REG - Baillie Gifford Shin - Annual Financial Report
14/04/2025 14:15
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RNS Number : 9446E Baillie Gifford Shin Nippon PLC 14 April 2025
Baillie Gifford Shin Nippon PLC (BGS)
Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83
Regulated Information Classification: Annual Financial and Audit Reports
Annual Report and Financial Statements
Further to the statement of audited annual results announced to the Stock
Exchange on 3 April 2025, Baillie Gifford Shin Nippon PLC ("the Company")
announces that the Company's Annual Report and Financial Statements for the
year ended 31 January 2025, including the Notice of Annual General Meeting,
has today been posted to shareholders and submitted electronically to the
National Storage Mechanism where it will shortly be available for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
It is also available on the Company page of the Baillie Gifford website at:
shinnippon.co.uk (http://www.shinnippon.co.uk) (as is the statement of audited
annual results announced by the Company on 3 April 2025).
Responsibility Statement of the Directors in respect of the Annual Financial
Report
The Directors confirm that, to the best of their knowledge:
¾ the Financial Statements set out in the Annual Report and Financial
Statements, prepared in accordance with the applicable set of accounting
standards, give a true and fair view of the assets, liabilities, financial
position and net return of the Company;
¾ the Strategic report/Directors' report set out in the Annual Report and
Financial Statements 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 the Company and business faces
(as also set out below); and
¾ the Annual Report and Financial Statements taken as a whole is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
Principal and emerging risks relating to the Company
As explained on pages 76 and 77 of the Annual Report and Financial Statements
there is a process for identifying, evaluating and managing the risks faced by
the Company on a regular basis. The Directors have carried out a robust
assessment of the principal and emerging risks facing the Company, including
those that would threaten its business model, future performance, regulatory
compliance, solvency or liquidity. There have been no material changes to the
principal risks during the year. A description of these risks, an assessment
of the risk level and how they are being managed or mitigated is set out
below.
The Board considers the heightened macroeconomic and geopolitical concerns to
be factors which exacerbate existing risks, rather than discrete risks, within
the context of an investment trust. Their impact is considered within the
relevant risks.
What is the risk? How is it managed? Current assessment of risk
Financial Risk: The Company's assets consist mainly of listed securities The Board has, in particular, considered the impact of market volatility due ↑ Risk level: High
(98.0% of the investment portfolio) and its principal financial risks are to macroeconomic factors such as higher inflation and geopolitical concerns.
therefore market related and include market risk (comprising currency risk, To mitigate this risk the Board considers at each meeting various portfolio This risk is considered to have increased as market volatility from ongoing
interest rate risk and other price risk), liquidity risk and credit risk. An metrics including individual stock performance and weightings, the top and geopolitical instability has a greater impact on the share prices of smaller
explanation of those risks and how they are managed is contained in note 18 to bottom contributors to performance and relative sector weightings against the companies which are typically more sensitive than larger companies to market
the Financial Statements on pages 109 to 115 of the Annual Report and comparative index. The portfolio manager provides rationale for stock sentiment and macroeconomic shocks.
Financial Statements. selection decisions. A comprehensive strategy meeting is held annually to
facilitate challenge of the Company's strategy. The Board has considered the
potential impact on the yen/sterling exchange rate of various geopolitical
events. The value of the Company's investment portfolio would be affected by
any impact, positively or negatively, on sterling but would be partially
offset by the effect of exchange movements on the Company's yen denominated
borrowings.
What is the risk? How is it managed? Current assessment of risk
Private company (unlisted) investment risk: The Company's liquidity risk could To mitigate this risk, the Board considers the private company securities in ↑ Risk level: Moderate
be increased by its investment in private company securities. These assets may the context of the overall investment strategy and provides guidance to the
be more difficult to buy or sell, assessment of their value is more subjective Managers on the maximum exposure to private company securities. Valuations of This risk is considered to have increased as private company investment
than for investments listed on a recognised stock exchange and their private companies are carried out on a frequent basis by the Manager and valuation risk increases in volatile markets. The more difficult fundraising
valuations may be perceived to be more volatile or out of date. updated regularly for identified changes in operational developments or recent environment and IPO conditions increase overall investment risk conditions for
transactions in shares. The Board reviews the valuations in detail which are private companies.
carried out by a third party valuation specialist, subject to the Managers'
private company valuation specialist input and is also subject to external There has been no change to the number of private company investments during
audit scrutiny annually. The investment policy limits the amount which may be the period.
invested in private company securities to 10% of the total assets of the
Company in aggregate, measured at the time of investment.
What is the risk? How is it managed? Current assessment of risk
Performance and investment strategy risk: Pursuit of an investment strategy to To mitigate this risk, the Board regularly reviews and monitors the Company's ↑ Risk level: High
fulfil the Company's objective which the market perceives to be unattractive objective and investment policy and strategy, the investment portfolio and its
or inappropriate or out of favour, or the ineffective implementation of an performance, the level of discount/premium to net asset value at which the This risk is considered to be increasing as the market's appetite for growth
attractive or appropriate strategy from poor stock selection and management of shares trade and movements in the share register and raises any matters stocks, typically held by the Company, has decreased during the recent period
gearing, may lead to reduced returns for shareholders and, as a result, of concern with the Managers. Following a thorough review of the investment of ongoing macroeconomic and geopolitical concerns.
a decreased demand for the Company's shares. This may lead to the Company's strategy in November 2024, the Board and the Managers have decided to appoint
shares trading at a widening discount to their net asset value. a deputy portfolio manager and make a non-material change to the Investment
Policy (see Chair's Statement on page 8 of the Annual Report and Financial
Statements).
What is the risk? How is it managed? Current assessment of risk
Climate and governance risk: Perceived problems on environmental, social and This is mitigated by the Managers' strong ESG stewardship and engagement ─ Risk level: Moderate
governance ('ESG') matters in an investee company could lead to that policies which are available to view on the Managers' website,
company's shares being less attractive to investors, adversely affecting its bailliegifford.com, and which have been reviewed and endorsed by the Company, This risk is considered to be unchanged. The Manager continues to employ
share price, in addition to potential valuation issues arising from any direct and which have been fully integrated into the investment process as well as strong ESG stewardship and engagement policies.
impact of the failure to address the ESG weakness on the operations or the extensive up-front and ongoing due diligence which the Manager undertakes
management of the investee company (for example in the event of an industrial on each investee company. Due diligence includes assessment of the risks
accident or spillage). Repeated failure by the Managers to identify ESG inherent in climate change (see page 78 of the Annual Report and Financial
weaknesses in investee companies could lead to the Company's own shares being Statements).
less attractive to investors, adversely affecting its own share price. In
addition the valuation of investments could be impacted by climate change.
What is the risk? How is it managed? Current assessment of risk
Discount risk: The discount/premium at which the Company's shares trade To manage this risk, the Board monitors the level of discount/premium at ↑ Risk level: High
relative to its net asset value can change. The risk of a widening discount is which the shares trade and the Company has authority to buy back its existing
that it may undermine investor confidence in the Company and shareholders shares, when deemed by the Board to be in the best interests of the Company
selling their shares will get less than the net asset value of those shares. and its shareholders. The Board has committed to a one-off tender offer for
up to 15% of the issued share capital if the NAV total return per share (with This risk is considered to have increased as there is an elevated risk that
debt valued at fair value) over the 3 years to 31 January 2027 underperforms sentiment towards the Company's shares could deteriorate resulting in a
the MSCI Japan Small Cap index (in sterling terms). widening of the discount. The Company's discount was unchanged at the year end
compared to 31 January 2024.
Over the year to 31 January 2025 the Company bought back 30.3m shares (2024:
4.4m shares) to be held in treasury.
The Board continues to closely monitor the discount and the impact of the
current buyback programme being deployed.
What is the risk? How is it managed? Current assessment of risk
Regulatory risk: Failure to comply with applicable legal and regulatory To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and ─ Risk level: Low
requirements such as the tax rules for investment trust companies, the FCA Compliance departments provide regular reports to the Audit Committee
Listing Rules and the Companies Act could lead to suspension of the Company's on Baillie Gifford's monitoring programmes. Major regulatory change could This risk is considered to be unchanged. All control procedures are working
Stock Exchange listing, financial penalties, a qualified audit report or the impose disproportionate compliance burdens on the Company. In such effectively. There have been no material regulatory changes that have impacted
Company being subject to tax on capital gains. circumstances representation is made to ensure that the special circumstances the Company during the year.
of investment trusts are recognised. Shareholder documents and announcements,
including the Company's published Interim and Annual Report and Financial
Statements, are subject to stringent review processes and procedures are in
place to ensure adherence to the Transparency Rules and the Market Abuse
Regulation with reference to inside information.
What is the risk? How is it managed? Current assessment of risk
Custody and depositary risk: Safe custody of the Company's assets may be To mitigate this risk, the Audit Committee receives six-monthly reports from ─ Risk level: Low
compromised through control failures by the Depositary, including cyber the Depositary confirming safe custody of the Company's assets held by the
security incidents. Custodian. Cash and portfolio holdings are independently reconciled to the
Custodian's records by the Managers who also agree uncertificated private
portfolio holdings to confirmations from investee companies. In addition, the This risk is considered to be unchanged. All control procedures are working
existence of assets is subject to annual external audit and the Custodian's effectively.
audited internal controls reports are reviewed by Baillie Gifford's Business
Risk department. A summary of the key points is reported to the
Audit Committee and any concerns investigated.
What is the risk? How is it managed? Current assessment of risk
Small company risk: The Company has investments in smaller companies which are To mitigate this risk, the Board reviews the investment portfolio at each ↑ Risk level: High
generally considered higher risk as changes in their share prices may be meeting and discusses the investment case and portfolio weightings with the
greater and the shares may be harder to sell. Smaller companies may do less Managers. A spread of risk is achieved by holding a minimum of 40 companies This risk is considered to have increased as market volatility from ongoing
well in periods of unfavourable economic conditions. and the relative industry weightings against the comparative index are geopolitical instability has a greater impact on the share prices of smaller
considered at each Board meeting. Following a thorough review of the companies which are typically more sensitive to market sentiment and
investment strategy in November 2024, the Board and the Managers have decided macroeconomic shocks.
to appoint a deputy portfolio manager and make a non-material change to the
Investment Policy (see Chair's Statement on pages 8 and 9 of the Annual Report
and Financial Statements).
What is the risk? How is it managed? Current assessment of risk
Operational risk: Failure of Baillie Gifford's systems or those of other third To mitigate this risk, Baillie Gifford has a comprehensive business continuity ─ Risk level: Low
party service providers could lead to an inability to provide accurate plan which facilitates continued operation of the business in the event of a
reporting and monitoring or a misappropriation of assets. service disruption. The Audit Committee reviews Baillie Gifford's Report on
Internal Controls and reports by other key third party providers are reviewed
by Baillie Gifford on behalf of the Board and a summary of the key points is All control procedures are working effectively.
reported to the Audit Committee and any concerns investigated. The other key
third party service providers have not experienced significant operational
difficulties affecting their respective services to the Company.
What is the risk? How is it managed? Current assessment of risk
Cyber security risk: A cyber attack on Baillie Gifford's network or that of a To mitigate this risk, the Audit Committee reviews Reports on Internal ↑ Risk level: Moderate
third party service provider could impact the confidentiality, integrity or Controls published by Baillie Gifford and other third party service providers.
availability of data and systems. Baillie Gifford's Business Risk Department report to the Audit Committee on
the effectiveness of information security controls in place at Baillie Gifford
and its business continuity framework. Cyber security due diligence is This risk is considered to be increasing due to ongoing geopolitical tensions
performed by Baillie Gifford on third party service providers which includes a and and an observed increase in malign cyber activity. Emerging technologies,
review of crisis management and business continuity frameworks. including AI, could potentially increase information security risks. In
addition, service providers operate a hybrid approach of remote and office
working, thereby increasing the potential of a cyber security threat.
What is the risk? How is it managed? Current assessment of risk
Leverage risk: The Company may borrow money for investment purposes. If the To mitigate this risk, all borrowings require the prior approval of the Board ↑ Risk level: Moderate
investments fall in value, any borrowings will magnify the impact of this and leverage levels are discussed by the Board and Managers at every meeting.
loss. If borrowing facilities are not renewed, the Company may have to sell Covenant levels are monitored regularly. Details of the Company's current
investments to repay borrowings. borrowing facilities can be found in note 11 on page 107 of the Annual Report
and Financial Statements. The majority of the Company's investments are in This risk is considered to be increasing due to the impact of gearing during a
quoted securities that are readily realisable. Further information period of underperformance.
on leverage can be found on page 124 and the Glossary of terms and
Alternative Performance Measures on pages 129 to 132 of the Annual Report and The level of gearing reduced from 18% to 16% over the year. During the year,
Financial Statements. the existing secured three-year ¥5bn and seven-year ¥2.1bn fixed rate
facilities with ING Bank N.V. ('ING') were refinanced on expiry with a ¥7.1bn
revolving credit facility with Bank of America, N.A. London Branch (Bank of
America') expiring on 7 November 2027. Additionally, following the financial
period end, the remaining ¥2bn and ¥7bn revolving credit facilities with ING
were cancelled and incorporated into the cheaper secured revolving credit
facility with Bank of America (extended to ¥16.1bn).
The Company's revolving credit facilities can be repaid with no penalties,
should the decision be taken to reduce gearing.
What is the risk? How is it managed? Current assessment of risk
Political and associated financial risk: The Board is of the view that Political developments are closely monitored and considered by the Board. The ↑ Risk level: High
political change in areas in which the Company invests or may invest may have Board has particular regard to macroeconomic and geopolitical tensions, and
financial consequences for the Company. considers the potential for negative impact of military action or trade
barriers.
This risk is considered to be increasing as governments and consumers around
the world continue to assess the impact of geopolitical and macroeconomic
tensions.
Emerging risks: As explained on pages 76 and 77 of the Annual Report and
Financial Statements, the Board has regular discussions on principal risks and
uncertainties, including any risks which are not an immediate threat but could
arise in the longer term. The Board considers that the key emerging risks
arise from the interconnectedness of global economies and the related exposure
of the investment portfolio to external and emerging threats such as the
societal and financial implications of escalating geopolitical tensions,
cyber security risks including developing AI and quantum computing
capabilities, and new coronavirus variants or similar public health threats.
This is mitigated by the Managers' close links to the investee companies and
their ability to ask questions on contingency plans. The Managers believe the
impact of such events may be to slow growth rather than to invalidate the
investment rationale over the long term.
↑ Increasing Risk ↓ Decreasing Risk ─ Stable Risk Baillie Gifford & Co Limited
Company Secretaries
14 April 2025
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