Half-year Report

RNS Number : 6919U

SchroderJapan Growth Fund PLC

08 April 2016

 

8 April 2016

Half Year Report

Schroder Japan Growth Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 January 2016 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document 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:

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

John Spedding

Schroder Investment Management Limited                                    

Tel: [phone]

Half Year Report for the Six Months Ended 31 January 2016

Interim Management Report - Chairman's Statement

Performance

The six-month period to 31 January 2016 has seen weaker performance from the Japanese stock market. Net asset value per share on a total return basis reduced by 4.6% (compared to a negative total return of 1.9% for the period from the Benchmark Index). The share price produced a negative total return of 8.7% as the discount widened from 6.4% to 10.5%.

Further performance details are set out in the Manager's Review on page 4 of the Report.

Gearing policy

During the period the Directors reviewed the long-term borrowing requirements of the Company. With effect from 15 January 2016, the Company took out a term loan of ¥6 billion for a three year period. This was done with the intention of locking in an attractive long term interest rate, whilst continuing to align the borrowing available to the portfolio manager with the investment objectives. In order to maintain flexibility, the Company maintained its revolving credit facility, but in the reduced amount of ¥1 billion. The gearing continues to be operated within the limits agreed by the Board. At the beginning of the period, the effective gearing ratio (borrowings less cash expressed as a percentage of net assets) was 12.5% and the level had increased to 14.8% at 31 January 2016.

Changes to the Board

As part of the long term refreshment policy of the Board, John Scott retired as a Director of the Company with effect from 31 December 2015. On behalf of the Board, I would like to place on record the Board's gratitude for Mr Scott's distinguished long service to the Company and we wish him well in his future endeavours.

I am pleased to announce the appointment of Alan Gibbs as an independent non-executive Director of the Company, with effect from 1 February 2016.

Alan worked for the Fleming Group in Hong Kong, London and Singapore from 1974 to 1991, with responsibility for investments in Japan and throughout the Far East. For the next 14 years he helped set up and ran two Far Eastern brokerages, before joining J.O. Hambro (latterly Waverton) Investment Management in 2005, where he ran Far Eastern funds, and is a Director. He has been Chairman of an educational trust, and is now Chairman of a nursing charity, the Burdett Trust, which he was instrumental in founding 15 years ago.  He is also an independent non-executive Director of the M&G Charibond Charities Fixed Interest Common Investment Fund (Charibond) and a member of the Advisory Committee of the M&G Equities Investment Fund for Charities (Charifund).

A resolution to elect Mr Gibbs as a Director of the Company will be proposed at the Annual General Meeting in November 2016.

Outlook

Not for the first time, Japan is proving to be a challenge. To take two examples, an economy almost completely dependent on imported oil might be expected to benefit from the collapse in the price of oil. The stock market recently has been weakest when the oil price fell the most. Meanwhile the Bank of Japan - and exporters - might have thought that making interest rates negative for some deposits would weaken the currency, to the benefit of domestic growth. As it turned out, negative rates so far have been accompanied by a surge in the yen.

Amidst this confusing macro-economic environment, most Japanese companies have got on with the job of growing profits for the fourth year in a row, in many cases with higher dividends and/or share buybacks. The portfolio has had a difficult six months as market attention switched to defensive sectors. We share the portfolio manager's view that the weak share prices in many other areas must be providing opportunities.

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 16 to 18 of the Company's published Annual Report and Accounts for the year ended 31 July 2015. These risks and uncertainties have not materially changed during the six months ended 31 January 2016.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on pages 18 and 19 of the published Annual Report and Accounts for the year ended 31 July 2015, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

Details of transactions with related parties, which under the Financial Conduct Authority's Listing Rules include the Manager, can be found on page 47 of the Company's published Annual Report and Accounts for the year ended 31 July 2015. There have been no material transactions with the Company's related parties during the six months ended 31 July 2015.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules.

Jonathan Taylor

Chairman

8 April 2016

Interim Management Report - Manager's Review

Market background

The Company's NAV total return in the six months to 31 January 2016 was -4.6% in sterling, compared to the benchmark return of -1.9%.

A small negative return of 1.9% in the index over the six months belies a weaker underlying environment. Stripping out the impact of the yen's appreciation relative to sterling the return was

-12.9%, a reversal of the direction of the currency during the previous three years of Abenomics. The market decline occurred at the beginning and end of the period, with the market broadly moving sideways in between. The root cause was the same in both instances, namely global uncertainty caused by weak resource prices and Chinese concerns. Japanese economic developments continued to undershoot most forecasts and the Bank of Japan maintained its record of surprising markets, particularly with a move to negative interest rates at the end of January, the repercussions of which have been felt after the end of the Company's half year. Corporate fundamentals were generally supportive, with profits growing and shareholder returns benefiting from corporate governance improvements.

Against an uncertain global backdrop the best performing sectors (i.e. those that fell the least) were domestic and defensive, such as construction, food and pharmaceuticals. This trend was reinforced by asset allocation changes at large domestic public pension funds, reducing bonds partly in favour of equities but at the same time focussing on equities that had perceived bond-like characteristics in terms of predictability and volatility. At the other end of the spectrum was more cyclical or resource price sensitive sectors such as shipping and steel. Financials also performed poorly, particularly at the end of the period due to the adverse impact on profitability from the central bank's negative interest rate policy.

Portfolio performance

The Company's NAV underperformance of the benchmark return was primarily due to the gearing. This was maintained in the range of 10-15% through the period, leading to losses when the market declined.

Unusually for the portfolio, the impact of the sector and sector positions were both self-cancelling. Underexposure to defensive sectors such as food detracted, offsetting positives in retail and telecoms stock selection. Two smaller cap holdings, Koito Manufacturing and Sakata Inx contributed positively, whilst the main detractors were financials such as T&D Holdings (an insurance company) and banks SMFG and 77 Bank.

Activity

We reduced the underweight position in real estate with the addition of Nomura Real Estate, following prolonged weakness in the sector at a time of moderately improving industry fundamentals in the shape of falling office vacancies and rental growth. In the pharmaceutical sector we switched a small holding in Takeda into a more meaningful one in Astellas. We took partial profits in better holdings such as Shimamura and Kaneka and used the proceeds to average down gradually in more cyclical or resource sensitive parts of the market, which were largely friendless. Examples include JGC and Isuzu.

Outlook

Uncertainties are heightened relative to the recent past particularly in relation to global economic activity and the impact of increasingly unorthodox Japanese monetary policy. The corporate profits outlook is also more blurred with the weak yen tailwind having reversed. The market has fallen about a fifth from its recent August 2015 high and so to some extent at least discounts this uncertainty with valuations looking attractive. For those attractions to be reflected in a market recovery probably relies on global factors in much the same way as the downside has been instigated by similar forces over the last six months. In particular signs that the US economy and corporate sector are sufficiently robust to support higher US interest rates during the course of 2016 would likely weaken the yen and be a positive for stock market returns. Domestically there is an election for at least one House of the Diet this summer and possibly for both, with the result that economic policy is likely to be market positive at least through this period.

Portfolio positioning

The portfolio's positioning is similar to six months ago, with an emphasis on domestic cyclicals such as retailers and railway companies over defensive areas like food producers and utilities. Policy is aiming to be relatively neutral on yen plays, with an overweight in the auto sector and an underweight in electrical companies.  Net gearing was 14.8% at the end of January 2016.

Sector performance has been unusually divergent in favour of low volatility, domestic and defensive sectors. This has been accentuated by the introduction of negative interest rates but it is difficult to find attractively valued new ideas in this part of the market. Accordingly we have gradually added to existing positions amongst more cyclical companies, not necessarily based on confidence that now is the trough but more on the basis that valuations are attractive on a mid term view. Negative interest rates are undoubtedly a headwind for profitability in the financial sector, but share price reaction has been extreme and we also see opportunities here.

The portfolio remains the result of an active stock driven investment approach, drawing on our extensive research resources in Japan. The research focuses on long term value creation and strength of franchise, targeting undervalued companies where the long term growth prospects are not fully priced in. We prefer companies that can generate and sustain above average returns on their capital, and also look for opportunities in turnaround situations where companies can improve returns from depressed levels.

Schroder Investment Management Limited

8 April 2016

Income Statement

	(Unaudited) for the six months ended 31 January 2016			(Unaudited) for the six months ended 31 January 2015			(Audited) for the year ended 31 July 2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments held at fair value through profit or loss	-	(6,912)	(6,912)	-	19,954	19,954	-	36,671	36,671
Net foreign currency (losses)/gains	-	(3,698)	(3,698)	-	373	373	-	2,829	2,829
Income from investments	2,138	-	2,138	1,740	-	1,740	4,139	-	4,139
Gross return/(loss)	2,138	(10,610)	(8,472)	1,740	20,327	22,067	4,139	39,500	43,639
Investment management fee	(254)	(593)	(847)	(232)	(541)	(773)	(489)	(1,142)	(1,631)
Administrative expenses	(289)	-	(289)	(257)	-	(257)	(476)	-	(476)
Net return/(loss) before finance costs and taxation	1,595	(11,203)	(9,608)	1,251	19,786	21,037	3,174	38,358	41,532
Finance costs	(36)	(84)	(120)	(34)	(78)	(112)	(67)	(155)	(222)
Net return/(loss) on ordinary activities before taxation	1,559	(11,287)	(9,728)	1,217	19,708	20,925	3,107	38,203	41,310
Taxation (note 3)	(213)	-	(213)	(174)	-	(174)	(414)	-	(414)
Net return/(loss) on ordinary activities after taxation	1,346	(11,287)	(9,941)	1,043	19,708	20,751	2,693	38,203	40,896
Return/(loss) per share (note 4)	1.08p	(9.03)p	(7.95)p	0.83p	15.77p	16.60p	2.15p	30.56p	32.71p

The "Total" column of this statement is the profit and loss account of the Company. 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 disclosed in the Income Statement and Statement of Changes in Equity.

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

Statement of Changes in Equity

For the six months ended 31 January 2016 (unaudited)

	Called-up share capital £'000	Share premium £'000	Share purchase reserve £'000	Warrant exercise reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 July 2015	12,501	7	97,205	3	99,692	2,693	212,101
Net (loss) return on ordinary activities	-	-	-	-	(11,287)	1,346	(9,941)
Dividend paid in the period (note 5)	-	-	-	-	-	(2,500)	(2,500)
At 31 January 2016	12,501	7	97,205	3	88,405	1,539	199,660

For the six months ended 31 January 2015 (unaudited)

	Called-up share capital £'000	Share premium £'000	Share purchase reserve £'000	Warrant exercise reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 July 2014	12,501	7	97,205	3	63,293	446	173,455
Net return on ordinary activities	-	-	-	-	19,708	1,043	20,751
Dividend paid in the period (note 5)	-	-	-	-	(1,804)	(446)	(2,250)
At 31 January 2015	12,501	7	97,205	3	81,197	1,043	191,956

For the year ended 31 July 2015 (audited)

	Called-up share capital £'000	Share premium £'000	Share purchase reserve £'000	Warrant exercise reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
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 (note 5)	-	-	-	-	(1,804)	(446)	(2,250)
At 31 July 2015	12,501	7	97,205	3	99,692	2,693	212,101

Statement of Financial Position

	(Unaudited) At 31 January 2016 £'000	(Unaudited) At 31 January 2015 £'000	(Audited) At 31 July 2015 £'000
Fixed assets
Investments held at fair value through profit or loss	229,615	217,494	238,825
Current assets
Debtors	1,039	721	463
Cash at bank and in hand	5,301	3,312	4,614
	6,340	4,033	5,077
Current liabilities
Creditors: amounts falling due within one year	(1,357)	(29,571)	(31,801)
Net current assets/(liabilities)	4,983	(25,538)	(26,724)
Total assets less current liabilities	234,598	191,956	212,101
Creditors: amounts falling due after more than one year (note 6)	(34,938)	-	-
Net assets	199,660	191,956	212,101
Capital and reserves
Called-up share capital (note 7)	12,501	12,501	12,501
Share premium	7	7	7
Share purchase reserve	97,205	97,205	97,205
Warrant exercise reserve	3	3	3
Capital reserves	88,405	81,197	99,692
Revenue reserve	1,539	1,043	2,693
Total equity shareholders' funds	199,660	191,956	212,101
Net asset value per share (note 8)	159.72p	153.55p	169.67p

Notes to the Accounts

1.         Financial statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31 July 2015 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 and which superseded the SORP issued in January 2009.

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

The Company has adopted Financial Reporting Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", FRS 104 "Interim Financial Reporting" and the amended SORP, all of which became effective for periods beginning on or after 1 January 2015. Some presentational changes are required, following the adoption of these new standards, however there has been no change to the way the Company measures the numbers in the accounts.

The changes to these accounts required by FRS 102, FRS 104 and the amended SORP may be summarised briefly as follows:

•        the reconciliation of movements in shareholders' funds has been renamed "Statement of changes in equity";

•        the balance sheet has been renamed "Statement of financial position";

•        the Company no longer presents a statement of cash flows or the related note, as it is no longer required for an investment company which meets certain specified conditions; and

•        new notes have been included entitled "Called-up share capital", "Financial instruments measured at fair value" and "Events after the interim period that have not been reflected in the financial statements for the interim period".

Other than these changes, the accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 July 2015.

3.         Taxation on ordinary activities

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises irrecoverable overseas withholding tax.

4.         Return/(loss) per share

	(Unaudited) Six months ended 31 January 2016	(Unaudited) Six months ended 31 January 2015	(Audited) Year ended 31 July 2015
Revenue return (£'000)	1,346	1,043	2,693
Capital (loss)/return (£'000)	(11,287)	19,708	38,203
Total (loss)/return (£'000)	(9,941)	20,751	40,896
Weighted average number of shares in issue during the period	125,008,200	125,008,200	125,008,200
Revenue return per share	1.08p	0.83p	2.15p
Capital (loss)/return per share	(9.03)p	15.77p	30.56p
Total (loss)/return per share	(7.95)p	16.60p	32.71p

5.         Dividends paid

	(Unaudited) Six months ended 31 January 2016 £'000	(Unaudited) Six months ended 31 January 2015 £'000	(Audited) Year ended 31 July 2015 £'000
2015 final dividend paid of 2.00p (2014: 1.80p)	2,500	2,250	2,250

No interim dividend has been declared in respect of the six months ended 31 January 2016 (31 January 2015: nil).

6.         Creditors: amounts falling due after more than one year

	(Unaudited) Six months ended 31 January 2016 £'000	(Unaudited) Six months ended 31 January 2015 £'000	(Audited) Year ended 31 July 2015 £'000
Bank loan	34,938	-	-

The loan is a Yen 6.0 billion three year term loan with Scotiabank expiring on 18 January 2019 carrying a fixed interest rate of 0.82% per annum.

7.         Called-up share capital

	(Unaudited) Six months ended 31 January 2016 £'000	(Unaudited) Six months ended 31 January 2015 £'000	(Audited) Year ended 31 July 2015 £'000
Ordinary shares allotted, called up and fully paid:
125,008,200 ordinary shares of 10p each	12,501	12,501	12,501

8.         Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue of 125,008,200 (31 January 2015 and 31 July 2015: same).

9.         Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 January 2016, all investments in the Company's portfolio were categorised as level (a) in accordance with paragraph 11.27 of FRS 102. That is, they are valued using quoted bid prices in active markets (31 January 2015 and 31 July 2015: same).

10.       Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any events which have not been reflected in the financial statements.

 

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