Half Yearly Report

RNS Number : 9487D

Baillie Gifford Japan Trust PLC

31 March 2011

 



THE BAILLIE GIFFORD JAPAN TRUST PLC

Results for the six months to 28 February 2011

In the six months to 28 February 2011, The Baillie Gifford Japan Trust's net asset value per share increased by 21.2%* compared to a 15.6% increase in the TOPIX total return index in sterling terms.  The Company's share price increased by 34.3%.  Since the period end, as at 29 March 2011, the Company's NAV is down 7.2%* and the TOPIX total return in sterling terms is down 8.5%.

·	Returns ahead of the Company's benchmark were as a result of good stock selection, particularly in the Information, Communication and Utilities and Retail sectors.  Sterling returns were hindered marginally by the yen weakening 3.2% over the period.
·	The use of gearing was beneficial to returns.  Net gearing stood at 18% at the period end (31 August 2010 - 18%).  We believe the growth potential of corporate Japan is fundamentally understated by current share prices so borrowings continue to be invested in the market.
·	Management attitudes seem to have improved with welcome signs of a more proactive stance on mergers.  MBOs have been more common as small companies in particular trade on valuations that make such transactions rewarding.  Company balance sheets have strengthened further and there has been a welcome increase in share buy-backs.
·	The Japanese economy grew by 3.9% in real terms in 2010 as it recovered from the global financial crisis.  Following the Tohoku earthquake and consequent events, although too early to judge accurately, estimates have reduced 2011 growth to just over 1%.  While we believe that Japan will recover from the crisis, there will be significant difficulties and major uncertainties in the shorter term.

* after deducting borrowings at fair value.

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.

The Baillie Gifford Japan Trust PLC (Baillie Gifford Japan) 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 2011, the Company had total assets of £167.2m (before deduction of bank loans of £26.6m). 

Baillie Gifford & Co, the Edinburgh based fund management group with around £73 billion under management and advice as at 30 March 2011, is appointed as investment managers and secretaries to The Baillie Gifford Japan Trust PLC.

30 March 2011

For further information please contact:

Sarah Whitley, Manager,

The Baillie Gifford Japan Trust PLC                                          0131 275 2000

Roland Cross, Director,

Broadgate Mainland                                                                 020 7726 6111

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

to 28 February 2011

THE BAILLIE GIFFORD JAPAN TRUST PLC

 

Half-Yearly Financial Report 28 February 2011

Responsibility Statement

 

We confirm that to the best of our knowledge:

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

b)   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 their impact on the financial statements, and description of principal risks and uncertainties for the remaining six months of the year); and

c)   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

30 March 2011

THE BAILLIE GIFFORD JAPAN TRUST PLC

Half-Yearly Management Report

Over the six months to the 28 February 2011 the net asset value per share, with borrowings deducted at fair value, rose by 21.2% to 226.3p compared with a rise in the TOPIX total return (in sterling terms) of 15.6%.  The yen remained generally strong, but fell marginally against sterling over the period.  Gearing was beneficial and contributed significantly to the outperformance. 

Subsequent to the reporting period Japan has suffered its worst ever earthquake causing a catastrophic tsunami in the Tohoku region.  There is currently a major humanitarian crisis, several hundred thousand people now homeless and a serious situation at a damaged nuclear power plant.  Whilst we believe that Japan will recover from the crisis, there will be significant difficulties and major uncertainties in the shorter term. Since the period end, as at 29 March 2011, the Company's NAV is down 7.2% and the TOPIX total return (in sterling terms) is down 8.5%.

During the half year, stock markets oscillated during September and October as there were concerns about the global recovery and worries in particular for Japan about the impact of a strengthening yen versus the dollar.  However the company results reported for the half year to September showed Japanese industry coping with the currency and benefitting from global recovery.  This lead to a strong recovery in the stock market from the end of October to the end of February of roughly 18% on the TOPIX total return in yen terms. 

Within the portfolio turnover was low and few changes were made.  The best performing sector was Information, Communication and Utilities as internet related companies were strong, particularly new purchase Digital Garage (an internet incubator with a stake in Twitter Inc), and telecoms stocks recovered.  Other positive contributors were Retail, as specialist companies continued to do well.   The Financial sector was a negative contributor as our holdings did not participate in the market recovery.  Management attitudes in Japan seem to have improved with welcome signs of a more proactive stance on mergers.  Nippon Steel and Sumitomo Metal Industries, two major steel companies, are intending to consolidate despite a large joint domestic market share which would previously have led the Japanese authorities to ban the merger.  Company balance sheets have strengthened further and there has been a welcome increase in share buy-backs.  Even MBOs, the ultimate proof that managements view share prices as too low, have been more common as small companies in particular trade on valuations that make such transactions very rewarding.  Companies have continued to use yen cash to make acquisitions overseas.

The Japanese economy grew 3.9% in real terms in 2010 as it recovered from the global financial crisis.  Growth dipped at the end of the year as some of the emergency measures put in by the government, such as car subsidies and discounts for energy efficient electrical appliances, finished and the technology cycle in much of Asia, Japan's largest export area, paused.  Before the earthquake growth had resumed in early 2011.  In the April to June quarter the worst effects of the earthquake on activity will be felt.  Current estimates by analysts are to reduce the growth expected for the economy by 0.5 to 1.0% in 2011 to just over 1%, but these are only early indications and there is little data for post-earthquake activity.  Apart from the damage caused by the earthquake and tsunami there are major shortages of power in Tokyo at the moment and it is unclear how long that will continue.

THE BAILLIE GIFFORD JAPAN TRUST PLC

Half-Yearly Management Report (ctd)

Monetary policy in Japan has loosened during the period with the Bank of Japan buying assets directly as an unconventional form of monetary policy.  Since the tsunami they have injected significant amounts of liquidity into the financial system and are prepared to take further measures to avoid financial shocks.  The yen initially strengthened post quake, but there has been G7 agreement that Japan and other countries will intervene to stop further significant currency appreciation.  Whilst there remain doubts as to the effectiveness of such policies, the yen has since stabilised.  Japan is very unusual in that concerns about the domestic affairs of the country lead to a strengthening of the currency as commentators fear that financial institutions will repatriate their significant overseas assets.  The yen has also been viewed as a safe haven and when global risk concerns rise the yen strengthens as well. 

Outlook

At the time of writing there is a lot of confusion about the short term issues arising from the natural disaster.  Supply chains across both technology and car production have been disrupted with implications well beyond Japan.  Whilst not wanting to underestimate the human tragedy and cost of rebuilding Tohoku, we believe that the effects on the vast majority of companies will be transitory.   Any complacency that stalked the Japanese establishment may well have been shaken with positive long term results.   The growth potential of corporate Japan, which decoupled from nominal GDP during the last decade, is fundamentally underestimated by current share prices and therefore we continue to invest the borrowings in the market.

THE BAILLIE GIFFORD JAPAN TRUST PLC

INCOME STATEMENT

(unaudited)

	For the six months ended 28 February 2011			For the six months ended 28 February 2010			For the year ended   31 August 2010
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total   £'000	Revenue £'000	Capital £'000	Total   £'000
Gains/(losses) on sales of investments	-	1,459	1,459	-	(1,841)	(1,841)	-	836	836
Changes in investment holding gains	-	22,247	22,247	-	12,638	12,638	-	2,804	2,804
Currency gains/(losses) (note 4)	-	773	773	-	(2,236)	(2,236)	-	(3,248)	(3,248)
Income from investments and interest receivable	1,155	-	1,155	1,207	-	1,207	2,605	-	2,605
Investment management fee	(736)	-	(736)	(574)	-	(574)	(1,188)	-	(1,188)
Other administrative expenses	(160)	-	(160)	(136)	-	(136)	(267)	-	(267)
Net return before finance costs and taxation	259	24,479	24,738	497	8,561	9,058	1,150	392	1,542
Finance costs of borrowings	(277)	-	(277)	(241)	-	(241)	(530)	-	(530)
Net return on ordinary activities before taxation	(18)	24,479	24,461	256	8,561	8,817	620	392	1,012
Tax on ordinary activities	(81)	-	(81)	(77)	-	(77)	(173)	-	(173)
Net return on ordinary activities after taxation	(99)	24,479	24,380	179	8,561	8,740	447	392	839
Net return per ordinary share (note 6)	(0.16p)	39.52p	39.36p	0.29p	13.82p	14.11p	0.72p	0.63p	1.35p

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 2011

(unaudited)

	28 February 2011		28 February 2010		31 August 2010
	£'000		£'000		£'000
FIXED ASSET
Investments	166,176		148,334		137,752
CURRENT ASSETS
Debtors	558		597		211
Cash and short term deposits	1,103		1,760		6,093
	1,661		2,357		6,304
CREDITORS
Amounts falling due within one year:
Bank loans (note 7)	(13,508)		(5,544)		(13,948)
Other creditors	(684)		(416)		(415)
	(14,192)		(5,960)		(14,363)
NET CURRENT LIABILITIES	(12,531)		(3,603)		(8,059)
TOTAL ASSETS LESS CURRENT LIABILITIES	153,645		144,731		129,693
CREDITORS
Amounts falling due after more than one year:
Bank loans (note 7)	(13,132)		(20,697)		(13,560)
TOTAL NET ASSETS	140,513		124,034		116,133
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	122,696		106,386		98,217
Revenue reserve	(7,593)		(7,762)		(7,494)
SHAREHOLDERS' FUNDS	140,513		124,034		116,133

NET ASSET VALUE PER ORDINARY SHARE (after deducting borrowings at fair value)	226.3p	199.4p	186.7p
NET ASSET VALUE PER ORDINARY SHARE (after deducting borrowings at par)	226.9p	200.3p	187.5p
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 2011

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2010	3,097	22,110	203	98,217	(7,494)	116,133
Net return on ordinary activities after taxation	-	-	-	24,479	(99)	24,380
Shareholders' funds at 28 February 2011	3,097	22,110	203	122,696	(7,593)	140,513

For the six months ended 28 February 2010

 

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2009	3,097	22,110	203	97,825	(7,941)	115,294
Net return on ordinary activities after taxation	-	-	-	8,561	179	8,740
Shareholders' funds at 28 February 2010	3,097	22,110	203	106,386	(7,762)	124,034

For the year ended 31 August 2010

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2009	3,097	22,110	203	97,825	(7,941)	115,294
Net return on ordinary activities after taxation	-	-	-	392	447	839
Shareholders' funds at 31 August 2010	3,097	22,110	203	98,217	(7,494)	116,133

*Capital reserve as at 28 February 2011 includes investment holding gains of £42,003,000 (28 February 2010 -  £29,590,000; 31 August 2010 - £19,756,000).

THE BAILLIE GIFFORD JAPAN TRUST PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months to 28 February 2011		Six months to 28 February 2010	Year to 31 August 2010
	£'000		£'000		£'000
Net cash inflow from operating activities	154		104		1,260
Net cash outflow from servicing of finance	(285)		(234)		(511)
Total tax paid	(69)		(50)		(165)
Net cash outflow from financial investment	(4,714)		(4,118)		(909)
Net cash outflow Before financing	(4,914)		(4,298)		(325)
Net cash outflow from bank loans	-		-		(1)
DECREASE in cash	(4,914)		(4,298)		(326)

Reconciliation of net cash flow to movement in net debt
Decrease in cash in the period	(4,914)		(4,298)		(326)
Net cash outflow from bank loans	-		-		1
Exchange differences on bank loans	868		(2,760)		(4,028)
Exchange differences on cash	(76)		276		636
Movement in NET DEBT in the period	(4,122)		(6,782)		(3,717)
Net debt at start of the period	(21,415)		(17,698)		(17,698)
Net debt at end of the period	(25,537)		(24,480)		(21,415)

 

Reconciliation of net reTURN before finance costs and taxation to net cash INFLOW from operating activities
Net return before finance costs and taxation	24,738		9,058		1,542
Gains on investments	(23,706)		(10,797)		(3,640)
Realised exchange differences	96		(405)		(549)
Unrealised exchange differences on bank loans	(868)		2,760		4,028
Amortisation of fixed interest book cost	-		(2)		(2)
Changes in debtors and creditors	(106)		(510)		(119)
Net cash INFLOW FROM operating activities	154		104		1,260

THE BAILLIE GIFFORD JAPAN TRUST PLC

 

TWENTY LARGEST HOLDINGS at 28 February 2011 (unaudited)
Name	Business	Value £'000	% of total assets*
Itochu	Trading conglomerate	6,171	3.7
Don Quijote	Discount store operator	5,253	3.1
Japan Tobacco	Tobacco manufacturer	4,709	2.8
Asahi Glass	TV, car and construction glass	4,466	2.7
Mitsubishi Electric	Industrial electric conglomerate	4,456	2.7
KDDI	Mobile telecommunications	3,961	2.4
Canon	Printers and copiers	3,944	2.4
Misumi Group	Precision machinery parts distributor	3,716	2.2
Yamada Denki	Major consumer electronics retailer	3,618	2.2
Shimadzu	Analytical and measuring instrument company	3,591	2.1
Rakuten	Internet retailer	3,541	2.1
Keihin	Honda related autoparts supplier	3,534	2.1
Inpex	Oil and gas producer	3,522	2.1
Hitachi High-Technologies	Semiconductor production equipment	3,453	2.1
Otsuka	IT hardware and software	3,453	2.1
Osaka Securities Exchange	Stock and futures exchange	3,426	2.0
Yaskawa Electric	Robots and automation manufacturer	3,343	2.0
Mitshubishi UFJ Lease & Finance	Leasing company	3,263	1.9
Ushio	Specialist lamps and digital cinema equipment	3,235	1.9
HIS	Travel agency	3,131	1.9
		77,786	46.5

*before deduction of bank loans

THE BAILLIE GIFFORD JAPAN TRUST PLC

NOTES

1.	The condensed financial statements for the six months to 28 February 2011 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 2010 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'. 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 November 2011. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the Half-Yearly Financial Report has 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.
2.	The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2010 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 sections 498 (2) or (3) of the Companies Act 2006.
3. 1.	The management agreement with Baillie Gifford & Co is terminable on not less than 6 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 2011 £'000	Six months to 28 February 2010 £'000	Year to 31 August 2010 £'000
4.	Currency gains/(losses)
	Exchange differences on:
	Cash balances	(76)	276	636
	Bank loans	868	(2,760)	(4,028)
	Other items	(19)	248	144
		773	(2,236)	(3,248)
5.	No interim dividend will be declared.
		Six months to 28 February 2011 £'000	Six months to 28 February 2010 £'000	Year to 31 August 2010 £'000
6.	Net return per ordinary share
	Revenue return on ordinary activities after taxation	(99)	179	447
	Capital return on ordinary activities after taxation	24,479	8,561	392
	Net return per ordinary share is based on the above totals of revenue and capital and on 61,935,000 (28 February 2010 and 31 August 2010 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.

THE BAILLIE GIFFORD JAPAN TRUST PLC

NOTES

7.	Bank loans of £26.6 million (¥3.6 billion) have been drawn down under yen loan facilities which are repayable between May 2011 and August 2014 (28 February 2010 - £26.2 million (¥3.6 billion); 31 August 2010 - £27.5 million (¥3.6 billion)).
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 £8,000 (28 February 2010 - £9,000; 31 August 2010 - £18,000) and transaction costs on sales amounted to £5,000 (28 February 2010 - £6,000; 31 August 2010 - £17,000).
10.	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 19 of the Company's Annual Report and Financial Statements for the year to 31 August 2010.  The principal risks and uncertainties have not changed since the publication of the Annual Report which can be obtained free of charge from Baillie Gifford & Co and is available on the Japan Trust page of the Managers' website www.japantrustplc.co.uk.†  Other risks facing the Company include the following:  regulatory risk (that the loss of investment trust status or a breach of applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage); operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss; the risk that the discount can widen; and gearing risk (the use of borrowing can magnify the impact of falling markets). Further information can be found on page 18 of the Annual Report and Financial Statements.
11.	The Half-Yearly Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around 15 April 2011.
	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.

- Ends -

 

END

 

 

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