Interim Results
Baillie Gifford Japan Trust PLC
27 March 2008
THE BAILLIE GIFFORD JAPAN TRUST PLC
Results for the six months to 29 February 2008
During the period, Japanese markets have been amongst the weakest globally. In
the six months to 29 February 2008, The Baillie Gifford Japan Trust's net asset
value per share declined by 14.4% compared to a 7.0% decline in TOPIX in
sterling terms. The Company's share price declined 19.9% and the discount to
net asset value per share widened from 5.5% to 11.5%.
• Underperformance against TOPIX was due to the Company's ongoing deployment
of gearing, the savage de-rating of several of the smaller companies held
and foreign investors appearing to sell quality Japanese companies
indiscriminately.
• The Japanese economy continues to expand, albeit at a reduced rate. Many
of the excesses witnessed in other western economies, such as high levels
of company and consumer debt, are not prevalent in Japan.
• Although the profit outlook for companies is uncertain, the robust state of
many company balance sheets and improving attitudes towards remunerating
shareholders means that the Company had net gearing of 15% as at 29
February 2008 and it has not changed significantly since then.
• The extremely low valuation on Japanese equities, with a significant amount
of companies now trading at or below book value, means that many appear to
be at attractive levels.
+ Past performance is no guarantee of 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. The Company has borrowed
money to make further investments. This is commonly referred to as gearing. The
risk is that, when this money is repaid by the Company, the value of these
investments may not be enough to cover the borrowing and interest costs, and the
Company makes a loss. You can find up to date performance information about The
Baillie Gifford Japan Trust PLC on the Company website at
www.japantrustplc.co.uk
Baillie Gifford & Co, the Edinburgh based fund management group with around £51
billion under management and advice as at 26 March 2008, is appointed as
investment managers and secretaries to The Baillie Gifford Japan Trust PLC.
26 March 2008
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 BAILLIE GIFFORD JAPAN TRUST PLC
Half-Yearly Financial Report 29 February 2008
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 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 and description of principal risks and
uncertainties for the remaining six months of the year); and
c) the interim management 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
G Malcolm Murray
Chairman
26 March 2008
THE BAILLIE GIFFORD JAPAN TRUST PLC
Investment Policy
The Baillie Gifford Japan Trust aims to achieve 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.
The Company's holdings are generally listed in Japan although the portfolio can
also include companies listed elsewhere whose business is predominantly in Japan
as well as unlisted companies. From time to time, fixed interest holdings, or
non equity investments, may be held.
The portfolio is constructed through the identification of individual companies
which offer long term growth potential, typically over a three to five year
horizon. The portfolio is actively managed and does not seek to track the
benchmark hence a degree of volatility against the index is inevitable.
In constructing the equity portfolio a spread of risk is achieved by
diversifying the portfolio through investment in 40 to 70 holdings. Although
sector concentration and the thematic characteristics of the portfolio are
carefully monitored, there are no maximum limits to deviation from benchmark
stock or sector weights except as imposed by banking covenants on borrowings.
On acquisition, no holding shall exceed 5% of the portfolio at the time of
purchase and any holding that as a result of good performance exceeds 5% of the
portfolio is subject to particular scrutiny. A holding greater than 5% will
only be held where the Managers continue to be convinced of the merits of the
investment case.
On acquisition, no more than 15% of the Company's gross assets will be invested
in other UK listed investment companies.
The Company may use derivatives which will be principally, but not exclusively,
for the purpose of efficient portfolio management (i.e. for the purpose of
reducing, transferring or eliminating investment risk in its investments,
including protection against currency risks).
The Company recognises the long term advantages of gearing and has a maximum
equity gearing level of 30% of shareholders' funds.
Borrowings are invested in securities when it is considered that investment
grounds merit the Company taking a geared position. Gearing levels, and the
extent of equity gearing, are discussed by the Board and Managers at every Board
meeting.
A detailed analysis of the Company's Investment Portfolio is given in the
Interim Management Report and the following pages.
THE BAILLIE GIFFORD JAPAN TRUST PLC
Interim Management Report
The six months to the end of February 2008 has been a very difficult period for
global markets and Japan has not been immune to these pressures. Politics and
policy making have effectively been in paralysis, which has damaged sentiment
and retarded any response to crises, and the peak of the profits cycle seems to
have passed. Over the period, the Company's net asset value per share fell by
14.4% compared with a 7.0% fall in the TOPIX in currency adjusted terms. The
yen strengthened by over 10% during the six months mitigating some of the stock
market falls to sterling based investors.
The underperformance of the portfolio against TOPIX was due to three main
reasons. Firstly we continued to use the gearing in the stock market as prices
fell, believing that valuations should be supportive. Secondly, several of the
smaller sized companies fell extremely sharply and finally the significant
level of selling by foreign investors meant that the quality growth style of the
portfolio was a hindrance rather than a help. Good quality companies with no
deterioration in outlook have performed poorly just because they have high
levels of foreign ownership.
Portfolio
None of the top twenty holdings is new, but the energy related stocks now make
up the top three reflecting global trends in commodity prices and their strong
relative performance. During the period we sold two of the property related
stocks, Sumitomo Realty and Goldcrest and switched our shipping exposure from
Mitsui OSK to Nippon Yusen which has a higher proportion of long term contracts.
We bought a holding in Osaka Securities Exchange, the only listed stock exchange
in Japan, which should benefit from consolidation in the industry and the
government's desire to increase the competitiveness of Japan's financial
services and sold Mitsubishi UFJ Financial Group.
Economy and Profits
Although expectations of growth have been downgraded for Japan, the banking
system is in a much healthier state than in the last global slowdown in 2001 and
there have been none of the borrowing excesses witnessed in the US. Indicators
of both consumer and corporate sentiment have fallen sharply as resource prices
have risen and there have been difficulties in passing on input cost increases
to customers. Some price rises have been forced through, but as wages have been
flat so far this has not led to general reflation.
Whilst consumption has been dull, exports have continued to expand although
levels of capital spending have not been as strong as before. The commercial
property market continues to see rising rents, land prices and Tokyo has
extremely low vacancy rates, but share prices of property related companies have
fallen sharply.
Interim Management Report (Ctd)
The strengthening of the yen, particularly against the US dollar, will affect
the level of reported profits both for the years ending March 2008 and 2009.
Profits are still likely to rise this year to March 2008, but companies are
cautious and we anticipate that declines will be forecast for the next year.
This weakness though is offset by the extremely low valuation on the market and
the significant improvement in companies' willingness to pay out dividends, buy
back shares and cancel treasury stock. As a result the stock market now yields
1/2% more than the Japanese government bond market.
Risks and Uncertainties
The Company's main risk is investment risk, including the risk of investing in
one overseas currency. Whilst prudent diversification within the stocks in the
portfolio can mitigate the risk of permanent loss of capital, it cannot
eliminate it altogether. The Company's focus on a single country's markets also
imposes limits on the diversification that can be achieved to mitigate political
and economic risk. Risk is inherently difficult to predict and calculate and
numerical assessments can be flawed, with mathematical risk models producing
particularly poor records of success in difficult market conditions.
Shareholders should be aware that unexpected and therefore unpredictable things
do happen and that these can have significant effects on the value of various
investments. Other risk factors that can be identified are detailed in note 11.
Outlook
The balance in Japan has been between the deteriorating global economy, poor
domestic outlook and the extremely low valuation on Japanese equities, with
significant portions of the market trading below their conservatively stated
book value. We continue to believe that whilst the profit outlook is uncertain,
Japanese companies are in better shape than in previous global downturns, their
attitudes towards remunerating shareholders are improving and therefore we
maintain net gearing of roughly 13%.
THE BAILLIE GIFFORD JAPAN TRUST PLC
INCOME STATEMENT
(unaudited)
For the six months ended For the six months ended For the year ended
29 February 2008 28 February 2007 31 August 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Losses on investments - (17,018) (17,018) - (437) (437) - (12,386) (12,386)
Currency (losses)/gains
(note 4) - (2,355) (2,355) - 1,028 1,028 - 1,203 1,203
Income from investments
and interest receivable 762 - 762 708 - 708 1,630 - 1,630
Stocklending fee income 70 - 70 109 - 109 214 - 214
Investment management
fee (619) - (619) (722) - (722) (1,432) - (1,432)
Other administrative
expenses (124) - (124) (121) - (121) (239) - (239)
Net return before
finance costs and
taxation 89 (19,373) (19,284) (26) 591 565 173 (11,183) (11,010)
Finance costs of
borrowings (252) - (252) (192) - (192) (385) - (385)
Net return on ordinary
activities before
taxation (163) (19,373) (19,536) (218) 591 373 (212) (11,183) (11,395)
Tax on ordinary
activities (53) - (53) (49) - (49) (114) - (114)
Net return on ordinary
activities after
taxation (216) (19,373) (19,589) (267) 591 324 (326) (11,183) (11,509)
Net return per ordinary
share (note 6) (0.35p) (31.28p) (31.63p) (0.43p) 0.95p 0.52p (0.52p) (18.06p) (18.58p)
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.
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 29 February 2008
(unaudited)
29 February 28 February 31 August
2008 2007 2007
£'000 £'000 £'000
FIXED ASSET
Investments 133,407 166,767 160,997
CURRENT ASSETS
Debtors 830 210 164
Cash and short term deposits 13,375 8,680 2,439
14,205 8,890 2,603
CREDITORS
Amounts falling due within one year:
Bank loans (note 7) (7,243) (3,446) (4,277)
Other creditors (609) (1,383) (485)
(7,852) (4,829) (4,762)
NET CURRENT ASSETS/(LIABILITIES) 6,353 4,061 (2,159)
TOTAL ASSETS LESS CURRENT LIABILITIES 139,760 170,828 158,838
CREDITORS
Amounts falling due after more than one year:
Bank loans (note 7) (23,179) (22,825) (22,668)
TOTAL NET ASSETS 116,581 148,003 136,170
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 101,405 94,467 93,068
Capital reserve - unrealised (1,299) 36,786 26,411
Revenue reserve (8,935) (8,660) (8,719)
EQUITY SHAREHOLDERS' FUNDS 116,581 148,003 136,170
NET ASSET VALUE PER ORDINARY SHARE 188.2p 239.0p 219.9p
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 29 February 2008
Share Share Capital Capital Revenue Total
capital premium reserve - reserve - reserve shareholders'
Capital realised unrealised funds
£'000 £'000 redemption £'000
reserve £'000 £'000 £'000
£'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 six months ended 28 February 2007
Share Share Capital Capital Revenue Total
capital premium reserve - reserve - reserve shareholders'
Capital realised unrealised funds
£'000 £'000 redemption £'000
reserve £'000 £'000 £'000
£'000
Shareholders' funds
at 1 September 2006 3,097 22,110 203 87,572 43,090 (8,393) 147,679
Net return on
ordinary activities
after taxation - - - 6,895 (6,304) (267) 324
Shareholders' funds
at 28 February 2007 3,097 22,110 203 94,467 36,786 (8,660) 148,003
For the year ended 31 August 2007
Share Share Capital Capital Revenue Total
capital premium reserve - reserve - reserve shareholders'
Capital realised unrealised funds
£'000 £'000 redemption £'000
reserve £'000 £'000 £'000
£'000
Shareholders' funds
at 1 September 2006 3,097 22,110 203 87,572 43,090 (8,393) 147,679
Net return on
ordinary activities
after taxation - - - 5,496 (16,679) (326) (11,509)
Shareholders' funds
at 31 August 2007 3,097 22,110 203 93,068 26,411 (8,719) 136,170
THE BAILLIE GIFFORD JAPAN TRUST PLC
CONDENDSED CASH FLOW STATEMENT
(unaudited)
Six months to Six months to Year to
29 February 2008 28 February 2007 31 August 2007
£'000 £'000 £'000
Net cash (outflow)/inflow from operating activities (18) (93) 148
Net cash outflow from servicing of finance (246) (200) (385)
Total tax paid (47) (47) (113)
Net cash inflow/(outflow) from financial investment 11,247 4,304 (2,747)
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING 10,936 3,964 (3,097)
Net cash inflow from bank loans - - 820
INCREASE/(DECREASE) IN CASH 10,936 3,964 (2,277)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash in the period 10,936 3,964 (2,277)
Net cash inflow from bank loans - - (820)
Exchange movement on bank loans (3,477) 1,072 1,218
MOVEMENT IN NET DEBT IN THE PERIOD 7,459 5,036 (1,879)
Net debt at start of the period (24,506) (22,627) (22,627)
NET DEBT AT END OF THE PERIOD (17,047) (17,591) (24,506)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND
TAXATION TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES
Net return on ordinary activities before finance costs
and taxation (19,284) 565 (11,010)
Losses on investments 17,018 437 12,386
Currency losses/(gains) 2,355 (1,028) (1,203)
Changes in debtors and creditors (107) (67) (25)
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (18) (93) 148
THE BAILLIE GIFFORD JAPAN TRUST PLC
TWENTY LARGEST HOLDINGS
at 29 February 2008
Market
value % of total
£'000 assets
Name Business
Itochu Trading conglomerate 4,201 2.9
Modec Designs and leases offshore oil platforms 4,035 2.7
Inpex Oil and gas producer 3,919 2.7
Canon Printers and copiers 3,764 2.6
East Japan Railway Tokyo based railway 3,614 2.5
Asahi Glass LCD, auto and construction glass 3,590 2.4
Misumi Group Precision machinery parts distributor 3,473 2.4
Sumitomo Heavy Specialist machinery 3,300 2.2
Shimadzu Environmental testing equipment 3,184 2.2
Accordia Golf Golf course operator 3,170 2.2
Japan Tobacco Tobacco manufacturer 3,159 2.1
Shinko Plantech Engineering services for utilities 3,083 2.1
KDDI Mobile telecommunications 3,078 2.1
SMC Pneumatic control equipment 2,972 2.0
Mitsubishi UFJ Lease & Finance Leasing company 2,952 2.0
USS Company Second-hand car auctioneer 2,893 2.0
Mitsubishi Electric Industrial electrical 2,891 2.0
Kamigumi Port operator 2,844 1.9
Yamada Denki Major consumer electronics retailer 2,679 1.8
Tsumura Herbal medicines 2,672 1.8
65,473 44.6
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 2007 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 2007 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 section 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,
1. 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 Six months to Year to
29 February 2008 28 February 31 August
£'000 2007 2007
£'000 £'000
4. Currency (losses)/gains
Exchange differences on cash balances 1,122 (44) (15)
Exchange differences on bank loans (3,477) 1,072 1,218
(2,355) 1,028 1,203
5. No interim dividend will be declared.
6. Net return per ordinary share
Revenue return (216) (267) (326)
Capital return (19,373) 591 (11,183)
Net return per ordinary share is based on the above totals of revenue and capital and on 61,935,000
(28 February 2007 and 31 August 2007 - 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 £30.4 million (Y6.3 billion) have been drawn down under yen loan facilities which are
repayable between August 2008 and August 2014 (28 February 2007 - £26.3 million (Y6.1 billion); 31
August 2007 - £26.9 million (Y6.3 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 £11,000 (28 February 2007 - £27,000; 31 August 2007 - £52,000) and transaction
costs on sales amounted to £24,000 (28 February 2007 - £21,000; 31 August 2007 - £38,000).
10. None of the views expressed in this document should be construed as advice to buy or sell a
particular investment.
11. Risks and uncertainties
The principal risks and uncertainties facing the Company are detailed in the Interim Management
Report. Other risks facing the Company include the following; currency risk (assets,
liabilities and income denominated in currencies other than sterling are subject to movements
in exchange rates), 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). These risks are monitored and assessed by the Managers and
reported on regularly to the Board and the Audit Committee.
12. The Half-Yearly Financial Report is available at www.japantrustplc.co.uk and will be posted to
shareholders on or around 18 April 2008.
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