Annual Financial Report

RNS Number : 0841R

JPMorgan Japanese Inv. Trust PLC

14 November 2012

 

LONDON STOCK EXCHANGE ANNOUNCMENT

JPMORGAN JAPANESE INVESTMENT TRUST PLC

AUDITED FINAL RESULTS FOR THE YEAR ENDED 30^th SEPTEMBER 2012

The Directors of JPMorgan Japanese Investment Trust plc announce

the Company's results for the year ended 30^th September 2012.

Chairman's Statement

It is a year since I wrote about the devastating effects and resulting challenges of the terrible earthquake and tsunami in Eastern Japan that occurred in March 2011. The Japanese people have continued to work hard to rebuild and re-establish those businesses and communities which were severely affected. Progress has been extremely encouraging and reflects the ability of Japanese society to cooperate for the good of the country as a whole.

Later in this report the Investment Manager details some of the political and macroeconomic challenges ahead of which shareholders need to be aware. Against this backdrop however, the Board and Investment Manager continue to believe that investment opportunities remain in Japan.

Investment Performance

In the year to 30th September 2012, although the Company saw a decline in net assets of 2.1% in sterling terms, the portfolio did outperform by 3.2% compared with the Tokyo Stock Exchange First Section (TOPIX) Index (our benchmark), which declined by 5.3%. The returns are calculated on a total return basis in sterling terms and were impacted by the movement in the yen/sterling rate from yen 120.1 at the beginning of the year to yen 125.6 at its conclusion.

The share price of your Company declined by 5.4% during the year assuming the reinvestment of the dividend, virtually in line with the benchmark. This movement in share price reflected both the decline in net assets and the increase in the level of the discount of the share price against the net asset value per share from 14.3% to 17.5%.

Revenue and Dividends

The Company's revenue position has continued to strengthen with earnings per share for the full year rising to 4.1p (2011: 3.49p). The Board proposes, subject to shareholders' approval at the Annual General Meeting, to pay a final dividend of 3.65p per share (2011: 3.3p) on 21st December 2012 to shareholders on the register at the close of business on 30th November 2012 (ex-dividend date 28th November 2012). This will be an increase of 10.6%. As previously explained, the dividend streams from Japan depend on the construction of the portfolio at any particular point in time and this year's dividend level is therefore not indicative of future dividend payments. However, your Board has noted that many of the companies in which the portfolio is invested are becoming more progressive in their dividend policies.

Gearing

The Board of Directors sets the overall strategic gearing policy and guidelines, reviewing these at each meeting. The Investment Manager then manages the gearing within these agreed levels. On 30th September 2012, the Company had a gearing level of 7%. The management of gearing has been active during the year with the level having ranged between a geared position of 9% and a net cash position of 2% and the level of gearing at the end of the financial year reflected the confidence of the Investment Manager in the individual companies held in the portfolio.

Investment Manager

The Company's objective is to provide shareholders with capital growth from a portfolio of investments in Japanese companies and, in spite of a negative return overall in the latest year, your Investment Manager did achieve outperformance against our benchmark, principally through good stock selection and sector allocation. These results can be seen from the performance attribution data shown in the annual report.

Board of Directors

Andrew Fleming and Keith Percy are retiring by rotation and, being eligible, are seeking reappointment at this year's Annual General Meeting. Having served as Directors for more than nine years, David Pearson and I also retire and will seek reappointment. The Board does not believe that length of service in itself should disqualify a Director from seeking reappointment and, in proposing our reappointment, it has taken into account the ongoing requirements of the UK Corporate Governance Code, including the need to refresh the Board and its Committees. Andrew, Keith and David bring a wealth of experience to the Board and I have no hesitation in recommending their reappointment.

The Directors' fees have remained unchanged for two years and it has therefore been decided to increase them by £2,500 per Director per annum. This results in fees per annum of £32,500 for me as Chairman, £27,500 for the Chairman of the Audit Committee and £22,500 for each other Director.

Authority to Repurchase the Company's Shares

At last year's Annual General Meeting, shareholders granted the Directors' authority to repurchase up to 14.99% of the Company's shares but the Company did not use this authority during the year (2011: 140,000 shares repurchased). The Directors continue to believe, however, that the power to repurchase shares is of ongoing benefit to shareholders and therefore propose that the authority be renewed for a further period. Share repurchases continue to be a useful tool for decreasing discount volatility and this approach will be used when considered to be appropriate by the Board.

Annual General Meeting

This year's Annual General Meeting will be held on 20th December 2012 at 2.00 p.m. at Holborn Bars, 138-142 Holborn, London EC1N 2NQ. As in previous years, in addition to the formal part of the meeting, there will be a presentation from the Investment Manager who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, the Investment Manager and representatives of JPMorgan Asset Management after the meeting. I look forward to welcoming as many of you as possible to this meeting.

If you have any detailed or technical questions, it would be helpful if you could raise these in advance of the meeting with the Company Secretary at Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. Alternatively, questions may be submitted via the Company's website (www.jpmjapanese.co.uk). Shareholders who are unable to attend the Annual General Meeting are encouraged to use their proxy votes. Proxy votes may be lodged electronically, whether shares are held through CREST or in certificate form, and full details are set out on the form of proxy.

Prospects

Economic conditions throughout the developed world continue to be challenging and Japan is no exception to this. However, as reflected in the Investment Manager's Report, new industries are appearing as the economy matures while, within existing industries, there is increasing differentiation between companies. These changes give your Board confidence that many investment opportunities remain available for your portfolio in the future.

Jeremy Paulson-Ellis

Chairman

13^th November 2012

Investment Manager's Report

In the 12 months ended 30th September 2012 the benchmark Topix index fell 5.3% in sterling terms. The Company's net assets fell 2.1%.  The Japanese economy continued to recover from last year's earthquake but concerns over the global economy, the outlook for the eurozone and the continuing strength of the yen weighed on the market. Overall, we believe that the outlook for Japanese companies is mixed but that this environment provides us with the opportunity to invest in undervalued franchises with excellent long term growth prospects.

Economy, Currency and Politics

As with last year, concerns over the strength of the global economy and the outlook for the eurozone dominated for much of the year. The Japanese economy continued to recover post the devastating March 2011 earthquake, although many companies suffered an additional setback when production facilities in Thailand were hit by floods. The Bank of Japan, like other central banks, took unconventional measures, but actions were much less aggressive and as such the yen remained strong. China-Japan relations soured at the end of the period with an escalation in the longstanding dispute over the Senkaku Islands. Some Japanese products have been boycotted and sales of cars by Japanese companies have fallen substantially. The backdrop of likely forthcoming leadership changes in both countries has made it hard to find a quick resolution. The long term consequences of this are still unclear but China is Japan's largest trading partner so we are monitoring events closely.

In politics the ruling Democratic Party of Japan ('DPJ') succeeded in passing a law that should see the consumption tax hiked in 2014. This is, arguably, the first substantial piece of legislation passed in several years by any Japanese government. However, it is also an unpopular measure and the DPJ's approval ratings have continued to fall. It is likely that there will be an election in the near future and the opposition Liberal Democratic Party may return to power. It recently elected former Prime Minister Shinzo Abe as its leader. One new party, the Japan Restoration Party, was also established by the current Mayor of Osaka, Toru Hashimoto. He is young and charismatic and may be able to bring about some change. He is opposed to the restart of Japan's nuclear reactors, something that resonates with many voters. Indeed, we continue to believe that Japan's long term energy policy has fundamentally shifted and that the biggest beneficiary will be liquefied natural gas.

Performance Review and Future Strategy

The Company outperformed the index by 3.2% over the year, continuing the trend over the last few years. The top contributors included FamilyMart, a convenience store operator that is expanding into Asia, and Namco Bandai, a toy and computer game company that is making better use of its valuable intellectual property. The detractors included Konami and Gree. These stocks were hit by increased government regulation of the nascent mobile phone gaming market. We do not believe that the long term investment case for these companies has substantially changed - in general people will play more games on mobile devices and less on traditional consoles.

There are strong structural trends in the Japanese market, both positive and negative. These trends provide the basic framework for how we think about companies overall. All of the themes we discussed in last year's annual report remain in place, namely companies expanding in Asia, those prioritising shareholder returns, those in structural growth markets, such as online shopping and gaming, and company specific opportunities such as LIXIL (previously called JS Group), a top manufacturer of bathrooms, kitchens and window frames.

One example of how we use themes to our advantage is the ageing population. It is highly likely the Japanese population will fall from 127 million today to around 95 million in 2050. This dynamic may make the outlook difficult for some companies. However, we can take advantage of this trend in a number of ways. Benesse and Message are leading nursing home and sheltered housing providers. These markets are still in the early stages of growth as historically elderly Japanese would live with their children. Unicharm is the dominant maker of adult nappies - the adult nappy market will be larger than that for babies in the next few years. Sugi Holdings is the number one operator of dispensing pharmacies. As the population ages we expect the quantity of drugs prescribed to increase along with the number of visits to pharmacies. We also expect to see consolidation in many industries as the owners of small companies gradually retire. This underpins our investment case in Nihon M&A Center. Companies relating to this theme make up close to 10% of the portfolio.

Similarly, we are very aware of the problems facing certain Japanese industries and companies. For example, 20 years ago Japanese consumer electronics companies such as Sony, Panasonic and Sharp were global leaders with very valuable brands. Now, their products have become commoditised and they have been surpassed by low-cost manufacturers in Taiwan, Korea and China. Even in areas where market shares remain high, technology changes are working against them. Thus, even though Sony remains the number one maker of camcorders, the market is shrinking as people take more videos on their mobile phones. We have no exposure to this sector. Furthermore, we are aware that a similar fate could befall other companies and keenly watch overseas competition and market developments in traditional areas of Japanese strength such as autos and machinery. In this respect the knowledge and insight of our investment teams spread across the Asian region is vitally important.  Companies expanding in Asia form roughly 50% of the portfolio; those prioritising shareholder returns roughly 20%; online shopping and gaming well over 15%.

We have also continued with our bias towards companies with strong balance sheets. With a lacklustre global economic backdrop, only those companies with top competitive positions and the robust balance sheets with which to invest for the future will succeed. It is noteworthy that most of the major equity financings this year came from companies that had also financed in 2009.

Outlook

We believe that the differences between those companies that will succeed and those that will not are set to become ever greater. Our local presence on the ground in Tokyo is a strong competitive advantage in identifying long term country, sector and stock specific themes. Valuations remain compelling, with the market still trading at the low end of historical ranges despite notable improvements in corporate governance, higher exposure to growing Asian markets and a more aggressive pursuit of profit than has been the case in the past. Through continued focus on these beneficiaries of secular trends, at a low valuation, we believe that the outlook for our holdings remains attractive.

Nicholas Weindling

Investment Manager

13^th November 2012

Directors' Report

Principal Risks

With the assistance of the Manager, JPMorgan Asset Management (UK) Limited ('JPMAM'), the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories:

•     Investment Underperformance: An inappropriate investment strategy, for example asset allocation, the level of gearing or the degree of portfolio risk, could lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments and through a set of investment restrictions and guidelines which are monitored and reported by the Manager. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Manager, who attends all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Investment Manager employs the Company's gearing tactically, within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.

•     Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the Investment process with the Investment Manager.

•     Political, Economic and Governance: Administrative risks, such as the imposition of restrictions on the free movement of capital. These risks are discussed by the Board on a regular basis.

•     Loss of Investment Team or Investment Manager: A sudden departure of the investment manager or several members of the investment management team could result in a short term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel.

•     Discount: A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow.

•     Change of Corporate Control of the Manager: The Board holds regular meetings with senior representatives of JPMAM in order to obtain assurance that the Manager continues to demonstrate a high degree of commitment to its investment trusts business through the provision of significant resources.

•     Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Business of the Company' in the annual report. Should the Company breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ('DTRs'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act, the UKLA Listing Rules and DTRs.

•     Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement in the annual report.

•     Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records may prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Corporate Governance Statement in the annual report.

•     Financial: The financial risks faced by the Company include market risk, liquidity risk and credit risk. Further details are disclosed in note 22 in the annual report.

Related Parties Transactions

During the financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the year.

Statement of Directors' Responsibilities

The Directors each confirm to the best of their knowledge that:

•     the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return or loss of the Company; and

•     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Jeremy Paulson-Ellis

Chairman

13^th November 2012

Income Statement

for the year ended 30th September 2012

		2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss		-	(11,574)	(11,574)	-	11,029	11,029
Net foreign currency gains/(losses)		-	141	141	-	(1,260)	(1,260)
Income from investments		8,121	-	8,121	7,321	-	7,321
Other interest receivable and similar income		-	-	-	2	-	2
Gross return/(loss)		8,121	(11,433)	(3,312)	7,323	9,769	17,092
Management fee		(368)	(1,475)	(1,843)	(449)	(1,795)	(2,244)
Other administrative expenses		(479)	-	(479)	(522)	-	(522)
Net return/(loss) on ordinary activities before finance costs and taxation		7,274	(12,908)	(5,634)	6,352	7,974	14,326
Finance costs		(93)	(371)	(464)	(210)	(840)	(1,050)
Net return/(loss) on ordinary activities before  taxation		7,181	(13,279)	(6,098)	6,142	7,134	13,276
Taxation		(569)	-	(569)	(512)	-	(512)
Net return/(loss) on ordinary activities after taxation		6,612	(13,279)	(6,667)	5,630	7,134	12,764
Return/(loss) per share (note 3)		4.10p	(8.23)p	(4.13)p	3.49p	4.42p	7.91p

Details of dividends paid and proposed are given in note 2 below.

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

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up		Capital
	share	Other	redemption	Capital	Revenue
	capital	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 30th September 2010	40,365	166,791	8,597	84,386	5,967	306,106
Repurchase and cancellation of the Company's own shares	(35)	-	35	(229)	-	(229)
Net return on ordinary activities	-	-	-	7,134	5,630	12,764
Dividends appropriated in the year	-	-	-	-	(4,517)	(4,517)
At 30th September 2011	40,330	166,791	8,632	91,291	7,080	314,124
Net (loss)/return on ordinary activities	-	-	-	(13,279)	6,612	(6,667)
Dividends appropriated in the year	-	-	-	-	(5,323)	(5,323)
At 30th September 2012	40,330	166,791	8,632	78,012	8,369	302,134

Balance Sheet

at 30th September 2012

		2012	2011
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		324,227	312,150
Current assets
Debtors		9,850	5,727
Cash and short term deposits		4,796	11,329
		14,646	17,056
Creditors: amounts falling due within one year		(36,739)	(2,590)
Net current (liabilities)/assets		(22,093)	14,466
Total assets less current liabilities		302,134	326,616
Creditors: amounts falling due after more than one year		-	(12,492)
Net assets		302,134	314,124
Capital and reserves
Called up share capital		40,330	40,330
Other reserve		166,791	166,791
Capital redemption reserve		8,632	8,632
Capital reserves		78,012	91,291
Revenue reserve		8,369	7,080
Total equity shareholders' funds		302,134	314,124
Net asset value per share (note 4)		187.3p	194.7p

Company registration number: 223583

Cash Flow Statement

for the year ended 30th September 2012

		2012	2011
		£'000	£'000
Net cash inflow from operating activities		4,795	3,729
Returns on investments and servicing of finance
Interest paid		(476)	(1,033)
Capital expenditure and financial investment
Purchases of investments		(121,148)	(156,837)
Sales of investments		96,134	155,730
Other capital charges		(5)	(3)
Net cash outflow from capital expenditure and financial investment		(25,019)	(1,110)
Dividend paid		(5,323)	(4,517)
Net cash outflow before financing		(26,023)	(2,931)
Financing
Net drawdown of loans		20,587	9,456
Repurchase and cancellation of the Company's own shares		-	(229)
Net cash inflow from financing		20,587	9,227
(Decrease)/increase in cash and cash equivalents		(5,436)	6,296

Notes to the Accounts

for the year ended 30th September 2012

1.    Accounting policies

(a)  Basis of accounting

      The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the AIC in January 2009. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.

      All of the Company's operations are of a continuing nature.

      The financial statements for the Company comprise the Income Statement, the Reconciliation of Movements in Shareholders' Funds, the Balance Sheet, the Cash Flow Statement and the Notes to the Accounts.

The accounts have been prepared on a going concern basis.

      The policies applied in these accounts are consistent with those applied in the preceding year.

2.   Dividend

(a)  Dividends paid and proposed

		2012	2011
		£'000	£'000
	Dividend paid
	2011 final dividend of 3.3p (2010: 2.8p)	5,323	4,517
	Dividend proposed
	2012 final dividend of 3.65p (2011: 3.3p)	5,888	5,323

      The final dividend proposed in respect of the year ended 30th September 2012 is subject to approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 30th September 2013.

(b) Dividend for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

      The proposed dividend of £5,888,000 (2011: £5,323,000) is the amount on which the requirements of Section 1158 are considered. The revenue available for distribution by way of dividend is £6,612,000 (2011: £5,630,000).

3.   Return/(loss) per share

      The revenue return per share is based on the revenue earnings attributable to the ordinary shares of £6,612,000 (2011: £5,630,000) and on the weighted average number of shares in issue throughout the year of 161,318,078 (2011: 161,334,188).

      The capital loss per share is based on the capital loss attributable to the ordinary shares of £13,279,000 (2011 return: £7,134,000) and on the weighted average number of shares in issue throughout the year of 161,318,078 (2011: 161,334,188).

      The total loss per share is based on the total loss attributable to the ordinary shares of £6,667,000 (2011 return: £12,764,000) and on the weighted average number of shares in issue throughout the year of 161,318,078 (2011: 161,334,188).

4.   Net asset value per share

      The net asset value per share is based on the net assets attributable to the ordinary shareholders of £302,134,000 (2011: £314,124,000) and on the 161,318,078 (2011: 161,318,078) shares in issue at the year end.

5.   Status of preliminary announcement

2011 Financial Information

The figures and financial information for 2011 are extracted from the published Annual Report and Accounts for the year ended 30^th September 2011 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2012 Financial Information

The figures and financial information for 2012 are extracted from the Annual Report and Accounts for the year ended 30^th September 2012 and do not constitute the statutory accounts for the year.  The Annual Report and Financial Statements include the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The annual report will also shortly be available on the Company's website at www.jpmjapanese.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

For further information please contact:

Rebecca Burtonwood

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

14^th November 2012

 

END

 

 

FR FFISALFESELF