REG - CC Japan Inc&Growth - Final Results
24/01/2023 07:00
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RNS Number : 6153N CC Japan Income & Growth Trust PLC 24 January 2023
CC JAPAN INCOME & GROWTH TRUST PLC
LEI: 549300FZANMYIORK1K98
ANNUAL FINANCIAL REPORT ANNOUNCEMENT
INVESTMENT OBJECTIVE
The investment objective of the CC Japan Income & Growth Trust Plc (the
"Company") is to provide Shareholders with dividend income combined with
capital growth, mainly through investment in equities listed or quoted in
Japan.
FINANCIAL INFORMATION
As at As at
31 October 31 October
2022 2021
Net assets (millions) £203.6 £222.9
Net asset value ("NAV") per Ordinary Share ("Share")(1) 151.1p 165.4p
Share price 138.8p 154.0p
Share price discount to NAV(2) 8.1% 6.9%
Transferable Subscription Share price 0.53p 3.50p
Ongoing charges(2) 1.06% 1.05%
Gearing (net)(2) 20.9% 21.1%
(1) Measured on a cum income basis.
(2) This is an Alternative Performance Measure ('APM'). Definitions of APMs
used in this report, together with how these measures have been calculated are
disclosed in the Annual Report.
PERFORMANCE SUMMARY
For the year to For the year to
31 October 31 October
2022 2021
% change(1) % change(1)
NAV ex-income total return per Share(2) -6.3% +25.1%
NAV cum-income total return per Share(2) -5.9% +24.3%
Share price total return(2) -7.1% +32.7%
Tokyo Stock Exchange Price Index ("TOPIX") total return -9.5% +11.9%
Revenue return per Share (Undiluted) 5.14p 4.75p
Dividends per Share:
First Interim dividend 1.40p 1.40p
Second interim dividend 3.50p 3.35p
Total dividends per Share for the year 4.90p 4.75p
(1)Total returns are stated in GBP sterling, including dividend reinvested.
(2) These are APMs.
Source: Coupland Cardiff Asset Management LLP - The Company's Factsheet
October 2022
PERFORMANCE SUMMARY
Launch to Year to Year to Year to Year to Year to Year to
Oct 2016* Oct 2017 Oct 2018 Oct 2019 Oct 2020 Oct 2021 Oct 2022
Share price 122.40p 152.00p 153.00p 150.00p 119.50p 154.00p 138.75p
Share price total return +23.5% +27.2% +2.8% +0.7% -17.3% +32.7% -7.1
NAV per Share 123.90p 146.00p 148.60p 158.90p 136.80p 165.40p 151.09p
NAV (cum-income) total return per Share +24.9% +20.7% +4.1% +9.9% -11.1% +24.3%
-5.9%
TOPIX Index total return in GBP sterling +32.7% +10.1% -0.4% +7.2% +0.3% +11.9%
-9.5%
Revenue return per Share (Undiluted) 3.60p 4.06p 4.55p 5.26p 5.04p 4.75p
5.14p
Dividends per Share 3.00p 3.45p 3.75p 4.50p 4.60p 4.75p 4.90p**
* Period from the Company's launch on 15 December 2015 to 31 October 2016.
** Includes second interim dividend of 3.50p for the year ended 31 October
2022.
CHAIRMAN'S STATEMENT
Performance
During the year to 31 October 2022, in sterling terms, the Net Asset Value of
the Company ("NAV") declined by
5.9% as measured by total return including income. The Ordinary Share price,
again measured by total return
fell by 7.1%. This is disappointing, particularly after the strong set of
results in the year to 31 October 2021,
where NAV increased by 24.3% and the share price rose 32.7%. However, I can
report that in the last year, we
outperformed the TOPIX Total Return Index which fell 9.5% in sterling terms
during the period.
Our long-term track record and relative performance against the AIC Japan
investment trust peer group
remains robust and underscores the validity of our investment mandate which
seeks dividend income
combined with capital growth. Since launch in December 2015 until the recent
financial year end, the Company's
NAV total return, including dividend distributions, recorded an 82.8%
increase, considerably outperforming
the sterling adjusted TOPIX total return index, which rose 58.0%. Over the
same period, the share price has
risen 65.7% again measured by total return in sterling, including an aggregate
distribution of 25.45p per
Ordinary Share of dividends paid to Shareholders.
It has been another difficult year given the challenges presented by Russia's
invasion of Ukraine, while
Japan continued to be impacted by successive waves of Covid-19 infections and
a cautious policy towards
reopening the economy and its borders. As the world's Central Banks led by the
US Federal Reserve have
increased interest rates and pursued a more hawkish monetary policy to combat
inflation, the Bank of Japan
("BOJ") has been an exception in continuing to provide liquidity to the
markets and remains wedded
to Yield Curve Control. This drove the Japanese Yen down at one time trading
below Y150 to the US$. Our
Investment Manager, Richard Aston, has handled the market volatility with
great discipline by retaining focus
within the scope of the investment mandate which seeks total return. Richard
has looked through market
volatility retaining confidence in portfolio holdings with solid prospects
while continuing to find companies
which have growth trajectories, improving cash flow and dividends; some of
which have already benefitted
from the prospect of a full reopening of the domestic Japanese economy. Over a
12-month and 5-year view,
our investment performance is a leader in the AIC Japanese investment trust
peer group as Richard's
confidence in the intrinsic value of portfolio holdings has been rewarded.
However, our premium share price
rating has not recovered with the NAV closing the year at an 8.1% discount
compared to a 6.9% discount at the
previous year end. At the time of writing the discount stands at 8.3%.
Growing the Company
The Ordinary Share price discount means that until we can restore our premium
to NAV, we are not able to issue any new shares.
Furthermore, world events and their impact on markets have conspired against
any real rerating of the Ordinary
Shares which might have allowed for the successful exercise of the
Transferable Subscription Shares ("TSS")
issued as a 1 for 5 free bonus to Ordinary Shareholders in February 2021.
Unless we see a Lester Piggott
type late run in NAV performance, the TSS will expire worthless on the last
business day of February 2023.
This is also the last quarterly exercise date. At the time of writing, the NAV
per Ordinary Share has nudged
above the Subscription Price set at £1.61, hence "in the money" whereas the
Ordinary Share trails below
that price, still "out of the money". So, there is a small possibility of
successful exercise of these entitlements at
the last opportunity.
The TSS scheme was designed by the Board potentially to raise a further £40
million as a "Covid-19 recovery"
warrant which if successfully executed would not only have increased our size
and spread costs but
also offered significant leverage into the Ordinary Shares so that TSS holders
could make some money
as recompense from the depressed valuations during Covid-19. Although the TSS
entitlements were allocated
as a free bonus and the scheme cost less than 0.34p per Ordinary Share at the
time of issue, I would like
to apologise for the administrative inconvenience this has caused not least in
TSS holders receiving
quarterly exercise notices, (a regulatory requirement of the custodian, but
not the Company) when it was uneconomic
to do so. The Scheme had the best of intentions and if validated by better
markets would have
been a good way to grow the Company.
The Board has invested in various marketing initiatives to raise the profile
of the Company by way
of webinars hosted by third parties and continue to update our website, which
you can visit
at:- https://ccjapanincomeandgrowthtrust.com/
(https://ccjapanincomeandgrowthtrust.com/)
Besides regular meetings with wealth managers and major Shareholders, we
continue to focus on improving
content together with web and media distribution to raise awareness of our
differentiated mandate which
represents a great opportunity for investors to capture total return from
Japan with appreciable and stable
growth in portfolio income streams.
Income and Dividends
It is pleasing to see Japanese companies continuing to pursue enlightened
distribution policies driven not
only through governance reforms but also by cash rich Japanese corporate
balance sheets. Furthermore,
despite difficult trading conditions, Japanese management teams have tended to
commit to their
dividend projections, and in some cases surprised on the upside by exceeding
expectations.
For the year to 31 October 2022, the revenue return per Ordinary Share
increased by 8.2% to 5.14p per Ordinary
Share. The result demonstrates the underlying trend of Japanese dividend
growth despite the vicissitudes
of currency volatility where the Yen to Sterling cross rate has been under
pressure. The yen has fluctuated
between Y149 = £1 to Y172 = £1 during the year with an average exchange rate
of Y159. Our clearly stated
policy is not to hedge our yen exposure. We translate dividend income into
sterling on receipt. Thus, revenue
is potentially at risk from a strengthening of sterling although conversely, a
weaker yen tends to stimulate
Japanese corporate earnings.
The Board has declared a second interim dividend of 3.50p per Ordinary Share
(an increase of 4.5%
over last year's second interim dividend) making a full year distribution of
4.90p per Ordinary Share and
representing a 3.2% improvement over last year. This will be paid on 3 March
2023 to those shareholders
on the register as at 3 February 2023 with an ex-date of 2 February 2023. We
are maintaining our policy of
paying a second interim dividend in substitution for a final dividend.
While the Board is committed to growing the dividend, it considers it prudent
to continue to build the revenue
reserve in uncertain times, which will stand at 2.20p per Ordinary Share after
the payment of the second interim
dividend. Shareholders should also be reminded that the Company has a Special
reserve of £64.6 million
available for distribution in circumstances where there is an unforeseen
revenue shortfall.
This is the seventh year of dividend increase for the Company with the annual
dividend increasing by 63%
since launch in December 2015. We currently pay a 3% dividend yield from
Japanese equities out of
covered income. Investors looking for equity income can continue to look to
Japan.
Board Succession & Composition
The Board has a succession plan in place whereby, subject to re-election by
Shareholders at this year's
Annual General Meeting ("AGM"), I intend to step down as Chairman at the AGM
in March 2024 having
served since launch in 2015. It is also the intention that Mr. Peter Wolton,
Senior Independent Director, also
one of the original members of the Board at launch, will retire before the end
of 2023.
A Search Consultant will be appointed during 2023 to identify a new candidate
for the Board with complementary
skills. I should point out that the Board composition meets the
recommendations of the AIC code and Hampton
Alexander review as far as gender and ethnic diversity representation is
concerned. Our diversity policy can be found
in the Annual Report.
Change of Auditor
Ernst & Young LLP ("EY") have served as the Company's Auditors since
launch but in line with the requirement to
conduct a tender at least every 10 years and in view of the projected increase
in audit fees, the Audit and Risk
Committee held a tender process to look for a more competitive solution.
Consequently, Johnston Carmichael will be
appointed as the Company's new Auditors, subject to Shareholder approval at
the forthcoming AGM. The Board is
confident that Johnston Carmichael will provide a high level of service at a
reduced cost. We would like to thank EY
for their service as Auditor of the Company for the past seven years. Further
details can be found in the Report of the
Audit and Risk Committee.
Annual General Meeting ("AGM")
In line with the requirements of the Companies Act 2006, the Company will hold
an AGM of Shareholders
to consider the resolutions laid out in the Notice of Meeting. The Board
encourages Shareholders to
attend and participate in the Company's forthcoming AGM on 1 March 2023 at the
offices of
Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH. Our Investment
Manager, Richard Aston, will
provide an update on the portfolio and take questions after the formal
business of the meeting. The Board will
also be available to meet shareholders and discuss the Company. I do hope that
you will join us.
We recognise it is not possible for everyone to attend the AGM and I would
remind Shareholders that any
questions relating to the business of the AGM, can be sent by email to
ukfundcosec@sannegroup.com. To the
extent that it is appropriate to do so, the Company will respond to any
questions received in a Q&A which will
be posted on the Company's website.
If Shareholders are unable to attend the meeting in person, they are strongly
encouraged to vote by proxy
and to appoint the "Chairman of the AGM" as their proxy. Details of how to
vote, either electronically, by
proxy form or through CREST, can be found in the Notes to the Notice of AGM.
The lodging of
a form of proxy (or an appointment of a proxy through CREST) will not however
prevent a shareholder from
attending the AGM and voting in person if they so wish.
Outlook
The long period of disinflation and free money is over. Collective Central
Bank policy led by the US Federal Reserve is firmly aimed at reducing
inflation at a time when the pricing power of labour in the USA and Europe is
in the ascendant. As interest rates rise on the back of a collapse in monetary
aggregates in the USA, it looks as if the risks of global recession are
rising. With the high levels of debt embedded in the world economy, tightening
policy beyond a certain point could also potentially expose credit problems.
Global market sentiment will, as ever, be driven by the perception of policy
direction emanating from the US Federal Reserve.
Japan too, is facing similar inflationary pressures, although these are
largely due to the war and hence
exogenous. As elsewhere, the labour market is tight, reflecting an ageing
demographic and shrinking
workforce. Both the BOJ and Government are keen to encourage wage growth which
has been static for
so long. Indeed, Prime Minister Kishida has urged employers to increase wages
by more than 3% as part
of his "new economic capitalism" plans with Consumer Price Inflation (CPI)
running at its highest for 30 years.
After a long period of deflation, some inflation will be good for Japan. Any
increase in wages should benefit
domestic consumption.
Just before Christmas, the BOJ announced a relaxation of the bands for
controlling the yield on the 10-year bond.
This is seen as a first step to normalising monetary policy and has sparked a
sharp rally in the yen. However,
the BOJ has had to absorb massive liquidation of Japanese Government Bonds
(JGBs) by stepping in to
buy bonds to defend the new yield level. Hence, rather than tightening
monetary policy, the BOJ are now forced
to expand their balance sheet and appear chained to loose monetary policy. We
can expect interest rates
and the Yield Curve Control Band to rise further in the months ahead and the
market will be looking closely for
pointers as to further policy direction, particularly with the appointment of
a new BOJ Governor in April 2023.
A weak yen has deterred foreign buying of Japanese securities, and a rebound
in its value could help
stimulate foreign interest which has always provided a catalyst for buying the
stock market. Equally, it should
be noted that TOPIX index companies now produce an income dividend yield
higher than inflation, which could
tempt domestic savers earning no interest on deposits. Moreover, the
Government has announced measures
to try and mobilise savings by offering incentives for people to invest.
Although Japan's domestic economy is steadily reopening for business, it is
frustrating to see that yet
another Covid-19 wave in China may further delay a recovery in tourist visitor
arrivals. Nevertheless, the
overall economic outlook appears favourable. The wild card remains geopolitics
and the stability of the region.
GDP forecasts show higher expectations for Japanese growth compared to other
developed economies
while there is growing confidence in better corporate earnings guidance.
Continuing commitment to corporate governance reforms should also underpin
rising dividend distributions.
Our focus on income will continue to be an important part of our total return
which clearly differentiates our mandate from most other funds investing in
Japan. Richard Aston and his colleagues are finding no shortage of investment
opportunities.
Harry Wells
Chairman
23 January 2023
INVESTMENT MANAGER'S REPORT
Performance Review
The investment landscape has become increasingly complex over the last twelve
months with a number
of developments challenging the relatively favourable conditions for investors
in a variety of assets in recent
years. This has resulted, and simplified by many, as an outperformance of
'value' over 'growth' across equity
markets with Japan being no exception. The rapid emergence of inflationary
trends around the world,
at levels not seen for decades, and the subsequent attempts by Central Banks
worldwide to regain
control by raising interest rates has been a significant contributory factor
to this change of market direction.
Additionally, political tensions have added to the elevated levels of risk.
Sentiment has been severely
impacted by the ongoing war in the Ukraine. The ramifications have played out
in a number of ways
with Russia's increasing international isolation, rising energy prices and
credit concerns amongst the factors
most relevant to Japanese companies. The direct trade between Japan and Russia
is limited to less than 1% of
Japan's international total and for most companies any direct country exposure
is a very small component of
their overall revenues.
Furthermore, as one of the main drivers for global growth in recent years, the
performance of the Chinese
economy has had an important bearing on international trends. A combination of
political discord with the USA,
concerns about the real estate market and a tough stance on managing Covid-19
outbreak has resulted
in a dramatic slowdown in the country's immediate prospects and international
trade.
In recent years, global 'risk on' investor sentiment has been accompanied by a
strengthening of the Yen.
Fundamental factors that may have contributed to this notably different trend
are 1) the impact of higher
oil prices of the foreign exchange market (given that Japan is an importer of
energy raw materials) and 2)
confirmation verbally and via market intervention that the Bank of Japan
intends to continue with an
accommodative monetary policy for the time being despite central banks in
other regions indicating a
withdrawal of components of their respective easy monetary programmes.
Despite these many uncertainties and challenges to the perceived orthodoxy of
recent years, portfolio
attribution has been positive and continued its post pandemic recovery. It has
been especially pleasing
to see the strong share price performance of longstanding holdings in
Mitsubishi UFJ Financial Group,
Tokio Marine Holdings and Sumitomo Mitsui Financial Group (financials sector),
Itochu Corp, Mitsubishi Corp
(wholesale sector), Nippon Telegraph & Telephone (telecommunications
sector) and more recently Nippon
Parking Development (service sector). These are all companies that faced
considerable and unexpected operational challenges during the pandemic but
have remained committed to their shareholder return policies
throughout with increases in annual dividends and opportunistic share buyback
programmes underpinning
the confidence in their business future.
It is this ability to compound returns through a business cycle which we
believe to be the most relevant and
differentiating factor of Japanese equities for foreign investors. It is
extremely encouraging to see these
attributes ultimately rewarded for those willing to be patient.
The weakest performers for the year include a number of companies whose
contribution had been notably positive in the first half and reflects a
significant downturn in expectations for technology companies in particular as
fears of a global recession have intensified. Shin-Etsu Chemical, Murata and
Tokyo Electron have all exemplified the characteristic we identify as
important for long term performance and as recently as their FY21 results
raised dividends to a level higher than originally expected. These companies
are all industry leaders with strong balance sheets and clear shareholder
return policies which we believe justifies taking a long-term investment
perspective and weathering any short-term adjustments.
We are somewhat disappointed in the recent share price performance of Carta
Holdings, the online advertiser,
which had been a strong performer since initial inclusion in the portfolio.
The company has embarked
on an investment phase which has been detrimental to earnings in the near term
on the basis of higher
expectations for newly identified projects. There is no immediate risk to the
shareholder return objective which
is based on a stable distribution reflecting the strength of the company's
balance sheet. However, we will be
mindful that this investment must enhance the value of the Company over the
medium term.
Portfolio Positioning
We believe that the current economic realities increase the importance of
bottom-up analysis in investment decision-making as many companies now face a
very different operating environment from anything experienced in recent
years. Rising raw material prices and higher energy costs, tighter monetary
conditions, stricter environmental regulation, digitalisation and changing
customer behaviour are amongst the prevailing trends that create varying
challenges and opportunities for individual companies. We remain steadfast in
the belief of the investment principles that underpin the strategy as
established when the Company was launched. Namely, consistent returns via
dividends and share buybacks are a key component of total shareholder return
that investors in Japan should now consider. We are consequently encouraged
by the increased recognition for companies able to compound these returns over
time. Furthermore, we believe that through initiatives such as the Japanese
Corporate Governance Code and consistent shareholder engagement, there is much
wider acknowledgement of its importance amongst company management. As a
consequence, the number of companies seeking to offer these attractive
characteristics continues to increase and the portfolio has continued to
evolve throughout the year seeking to take advantage of this expanding
investment universe.
New holdings have been established in Zozo, Intage and Benefit One, smaller
domestically focused companies
with leading market positions which operate in areas we believe offer good
growth potential. Importantly
this is accompanied by a greater recognition by management of the role of
stable shareholders, which
has led, in our view, to better corporate governance and friendlier
shareholder return policies. Zozo operates
Japan's largest online fashion websites and is benefiting from the low market
penetration of e-commerce in
Japan. The company has suffered in the past from the erratic corporate
governance of its founder, but his
departure has seen a more consistent approach to both operational and
shareholder management consistent
with our own expectations. Intage provides marketing research services for a
diverse range of clients and
sees future opportunities in data analytics and international expansion.
Coincidently, it is seeking to
improve its shareholder relations and capital efficiency through an uplift in
annual dividend distribution and
share buybacks. Benefit One provides a number of outsourced services such as
childcare, healthcare and
leisure activities to a range of corporate clients. The company targets a high
level of annual distribution to its
shareholders based on the strength of its cashflow and balance sheet strength.
For the first time in a number of years, we participated in an Initial Public
Offering. Socionext was founded in
2015 as a result of a merger between the SoC (Systemon-Chip) divisions of
Fujitsu and Panasonic, and an
investment received from the Development Bank of Japan. It is a fabless SoC
solution provider, meaning
they design their own chips but contract out their production, covering both
software development as well
as semiconductor logic/physical design. In stark contrast to many companies
listed in recent years, the company
is debt free, has valuations that were attractive relative to its growth
prospects besides a clear intention to pay
dividends to its shareholders from the start.
The rising interest rate environment and falling valuations elsewhere in the
market have lowered the
attraction of Real Estate Investment Trusts and the overall weighting in these
specialist investment vehicles
has fallen, with the disposal of holdings in Japan GLP REIT and Star Asia
REIT. We also exited holdings in Japan
Exchange Group (operator of the Tokyo and Osaka Stock Exchanges), Exeo
(telecommunications infrastructure) and Hikari Tsushin (small company
business services) as greater risks have emerged to their business prospects
and ultimately their ability to maintain a shareholder return profile
consistent with previous expectations.
Outlook
The global economic backdrop appears increasingly challenging with the recent
debate over the
sustainability of inflationary trends and prospect of a new era of rising
interest rates shifting notably to rapidly
falling expectations for economic growth and the risk of global recession.
Japan, on a relative basis, is set to offer
many interesting opportunities given that its economic cycle is no longer in
sync with other major economies,
primarily as a consequence of its delayed domestic recovery following the
Covid-19 pandemic. There are
reasons to be optimistic about the expected economic rebound in Japan in 2023
given the experience of other
economies as consumer behaviour returned to normal. The recent Yen weakness
that has accompanied these
developments only adds to the attraction of Japanese equities over the medium
term.
The investment strategy employed by the Company is not dependent on any
economic outcome nor correlated
with a particular investment style - it is one that seeks to capture a total
and compounding shareholder return
over time regardless of short-term economic variations. This seems a
particularly relevant consideration for
investors in these more uncertain times and we believe that Japanese equites
now offer a differentiated and
compelling opportunity in this regard. A combination of strong balance sheets,
healthy dividend cover and,
most importantly, changing attitudes have created a new investment landscape.
The benefit has been
demonstrated clearly over the past three years with companies in Japan
offering robust levels of distribution
to shareholders despite the sluggish trends in the domestic and global
economies.
As a result, dividends and share buybacks are set to establish new records
during the current fiscal year, with
minimal strain on balance sheets and dividend cover ratios. A further revision
to the Japanese Corporate
Governance Code in June 2022 and the restructuring of the main Tokyo Stock
Exchange indices in April
2022 were consistent with the previously established objectives of improving
capital efficiency and corporate
governance which have underpinned the favourable progression of shareholder
returns. We believe that the
benefits of Prime Minister Kishida's goal of doubling asset-based income
places further pressures on
companies to continue the trajectory of improvement and that shareholders in
Japanese companies will
consequently continue to reap the rewards.
Richard Aston
Coupland Cardiff Asset Management LLP
23 January 2023
INVESTMENT POLICY, RESULTS AND OTHER INFORMATION
Investment policy
The Company intends to invest in equities listed or quoted in Japan. The
Company may also invest in exchange traded funds in order to gain exposure to
such equities. Investment in exchange traded funds shall be limited to not
more than 20 per cent. of Gross Assets at the time of investment. The Company
may also invest in listed Japanese real estate investment trusts ("J-REITs").
The Company may enter into long only contracts for difference or equity swaps
for gearing and efficient portfolio management purposes.
No single holding (including any derivative instrument) will represent more
than 10 per cent. of Gross Assets at the time of investment and, when fully
invested, the portfolio is expected to have between 30 to 40 holdings,
although there is no guarantee that this will be the case and it may contain a
lesser or greater number of holdings at any time.
The Company will have the flexibility to invest up to 10 per cent. of its
Gross Assets at the time of investment in unquoted or untraded companies.
The Company will not be constrained by any index benchmark in its asset
allocation.
Borrowing policy
The Company may use borrowings for settlement of transactions, to meet
on-going expenses and may be geared through borrowings and/or by entering into
long only contracts for difference or equity swaps that have the effect of
gearing the Company's portfolio to seek
to enhance performance. The aggregate of borrowings and long only contracts
for difference and equity swap exposure will not exceed 25 per cent. of Net
Asset Value at the time of drawdown of the relevant borrowings or entering
into the relevant transaction, as appropriate, although the Company's normal
policy will be to utilise and maintain gearing to a lower limit of 20 per
cent. of Net Asset Value at the time of drawdown of the relevant borrowings or
entering into the relevant transaction, as appropriate. It is expected that
any borrowings entered into will principally be denominated in Yen.
Hedging policy
The Company does not currently intend to enter into any arrangements to hedge
its underlying currency exposure to investment denominated in Yen, although
the Investment Manager and the Board may review this from time to time.
Results and dividend
The Company's revenue return after tax for the financial year amounted to
£6,930,000 (2021: £6,404,000). In August 2022, the Company paid an interim
dividend of 1.40p (2021: 1.40p) per Ordinary Share. On 20 January 2023, the
Directors declared a second interim dividend for the year ended 31 October
2022 of 3.50p (2021: 3.35p) per Ordinary Share, which will be paid on 3 March
2023 to Shareholders on the register at 3 February 2023. Therefore, the total
dividend in respect of the financial year to 31 October 2022 will be 4.90p
(2021: 4.75p) per Ordinary Share.
The Company made a capital loss after tax of £19,818,000 (2021: capital gain
of £38,673,000). The total return, including income, after tax for the year
was a loss of £12,888,000 (2021: gain of £45,077,000).
The Company's Purpose, Values and Culture
The primary focus of the Company is to generate total returns for Shareholders
by investing in equities quoted on the recognised exchanges in Japan. The
Investment Manager identifies companies which are undervalued, have strong
balance sheets, strong business franchises, and favourable attitudes to
shareholder returns in the form of sustainable and growing dividends and share
buyback policies.
The Company aims to meet the needs of investors through the Investment
Manager's dual mandate of generating income and capital growth. The Company
has been investing in Japanese equities since launch in 2015. Whilst the
Company does not have a benchmark, the Board measures performance against the
TOPIX Total Return Index and High Yield Indices.
To achieve this, the Board of Directors has engaged Coupland Cardiff Asset
Management LLP, who have the appropriate capability, resources and controls in
place to actively manage the Company's assets in order to meet its investment
objective. The Investment Manager has a well-defined investment strategy and
process which is regularly and rigorously monitored and reviewed by the Board.
As the Company has no employees and acts through its service providers, its
culture is represented by the values and behaviour of the Board and third
parties to which it delegates.
To ensure that the Company's purpose, values, strategy and culture are
aligned, the Board comprises independent non-executive Directors from a
diverse background, who together bring a wide range of knowledge, skills and
experience. The Board members contribute to a transparent culture ensuring
effective oversight, critical support and challenge to the Investment Manager,
and all other third-party suppliers. For more information, please refer to the
Company's section 172 statement.
Key performance indicators ("KPIs")
The Board measures the Company's success in attaining its investment objective
by reference to the following KPIs:
(i) Long-term capital growth
The Board considers the Company's Net Asset Value ("NAV") total return figures
to be the best indicator of performance over time and this therefore is the
main indicator of performance used by the Board. The NAV cum-income total
return for the year to 31 October 2022 fell by 5.9% (2021: +24.3%) but the NAV
total return from the Company's inception in December 2015 to 31 October 2022
increased by 18.9%.
The Chairman's Statement incorporates a review of the highlights during the
year. The Investment Manager's Report gives details on investments made during
the year and how performance has been achieved.
(ii) Revenue return per Share and dividends
he Company's revenue return per Ordinary Share, based on the weighted average
number of shares in issue during the year, was 5.14p (2021: 4.75p). The
Company's proposed total dividend payable in respect of the year ended 31
October 2022, including an interim dividend of 1.40p per Ordinary Share paid
on 5 August 2022 and a second interim dividend of 3.50p payable on 3 March
2023 is 4.90p (2021: 4.75p) per Ordinary Share.
(iii) Discount/premium to NAV
The discount/premium relative to the NAV per share represented by the share
price is closely monitored by the Board. The share price closed at a 8.1%
discount to the NAV as at 31 October 2022 (2021: 6.9% discount). This is
addressed in the Chairman's Statement.
(iv) Control of the level of ongoing charges
The Board monitors the Company's operating costs carefully. Growing the size
of the Company offers many benefits, as not all of the Company's operating
costs increase in line with the Company's assets under management. Based on
the Company's average net assets for the year ended 31 October 2022, the
Company's ongoing charges figure calculated in accordance with the AIC
methodology was 1.06% (2021: 1.05%).
Other information
Modern slavery disclosure
The Company aims to act to the highest standards and is committed to
integrating responsible business practices throughout its operations. The
prevention of modern slavery is an important part of good corporate
governance.
As an investment trust, the Company does not offer goods or services to
consumers and deals predominantly with professional advisers and service
providers in the financial services industry. As such the Board considers that
the Company is out of scope of the Modern Slavery Act 2015.
Greenhouse Gas Emissions and Streamlined Energy and Carbon Reporting ("SECR")
The Company has no employees, physical assets, property or operations of its
own, does not provide goods or services and does not have its own customers.
It follows that the Company has little to no direct environmental impact. In
consequence, the Company has limited greenhouse gas emissions to report from
its operations, nor does it have responsibility for any other sources of
emissions under the Companies Act 2006 (Strategic Report and Directors'
Reports) Regulations 2013. As the Company has no material operations and
therefore has little energy use, it falls below the threshold to produce an
energy and carbon report. The Company's ESG policy is contained in the Annual
Report.
Employees
The Company has no employees. As at 31 October 2022, the Company had five
Directors, comprising three males (60%) and two females (40%). On 1 February
2022, June Aitken and Craig Cleland joined the Board, bringing with them a
wealth of experience and skills. As part of the recruitment process, the Board
was mindful of the Company's policy on diversity which is contained in the
Corporate Governance statement.
Anti-bribery, Corruption and Tax Evasion
It is the Company's policy to conduct all of its business in an honest and
ethical manner. The Company takes a zero-tolerance approach to bribery,
corruption and tax evasion and is committed to acting professionally, fairly
and with integrity in all its business dealings and relationships wherever it
operates. Taking account of the nature of the Company's business and
operations, the Board has adopted policies and procedures that allow it to
have reasonable assurance that persons associated with the Company are
prevented from engaging in bribery, corruption or tax evasion; and has adopted
the same standard of zero tolerance.
Viability Statement
The Directors have assessed the viability of the Company for the period until
31 October 2027 (the "'Period'') taking into account the long-term nature of
the Company's investment strategy and the principal risks and emerging risks.
The Board has chosen a five-year period to assess the Company's viability
because of the expected long-term nature of equity investment, the Investment
Manager's holding period and the fact that the investment objective is
unlikely to change significantly over this period. Based on this assessment,
the Directors have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the
Period.
In their assessment of the prospects of the Company, the Directors have
considered each of the principal and emerging risks and uncertainties and the
liquidity and solvency of the Company. The Directors have considered the
Company's income and expenditure projections and the fact that the Company's
investments comprise readily realisable securities which could, if necessary,
be sold to meet the Company's funding requirements. Portfolio activity and
market developments are discussed at quarterly Board meetings. The internal
control framework of the Company is subject to a formal review on at least an
annual basis.
The Directors do not expect there to be any material increase in the annual
ongoing charges of the Company over the Period. The Company's income from
investments and cash realisable from the sale of its investments provide
substantial cover to the Company's operating expenses, and any other costs
likely to be faced by the Company over the period of their assessment.
The Chairman's Statement and Investment Manager's Report present a positive
long-term investment case for Japanese equities, which also underpins the
Company's viability for the Period.
The continuation of the Company is subject to approval by Shareholders every
three years with the next continuation vote due to be held at the AGM in 2025.
This assessment takes into account the impact that higher levels of global
inflation are having on portfolio companies and the investment environment as
discussed in the Chairman's Statement, the Investment Manager's Report and in
the Principal and Emerging Risks section.
Outlook
The outlook for the Company is discussed in the Chairman's Statement.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of
Directors on 23 January 2023.
RISK AND RISK MANAGEMENT
Principal and emerging risks and uncertainties
The Board is responsible for the management of risks faced by the Company and
delegates this role to the Audit and Risk Committee (the "Committee").
The Committee carries out, at least annually, a robust assessment of principal
and emerging risks and uncertainties and monitors the risks on an ongoing
basis. The Committee has a dynamic risk management register in place to help
identify key risks in the business and oversee the effectiveness of internal
controls and processes.
The risk management register and associated risk heat map provide a visual
reflection of the Company's identified principal and emerging risks. These
fall into three categories: strategic and business risk, financial and
operational risk, and regulatory and compliance risk. The Committee considers
both the impact and the probability of each risk occurring and ensures
appropriate controls are in place to reduce risk to an acceptable level.
During the year under review the Committee was particularly concerned with the
increase in geopolitical risk following the outbreak of war in the Ukraine.
The subsequent rise in global energy prices, inflation and rising interest
rates worldwide have led to a more uncertain investment environment. The
increase in exchange rate volatility has had a particular impact on the values
of Japanese portfolio holdings and the dividend income received. The Japanese
(and Asian) economies have also taken longer to recover from the Covid-19
pandemic than those in Europe and America. The Committee continues to review
the processes in place to mitigate risk; and to ensure that these are
appropriate and proportionate in the current market environment.
The Company's ability to operate as a going concern and the Company's
longer-term viability can be found in the Annual Report.
The principal and emerging risks, together with a summary of the processes and
internal controls used to manage and mitigate risks where possible are
outlined below.
Principal Risks Mitigation Movement During the Year
Poor investment performance The Investment Manager has a well-defined investment strategy and process
which is regularly and rigorously reviewed by the Board.
The Company's investment performance depends on the Investment Manager's
ability to identify successful investments in accordance with the Company's The Board monitors the Company's investment performance against its peer group
investment policy. over a range of periods.
Whilst the Company does not have a benchmark, the Board measures
performance for reference purposes against the TOPIX and High Yield Indices.
At each meeting, the Board discusses the Japanese investment environment. The
Investment Manager reports on the composition of the portfolio, any recent
sales
and purchases, and expectations of dividend income.
The Company's investment policy states that no single holding will represent
more than 10 per cent. of the Company's Gross Assets at the time of investment
and the portfolio is expected to have between 30 to 40 holdings although there
is no guarantee that this will be the case
and it may contain a lesser or greater number of holdings at any time.
An investment management contract is in place which defines the duties and
responsibilities of the Investment Manager. Safeguards include the provision
to terminate the Management Agreement with 6 months' notice and in line with
AIC guidance, the Investment Manager's appointment is considered on an annual
basis.
Principal Risks Mitigation Movement During the Year
Currency Risk The currency risk is explained to shareholders in the prospectus and the
annual and interim reports. The Board regularly reviews the level
The Company's investments are denominated in Japanese Yen. Changes in the Yen
/ Sterling exchange rate may impact returns and lead to a devaluation of the of foreign currency exposure and monitors forecast revenues. The revenue
Company's assets when translated into sterling. forecast presented to the board includes a Yen sensitivity analysis.
Currency risk increased in the year under review as the Yen continued to fall
Income is received from investee companies in Yen. Exchange The Company's policy is not to hedge against any foreign currency movements. against the dollar and sterling. This impacts the sterling value of revenues
Income received from received and presents both opportunities and threats to the portfolio.
rate fluctuations could impact distributable income available for dividends.
investee companies is translated into sterling on receipt.
The Company has built up a revenue reserve and the Board regularly reviews the
net income available for distribution using the Investment Manager's
sensitivity analysis of revenue estimates. The Company also has a Special
reserve available for distribution in the event of unforeseen revenue
shortfall.
Share price does not reflect The Board closely monitors the Company's share price relative to NAV and the
Company's discount / premium relative to their peer group, and recognises the
underlying net asset value ("NAV") importance that investors attach to the ordinary shares not trading at a
significant discount or premium to the prevailing NAV.
The market value of the Company's shares can fluctuate and may not always
reflect their underlying value. Returns achieved are reliant primarily upon Should the shares trade at a significant discount to the prevailing NAV, the The share price continued to trade at a discount during the year under review
the performance Board will consider whether the Company should purchase its own ordinary despite improving performance. In the uncertain
shares, pursuant to the general authority renewed at each AGM.
of the Company's portfolio and the Company may experience fluctuations in its
market environment, the discount is in line with the peer group.
operating results due to a number of factors. Such variability may lead to Conversely, the Board will issue new Ordinary Shares should the shares trade
volatility at a premium to their prevailing NAV, pursuant to the general authority
renewed at each AGM.
in the trading price of the Company's shares, in excess of levels acceptable
to the Board or shareholders. Extensive marketing is carried out by the Company's Investment Manager, Broker
and a specialist PR company. An investment research consultant is engaged to
provide independent research for retail shareholders.
Principal Risks Mitigation Movement During the Year
Market Risk The Directors acknowledge that market risk is inherent in the investment
process. The Company maintains a diversified portfolio
Changes in the investment, economic or political conditions in Japan, and/or
in the countries in which the Company's investee companies operate could of quoted investments. The Board has imposed guidelines within its investment
substantially and adversely affect the Company's prospects. policy to limit exposure to individual holdings and limits the level of
gearing. Further information on financial instruments and risk can be found in The invasion of Ukraine, the consequent escalation in energy prices, rising
In addition to changing economic factors such as interest rates, employment, note 16 to the Financial Statements. interest rates, global inflation and rising geopolitical tensions in Asia,
industry conditions and competition, unpredictable factors such as natural
have all led to a more uncertain environment for equity investments. The
disasters, earthquakes and diplomatic events may impact market risk. In addition to regular market updates from the Investment Manager and reports Manager's emphasis on companies which can pay sustainable dividends has helped
at Board meetings, the Board convenes more often during periods of extreme alleviate the impact.
Geopolitical instability in the region may threaten global economic growth volatility.
and, consequently, companies in the portfolio.
Japan (and Asia) have taken longer to emerge from the Covid-19 restrictions
than European and American markets. However, the
Board is encouraged by the scope for recovery as Japan emerges from the
pandemic.
Excess leverage An ability to gear is a unique advantage of closed-end companies and
structural gearing is a clearly stipulated component of the Company's
The Company may use borrowings to seek to enhance investment returns. While investment policy.
this has the potential to enhance investment returns in rising markets, in
falling markets the impact could be detrimental to performance. This is highlighted in shareholder communications.
Gearing is monitored and strict restrictions on borrowings are imposed:
gearing continues to operate within a limit of 25% of NAV at the time of
investment.
Principal Risks Mitigation Movement During the Year
Underperforming key service providers The Board has appointed an experienced independent professional Investment
Manager, Depositary, Custodian and Administrator.
The Company's service providers including the Investment Manager, Depositary,
the Custodian and the Administrator could fail to provide accurate timely All key service providers produce annual internal control reports for review
information to the Board. by the Audit and Risk Committee. These reviews include consideration of their
business
External events, such as cyber- crime, natural disasters or pandemics may lead
to business interruption and mean service providers are unable to meet their continuity plans and the associated cyber security risks.
contractual obligations.
Service providers report on cyber risk mitigation and management at least
annually, which includes
confirmation of business continuity capability in the event of a cyber-
attack. Penetration testing is carried out by the Investment Manager
and key service providers at least annually.
Emerging risk
ESG and Climate Change The Company's ESG Policy, which is updated annually is published on the
Company's website and the AIC website.
Potential reputational damage from non-compliance with regulations or
incorrect disclosures. The Company's approach to ESG, including the ESG factors that are considered
in the investment process, such as climate change, where they are relevant and
Climate change leads to additional costs and risks for portfolio companies. have a material impact on stock performance, is included in the Annual Report. Shareholders expect relevant ESG factors and sustainability to be taken into
It also includes examples of responsible engagement. account in investment decisions.
The Company could suffer as a result of increased investor demand for products
which promote ESG investments. Coupland Cardiff Asset Management Climate change is impacting operating conditions of portfolio companies and
their reporting obligations.
LLP (the Investment Manager) is a signatory to the Principles of Responsible
Investment Initiative
("PRI") and reports annually according to the PRI reporting framework. The
Investment Manager also complies with the obligations of both the UK
Stewardship Code and the Japan Stewardship Code.
Investment trusts are currently exempt from the Task Force on Climate-Related
Financial Disclosures ("TCFD") disclosure, but the Board will continue to
monitor the situation.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice, including FRS 102, which is The Financial Reporting
Standard applicable to the UK and Republic of Ireland 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
the Company's affairs as at the end of the year and of the net return for the
year. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates, which are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; 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 which disclose
with reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements 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.
The Company Reports and Accounts are published on its website at
www.ccjapanincomeandgrowthtrust. com which is maintained by the Company's
Investment Manager. The work carried out by the auditors does not involve
consideration of the maintenance and integrity of this website and,
accordingly, the auditor accepts no responsibility for any changes that have
occurred to the financial statements since being initially presented on the
website. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
Directors' confirmation statement
The Directors each confirm to the best of their knowledge that:
(a) the financial statements, prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Company; and
(b) this Annual Report includes a fair review of the
development and performance of the business and position of the Company,
together with a description of the principal risks and uncertainties that it
faces.
Having taken advice from the Audit and Risk Committee, the Directors consider
that 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 performance, business model and strategy.
For and on behalf of the Board
Harry Wells
Chairman
23 January 2023
FINANCIAL STATEMENTS
INCOME STATEMENT
FOR THE YEAR ENDED 31 OCTOBER 2022
Year ended 31 October 2022 Year ended 31 October 2021
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments 3 - (18,118) (18,118) - 39,373 39,373
Currency (losses)/gains - (209) (209) - 734 734
Income 4 8,878 - 8,878 8,241 - 8,241
Investment management fee 5 (327) (1,306) (1,633) (318) (1,273) (1,591)
Other expenses 6 (664) - (664) (634) - (634)
Return on ordinary activities before finance costs and taxation 7,887 (19,633) (11,746) 7,289 38,834 46,123
Finance costs 7 (69) (185) (254) (61) (161) (222)
Return on ordinary activities before taxation 7,818 (19,818) (12,000) 7,228 38,673 45,901
Taxation 8 (888) - (888) (824) - (824)
Return on ordinary activities after taxation 6,930 (19,818) (12,888) 6,404 38,673 45,077
Return per Ordinary Share-undiluted 13 5.14p (14.71)p (9.57)p 4.75p 28.70p 33.45p
Return per Ordinary Share-diluted 13 4.29p (12.26)p (7.97)p 3.96p 23.92p 27.88p
The total column of the Income Statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations.
Both the supplementary revenue and capital columns are prepared under guidance
from the Association of Investment Companies. There is no other comprehensive
income and therefore the return for the year is also the total comprehensive
income for the year. The Company's "Ordinary Shares - diluted" is due to the
issuance of 26,946,122 Subscription Shares issued on 18 February 2021.
STATEMENT OF FINANCIAL POSITION
AT 31 OCTOBER 2022
31 October 2022 31 October 2021
Note £'000 £'000
Fixed assets
Investments at fair value through profit or loss 3 199,642 220,271
Current assets
Cash and cash equivalents 1,413 -
Cash collateral in respect of Contracts for Difference ("CFDs") 433 -
Amounts due in respect of CFDs 2,680 443
Other debtors 10 4,434 3,264
8,960 3,707
Creditors: amounts falling due within one year
Cash and cash equivalents-Bank overdraft - (48)
Cash collateral in respect of CFDs - (18)
Amounts payable in respect of CFDs (2,780) (738)
Other creditors 11 (2,240) (304)
(5,020) (1,108)
Net current assets 3,940 2,599
Total assets less current liabilities 203,582 222,870
Net assets 203,582 222,870
Capital and reserves
Share capital 12 1,348 1,348
Share premium 98,067 98,067
Special reserve 64,671 64,671
Capital reserve
-Revaluation gains on non-derivative investments held at year end 3 5,841 26,628
-Other capital reserves 26,182 25,213
Revenue reserve 7,473 6,943
Total Shareholders' funds 203,582 222,870
NAV per share - Ordinary Shares - undiluted (pence) 14 151.10p 165.42p
NAV per share - Ordinary Shares - diluted (pence) 14 152.75p 164.68p
Approved by the Board of Directors and authorised for issue on 23 January
2023 and signed on their behalf by:
Harry Wells
Director
CC Japan Income & Growth Trust plc is incorporated in England and Wales
with registration number 9845783.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 OCTOBER 2022
Share capital Share premium Special reserve Capital reserve Revenue reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 November 2021 1,348 98,067 64,671 51,841 6,943 222,870
Return on ordinary activities after taxation - - - (19,818) 6,930 (12,888)
Dividends paid 9 - - - - (6,400) (6,400)
Balance at 31 October 2022 1,348 98,067 64,671 32,023 7,473 203,582
For the year ended 31 October 2021
Share capital Share premium Special reserve Capital reserve Revenue reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 November 2020 1,348 98,437 64,671 13,168 6,736 184,360
Return on ordinary activities after taxation - - - 38,673 6,404 45,077
Dividends paid 9 - - - - (6,197) (6,197)
Subscription Shares issue costs - (370) - - - (370)
Balance at 31 October 2021 1,348 98,067 64,671 51,841 6,943 222,870
The Company's distributable reserves consist of the Special reserve, Revenue
reserve and Capital reserve attributable to realised profits.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 OCTOBER 2022
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Operating activities cash flows
Return on ordinary activities before finance costs and taxation* (11,746) 46,123
Adjustment for:
Losses/(gains) on investments 18,106 (28,306)
Movements in CFD transactions (646) (1,601)
Increase in other debtors (6) (293)
Increase in other creditors 3 89
Tax withheld on overseas income (888) (824)
Net cash flow from operating activities 4,823 15,188
Investing activities cash flows
Purchases of investments (43,572) (100,687)
Proceeds from sales of investments 46,864 89,778
Net cash flow from/(used in) investing activities 3,292 (10,909)
Financing activities cash flows
Subscription Share issue costs paid - (370)
Equity dividends paid (6,400) (6,197)
Finance costs paid (254) (223)
Net cash used in financing activities (6,654) (6,790)
Increase/(decrease) in cash and cash equivalents 1,461 (2,511)
Cash and cash equivalents at the beginning of the year (48) 2,463
Cash and cash equivalents at the end of the year 1,413 (48)
* Cash inflow from dividends was £8,038,000 (2021: £7,083,000).
NOTES TO THE ACCOUNTS
1. GENERAL INFORMATION
CC Japan Income & Growth Trust plc (the "Company") was incorporated in
England and Wales on 28 October 2015 with registered number 9845783, as a
closed-ended investment company. The Company commenced its operations on 15
December 2015. The Company carries on business as an investment trust within
the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.
The Company's investment objective is to provide Shareholders with dividend
income combined with capital growth, mainly through investment in equities
listed or quoted in Japan.
The Company's shares were admitted to the Official List of the Financial
Conduct Authority with a premium listing on 15 December 2015. On the same day,
trading of the Ordinary Shares commenced on the London Stock Exchange.
In 2021, the Company's 26,946,122 TSS were admitted to the London Stock
Exchange with the ticker CCJS.
The Company's registered office is 6th Floor, 125 London Wall, London EC2Y
5AS.
2. ACCOUNTING POLICIES
The principal accounting policies followed by the Company are set out below:
(a) Basis of accounting
The financial statements have been prepared in accordance with FRS 102 ("the
Financial Reporting Standard applicable in the UK and Republic of Ireland")
issued by the Financial Reporting Council, with the Statement of Recommended
Practice "Financial Statements of Investment Trust Companies and Venture
Capital Trusts" issued by the Association of Investment Companies in April
2021 and the Companies Act 2006. The financial statements have been prepared
on the historical cost basis except for the modification to a fair value basis
for certain financial instruments as specified in the accounting policies
below.
They have also been prepared on the assumption that approval as an investment
trust will continue to be granted. As required by its Articles of Association,
the Company's continuation vote was passed at the AGM in 2022 and will next
put forward a vote for its continuation at the AGM in 2025.
The financial statements have been prepared on a going concern basis. In
forming this opinion, the Directors have considered any potential impact of
the war in Ukraine and the ongoing impact of the Covid-19 pandemic on the
going concern and viability of the Company. In making their assessment, the
Directors have reviewed income and expense projections and the liquidity of
the investment portfolio, and considered the mitigation measures which key
service providers, including the Investment Manager, continue to have in place
to maintain operational resilience.
The Company's ability to continue as a going concern for the period assessed
by the Directors, being the period to 31 January 2024 which is at least 12
months from the date the financial statements were authorised for issue.
The financial statements have been presented in GBP sterling (£), which is
also the functional currency as this is the currency of the primary economic
environment in which the Company operates. The Board, having regard to the
currency of the Company's share capital and the predominant currency in which
it pays distributions, expenses and its shareholders operate, has determined
that sterling is the functional currency.
In preparing these financial statements the Directors have considered the
impact of ESG and climate change risk as an emerging risk and have concluded
that while climate change impacts operating conditions of portfolio companies
and increases obligations, it does not have a material impact on the value of
the Company's investments. In line with FRS 102, investments are valued at
fair value, which for the Company are quoted bid prices for investments in
active markets at 31 October 2022 and therefore reflect market participants'
view of climate change risk.
(b) Investments
As the Company's business is investing in financial assets with a view to
profiting from their total return in the form of increases in fair value,
financial assets are held at fair value through profit or loss in accordance
with FRS 102 Section 11: 'Basic Financial Instruments', and Section 12: 'Other
Financial Instruments'. The Company manages and evaluates the performance of
these investments on a fair value basis in accordance with its investment
strategy, and information about the investments is provided on this basis to
the Board of Directors.
Upon initial recognition, investments are classified by the Company as "at
fair value through profit or loss". They are recognised on the date they are
traded and are measured initially at fair value, which is taken to be their
transaction price, excluding expenses incidental to purchases which are
expensed to capital on acquisition. Subsequently investments are revalued at
fair value which is the bid market price for listed investments over the time
until they are sold, any unrealised gains/losses are included in the fair
value of the investments.
Changes in the fair value of investments held at fair value through profit or
loss and gains or losses on disposal are included in the capital column of the
income statement within "gains on investments held at fair value".
(c) Derivatives
Derivatives comprise Contracts for Difference ("CFD"), which are measured at
fair value and valued by reference to the underlying market value of the
corresponding security. CFDs are held for investment purposes. Where the fair
value is positive the CFD is presented as a current asset, and where the fair
value is negative the CFD is presented as a current liability. Gains or losses
on these derivative transactions are recognised in the Income Statement. They
are recognised as capital and are shown in the capital column of the Income
Statement if they are of a capital nature and are recognised as revenue and
shown in the revenue column of the Income Statement if they are of a revenue
nature. To the extent that any gains or losses are of a mixed revenue and
capital nature, they are apportioned between revenue and capital accordingly.
The CFD balance is made up of transactions in relation to the underlying
equity held by the Company, with the risks embedded in the CFDs disclosed in
Note 16.
(d) Foreign currency
Transactions denominated in foreign currencies including dividends are
translated into sterling at actual exchange rates as at the date of the
transaction. Assets and liabilities denominated in foreign currencies at the
year end are reported at the rates of exchange prevailing at the year end.
Foreign exchange movements on investments and derivatives are included in the
Income Statement within gains on investments. Any other gain or loss is
included as an exchange gain or loss to capital or revenue in the Income
Statement as appropriate.
(e) Income
Investment income has been accounted for on an ex-dividend basis or when the
Company's right to the income is established. Special dividends are credited
to capital or revenue in the Income Statement, according to the circumstances
surrounding the payment of the dividend. Overseas dividends are included gross
of withholding tax recoverable.
Interest receivable on deposits is accounted for on an accrual basis.
(f) Dividend payable
Interim dividends are recognised when the Company pays the dividend. Final
dividends are recognised in the period in which they are approved by the
shareholders. This year, as was also the case last year, a second interim
dividend is being paid in substitution for the final dividend.
(g) Expenses
All expenses are accounted for on an accruals basis and are charged as
follows:
• the basic investment management fee is charged 20%
to revenue and 80% to capital;
• CFD finance costs are charged 20% to revenue and
80% to capital;
• investment transactions costs are allocated to
capital; and
• other expenses are charged wholly to revenue.
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax. The tax currently payable is based on the taxable profit for the year.
Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expenses that are taxable or deductible
in other years and it further excludes items that are never taxable or
deductible. The Company's liability for current tax is calculated using tax
rates that were applicable at the financial reporting date.
Where expenses are allocated between capital and revenue any tax relief in
respect of the expenses is allocated between capital and revenue returns on
the marginal basis using the Company's effective rate of corporation taxation
for the relevant accounting period.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the financial reporting date, where
transactions or events that result in an obligation to pay more tax in the
future or right to pay less tax in the future have occurred at the financial
reporting date. This is subject to deferred tax assets only being recognised
if it is considered more likely than not that there will be suitable profits
from which the future reversal of the timing differences can be deducted.
Deferred tax assets and liabilities are measured at the rates applicable to
the legal jurisdictions in which they arise.
(i) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short
term in nature and are accordingly stated at their nominal value.
(j) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business being that of an investment trust, as disclosed in note 1.
(k) Accounting estimates, judgements and assumptions
The preparation of financial statements requires the Directors to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Although these estimates
are based on management's best knowledge of current facts, circumstances and,
to some extent, future events and actions, the Company's actual results may
ultimately differ from those estimates, possibly significantly.
There have not been any instances requiring any significant estimates or
judgements in the year.
(l) Cash and cash equivalents
Cash comprises cash and demand deposits. Cash equivalents, include bank
overdrafts, and short-term, highly liquid investments that are readily
convertible to known amounts of cash, are subject to insignificant risks of
changes in value, and are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
3. INVESTMENTS
(a) Summary of valuation
As at 31 October 2022 As at 31 October 2021
£'000 £'000
Investments listed on a recognised overseas investment exchange 199,642 220,271
199,642 220,271
(b) Movements
During the year ended 31 October 2022
2022 2021
£'000 £'000
Book cost at the beginning of the year 193,643 166,181
Revaluation gains on non-derivative investments held at beginning of the year 26,628 14,746
Valuation at beginning of the year 220,271 180,927
Purchases at cost 45,505 100,687
Sales:
- proceeds (48,028) (89,649)
- gains on investment holdings sold during the year 2,681 16,424
Movements in revaluation (losses)/gains on investment held at year end (20,787) 11,882
Valuation at end of the year 199,642 220,271
Book cost at end of the year 193,801 193,643
Revaluation gains on non-derivative investment held at year end 5,841 26,628
Valuation at end of the year 199,642 220,271
Transaction costs on investment purchases for the year ended 31 October 2022
amounted to £17,000 (2021: £46,000) and on investment sales for the year
amounted to £19,000 (2021: £39,000).
The Company received £48,028,000 (2021: £89,649,000) from investments sold
during the year. The book cost of these investments when they were purchased
was £45,347,000 (2021: £73,225,000). These investments have been revalued
over time and until they were sold any unrealised gains/losses were included
in the fair value of the investments.
c) (Losses)/gains on investments
Year ended Year ended
31 October 2022 31 October 2021
£'000 £'000
Gains on non-derivative investment holdings sold during the year 2,681 16,424
Movements in revaluation (losses)/gains on investment held at year end (20,787) 11,882
Other capital losses (23) (27)
Total (losses)/gains on non-derivative investments held at fair value (18,129) 28,279
Realised (losses)/gains on CFD assets and liabilities (184) 9,434
Unrealised gains on CFD assets and liabilities 195 1,660
Total (losses)/gains on investments held at fair value (18,118) 39,373
4. INCOME
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Income from investments:
Overseas dividends 8,878 8,241
Total 8,878 8,241
Overseas dividend income is translated into sterling on receipt.
5. INVESTMENT MANAGEMENT FEE
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Basic fee:
20% charged to revenue 327 318
80% charged to capital 1,306 1,273
Total 1,633 1,591
The Company's Investment Manager is Coupland Cardiff Asset Management LLP. The
Investment Manager is entitled to receive a management fee payable monthly in
arrears and is at the rate of one-twelfth of 0.75% of Net Asset Value per
calendar month. There is no performance fee payable to the Investment Manager.
6. OTHER EXPENSES
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Secretarial services 48 48
Administration and other expenses 420 416
Auditor's remuneration - statutory audit services 50 45
Directors' fees 146 125
Other expenses - Revenue 664 634
7. FINANCE COSTS
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Interest paid - 100% charged to revenue 23 21
CFD finance cost and structuring fee - 20% charged to revenue 45 39
Structuring fees - 20% charged to revenue 1 1
69 61
CFD finance cost and structuring fee - 80% charged to capital 181 157
Structuring fees - 80% charged to capital 4 4
185 185
Total finance costs 254 222
8. TAXATION
Year ended 31 October 2022 Year ended 31 October
2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of tax charge in the year:
Overseas withholding tax 888 - 888 824 - 824
Total tax charge for the year (see note 8 (b)) 888 - 888 824 - 824
(b) Factors affecting the tax charge for the year:
Year ended 31 October 2022 Year ended 31 October
2021
Revenue Capital Total Revenue
Capital Total
£'000 £'000
£'000 £'000
£'000 £'000
Total return before taxation 7,818 (19,818) (12,000) 7,228 38,673 45,901
The effective UK corporation tax rate for the year is 19.00% (2021: 19.00%). The tax charge for the Company differs from the charge resulting from applying the standard rate of UK corporation tax for an investment trust company. The differences are explained below:
Effective UK corporation tax at 19.00% (2021: 19.00%) 1,485 (3,765) (2,280) 1,373 7,348 8,721
Effects of:
Overseas withholding tax suffered 888 - 888 824 - 824
Non-taxable overseas dividends (1,687) - (1,687) (1,566) - (1,566)
Capital losses/(gains) not subject to tax - 3,482 3,482 - (7,620) (7,620)
Finance costs not tax deductible 13 35 48 12 31 43
Movement in unutilised management expenses 189 248 437 181 241 422
Total tax charge for the year 888 - 888 824 - 824
The Company has an unrecognised deferred tax asset of £1,218,000 (2021:
£904,000) based on the long-term prospective corporation tax rate of 25%
(2021: 25%). This asset has accumulated because deductible expenses exceeded
taxable income for the year ended 31 October 2022. No asset has been
recognised in the accounts because, given the composition of the Company's
portfolio, it is unlikely that this asset will be utilised in the foreseeable
future. The Company has not provided for deferred tax on any tax losses.
9. DIVIDEND
(i) Dividends paid during the financial year
Year ended 31 October 2022 Year ended 31 October 2021
£'000 £'000
Second Interim - year ended 31 October 2021 3.35p (2020: 3.20p) 4,514 4,311
Interim dividend - year ended 31 October 2022 1.40p (2021: 1.40p) 1,886 1,886
Total 6,400 6,197
(ii) The dividend relating to the year ended 31 October 2022, which is the basis on which the requirements of
Section 1159 of the Corporation Tax Act 2010 are considered is detailed below:
Year ended 31 October 2022 Year ended 31 October 2021
Pence
per
Pence per
Ordinary
Ordinary
Share £'000 Share £'000
Interim dividend 1.40p 1,886 1.40p 1,886
Second interim dividend* 3.50p 4,716 3.35p 4,513
4.90p 6,602 4.75p 6,399
* Not included as a liability in the year ended 30 October 2022
accounts.
The Directors have declared a second interim dividend for the financial year
ended 31 October 2022 of 3.50p per Ordinary Share. The dividend will be paid
on 3 March 2023 to Shareholders on the register at the close of business on 3
February 2023.
10. OTHER DEBTORS
As at 31 October 2022 As at 31 October 2021
£'000 £'000
Accrued income 3,146 3,194
Sales for settlement 1,184 20
VAT receivable 62 19
Prepayments and other receivables 42 31
Total 4,434 3,264
11. OTHER CREDITORS
As at 31 October 2022 As at
£'000 31 October 2021
£'000
Amounts falling due within one year:
Purchases for future settlement 1,933 -
Accrued finance costs 7 7
Accrued expenses 300 297
Total 2,240 304
12. SHARE CAPITAL
Share capital represents the nominal value of shares that have been issued.
The share premium includes any premiums received on issue of share capital.
Any transaction costs associated with the issuing of shares are deducted from
share premium.
As at 31 October 2022 As at 31 October 2021
No. of shares £'000 No. of shares £'000
Allotted, issued & fully paid:
Ordinary Shares of 1p
Opening balance 134,730,610 1,348 134,730,610 1,348
Closing balance 134,730,610 1,348 134,730,610 1,348
Since the year end, the Company has issued no Ordinary Shares, with
134,730,610 Ordinary Shares in issue as at 23 January 2023.
Transferable Subscription Shares
On at the year end and the date of this report, the Company had 26,946,122 TSS
in issue at a Subscription Price of £1.61. The TSS were issued as a free
bonus to Shareholders on the basis of 1 Subscription Share for every 5
Ordinary Shares owned. The TSS have a limited life but can be exercised by
paying the Subscription Price of £1.61 for new Ordinary Shares on a quarterly
basis on the last business day of May, August, November and February up until
the last business day of February 2023, whereupon they expire. As of 31
October 2022, none of the TSS have been exercised.
13. RETURN PER ORDINARY SHARE
Total return per Ordinary Share is based on the return on ordinary activities,
including income, a loss for the year after taxation of £12,888,000 (2021:
profit of £45,077,000) and the weighted average number of Ordinary
Shares-undiluted in issue for the year to 31 October 2022 of 134,730,610
(2021: 134,730,610); Ordinary Shares-diluted in issue for the year to 31
October 2022 of 161,676,732 (2021: 134,730,610). The Company's Ordinary
Shares-diluted is due to the 26,946,122 Subscription Shares in issue for the
year to 31 October 2022.
The returns per Ordinary Share were as follows:
As at Revenue 31 October 2022 As at Revenue 31 October Capital 2021
Capital Total Total
Return per Ordinary Share - undiluted
5.14p (14.71)p (9.57)p 4.75p 28.70p 33.45p
Return per Ordinary Share - diluted*
4.29p (12.26)p (7.97)p 3.96p 23.92p 27.88p
*Diluted assumes that all the TSS in issue are fully subscribed for at the
price of £1.61p per TSS
14. NET ASSET VALUE PER SHARE
Total Shareholders' funds and the net asset value ("NAV") per share
attributable to the Ordinary Shareholders at the year end calculated in
accordance with the Articles of Association were as follows:
NAV per Ordinary Share - undiluted
As at 31 October 2022 As at 31 October 2021
Net Asset Value (£'000) 203,582 222,870
Ordinary Shares in issue 134,730,610 134,730,610
NAV per Ordinary Share - undiluted 151.10p 165.42p
NAV per Ordinary Share - diluted
As at 31 October 2022 As at 31 October 2021
Subscription shares issue 26,946,122 26,946,122
Proceeds from exercise of TSS (£'000) 43,383 43,400
Adjusted Net Asset Value for exercise of TSS (£'000) 246,954 266,270
Ordinary Shares - post exercise of TSS 161,676,732 161,676,732
NAV per Ordinary Share - diluted 152.75p 164.68p
As at the year end, there was no dilution effect on the NAV per share.
15. RELATED PARTY TRANSACTIONS
Transactions with the Investment Manager and the Alternative Investment Fund
Investment Manager ("AIFM")
The Company provides additional information concerning its relationship with
the Investment Manager and AIFM, Coupland Cardiff Asset Management LLP. The
fees for the period are disclosed in note 5 and amounts outstanding at the
year ended 31 October 2022 were £134,000 (2021: £141,000).
Research purchasing agreement
MiFID II treats investment research provided by brokers and independent
research providers as a form of "inducement" to investment managers and
requires research to be paid separately from execution costs. In the past, the
costs of broker research were primarily borne by the Company as part of
execution costs through dealing commissions paid to brokers. With effect from
3 January 2018, this practice has changed, as brokers subject to MiFID II are
now required to price, and charge for, research separately from execution
costs. Equally, the rules require the Investment Manager, as an investment
Manager, to ensure that the research costs borne by the Company are paid for
through a designated Research Payment Account ("RPA") funded by direct
research charges to the Investment Manager's clients; including the Company.
The research charge for the year 1 January 2022 to 31 December 2022, as agreed
between the Investment Manager and the Company, was £34,000 (31 December
2021: £28,000). The research charge for the year 1 January 2023 to 31
December 2023, as budgeted by the Investment Manager, is £28,000.
Directors' fees and shareholdings
The Directors' fees and shareholdings are disclosed in the Directors'
Remuneration Implementation Report.
16. FINANCIAL INSTRUMENTS AND CAPITAL DISCLOSURES
Risk Management Policies and Procedures
As an investment trust the Company invests in equities and equity related
derivatives for the long-term so as to secure its investment objective. In
pursuing its investment objective, the Company is exposed to a variety of
risks that could result in either a reduction in the Company's net assets or a
reduction of the profits available for dividends.
These risks, include market risk (comprising currency risk, interest rate
risk, and other price risk), liquidity risk, and credit risk, and the
Directors' approach to the management of them are set out follows.
The objectives, policies and processes for managing the risks, and the methods
used to measure the risks, are set out below.
(a) Market Risk Overview
Economic conditions
Changes in economic conditions in Japan (for example, interest rates and rates
of inflation, industry conditions, competition, political and diplomatic
events and other factors) and in the countries in which the Company's investee
companies operate could substantially and adversely affect the Company's
prospects. The Company is subject to concentration risk as it only invests in
Japanese companies but has diversified investments across the different
sectors in the Japanese market.
Sectoral diversification
The Company has no limits on the amount it may invest in any sector. This may
lead to the Company having significant concentrated exposure to portfolio
companies in certain business sectors from time to time.
Concentration of investments in any one sector may result in greater
volatility in the value of the Company's investments and consequently its NAV
and may materially and adversely affect the performance of the Company and
returns to Shareholders.
Unquoted companies
The Company may invest in unquoted companies from time to time. Such
investments, by their nature, involve a higher degree of valuation and
performance uncertainties and liquidity risks than investments in listed and
quoted securities and they may be more difficult to realise. However, the
Company does not currently hold and has never held any unquoted securities.
Management of market risk
The Company is invested in a diversified portfolio of investments. The
Company's investment policy states that no single holding (including any
derivative instrument) will represent more than 10% of the Company's Gross
Assets at the time of investment and, when fully invested, the portfolio is
expected to have between 30 to 40 holdings although there is no guarantee that
this will be the case and it may contain a lesser or greater number of
holdings at any time. A maximum of 10% of the Company's Gross Assets at the
time of investment may be invested in unquoted or untraded companies at time
of investment.
The Investment Manager's approach will in most cases achieve diversification
across a number of sectors as shown in the Holdings in Portfolio.
(b) Currency risk
The majority of the Company's assets will be denominated in a currency other
than sterling (predominantly in yen) and changes in the exchange rate between
sterling and yen may lead to a depreciation of the value of the Company's
assets as expressed in sterling and may reduce the returns to the Company from
its investments and, therefore, negatively impact the level of dividends paid
to shareholders.
Management of currency risk
The Investment Manager monitors the currency risk of the Company's portfolio
on a regular basis. Foreign currency exposure is regularly reported to the
Board by the Investment Manager. The Company does not currently intend to
enter into any arrangements to hedge its underlying currency exposure to
investment denominated in yen, although the Investment Manager and the Board
will keep this approach under regular review.
Foreign currency exposures
An analysis of the Company's assets and liabilities denominated in yen are as
follows:
As at 31 October 2022 As at 31 October 2021
£'000 £'000
Equity Investments: Yen 199,642 220,271
Receivables (due from brokers, dividends, and other income receivable) 4,330 3,214
CFD: yen (fair value of open positions) (100) (295)*
Cash and cash equivalent: yen (1,927) (3,360)
Total 201,945 219,830
Foreign currency sensitivity
If the Japanese Yen had appreciated or depreciated by 10% as at 31 October
2022 (2021: 10%) then the returns of the company as at that date would have
increased or decreased as shown below:
Increase in Fair Value Decrease in Fair Value Increase in Fair Value Decrease in Fair Value
As at 31 October As at 31 October As at 31 October As at 31 October
2022 2022 2021 2021
£'000 £'000 £'000 £'000
Impact on capital return - increase/(decrease) 20,195 (20,195) 21,983 (21,983)
Return after taxation - increase/(decrease) 20,195 (20,195) 21,983 (21,983)
* Within the foreign currency exposures table, the 31 October 2021 figure
for CFDs was previously reported as £44,055,000 which represented the CFDs
absolute exposure, rather than the fair value of open positions. The
corresponding foreign currency sensitivity was previously reported as +/-
£26,418,000.
(c) Leverage risk
Derivative instruments
The Company may utilise long only CFDs or equity swaps for gearing and
efficient portfolio management purposes. Leverage may be generated through the
use of CFDs or equity swaps. Such financial instruments inherently contain
much greater leverage than a non-margined purchase of the underlying security
or instrument. This is due to the fact that, generally, only a very small
portion (and in some cases none) of the value of the underlying security or
instrument is required to be paid in order to make such leveraged investments.
As a result of any leverage employed by the Company, small changes in the
value of the underlying assets may cause a relatively large change in the Net
Asset Value of the Company. Many such financial instruments are subject to
variation or other interim margin requirements, which may force premature
liquidation of investment positions.
Borrowing risks
The Company may use borrowings to seek to enhance investment returns. While
the use of borrowings can enhance the total return on the Ordinary Shares
where the return on the Company's underlying assets is rising and exceeds the
cost of borrowing, it will have the opposite effect where the return on the
Company's underlying assets is rising at a lower rate than the cost of
borrowing or falling, further reducing the total return on the Ordinary
Shares. As a result, the use of borrowings by the Company may increase the
volatility of the Net Asset Value per Ordinary Share. The Company had no
borrowings at the year end.
Any reduction in the value of the Company's investments may lead to a
correspondingly greater percentage reduction in its Net Asset Value (which is
likely to adversely affect the price of an Ordinary Share). Any reduction in
the number of Ordinary Shares in issue (for example, as a result of buy backs)
will, in the absence of a corresponding reduction in borrowings, result in an
increase in the Company's level of gearing.
To the extent that a fall in the value of the Company's investments causes
gearing to rise to a level that is not consistent with the Company's gearing
policy or borrowing limits, the Company may have to sell investments in order
to reduce borrowings, which may give rise to a significant loss of value
compared to the book value of the investments, as well as a reduction in
income from investments.
Management of leverage risk
The aggregate of borrowings and long only CFD and equity swap exposure will
not exceed 25% of Net Asset Value at the time of drawdown of the relevant
borrowings or entering into the relevant transaction, as appropriate, although
the Company's normal policy will be to utilise and maintain gearing to a lower
limit of 20% of Net Asset Value at the time of drawdown of the relevant
borrowings or entering into the relevant transaction, as appropriate. It is
expected that any borrowings entered into will principally be denominated in
Yen.
The Company's level of gearing as at 31 October 2022 is disclosed in the
Alternative Performance Measures section of this Annual Report.
(d) Interest rate risk
The Company is exposed to interest rate risk specifically through its cash
holdings and on positions within the CFD portfolio. Interest rate movements
may affect the level of income receivable from any cash at bank and on
deposits. The effect of interest rate changes on the earnings of the companies
held within the portfolio may have a significant impact on the valuation of
the Company's investments. Movements in interest rates will also have an
impact on the valuation of the CFD derivative contracts. Interest receivable
on cash balances or paid on overdrafts is at fixed rate.
Management of interest rate risk
The possible effects on Fair Value and cash flows that could arise as a result
of changes in interest rates are taken into account when making investment
decisions. Derivative contracts are not used to hedge against the exposure to
interest rate risk.
Interest income earned on deposits and paid on overdraft by the Company is
primarily derived from fixed interest rates, as such do not have a material
exposure to interest rate risk.
The bank overdraft is an integral part of cash management and the Company has
a legal right of offset and has the intention to settle this at net.
Interest rate exposure
The exposure at 31 October 2022 of financial assets and liabilities to
interest rate risk is shown by reference to floating interest rates - when the
interest rate is due to be reset. Due to the current low interest rate
environment in Japan, no sensitivity analysis is shown as the total impact
will not be material.
As at 31 October 2022 As at 31 October 2021
due within due within
one year one year
£'000 £'000
Exposure to floating interest rates: CFD derivative contract - (absolute 39,926 44,055
exposure)
Collateral paid in respect of CFDs 433 -
( e ) Credit risk
Credit risk is the possibility of a loss to the Company due to the failure of
the counterparty to a transaction discharging its obligations under that
transaction.
Cash and other assets held by the Depositary
The cash and other assets held by the Depositary, or its sub-custodians are
subject to counterparty credit risk as the Company's access to its cash could
be delayed should the counterparties become insolvent or bankrupt.
Derivative instruments
The Company's holdings in CFD contracts present counterparty credit risks,
with the risk of the counter party (Morgan Stanley & Co International plc)
defaulting.
Management of credit risk
Cash and other assets held by the Depositary
Cash and other assets that are required to be held in custody will be held by
the depositary or its sub-custodians. Cash and other assets may not be treated
as segregated assets and will therefore not be segregated from any custodian's
own assets in the event of the insolvency of a custodian. Cash held with any
custodian will not be treated as client money subject to the rules of the
Financial Conduct Authority ('FCA') and may be used by a custodian in the
course
of its own business. The Company will therefore be subject to the
creditworthiness of its custodians. In the event of the insolvency of a
custodian, the Company will rank as a general creditor in relation thereto and
may not be able to recover such cash in full, or at all. The Company has
appointed Northern Trust Investor Services Limited as its
depositary. The credit rating of Northern Trust was reviewed at time of
appointment and will be reviewed on a regular basis by the Investment Manager
and/or the Board. The Fitch's credit rating of Northern Trust is AA-.
Derivative instruments
Where the Company utilises CFDs or equity swaps, it is likely to take a credit
risk with regard to the parties with whom it trades and may also bear the risk
of settlement default. These risks may differ materially from those entailed
in exchange-traded transactions that generally are backed by clearing
organisation guarantees, daily marking-to-market and settlement, and
segregation and minimum capital requirements applicable to intermediaries.
Transactions entered into directly between counterparties generally do not
benefit from such protections and expose the parties to the risk of
counterparty default. CFD contracts generally require variation margins and
the counterparty credit risk is monitored by the Investment Manager.
The Investment Manager monitors the Company's exposure to its counterparties
on a regular basis and the position is reviewed by the Directors at Board
meetings. Investment transactions are carried out with a number of brokers,
whose credit-standing is reviewed periodically by the Investment Manager, and
limits are set on the amount that may be due from any one broker.
In summary, the exposure to credit risk as at 31 October 2022 was as follows:
As at 31 October 2022 3 months or less As at 31 October 2021 3 months or less
£'000 £'000
Cash at bank 1,413 -
Amounts due in respect of CFDs 2,680 443
Collateral paid in respect of CFDs 433 -
Debtors 4,434 3,264
Total 8,960 3,707
None of the above assets or liabilities were impaired or past due but not
impaired.
( f ) Other Price Risk
Other price risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices (other
than those arising from interest rate risk or currency risk), whether those
changes are caused by factors specific to the individual financial instrument
or its issuer, or factors affecting similar financial instruments traded in
the market.
The Company is exposed to market price risk arising from its equity
investments and its exposure to the positions within the CFD portfolio. The
movements in the prices of these investments result in movements in the
performance of the Company.
The Company's exposure to other changes in market prices at 31 October 2022 on
its equity investments was
£199,631,000 (2021: £220,271,000).
In addition, the Company's gross market exposure to these price changes
through its CFD portfolio was £39,926,000 through long positions (2021:
£44,055,000).
The Company uses CFDs, as part of its investment policy. These instruments can
be highly volatile and potentially expose investors to a higher risk of loss.
The low initial margin deposits normally required to establish a position in
such instruments permit a high degree of leverage. As a result, a relatively
small movement in the price of a contract may result in a profit or loss which
is high in proportion to the value of the net exposures in the underlying CFD
positions. In addition, daily limits on price fluctuations and speculative
position limits on exchanges may prevent prompt liquidation of positions
resulting in potentially greater losses.
The Company limits the gross market exposure, and therefore the leverage, of
this strategy to approximately 200% of the Company's net assets. The CFDs
utilised have a linear performance to referenced stocks quoted on exchanges
and therefore have the same volatility profile to the underlying stocks.
Market exposures to derivative contracts are disclosed below.
The Company's exposure to CFDs is the aggregate of long CFD Positions. The
gross and net market exposure is the same as the Company does not hold Short
CFD Positions.
Exposures are monitored daily by the Investment Manager. The Company's Board
also reviews exposures regularly.
The gross underlying notional exposures within the CFD portfolio as at 31
October 2022 were:
As at 31 October 2022 As at 31 October 2021
% of net % of net
£'000 assets £'000 assets
CFDs - (absolute exposure) 39,926 19.61% 44,055 19.77%
CFDs - (net exposure) 39,926 19.61% 44,055 19.77%
The Board of Directors manages the market price risks inherent in the
investment portfolio by ensuring full and timely access to relevant
information from the Investment Manager. The Board meets regularly and at each
meeting reviews investment performance. The Board monitors the Investment
Manager's compliance with the Company's objective.
Concentration of exposure to other price risk
A sector breakdown of the portfolio is contained in the Portfolio.
Other price risk sensitivity
The following table illustrates the sensitivity of the profit after taxation
for the period to an increase or decrease of 10% in the fair values of the
Company's equities and CFDs. This level of change is considered to be
reasonably possible based on observation of current market conditions. The
sensitivity analysis is based on the notional exposure of the Company's
equities investments and long CFDs.
As at 31 October 2022 As at 31 October 2021
Increase in Decrease in Increase in Decrease in Fair Value
Fair
Value
Fair Value Fair Value
£'000 £'000
£'000 £'000
Impact on capital return - increase/(decrease) 23,967 (23,967) 26,462 (26,462)
Return after taxation - increase/(decrease) 23,967 (23,967) 26,462 (26,462)
( g) Liquidity Risk
The securities of small-to-medium-sized (by market capitalisation) companies
may have a more limited secondary market than the securities of larger
companies. Accordingly, it may be more difficult to effect sales of such
securities at an advantageous time or without a substantial drop in price than
securities of a company with a large market capitalisation and broad trading
market. In addition, securities of small-to-medium-sized companies may have
greater price volatility as they can be more vulnerable to adverse market
factors such as unfavourable economic reports.
Management of liquidity risk
The Company's Investment Manager monitors the liquidity of the Company's
portfolio on a regular basis.
Liquidity risk exposure
The undiscounted gross cash outflows of the financial liabilities as at 31
October 2022, based on the earliest date on which payment can be required,
were as follows:
As at 31 October 2022 less than 3 months As at 31 October 2021 less than 3 months
£'000 £'000
Bank overdraft - 48
Amounts payable in respect of CFDs 2,780 756
Other payables 2,240 304
Total 5,020 1,108
The Company is exposed to liquidity risks from the leverage employed through
exposure to long only CFD positions. However, timely sale of trading positions
can be impaired by many factors including decreased trading volume and
increased price volatility. As a result, the Company could experience
difficulties in disposing of assets to satisfy liquidity demands. Liquidity
risk is minimised by holding sufficient liquid investments which can be
readily realised to meet liquidity demands. The Company's liquidity risk is
managed on a daily basis by the Investment Manager in accordance with
established policies and procedures in place.
( h) Fair Value Measurements of Financial Assets and Financial Liabilities
The financial assets and liabilities are either carried in the balance sheet
at their Fair Value, or the balance sheet amount is a reasonable approximation
of Fair Value (due from brokers, dividends receivable, accrued income, due to
brokers, accruals and cash and cash equivalents).
The valuation techniques for investments and derivatives used by the Company
are explained in the accounting policies notes 2 (b and c).
The table below sets out Fair Value measurements using Fair Value Hierarchy.
Level 1 Level
2 Level
3 Total
As at 31 October 2022 £'000 £'000 £'000 £'000
Assets:
Equity investments 199,642 - - 199,642
CFDs - Unrealised Fair Value gains - 2,680 - 2,680
Liabilities:
CFDs - Unrealised Fair Value losses - (2,780) - (2,780)
Total 199,642 (100) - 199,542
Level 1 Level
2 Level
3 Total
As at 31 October 2021 £'000 £'000 £'000 £'000
Assets:
Equity investments 220,271 - - 220,271
CFDs - Unrealised Fair Value gains - 443 - 443
Liabilities:
CFDs - Unrealised Fair Value losses - (738) - (738)
Total 220,271 (295) - 219,976
There were no transfers between levels during the year (2021: same).
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the Fair Value measurement of the
relevant asset as follows:
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs
including quoted prices.
Level 3 - valued by reference to valuation techniques using inputs that are
not based on observable market data. There were no Level 3 investments as at
31 October 2022 (2021: nil).
(i) Capital Management Policies and Procedures
The Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going
concern; and
- to provide dividend income combined with capital growth, mainly
through investment in equities listed or quoted in Japan and by utilising the
leverage effect of CFD.
The key performance indicators are contained in the strategic report.
The Company is subject to several externally imposed capital requirements:
- As a public company, the Company has to have a minimum share capital
of £50,000.
- In order to be able to pay dividends out of profits available for
distribution by way of dividends, the Company has to be able to meet one of
the two capital restriction tests imposed on investment companies by company
law.
The Company's capital at 31 October 2022 comprises called up share capital and
reserves totalling £203,582,000 (2021:£222,870,000).
The Board regularly monitors and has complied with the capital requirements.
17. DISTRIBUTABLE RESERVES
The Company's distributable reserves consist of the Special reserve, Revenue
reserve and Capital reserve attributable to realised profits. As at 31 October
2022 the total Capital reserve distributable is £26,182,000 (2021:
£25,213,000), total Capital reserve not distributable is £5,841,000 (2021:
£26,628,000).
Special reserve: As stated in the Company's prospectus dated 13 November 2015,
in order to increase the distributable reserves available to facilitate the
flexibility and source of future dividends, the Company resolved that,
conditional upon First Admission to listing on the London Stock Exchange and
the approval of the Court, the net amount standing to the credit of the share
premium account of the Company immediately following completion of the First
Issue be cancelled and transferred to a special distributable reserve.
Following approval by the Court, the cancellation became effective on 23 March
2016 and an amount of £64,671,250 was transferred to the above Special
reserve at that time.
The Special reserve may be used to fund dividend payments.
18. SUBSEQUENT EVENTS
There were no post balance sheet events other than those already disclosed in
this report.
ANNUAL GENERAL MEETING
The Annual General Meeting will be held on 1 March 2023 at the offices of
Stephenson Harwood LLP, 1 Finsbury Circus,
London EC2M 7SH. Investment Manager, Richard Aston, will provide an update on
the investments and take questions after the formal business of the meeting.
Members of the Board, will also be available to discuss the Company.
24 January 2023
Secretary and registered office:
Apex Listed Companies Services (UK) Limited
6th Floor, 125 London Wall
London
EC2Y 5AS
For further information contact:
Apex Listed Companies Services (UK) Limited
Tel: 020 3327 9270
END
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