Annual Financial Report

RNS Number : 0056B

SchroderJapan Growth Fund PLC

01 October 2015

 



1 October 2015

ANNUAL REPORT AND ACCOUNTS

Schroder Japan Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 31 July 2015 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 July 2015 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderjapangrowthfund.com.  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/0056B_-2015-10-1.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

John Spedding

Schroder Investment Management Limited               

Tel: [phone]

Chairman's Statement

Performance

I am pleased to report a successful year of performance with the Company's net asset value ("NAV") total return being 24.0%, well above the benchmark which produced a total return of 17.7%. This performance was achieved notwithstanding a weakening in the yen against sterling of 10.3% over the period, which reduced returns for sterling investors.

As a result of strong local market performance over the last 12 months, Japan has increasingly become a focus for investors. This, coupled with the Company's outperformance of the benchmark, has led to additional interest in its shares, with the share price setting an all time high over the year and the discount tightening from 10.8% to 6.4%.

Further comment on performance and investment policy may be found in the Manager's Review.

Our portfolio manager, Andrew Rose, won the 2015 Morningstar Outstanding Fund Manager award. Their awards recognise individual fund managers that have made a substantial contribution to the retail investment management industry.

Revenue and dividend

More evidence of the recovery in Japanese profitability has been seen in increased dividends from portfolio companies. The revenue return per share increased by 12.0% over the year ended 31 July 2015 and the Directors have declared a final dividend of 2.00p per share for the year, an increase of 11.1% over the 1.80p per share paid in respect of the previous year. This dividend will be paid on 6 November 2015 to shareholders on the Register on 16 October 2015, subject to approval by shareholders at the Annual General Meeting on 3 November 2015. This year the dividend will be paid entirely from revenue reserve and it is currently expected that this will continue in future.

Gearing

During the year, the Company increased its revolving credit facility of Yen 5 billion to Yen 7 billion and extended it for a further twelve months. The gearing level, reflecting the higher net asset value, has remained relatively static beginning and ending the year at 12.8% and 12.5% respectively. The Company's gearing continues to operate within pre-agreed limits so that net effective gearing does not represent more than 25% of shareholders' funds.

Corporate Broker

Following a comprehensive review of promotional activities undertaken on behalf of the Company earlier this year, the Board appointed Cenkos Securities as its Corporate Broker.

Purchase of shares for cancellation and share issuance

The Directors did not use the authority given to them to purchase shares for cancellation during the financial year ended 31 July 2015. Nevertheless, as the ability to buy back shares is one of a number of tools that may be used to enhance shareholder value and to reduce the discount volatility, the Board will be seeking to renew the share buy-back authority granted at the Company's Annual General Meeting in November 2014 to purchase up to 14.99% of the Company's issued share capital for cancellation.

As in previous years, the Board is also seeking authority to issue up to 5% of the issued share capital on a non pre-emptive basis at a premium to net asset value. As part of the Company's premium management programme the Board will look to issue shares in order to provide liquidity to the market and to reduce volatility in any premium to net asset value.

Board refreshment

The Board continues to consider its composition, balance and diversity and has a long term refreshment policy in place which generally has resulted in Board changes every two to three years. In view of the length of service of two of the Directors, the Board has commenced the search for a new Director. Following such appointment, and allowing an opportunity for any new Director to settle into the role, it is envisaged that at least one of the long serving Directors will retire.

Outlook

Some of the Company's success this year has been partially overshadowed by events after the end of July. Since then, the NAV has reduced by around 10% as worldwide stock prices fell following the Chinese stock markets' collapse. One judgment for investors is whether this is just a reaction to market events in China (which have little direct impact on the Company's portfolio), or indicative of a more fundamental change in the outlook for global growth. Resolution of this is not made any easier by concern that Abenomics may be running out of steam.

The Manager's review discusses both issues, and your Board takes comfort from the generally optimistic conclusion offered. One obvious hangover from the market correction, however, is that day-to-day volatility in share prices remains high. While this is always threatening to investor confidence, one benefit is that this is likely to be an environment with considerable opportunities for a stock-picker looking for long term value. We want our Manager to continue to find those opportunities.

Annual General Meeting

The Annual General Meeting will be held at 3.00 p.m. on Tuesday, 3 November 2015, and I hope as many of you as possible will be able to come along to participate. The meeting, as in previous years, will include a presentation by the portfolio manager on the prospects for the Japanese market and the Company's investment strategy.

Jonathan Taylor

Chairman

1 October 2015

Manager's Review

Market Background

The Company's NAV total return for the year of 24.0% outperformed the benchmark total return of 17.7%. Stock selection contributed positively as did maintaining gearing over that period. Stock selection in telecommunications and technology was supportive such as KDDI, TDK and Koito Manufacturing. This offset the drag from holdings adversely affected by the fall in commodity prices such as trading company Mitsui & Co.

After a weak beginning to the year under review the market moved broadly higher thereafter following the second round of quantitative easing in October, a snap general election and postponement of the planned rise in VAT. The yen weakened following the additional monetary easing which reduced returns in sterling, which were healthy nonetheless. Developments at the company level were also generally positive in terms of rising corporate profits and the impact of recently introduced stewardship and corporate governance codes being seen.

Sector trends within the market generally favoured more defensive domestic sectors such as pharmaceuticals, food and railways. The exception was top performer insurance which benefited from improved underwriting performance and rising equity prices. At the other end of the spectrum, global cyclicals and commodity price sensitive areas performed relatively poorly as concerns grew about the health of the global economy and emerging markets in particular.

Activity

Small cap stock selection has added value over the year and we took some profits in this area, such as in SK Kaken (a paint producer) and Moshi Moshi Hotline (a call centre). In the larger cap part of the market we have maintained our mildly pro cyclical stance and added a new holding in the truck maker Isuzu Motors. Financials continue to offer attractive valuations and we added to bank exposure. We have also taken partial profits amongst electronics and precision companies such as Koito Manufacturing, Nidec and Konica Minolta.

The proceeds of these sales were reinvested in more laggard stocks such as Shinko Electric and Toshiba Tec. The pharmaceutical sector was generally a strong performer and we sold out of Tsumura (a Chinese herbal medicine producer) and added to the existing position in Otsuka Holdings, which had lagged.

Outlook

The current economic environment is less supportive of the equity market than it was during most of the last year, as evidenced by a sharp correction and increased volatility immediately after the Company's July year end. Whilst the external environment remains uncertain, especially in relation to China, we are more confident that the domestic economy will emerge from its recent soft patch.

The fall in the market has brought stock market valuations back to lower levels. Corporate profit trends bear watching but so far the revisions index overall remains positive, even if it is weaker for manufacturing. Despite specific problems at one leading Japanese company, Toshiba, nothing has happened to undermine the more positive underlying developments in corporate governance, capital efficiency and shareholder returns. On balance we expect market volatility to continue, but remain cautiously optimistic from current levels given these developments at the corporate level.

Investment policy

Following the sharp divergence in performance between steady domestic growth companies and more cyclical companies, relative valuations appear generally to favour the latter. On a selective basis we expect to find more ideas in this part of the market over coming months.

Net gearing was 12.5% at the end of July 2015, slightly lower than the previous year end.

Schroder Investment Management Limited

1 October 2015

Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks identifying significant strategic, investment, financial, regulatory, custodial and service provider risks relevant to the Company's business as an investment company and has put in place an appropriate monitoring system. This system assists the Board in determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. Both the principal risks and the monitoring system are subject to robust review at least annually. The last review took place in September 2015.

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Board, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Board's on going risk assessment which has been in place throughout the financial year and up to the date of this report.

Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

A summary of the principal risks and uncertainties faced by the Company, and actions taken to mitigate these risks and uncertainties, is set out below.

Strategy and competitiveness risk

Over time, the Company's investment strategy and asset class may become out of favour with investors or fail to meet their investment objectives, or the Company's cost base could become uncompetitive, particularly in light of open ended alternatives. This may result in a wide discount of the share price to underlying asset value both in absolute terms and comparative to the peer group.

In order to mitigate this risk, the Directors periodically review whether the Company's investment remit remains appropriate and monitor the success of the Company in meeting its stated objectives at each Board meeting. The Manager monitors the share price relative to net asset value and the Directors review the marketing and distribution activity undertaken by the Manager and the Corporate Broker at each Board meeting.

The level of fees charged by the Manager and the Company's other service providers is also monitored by the Board and the ongoing competitiveness of management fee levels is considered annually by the Management Engagement Committee and the Board.

Investment management risk

The Manager's investment strategy (for example in terms of asset allocation employed by the Manager or the level of gearing), if inappropriate, may result in the Company underperforming the market and/or peer group companies.

To mitigate this risk, the Board reviews at each Board meeting the Manager's compliance with the agreed investment restrictions; investment performance and risk against investment objectives and strategy; the portfolio's risk profile; and appropriate strategies to mitigate any negative impact of substantial changes in markets. The Board also receives an annual presentation from the Manager's internal audit function and conducts an annual review of the ongoing suitability of the Manager.

Financial and currency risk

The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in Japanese equity markets would have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in underlying assets which are denominated in yen, its exposure to changes in the exchange rate between sterling and yen has the potential to have a significant impact on returns.

To mitigate this risk, the Directors consider the risk profile of the portfolio at each Board meeting and discuss appropriate strategies to mitigate any negative impact of substantial changes in markets or currency with the Manager.  While the Directors consider the Company's hedging policy on a regular basis, the Company did not engage in currency hedging to reduce the risk of currency fluctuations and the volatility of returns which might result from such currency exposure during the year ended 31 July 2015.

The Board also monitors the Manager's use of gearing and leverage in accordance with agreed guidelines and restrictions set out in the Company's investment policy. The Company utilises a credit facility, currently in the amount of Yen 7 billion, which increases the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.

To mitigate this risk, the Directors keep the Company's gearing under continual review and impose strict restrictions on borrowings. The Company's gearing continues to operate within pre-agreed limits so that it does not exceed 25% of shareholders' funds.

A full analysis of the financial risks facing the Company is set out in note 21 on pages 47 to 51 of the 2015 Annual Report.

Accounting, legal and regulatory risk

In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Should the Company not comply with these requirements, it could ultimately lose its investment trust status and capital gains within the Company's portfolio could, as a result, be subject to Capital Gains Tax.

In addition, breaches of the UK Listing Rules, the Companies Acts or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes which could damage the Company's reputation, including suspension from listing on the London Stock Exchange or a qualified audit report.

To mitigate these risks, the Board receives confirmation from the Manager and other key service providers at each Board meeting of compliance with relevant laws and regulations. Shareholder documents and announcements, including the Company's published Half Year and Annual Reports are subject to stringent review processes, and procedures are in place to safeguard against the disclosure of inside information.

Custody and Depositary risk

Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking. To mitigate this risk, the Board receives quarterly reports from the Depositary confirming safe custody of the Company's assets, including cash, and portfolio holdings are independently reconciled by the Manager. In addition the existence of assets is subject to annual external audit and the Depositary's audited internal controls reports are reviewed by the Audit Committee and any concerns investigated.

Service provider risk

The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, Depositary and Registrar. Failure of controls and poor performance of any service provider could lead to reputational damage or loss. The Board is therefore reliant on the effective operation of the systems of its service providers. To mitigate this risk, the Board considers regular reports from key service providers and monitors the quality of services provided, and the Management Engagement Committee conducts an annual review of services to ensure that they remain appropriate. The Audit Committee also reviews annual audited internal controls reports from its key service providers, which includes confirmation of business continuity arrangements.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report, the Strategic Report, the Report of the Directors including the Corporate Governance Statement, the Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

-      select suitable accounting policies and then apply them consistently;

-      make judgements and accounting estimates that are reasonable and prudent;

-      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

-      prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the Directors, whose names and functions are set out on page 1 of the 2015 Annual Report, confirms that, to the best of their knowledge:

-      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 net return of the Company;

-      the Strategic 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; and

-      they consider that the Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the Viability Statement, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

A statement on the medium term viability of the Company can be found in the Strategic Report on pages 18 and 19 of the 2015 Annual Report.

Income Statement

for the year ended 31 July 2015

		2015			2014
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	36,671	36,671	-	(1,383)	(1,383)
Net foreign currency gains	-	2,829	2,829	-	3,168	3,168
Income from investments	4,139	-	4,139	3,793	-	3,793
Other interest receivable and similar income	-	-	-	1	-	1
Gross return	4,139	39,500	43,639	3,794	1,785	5,579
Investment management fee	(489)	(1,142)	(1,631)	(551)	(1,285)	(1,836)
Administrative expenses	(476)	-	(476)	(432)	-	(432)
Net return before finance costs and taxation
	3,174	38,358	41,532	2,811	500	3,311
Finance costs	(67)	(155)	(222)	(71)	(166)	(237)
Net return on ordinary activities before taxation
	3,107	38,203	41,310	2,740	334	3,074
Taxation on ordinary activities	(414)	-	(414)	(339)	-	(339)
Net return on ordinary activities after taxation	2,693	38,203	40,896	2,401	334	2,735
Return per share (note 3)	2.15p	30.56p	32.71p	1.92p	0.27p	2.19p

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 Company has no recognised gains and losses other than those included in the results above and therefore no separate statement of total recognised gains and losses has been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the year ended 31 July 2015

	Called-up		Share	Warrant
	share	Share	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 July 2013	12,501	7	97,205	3	65,147	(1,955)	172,908
Net return on ordinary activities	-	-	-	-	334	2,401	2,735
Dividend paid in the year	-	-	-	-	(2,188)	-	(2,188)
At 31 July 2014	12,501	7	97,205	3	63,293	446	173,455
Net return on ordinary activities	-	-	-	-	38,203	2,693	40,896
Dividend paid in the year	-	-	-	-	(1,804)	(446)	(2,250)
At 31 July 2015	12,501	7	97,205	3	99,692	2,693	212,101

Balance Sheet

at 31 July 2015

	2015	2014
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	238,825	196,932
Current assets
Debtors	463	571
Cash at bank and in hand	4,614	6,575
	5,077	7,146
Current liabilities
Creditors: amounts falling due within one year	(31,801)	(30,623)
Net current liabilities	(26,724)	(23,477)
Total assets less current liabilities	212,101	173,455
Net assets	212,101	173,455
Capital and reserves
Called-up share capital	12,501	12,501
Share premium	7	7
Share purchase reserve	97,205	97,205
Warrant exercise reserve	3	3
Capital reserves	99,692	63,293
Revenue reserve	2,693	446
Total equity shareholders' funds	212,101	173,455
Net asset value per share (note 4)	169.67p	138.75p

 

These accounts were approved and authorised for issue by the Board of Directors on 1 October 2015 and signed on its behalf by:

Jonathan Taylor

Chairman

Registered in England and Wales

Company registration number: 2930057

Cash Flow Statement

for the year ended 31 July 2015

	2015	2014
	£'000	£'000
Net cash inflow from operating activities (note 5)	1,975	1,482
Servicing of finance
Interest paid	(222)	(267)
Net cash outflow from servicing of finance	(222)	(267)
Taxation
Overseas tax paid	(409)	(335)
Investment activities
Purchases of investments	(22,084)	(18,631)
Sales of investments	15,965	13,643
Net cash outflow from investment activities	(6,119)	(4,988)
Dividend paid	(2,250)	(2,188)
Net cash outflow before financing	(7,025)	(6,296)
Financing
Loan drawn down	5,438	12,489
Net cash inflow from financing	5,438	12,489
Net cash (outflow)/inflow in the year	(1,587)	6,193

Notes to the Accounts

1.         Accounting Policies

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 Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value through profit or loss.

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

2.         Dividends

	2015	2014
Dividend paid and proposed	£'000	£'000
2014 final dividend paid of 1.80p (2013: 1.75p)	2,250	2,188
	2015	2014
	£'000	£'000
2015 final dividend proposed of 2.00p (2014: 1.80p)	2,500	2,250

The proposed dividend amounting to £2,500,000 is the amount used for the basis of determining whether the Company has satisfied 

the distribution requirements of Section 1158 ("S1158") of the Corporation Tax Act 2010. The revenue available for distribution by way 

of dividend for the year is £2,693,000. The Company was not required to pay a dividend in respect of the prior year in order to satisfy the 

requirements of S1158 as the balance on its accumulated revenue reserve was within the amount it was allowed to retain for the year. 

However the Company did pay a dividend, in line with its policy of distributing substantially all of its net revenue earned in the year. 

The 2014 dividend paid during the year was funded partly from capital and partly from revenue reserve.

3.         Return per share

	2015	2014
Revenue return (£'000)	2,693	2,401
Capital return (£'000)	38,203	334
Total return (£'000)	40,896	2,735
Weighted average number of ordinary shares in issue during the year	125,008,200	125,008,200
Revenue return per share	2.15p	1.92p
Capital return per share	30.56p	0.27p
Total return per share	32.71p	2.19p

4.         Net asset value per share

	2015	2014
Net assets attributable to shareholders (£'000)	212,101	173,455
Shares in issue at the year end	125,008,200	125,008,200
Net asset value per share	169.67p	138.75p

5.         Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	2015	2014
	£'000	£'000
Total return on ordinary activities before finance costs and taxation	41,532	3,311
Less capital return on ordinary activities before finance costs and taxation	(38,358)	(500)
Less management fee allocated to capital	(1,142)	(1,285)
(Increase)/decrease in accrued dividends and interest receivable	(50)	8
Increase in other debtors	(3)	(19)
Decrease in accrued expenses	(4)	(33)
Net cash inflow from operating activities	1,975	1,482

6.         Status of announcement

2014 Financial Information

The figures and financial information for 2014 are extracted from the published Annual Report and Accounts for the year ended 31 July 2014 and do not constitute the statutory accounts for that year. The 2014 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2015 Financial Information

The figures and financial information for 2015 are extracted from the Annual Report and Accounts for the year ended 31 July 2015 and do not constitute the statutory accounts for the year. The 2015 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2015 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.

 

END

 

 

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