Results for the six months to 28 February 2015

RNS Number : 4770I

Baillie Gifford Japan Trust PLC

26 March 2015

 

RNS Announcement

The Baillie Gifford Japan Trust PLC

Results for the six months to 28 February 2015

In the six months to 28 February 2015, The Baillie Gifford Japan Trust's net asset value per share (after deducting borrowings at fair value) increased by 20.5% compared to a 12.3% increase in the TOPIX total return (in sterling terms). The Company's share price increased by 20.6%. 

¾ Outperformance versus the benchmark was due to strong stock selection and the positive effect of gearing over the period.

¾ Active Share at the period end was 87%, which shows that the overlap with the index is very small and that an investment approach which emphasises the individual merits of companies is being taken.

¾ Economic policy in Japan remains supportive of the corporate sector with continued quantitative easing from the Bank of Japan as it tries to reach an inflation target of 2%.

¾ There have been further positive developments in corporate governance in Japan. Company behaviour is clearly changing, with more emphasis on increasing returns to shareholders.

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 2015, the Company had total assets of £347.0m (before deduction of bank loans of £47.1m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £127bn under management and advice as at 25 March 2015.

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.

25 March 2015

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director

Broadgate Mainland 

Tel: [phone]
 

The following is the unaudited Half-Yearly Financial Report for the six months to 28 February 2015.

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, their impact on the financial statements and a 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).

By order of the Board

Nick AC Bannerman

Chairman

25 March 2015

 

Half-yearly management report

During the six months to the end of February 2015 the net asset value per share, with borrowings deducted at fair value, rose by 20.5% to 425.9p as the Japanese stock market reached new post-2008 Crisis highs.  This compares with a 12.3% increase in the comparative index in sterling terms after the 7% depreciation of the yen against sterling.  The significant outperformance was due to both good stock selection and the positive impact of gearing.  There were six stocks each contributing more than 0.5% in relative gains and only two detracting similarly.

For the first time the Half-Yearly Report includes a figure on the Active Share of the portfolio.  There has been a significant amount of discussion recently in the financial press about the need for true active management of portfolios rather than any mimicking of indices.  Japan Trust's figure of an 87% Active Share, which was the same at the previous year end, shows that the overlap with the index is very small and that an investment approach which emphasises the individual merits of companies is being taken.  This figure will continue to be shown in future reports. 

The Japanese economy is recovering gradually from the effects of the consumption tax increase in April 2014 but the overall level of growth in the last quarter of 2014 was disappointing with GDP only rising 0.4%.  However this figure masks other encouraging trends in the economy with the labour market tightening further, female participation in the workforce increasing, wage growth beginning to accelerate, an ongoing property recovery both in city land prices and the office market, exports growing and a surge in inbound tourism particularly from China and other countries in East Asia.  As a result of this, profits have continued to increase and there are good prospects for further growth in both the economy overall and corporate profitability.

The yen, which had already weakened significantly, was again depreciating against sterling in the first half of the period under review.  However since the end of November there has been a shift and the yen has now risen marginally against sterling.  Whilst direct influences on currency levels are difficult to analyse there seem to be a number of factors involved.  The adoption of quantitative easing by the ECB, the weakening of the oil price, the resumption of export growth may all have had an influence.  If Japan does restart some nuclear power stations, as seems increasingly likely, energy imports will fall significantly and this should also help support the yen.  At current levels Japan is a competitive place to manufacture and there are many news stories of production being returned to Japan and further investments being made in upgrading production capacity.

We have commented in previous reports on the encouraging improvements in corporate governance in Japan and there have been further positive developments since then.  A Corporate Governance code has been announced recently in addition to last year's Stewardship Code.  Company behaviour is clearly changing, with more emphasis on increasing returns to shareholders via higher targets for return on equity, more share buy-backs and increased cash dividends. Baillie Gifford welcomes the opportunity for more constructive engagement with company managements and we feel that our long term outlook is well aligned to the time scales that corporate Japan considers.  Recent shifts in domestic asset allocation and the need for Japan to increase returns to support an ageing population means that pressure for action is increasing and the scope for improvement in balance sheet management is very large as cash balances have built up through the years of deflation. 

Economic policy in Japan remains supportive of the corporate sector with continued quantitative easing from the Bank of Japan as it tries to reach an inflation target of 2%.  The government was returned to power with an improved majority after a snap election in December and is aiming to enact a significant structural reform programme.  Cuts to corporate taxes have been announced and further reductions seem likely as the tax system is reformed.  Tax revenues overall are rising strongly as the tax base is extremely cyclical, although there is still a budget deficit.  Whilst hopes for Mr Abe's Third Arrow have perhaps faded the positive impacts of various policies are beginning to be felt. 

Past performance is not a guide to future performance.

 

Income statement (unaudited)

	For the six months ended 28 February 2015			For the six months ended 28 February 2014			For the year ended 31 August 2014
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	2,728	2,728	-	1,883	1,883	-	7,538	7,538
Changes in investment holding gains	-	44,826	44,826	-	2,495	2,495	-	11,263	11,263
Currency gains (note 4)	-	2,633	2,633	-	3,630	3,630	-	3,927	3,927
Income from investments and interest receivable	2,087	-	2,087	1,690	-	1,690	3,746	-	3,746
Investment management fee	(993)	-	(993)	(835)	-	(835)	(1,693)	-	(1,693)
Other administrative expenses	(273)	-	(273)	(185)	-	(185)	(386)	-	(386)
Net return before finance costs and taxation	821	50,187	51,008	670	8,008	8,678	1,667	22,728	24,395
Finance costs of borrowings	(507)	-	(507)	(470)	-	(470)	(1,004)	-	(1,004)
Net return on ordinary activities before taxation	314	50,187	50,501	200	8,008	8,208	663	22,728	23,391
Tax on ordinary activities	(209)	-	(209)	(135)	-	(135)	(341)	-	(341)
Net return on ordinary activities after taxation	105	50,187	50,292	65	8,008	8,073	322	22,728	23,050
Net return per ordinary share (note 6)	0.15p	72.23p	72.38p	0.10p	11.92p	12.02p	0.47p	33.45p	33.92p

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.

 

Balance sheet (unaudited)

	At 28 February 2015 £'000	At 28 February 2014 £'000	At 31 August 2014 £'000
Fixed assets
Investments	339,797	261,228	286,275
Current assets
Debtors	757	754	369
Cash and short term deposits	7,429	10,270	5,231
	8,186	11,024	5,600
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(8,119)	(16,370)	-
Other creditors	(956)	(823)	(1,428)
	(9,075)	(17,193)	(1,428)
Net current liabilities	(889)	(6,169)	4,172
Total assets less current liabilities	338,908	255,059	290,447
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(38,973)	(25,724)	(41,733)
Net assets	299,935	229,335	248,714
Capital and reserves
Called up share capital	3,479	3,403	3,467
Share premium	48,009	42,754	47,092
Capital redemption reserve	203	203	203
Capital reserve	254,155	189,248	203,968
Revenue reserve	(5,911)	(6,273)	(6,016)
Shareholders' funds	299,935	229,335	248,714
Net asset value per ordinary share (after deducting borrowings at fair value)	425.9p	335.4p	353.3p
Net asset value per ordinary share (after deducting borrowings at par)	431.1p	337.0p	358.7p
Ordinary shares in issue (note 8)	69,581,750	68,056,750	69,331,750

 

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 28 February 2015

	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	12	917	-	-	-	929
Net return on ordinary activities after taxation	-	-	-	50,187	105	50,292
Shareholders' funds at 28 February 2015	3,479	48,009	203	254,155	(5,911)	299,935

For the six months ended 28 February 2014

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2013	3,251	32,019	203	181,240	(6,338)	210,375
Shares issued	152	10,735	-	-	-	10,887
Net return on ordinary activities after taxation	-	-	-	8,008	65	8,073
Shareholders' funds at 28 February 2014	3,403	42,754	203	189,248	(6,273)	229,335

For the year ended 31 August 2014

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2013	3,251	32,019	203	181,240	(6,338)	210,375
Shares issued	216	15,073	-	-	-	15,289
Net return on ordinary activities after taxation	-	-	-	22,728	322	23,050
Shareholders' funds at 31 August 2014	3,467	47,092	203	203,968	(6,016)	248,714

*      The Capital Reserve balance as at 28 February 2015 includes investment holding gains on fixed asset investments of £148,458,000 (28 February 2014 - gains of £94,864,000; 31 August 2014 - gains of £103,632,000).

 

Condensed cash flow statement (unaudited)

	Six months to 28 February 2015 £'000	Six months to 28 February 2014 £'000	Year to 31 August 2014 £'000
Net cash inflow from operating activities	653	455	1,652
Net cash outflow from servicing of finance	(502)	(425)	(884)
Total tax paid	(181)	(109)	(330)
Net cash outflow from financial investment	(6,689)	(12,659)	(22,491)
Net cash outflow before financing	(6,719)	(12,738)	(22,053)
Financing
Shares issued	929	10,887	15,289
Bank loans drawn down	8,070	11,023	27,410
Bank loans repaid	-	-	(16,387)
Net cash inflow from financing	8,999	21,910	26,312
Increase in cash	2,280	9,172	4,259
Reconciliation of net cash flow to movement in net debt
Increase in cash in the period	2,280	9,172	4,259
Net cash inflow from bank loans	(8,070)	(11,023)	(11,023)
Exchange differences on bank loans	2,711	4,508	4,869
Exchange differences on cash	(83)	(762)	(888)
Movement in net debt in the period	(3,162)	1,895	(2,783)
Net debt at start of the period	(36,502)	(33,719)	(33,719)
Net debt at end of the period	(39,664)	(31,824)	(36,502)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation	51,008	8,678	24,395
Gains on investments	(47,554)	(4,378)	(18,801)
Currency gains	(2,633)	(3,630)	(3,927)
Changes in debtors and creditors	(168)	(215)	(15)
Net cash inflow from operating activities	653	455	1,652

Twenty largest holdings at 28 February 2015 (unaudited)

Name	Business	Value £'000	% of total  assets*
Toyo Tyre & Rubber	Tyre manufacturer	10,873	3.1
Don Quijote	Discount store operator	10,746	3.1
Fuji Heavy Industries	Subaru cars	9,934	2.9
Sysmex	Medical equipment	9,841	2.8
Cyberagent	Internet advertising and content	9,669	2.8
Rakuten	Internet retail and financial services	9,210	2.7
Misumi Group	Precision machinery parts distributor	8,866	2.5
Iriso Electronics	Specialist auto connectors	8,697	2.5
SoftBank	Telecom operator and internet investor	8,601	2.5
Japan Exchange Group	Stock Exchange operator	8,391	2.4
M3	Online medical database	8,287	2.4
Kubota	Agricultural machinery	8,252	2.4
H.I.S.	Travel agency and theme parks	8,060	2.3
Itochu	Trading conglomerate	7,596	2.2
Temp Holdings	Employment and outsourcing services	7,211	2.1
Sony	Consumer electronics, films and finance	7,079	2.0
Yaskawa Electric	Robots and factory automation	6,807	2.0
Isuzu Motors	Trucks and pick-ups	6,659	1.9
Asics	Sports shoes and clothing	6,438	1.8
Otsuka Corp	IT solutions for SMEs	6,181	1.8
		167,398	48.2

*       Before deduction of bank loans

 

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 28 February 2015 comprise the statements set out on pages 6 to 10 together with the related notes on pages 11 and 12. They 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 2014 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 2015. 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 sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2014 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.	The management agreement with Baillie Gifford & Co Limited is terminable on not less than 6 months' notice, or on shorter notice in certain circumstances. With effect from 1 April 2013 the annual management fee was changed to 0.95% on the first £50 million of net assets and 0.65% on the remaining net assets, calculated and payable quarterly. The annual fee previously was 1.0% of net assets, calculated and payable quarterly.
4.	Currency gains/(losses)	Six months to 28 February 2015 £'000	Six months to 28 February 2014  £'000	Year to 31 August 2014 £'000
	Exchange differences on:
	Cash balances	(83)	(762)	(888)
	Bank loans	2,711	4,508	4,869
	Other items	5	(116)	(54)
		2,633	3,630	3,927
5.	No interim dividend will be declared.

 

Notes to the condensed financial statements (unaudited) (continued)

6.	Net return per ordinary share	Six months to 28 February 2015 £'000	Six months to 28 February 2014  £'000	Year to 31 August 2014 £'000
	Revenue return on ordinary activities after taxation	105	65	322
	Capital return on ordinary activities after taxation	50,187	8,008	22,728
	Net return per ordinary share is based on the above totals of revenue and capital and on 69,482,579 ordinary shares (28 February 2014 - 67,184,926; 31 August 2014 - 67,942,092), being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.
7.	Bank loans of £47.1 million (¥8.7 billion) have been drawn down under yen loan facilities which are repayable between November 2017 and August 2020 (28 February 2014 - £42.1 million (¥7.2 billion); 31 August 2014 - £41.7 million (¥7.2 billion)). The November 2017 loan is shown under short term creditors as this is a revolving facility which can be drawn for 1, 2, 3 or 6 months and repaid at the end of each drawdown period without incurring breakage costs.
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, 250,000 shares (28 February 2014 - 3,025,000; 31 August 2014 - 4,300,000) were issued at a premium to net asset value raising proceeds of £929,000 (28 February 2014 - £10,887,000; 31 August 2014 - £15,289,000).
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 £10,000 (28 February 2014 - £18,000; 31 August 2014 - £32,000) and transaction costs on sales amounted to £6,000 (28 February 2014 - £11,000; 31 August 2014 - £19,000).
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 2014. The principal risks and uncertainties have not changed since the publication of the Annual Report and Financial Statements 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 premium/discount at which the Company's shares trade can change; and gearing risk (the use of borrowing can magnify the impact of falling markets). Further information can be found on pages 6 and 7 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 16 April 2015.
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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