.28p)	(31.63p)		0.40p	(40.40p)	(40.00p)

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year. 

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.

THE BAILLIE GIFFORD JAPAN TRUST PLC

BALANCE SHEET

at 28 February 2009

(unaudited)

	28 February 2009		29 February 2008		31 August  2008
	£'000		£'000		£'000
FIXED ASSET
Investments	89,671		133,407		127,749
CURRENT ASSETS
Debtors	122		830		332
Cash and short term deposits	23,548		13,375		10,511
	23,670		14,205		10,843
CREDITORS
Amounts falling due within one year:
Bank loans (note 7)	-		(7,243)		(2,526)
Other creditors	(623)		(609)		(424)
	(623)		(7,852)		(2,950)
NET CURRENT ASSETS	23,047		6,353		7,893
TOTAL ASSETS LESS CURRENT LIABILITIES	112,718		139,760		135,642
CREDITORS
Amounts falling due after more than one year:
Bank loans (note 7)	(27,247)		(23,179)		(24,249)
TOTAL NET ASSETS	85,471		116,581		111,393
CAPITAL AND RESERVES
Called-up share capital	3,097		3,097		3,097
Share premium	22,110		22,110		22,110
Capital redemption reserve	203		203		203
Capital reserve - realised	94,605		101,405		98,710
Capital reserve - unrealised	(26,479)		(1,299)		(4,254)
Revenue reserve	(8,065)		(8,935)		(8,473)
EQUITY SHAREHOLDERS' FUNDS	85,471		116,581		111,393

NET ASSET VALUE PER ORDINARY SHARE	138.0p	188.2p	179.9p
Ordinary shares in issue (note 8)	61,935,000	61,935,000	61,935,000

THE BAILLIE GIFFORD JAPAN TRUST PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 28 February 2009

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 September 2008	3,097	22,110	203	98,710	(4,254)	(8,473)	111,393
Net return on ordinary activities after taxation	-	-	-	(4,105)	(22,225)	408	(25,922)
Shareholders' funds at 28 February 2009	3,097	22,110	203	94,605	(26,479)	(8,065)	85,471

For the six months ended 29 February 2008

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 September 2007	3,097	22,110	203	93,068	26,411	(8,719)		136,170
Net return on ordinary activities after taxation	-	-	-	8,337	(27,710)	(216)		(19,589)
Shareholders' funds at 29 February 2008	3,097	22,110	203	101,405	(1,299)	(8,935)		116,581

For the year ended 31 August 2008

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 September 2007	3,097	22,110	203	93,068	26,411	(8,719)	136,170
Net return on ordinary activities after taxation	-	-	-	5,642	(30,665)	246	(24,777)
Shareholders' funds at 31 August 2008	3,097	22,110	203	98,710	(4,254)	(8,473)	111,393

  THE BAILLIE GIFFORD JAPAN TRUST PLC

CONDENDSED CASH FLOW STATEMENT (unaudited)
	Six months to 28 February 2009		Six months to  29 February 2008		Year to 31 August 2008
	£'000			£'000		£'000
Net cash inflow/(outflow) from operating activities	614			(18)		826
Net cash outflow from servicing of finance	(310)			(246)		(502)
Total tax paid	(80)			(47)		(130)
Net cash inflow from financial investment	16,800			10,202		10,821
Net cash inflow before financing	17,024			9,891		11,015
Net cash outflow from bank loans	(8,614)			-		(4,923)
Increase in cash	8,410			9,891		6,092

Reconciliation of net cash flow to movement in net debt
Increase in cash in the period	8,410		9,891		6,092
Net cash outflow from bank loans	8,614		-		4,923
Exchange differences on bank loans	(9,086)		(3,477)		(4,753)
Exchange differences on cash	4,627		1,045		1,980
Movement in NET DEBT in the period	12,565		7,459		8,242
Net debt at start of the period	(16,264)		(24,506)		(24,506)
Net debt at end of the period	(3,699)		(17,047)		(16,264)

Reconciliation of net reTURN before finance costs and taxation to net cash INFLOW/(outflow) from operating activities
Net return before finance costs and taxation	(25,545)		(19,284)		(24,132)
Losses on investments	22,301		17,018		22,157
Currency losses	3,820		2,355		2,970
Amortisation of fixed interest book cost	(20)		-		(11)
Changes in debtors and creditors	58		(107)		(158)
Net cash INFLOW/(outflow)from operating activities	614		(18)		826

  THE BAILLIE GIFFORD JAPAN TRUST PLC

TWENTY LARGEST HOLDINGS at 28 February 2009 (unaudited)
Name	Business	Market value £'000	% of total assets
KDDI	Mobile telecommunications	3,692	3.3
East Japan Railway	Tokyo based railway	3,070	2.7
Shimadzu	Environmental testing equipment	2,934	2.6
Accordia Golf	Golf course owner and operator	2,759	2.4
Takeda Pharmaceuticals	Major pharmaceutical manufacturer	2,552	2.3
AIOI Insurance	Non-life insurance	2,543	2.3
SMC	Pneumatic control equipment	2,532	2.3
Itochu	Trading conglomerate	2,480	2.2
Canon	Printers and copiers	2,430	2.2
Misumi Group	Precision machinery parts distributor	2,381	2.1
Ricoh	Printers and copiers	2,226	2.0
Japan Tobacco	Tobacco manufacturer	2,212	2.0
Inpex	Oil and gas producer	2,183	1.9
Keihin	Carburettors and fuel injection systems	2,172	1.9
Sysmex	Medical equipment	2,165	1.9
Hitachi High-Technologies	Semi conductor production equipment	2,114	1.9
Don Quijote	Discount store operator	2,052	1.8
Tsumura	Herbal medicines	2,050	1.8
Yamada Denki	Major consumer electronics retailer	1,997	1.8
H.I.S.	Discount travel agency	1,976	1.8
		48,520	43.2

THE BAILLIE GIFFORD JAPAN TRUST PLC

NOTES

1.	The condensed set of financial statements have been prepared on the basis of the same accounting policies as set out in the Company's Annual Financial Statements at 31 August 2008 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the year ended  31 August 2008 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain statements under the sections 237(2) or (3) of the Companies Act 1985.
3.	The management agreement with Baillie Gifford & Co is terminable on not less than 12 months' notice, or on shorter notice in certain circumstances. The annual fee is 1.0% of the net assets of the Company, calculated on a quarterly basis.
		Six months to 28 February 2009 £'000	Six months to 29 February 2008 £'000	Year to 31 August  2008 £'000
4.	Currency losses
	Exchange differences on:
	Cash balances	4,627	1,045	1,980
	Bank loans	(9,086)	(3,477)	(4,753)
	Other items	430	77	(93)
		(4,029)	(2,355)	(2,866)
5.	No interim dividend will be declared.
		Six months to 28 February 2009 £'000	Six months to 29 February 2008 £'000	Year to 31 August  2008 £'000
6.	Net return per ordinary share
	Revenue return	408	(216)	246
	Capital return	(26,330)	(19,373)	(25,023)
	Net return per ordinary share is based on the above totals of revenue and capital and on 61,935,000 (29 February 2008 and 31 August 2008 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during the period. There are no dilutive or potentially dilutive shares in issue.
7.	Bank loans of £27.2 million (¥3.8 billion) have been drawn down under yen loan facilities which are repayable between August 2010 and August 2014 (29 February 2008 - £30.4 million (¥6.3 billion); 31 August 2008 - £26.8 million (¥5.3 billion)). Subsequent to 28 February 2009, ¥250 million of the ¥1 billion facility maturing in August 2010 has been repaid.
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. No shares were issued or bought back during the period under review.
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 £9,000 (29 February 2008 - £11,000; 31 August 2008 - £28,000) and transaction costs on sales amounted to £20,000 (29 February 2008 - £24,000; 31 August 2008 - £40,000).
10.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
11.	Principal Risks and Uncertainties  The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 20 of the Company's Annual Report and Accounts for the year to 31 August 2008. Other risks facing the Company include the following: gearing risk (the use of borrowing can magnify the impact of falling markets), the risk that the discount can widen and regulatory risk (that the loss of investment trust status or a breach of the UKLA Listing Rules could have adverse financial consequences and cause reputational damage). Since 31 August 2008, the volatility of the Company's net asset value has increased with the volatility of share prices. The Annual Report can be obtained free of charge from Baillie Gifford & Co: www.bailliegifford.com and is available on the Japan Trust page of the Managers' website: www.japantrustplc.co.uk
12.	The Half-Yearly Financial Report is available at www.japantrustplc.co.uk  and will be posted to shareholders on or around 17 April 2009.

 

END

 

 

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