Annual Financial Report
27/03/2024 07:00
FIDELITY JAPAN TRUST PLC
Final Results for the year ended 31 December 2023
Financial Highlights:
* During the year ended 31 December 2023, Fidelity Japan Trust PLC reported a
net asset value (NAV) return of +12.2%, whilst the Reference Index, the TOPIX
Total Return Index, returned 13.3%.
* Over the same period, the ordinary share price total return was +12.3%.
Contacts
For further information, please contact:
George Bayer
Company Secretary
0207 961 4240
FIL Investments International
CHAIRMAN’S STATEMENT
PERFORMANCE REVIEW
After an extremely challenging year in 2022, 2023 was much more positive for
investors in Japan, with the Nikkei 225 Index surpassing levels last seen in
1990. Spurred on by corporate governance reforms increasing focus on
shareholder returns, the bulk of the rally was driven by more traditional
‘value’ style companies, although the higher-growth businesses preferred
by the Portfolio Manager, Nicholas Price, began to regain favour towards the
end of the year.
In the year ended 31 December 2023, the TOPIX Index of Japanese stocks posted
a return of 25.0% in yen, its best performance since 2013. However, over the
same period, the Japanese yen weakened by 11.7% against sterling. As a result,
the TOPIX Total Return Index (in sterling terms), the Company’s Reference
Index, saw its return pegged back to 13.3% for the year. The NAV and share
price total returns of the Company marginally underperformed the Index,
returning 12.2% and 12.3% respectively.
While the underperformance suffered in 2022 means that the Company’s
three-year cumulative returns are behind the Index, the longer-term results
remain positive. Since Nicholas took over the management of the Company in
September 2015 and up to the end of December 2023, the NAV has returned 112.5%
against the Index Return of 95.5%. The share price returned 127.3% over the
same period.
DISCOUNT MANAGEMENT, SHARE REPURCHASES AND TREASURY SHARES
The primary purpose of the Board’s discount management policy is to reduce
discount volatility. We will continue to aim to limit the share price discount
to single figures in normal market conditions through share repurchases.
However, we have witnessed periods when the discount has remained stubbornly
high despite a steady share repurchase programme. In a year in which
investment trust discounts widened significantly across the board, the
discount at which the Company’s shares traded was broadly stable, beginning
the reporting year at 9.6% and ending it at 9.5% having briefly peaked at
14.3% and narrowing from 10.9% at the half-year end. 3,615,644 ordinary shares
were repurchased for holding in Treasury over the year, at a cost of
£6,276,000. This represents 2.7% of the issued share capital. Subsequent to
the year end and up to the latest practicable date of this report, the Company
has repurchased a further 3,351,529 ordinary shares at a cost of £6,029,000.
At the forthcoming Annual General Meeting (AGM) on 22 May 2024, the Board is
seeking to renew the annual authority to repurchase up to 14.99% of the
Company’s shares, to be either cancelled or held in Treasury, as it has done
each year previously.
A sustained reduction in the discount of the Company is only likely if there
is a significant increase in investor interest in Japan. We may see this after
the Japanese market has reached a new record high and if it continues its
current trajectory. Meanwhile, the Board and the Manager will continue their
efforts to raise the Company’s and promote the investment opportunities in
the Japanese market.
ONGOING CHARGES RATIO
The ongoing charges ratio for the year, including the variable element, is
0.84% (2022: 0.96%). This comprises a fixed charge of 0.99% (2022: 0.99%) and
a variable credit of 0.15% (2022: credit of 0.03%). The variable management
fee credit is due to the Company’s underperformance in comparison to its
Reference Index on a three-year rolling basis.
GEARING
The ability to gear is an important advantage of the investment trust
structure, and the Board believes that the Company’s use of long Contracts
for Difference (CFDs) to achieve its gearing is a differentiating factor. CFDs
are generally cheaper than borrowing through traditional bank debt and they
also provide greater flexibility. The use of CFDs had a positive impact and
contributed +6.3% to the NAV total return in the year under review.
The Portfolio Manager has the discretion to be up to 25% geared. Based on
total portfolio exposure at the end of the year of £317.4m, the level of
gearing was 23.1% compared with 20.8% at the end of 2022. Further information
can be found in the Annual Report. As at 22 March 2024, gearing was 22.0%.
UNLISTED COMPANIES
Over the past few years, there have been an increasing number of opportunities
for the Manager to invest in certain companies before they list on the Tokyo
Stock Exchange. This follows a global trend of companies wishing to remain
private for longer. While there is authority from shareholders for the Company
to invest up to 20% of its assets in unlisted companies, it is the Board’s
view that, given the current lacklustre IPO market in Japan, it is prudent to
limit the proportion held in unlisted companies to a maximum of 10% at the
time of any further investment. The actual exposure to unlisted holdings at
the end of the year was 6.3% of the net assets (2022: 8.0%). During the year,
one unlisted position was redeemed via a repurchase plan and one new position
was added to the portfolio, leaving the total number of unlisted holdings at
seven.
Twice yearly, the Audit Committee meets specifically to review the unlisted
investments together with Fidelity’s Fair Value Committee, Fidelity’s
unlisted Asian investments specialist and representatives of Kroll, the
independent valuation specialists.
Further details can be found in the Portfolio Manager’s Review below and
also in the Annual Report.
DUE DILIGENCE TRIP
As detailed in the report for the half-year ended 30 June 2023, the Board was
pleased to undertake a due diligence trip to Japan last June. As well as
spending time with the investment team, we had meetings with senior management
and a number of Fidelity’s analysts, external market commentators, and the
management teams of some of the companies held in the Company’s portfolio.
The trip helped to reinforce our confidence in the strength and depth of the
team in Japan responsible for the management of the Fidelity Japan Trust PLC.
BOARD CHANGES
As also mentioned in the Half-Yearly Report, Dominic Ziegler will retire from
the Board at the conclusion of the Company’s AGM on 22 May 2024, having
served as a non-executive Director for nine years since November 2014. We
thank him for his excellent service and valuable insights on Japan and East
Asia.
In September 2023, we announced that Seiichi Fukuyama would join the Board as
a non-executive Director with effect from 1 March 2024. Seiichi brings strong
relevant experience gained in the asset management business, having been
President of BlackRock Japan before becoming Chairman of Standard Life
Investment in Asia from 2010 until 2018.
Seiichi will stand for election at the forthcoming AGM, when all the other
Directors, apart from Dominic, are subject to annual re-election. Biographical
details of all Directors are in the Annual Report to assist shareholders when
considering their voting at the AGM.
ANNUAL GENERAL MEETING (AGM)
Once again, we will be holding a ‘hybrid’ AGM, allowing attendance and
voting in real time online as well as in person. The AGM is a valuable
opportunity for us as a Board to engage with shareholders. Nicholas Price will
be making a presentation, considering the year under review and outlining the
opportunities in the market and prospects for the year ahead. The Board and
Nicholas will be very happy to answer questions from shareholders attending
both in person and virtually. Japanese refreshments will be served to
attendees, and we look forward to seeing many of you there.
More details of the AGM are set out below and in the Notice of Meeting in the
Annual Report.
OUTLOOK
The market rally which commenced in 2023 and continued into 2024 has been
driven by large-cap value stocks, leaving many of the higher growth medium and
smaller-sized companies held by the Company underperforming the overall
market. We share the Portfolio Manager’s view that there is significant
scope for a rerating of these businesses which now look undervalued.
Foreign investors are taking renewed interest in Japan, encouraged by the
extensive Corporate Governance reforms currently being promoted by the Tokyo
Stock Exchange (TSE). In addition, Japan’s central bank raised its benchmark
interest rate on 19 March 2024 to a range of 0 to 0.1% for the first time in
17 years, ending a longstanding policy of negative rates in order to boost the
economy. This may result in the strengthening of the yen. Investor
disillusionment with China has also fuelled a renewed interest in Japan from
foreign investors and there are positive signs that Japanese investors,
partially encouraged by tax incentives, are returning to the stock market.
The Nikkei Dow Jones 225 Index closed at a new record high level on 5 March
2024 having taken 34 years to regain this level. The broader TSE Index is
still a little behind its record high of that era. It is hoped that the
current market momentum will continue, and with it, the market focus will
alight on the stocks in the portfolio which are showing good earnings growth
and compelling valuations. We are confident that the Fidelity team in Japan,
with their disciplined, research-driven investment process, will return to
delivering strong investment returns for shareholders.
DAVID GRAHAM
Chairman
26 March 2024
ANNUAL GENERAL MEETING (AGM) – WEDNESDAY, 22 MAY 2024 AT 12 NOON
The AGM of the Company will be held at 12 noon on Wednesday, 22 May 2024 at 4
Cannon Street, London EC4M 5AB (nearest tube stations are St. Paul’s or
Mansion House) and virtually via the online Lumi AGM meeting platform. Full
details of the meeting are given in the Annual Report.
For those shareholders who would prefer not to attend in person, we will
live-stream the formal business and presentations of the meeting online.
Nicholas Price, the Portfolio Manager, will be making a presentation to
shareholders highlighting the achievements and challenges of the year past and
the prospects for the year to come. He and the Board will be very happy to
answer any questions that shareholders may have. Copies of the Portfolio
Manager’s presentation can be requested by email at investmenttrusts@fil.com
or in writing to the Company Secretary at FIL Investments International, Beech
Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to
vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice
of Meeting in the Annual Report for details on how to vote virtually.
Investors viewing the AGM online will be able to submit live written questions
to the Board and the Portfolio Manager and these will be addressed on their
behalf at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the
Company’s website www.fidelity.co.uk/japan. On the day of the AGM, in order
to join electronically and ask questions via the Lumi platform, shareholders
will need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms such as Fidelity Personal Investing,
Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest will need to
request attendance at the AGM in accordance with the policies of your chosen
platform. They may request that you submit electronic votes in advance of the
meeting. If you are unable to obtain a unique IVC and PIN from your nominee or
platform, we will also welcome online participation as a guest. Once you have
accessed https://web.lumiagm.com from your web browser on a tablet or
computer, you will need to enter the Lumi Meeting ID which is 144-545-039. You
should then select the ‘Guest Access’ option before entering your name and
who you are representing, if applicable. This will allow you to view the
meeting and ask questions, but you will not be able to vote.
PORTFOLIO MANAGER’S REVIEW
QUESTION
The year under review continued to be challenging for growth-oriented equity
strategies. Why is that and what were the key drivers of the Japanese stock
market?
ANSWER
Japanese stocks gained markedly in 2023, with key indices registering their
strongest annual returns since 2013. Overseas investors played a key role in
the market’s ascent, encouraged by Japan’s shift to a moderately
inflationary environment and initiatives implemented by the Tokyo Stock
Exchange (TSE) to enhance corporate value. An accommodative policy stance by
the Bank of Japan (BoJ) and a weaker yen also supported the positive trend in
share prices. Japan’s currency came under broad-based pressure amid
sustained monetary policy divergence with other major central banks, closing
the year at an eight-year low of ¥180 against sterling.
While the Japanese market recorded historical gains, 2023 was a year of
significant style divergence. The US bond yield cycle and accompanying
currency trends exerted a sizeable impact on style returns, with strong gains
in large-cap value stocks contrasting with the far more muted performance of
small-cap growth names. These trends continued to generate headwinds for
growth-oriented strategies, particularly during periods of sharp rises in
long-term interest rates.
In this environment, stocks with low price-to-earnings and low price-to-book
multiples, and those with high dividend yields generated the strongest
returns. At a sector level, commodity-related segments, led by Iron & Steel,
Maritime Transportation, Wholesale Trade and Mining, were among the year’s
strongest performers. Automobiles benefited from a recovery in production and
a weaker yen, while expectations for a bottoming of the semiconductor cycle
drove gains in related stocks. Financials benefited from rising interest rates
in the US and Japan but relinquished a measure of their gains in the final
quarter when government bond yields retreated in line with waning expectations
for further rate hikes. Defensive sectors were relative laggards globally and
Pharmaceuticals was the only sector in Japan to generate a negative return in
the 2023 calendar year.
QUESTION
How has the Company performed in the year to 31 December 2023? What were the
key contributors and detractors?
ANSWER
The Company’s NAV per ordinary share rose by 12.2% in sterling terms and the
share price gained by 12.3%. In comparison, the Reference Index rose by 13.3%.
The discount narrowed very slightly to 9.5% from 9.6% a year ago. Over five
and ten year periods, the Company outperformed the Reference Index and most of
its peers.
The Company’s holding in Osaka Soda was among the standout contributors to
performance. It reported above-consensus earnings results, spurred by
favourable pricing and strong sales of silica gel, a material used in the
purification of pharmaceuticals including diabetes drugs. Profitability is
steadily increasing as the company transitions from basic chemicals to
functional chemicals under its Global Niche Top (GNT) strategy. Positions in
semiconductor-related stocks also added value. Shares in semiconductor
production equipment (SPE) maker Tokyo Electron rebounded strongly as the
market shifted its focus from the earnings downside in 2023 to a recovery from
2024. Tokyo Electron is a highly competitive player in a structural growth
market, supported by sustained semiconductor demand, technological advances in
chip making and government support amid rising geopolitical tensions.
Meanwhile, fabless semiconductor manufacturer Socionext reported strong
full-year results that exceeded street estimates, driven by automotive-related
orders in the US and data centre/network sales in China. Furthermore,
development efficiency gains contributed to an improvement in margins. In the
Retail sector, the holding in Ryohin Keikaku outperformed. The operator of the
MUJI brand of general merchandise stores reported better than expected annual
results, underpinned by its strong overseas business, while its forward
guidance was also supported by improving margins in Japan. The MUJI brand
remains strong and is expected to return to a medium to long-term growth path
through store openings in Japan and overseas, as well as through enhancements
to its product management system and product capabilities.
Conversely, the Company’s position in MISUMI Group was the most significant
detractor from performance over the year. Shares in the supplier of factory
automation components fell as adverse business conditions and a delayed
recovery in the order cycle produced a slew of near-term earnings downgrades.
However, leading indicators, such as machine tool orders, are close to a
trough and we expect earnings to recover in 2024. In the Services sector,
Nihon M&A Center Holdings, Japan’s largest provider of merger and
acquisition (M&A) advisory services for small and medium enterprises (SMEs),
underperformed. At the start of the year, the company’s quarterly results
came in far below market expectations due to a deterioration in sales
efficiency and weaker pricing of M&A deals. The emergence of innovative new
entrants posed a threat to its business model, and we sold the position.
Raksul, a leading business-to-business (B2B) platformer that provides online
printing and marketing/sales support services, faced selling pressure. The
stock faced profit taking in early 2023 as the market rotated in favour of
technology-related cyclicals. We remain confident in its core e-commerce (EC)
printing business which is recovering strongly as the effects of the Covid-19
pandemic recede and the number of registered users continues to grow. We also
see the potential for growth in the logistics industry. Kamakura Shinsho, a
funeral service platformer, reported solid annual results amid a post-pandemic
recovery, but the stock faced style headwinds and some concerns about rising
costs associated with the development of new operations, such as inheritance
services and nursing. However, we retain a positive view of its core
businesses, and most of its new segments are already profitable.
The ten highest stock contributors and detractors to the NAV total return on a
relative basis are shown in the Annual Report.
QUESTION
How has the Company’s portfolio changed over the period?
ANSWER
The Chemicals, Services and Retail sectors remained among the largest
positions in the Company, reflecting holdings in niche materials companies,
unique service providers and speciality retailers that are executing well in
Japan and overseas. The scale of the active position in the Chemicals sector
increased notably over the year, primarily reflecting a higher weighting in
Osaka Soda (6.4% at the end of 2023 versus 2.6% a year ago), as well as strong
gains in the company’s share price. Meanwhile, there was no significant
change in the key underweight sector positions (Transportation Equipment,
Pharmaceuticals and Banks) in the portfolio.
As a result of bottom-up stock selection, active exposure to the Electric
Appliances sector has increased. Factory automation and semiconductor-related
companies have had to deal with a prolonged inventory correction that was
exacerbated by the weak recovery in China. However, leading indicators such as
machine tool orders are bottoming out and there are signs of a gradual pickup
in demand. MISUMI Group and Tokyo Electron remain key active positions in the
Company. We increased the allocation to Harmonic Drive Systems, a leading
maker of precision reduction gears used in the production of small industrial
robots and semiconductor equipment. Elsewhere, we increased the exposure to
electronic components maker Taiyo Yuden, a leading producer of high-end
ceramic capacitors for automotive and smartphone applications.
On the other hand, we sold positions in Rinnai, a producer of high-quality
home gas appliances which is facing problems in housing/ real estate markets
overseas, and Tsuburaya Fields, a digital content and game machine company
that reached our target price following a period of strong share price
performance. We also took some profits in strong performers in the technology
sector, including Tokyo Electron and Socionext, and recycled the proceeds into
new stocks.
QUESTION
How do you view the valuations in the market and for the overall portfolio?
ANSWER
Overall, we are focusing on growth at reasonable price and holding companies
that are trading at or close to market multiples even as they offer consistent
mid-term growth. We are also focusing on contrarian growth names – stocks
that are disliked by the market but where we see catalysts for change.
Many of the Japanese companies that we are looking at trade at a discount
versus their overseas peers, and there are a lot of opportunities where
improvements in corporate governance are driving higher returns on equity.
Many growth stocks now trade on sub-market multiples despite higher rates of
earnings growth and higher returns.
This trend is apparent at the portfolio level, with the forward
price-to-earnings ratio now at a comparable level to the Reference Index (see
chart in the Annual Report). This is very unusual as it typically trades at a
premium to the market, given the higher growth rates and Return on Equity
(RoE) of the underlying companies, and is indicative of a level of potential
upside.
As a natural profit taker, I aim to trim into strength and recycle into new
names to keep the portfolio fresh and have new ideas competing with existing
holdings. In 2023, portfolio turnover was at around 64% compared to a
three-year average of 79%. Looking at the top 20 active names, which account
for around 70% of the portfolio, 14 stocks remained in place (when comparing
end of December 2022 versus December 2023).
QUESTION
What are your current thoughts on gearing? And what impact has it had on
returns during the year?
ANSWER
The level of gearing closed the year at 23.1% (versus 20.8% at the end of
2022). If we see a sustained uptrend in Japanese stocks, then I would be
inclined to reduce the level of gearing employed. However, I am happy with
where market valuations currently stand, and the leverage is deployed in
stable growth companies rather than high beta names. So, overall, I am
comfortable with the Company’s current gearing positioning.
Over the course of 2023, the gearing position had a positive impact on
returns, notably through the exposure to semiconductor production equipment
maker Tokyo Electron and speciality retailer Ryohin Keikaku.
QUESTION
How has the Company’s exposure to unlisted companies changed during the year
under review?
ANSWER
At the end of the review period, seven unlisted names were held, representing
6.3% of the portfolio. Although the total number of positions remained the
same, the composition of the holdings changed somewhat.
The Company’s shares in Innophys, a developer of exoskeleton support suits,
were redeemed via a repurchase plan executed at the end of March. The company
failed to fully execute on its business plan for wearable muscle suits. Given
the uncertain outlook for the market and competitive landscape, we first wrote
down the asset and then exited it in a trade sale to a corporate.
In October, we initiated a position in GO Inc, the top ride-hailing company in
Japan. GO has a significant lead over competitors in terms of access to taxis.
This creates strong and lasting competitive advantages in the ride-hailing
industry which is still in the early stages of digitalisation. GO has
delivered robust growth in its core ride-hailing business since its inception
in 2020, and revenue per ride has steadily increased through greater
monetisation. It also has steady cash generating businesses such as
advertising that subsidise its high-growth segments, a factor that enhances
its overall financial profile.
As always, we continue to evaluate new opportunities, while maintaining a
disciplined approach towards valuations.
QUESTION
Environmental, social and governance (ESG) themes are very topical among
investors. Could you explain your approach to ESG and how you integrate it
into your portfolio?
Answer
Sustainability and ESG related factors are incorporated into the Fidelity wide
investment process. Assessing which companies can grow sustainably over the
mid-term and enhance the efficiency of other corporates and their supply
chains is a key part of my portfolio construction that in turn will enhance
their financial performance. By working closely with our Head of Engagement in
Tokyo and maintaining an active dialogue with investee companies, we
continually aim to improve the sustainability of their businesses. That in
turn will enhance their performance.
Although Japanese companies generally have lower sustainability scores than
their European counterparts, we believe this is not due to any fundamental
differences in strategy but more to do with cultural factors around disclosure
practices and language. By working closely with the Fidelity sustainable
investing team in Tokyo, we can identify companies which are implementing real
change and moving up the governance scale. As these companies improve
disclosure, their ESG ratings should catch up and the market should adjust
valuations accordingly. This creates an opportunity for investors to benefit
from the adjustment.
QUESTION
Could you outline specific examples where engagement has resulted in positive
outcomes?
Answer
SWCC, a wire and cable producer, is a good example of how ESG considerations,
particularly ‘G’ in this instance, can factor into valuations. We engaged
the company’s executives in discussing their efforts to increase shareholder
value and improve capital efficiency, thereby addressing SWCC’s low
price-to-book valuation. Although returns on equity have been improving, we
explained that the company needed to reorganise its business portfolio to
ensure further sustainability and convey its strategy more clearly to the
market to ensure that its growth potential is fully appreciated. At its most
recent financial results meeting, the company presented its business strategy
approach to improving its price-to-book ratio in the same format that we had
explained during our meeting with them. In addition, management laid out
specific measures for improving each business unit and announced a share
buyback. That was proof of their confidence in their ability to improve
profitability and it led to a significant rise in the company’s share price.
We engaged with Raksul’s new CEO to confirm the company’s new compensation
structure. While the CEO’s minimum holding period for equity compensation is
one year, which is in conflict with our voting guideline of three years, we
appreciated that the new structure would encourage shareholder-oriented
management by replacing a significant portion of a cash salary with equity
compensation. The strong relationship that we have developed with Raksul’s
new President since his previous tenure as CFO, and a significant improvement
in sustainability in response to our previous engagements, indicate that the
Board is functioning effectively. Given these factors, we believe that the
risk of directors, including the new president, intentionally selling their
shares for immediate gain is extremely limited. We, therefore, voted in favour
of the company’s new compensation structure.
QUESTION
How do you evaluate the corporate changes being driven by the Tokyo Stock
Exchange’s (TSE) initiatives?
ANSWER
A long-awaited reform effort to boost capital efficiency in Japan’s stock
market started to gain traction, with the TSE issuing guidance promoting the
requirement of a price-to-book ratio above one, among other measures, to
improve capital efficiency.
Traditionally, Japanese companies have notoriously sat on excess cash piles,
thus tending to limit investor returns. But that is changing. From the first
quarter of 2023, the TSE required most listed firms, especially those trading
below book value, to “properly identify” their cost and efficiency of
capital.
In a panel discussion organised by the TSE in 2022, Fidelity International
highlighted the issue of inefficiency and pointed out that about half of
Japan’s listed firms were trading below book value. The TSE included our
views in select feedback published in both Japanese and English on its
website.
The TSE’s latest reform measures represent a bold step forward which has
helped to bolster investor confidence. While these measures are encouraging,
we think it is even more important to introduce incentives for companies to
pursue sustainable growth. With wider reforms and quicker steps, we believe
many more Japanese firms could unlock their value and the country’s stock
market would attract greater inflows of foreign capital.
Question
What are your expectations for monetary policy and what impact could a change
by the Bank of Japan have on the yen?
Answer
With the rate hike cycle in the US peaking out and the Bank of Japan widely
terminating its negative interest rate policy, there is scope for the yen to
strengthen somewhat. However, demand in the Japanese economy is not that tight
and I do not expect the Bank of Japan to pursue further significant
tightening. Governor Ueda has already stated that monetary policy will remain
accommodative and a key focus point once negative rates are ended will be
forward guidance about the path of future hikes.
I generally do not take a strong view on the yen, and currency forecasts do
not play an active role in my bottom-up investment process. While individual
holdings with a high ratio of overseas sales may at times benefit from a
weaker yen, the overall portfolio has tended to be relatively currency neutral
versus the Reference Index. This is because of a consistent focus on mid/small
caps, which typically generate the bulk of their revenues at home.
Question
What do you view as the biggest risks for the next twelve months?
Answer
The most significant risks are still around inflation and how interest rates
can impact market valuations and levels. Continued signs of weakness in
China’s recovery and a slowdown in America also represent potential
headwinds that could prompt a near-term adjustment in Japanese stocks.
Additional shocks from energy prices, driven by an escalation in geopolitical
events, remain a risk factor that we are closely monitoring.
Question
What should investors be focusing on as we move through 2024?
Answer
On the macroeconomic side, the Bank of Japan has ended its negative interest
rate policy and the loosening of interest rates by the US Federal Reserve,
could drive yen strength in the second half of the year. The domestic economy
is doing quite well, and companies are investing in digitalisation and
reshoring in the technology space, especially across the semiconductor
industry. China is likely to see an uneven recovery, though there are
opportunities among associated companies that underperformed last year.
Tentative signs of improvement in the global manufacturing cycle are
supportive of technology and factory automation related stocks held by the
Company. As the machine tool cycle bottoms out, early cyclicals typically
perform strongly at the start of the recovery. We also expect to see a strong
semiconductor cycle, spurred by greater needs for artificial intelligence
(AI), the Internet of Things (IoT), smartphone AI and developments in edge
computing. This is creating opportunities in niche materials and component
makers that offer attractive levels of potential upside. Political change in
the US is a potential risk factor, as it could lead to greater protectionism,
which could hurt Japan and particularly exporters.
Labour supply shortages in Japan will continue to underpin inflationary
pressures and a successive year of successful wage hikes, potentially leading
to growth in real wages, would have positive implications for consumer facing
sectors.
Corporate governance improvements, such as sustained efforts by companies that
trade below book value to rectify their situation, an acceleration in the
unwinding of cross-shareholdings, and further progress in the restructuring of
business portfolios, can enhance the outlook for returns on capital in Japan.
Last year, most of the activity came from companies that trade below 1x book.
However, as TSE-led governance reforms are broadening out across the market
and through our engagements we are seeing higher valuation companies and
mid-caps become more active in terms of shareholder returns. After a year of
significant style headwinds, this broadening of corporate change should be
conducive to a more balanced market environment in Japan.
A reversion of the interest rate cycle in the US is generally conducive to
better performance by growth stocks, an area of the Japanese market where we
are seeing a lot of undervaluation. From a technical perspective, the recent
market rally in Japan has been concentrated in a small number of large-cap
names that are collectively looking overbought and investor interest is likely
to move down the market cap scale. In particular, mid/small caps that are
overlooked or under appreciated by the market and are trading on reasonable
valuations offer a source of differentiated returns for the Company. All of
these factors combined will, we believe, be supportive of a reversion in
growth stocks.
NICHOLAS PRICE
Portfolio Manager
26 March 2024
Strategic Report
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and
managing the principal and emerging risks and uncertainties faced by the
Company, including those that could threaten its business model, future
performance, solvency or liquidity. The Board, with the assistance of the
Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the
Manager), has developed a risk matrix which, as part of the risk management
and internal controls process, identifies the key existing and emerging risks
and uncertainties that the Company faces. The Audit Committee continues to
identify any new emerging risks and take any action necessary to mitigate
their potential impact. The risks identified are placed on the Company’s
risk matrix and graded appropriately. This process, together with the policies
and procedures for the mitigation of existing and emerging risks, is updated
and reviewed regularly in the form of comprehensive reports by the Audit
Committee. The Board determines the nature and extent of any risks it is
willing to take in order to achieve its strategic objectives.
Climate change, which refers to a large scale shift in the planet’s weather
patterns and average temperatures, continues to be a key emerging as well as a
principal risk confronting asset managers and their investors. Globally,
climate change effects are already being experienced in the form of changing
weather patterns. Extreme weather events can potentially impact the operations
of investee companies, their supply chains and their customers. The Board
notes that the Manager has integrated ESG considerations, including climate
change, into the Company’s investment process. Further details are in the
Annual Report. The Board will continue to monitor how this may impact the
Company as a risk to investment valuations and potentially shareholder
returns.
Other emerging risks may continue to evolve from unforeseen geopolitical and
economic events.
The Board, together with the Manager, is also monitoring the emerging risks
posed by the rapid advancement of artificial intelligence (AI) and technology
and how it may threaten the Company’s activities and its potential impact on
the portfolio and investee companies. Although advances in computing power
mean that AI is a powerful tool that will impact society, there are risks from
its increasing use and manipulation with the potential to harm, including a
heightened threat to cybersecurity.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks
and uncertainties and to ensure that the Board can continue to meet its UK
corporate governance obligations.
The Board considers the risks listed below as the principal risks and
uncertainties faced by the Company.
Principal Risks Mitigation
Geopolitical Risk The Board is provided with a detailed investment review which covers material economic, market and legislative changes at each Board meeting as well as receiving periodic updates from economic and political commentators in the region. Although it is
Geopolitical risk is the potential for political, socio-economic and cultural events, trends and developments to have an adverse effect on the Company’s assets. In Asia, the key geopolitical risks stem from China and the tensions with the United States over trade and the future of Taiwan; and the potential of North Korean aggression and its impact on the region. Elsewhere, there is increased global economic uncertainty from the ongoing war in Ukraine and the conflict in the Middle East. unclear how long the Ukraine and Middle East conflicts will last, the direct impact for Japan is not significant. The impact on the Company’s portfolio of holdings is also relatively limited. However, the ramifications of a global downturn could have a
significant impact on the Japanese economy. The Portfolio Manager’s Review above provides further detail on some of the risk factors.
Natural Disaster Risk Whilst natural disasters cannot be averted, the Board is comfortable that the Manager has a robust business continuity plan in place.
Japan is extremely vulnerable to earthquakes and tsunamis. Depending on the magnitude of such events, positions in the portfolio may be affected. The Manager could also be impacted from an operational perspective if the epicentre is in or near Tokyo.
Market, Economic and Currency Risks These risks are somewhat mitigated by the Company’s investment trust structure which means no forced sales will need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon. Risks to which the Company is
The Company’s assets consist mainly of listed securities. Therefore, its principal risks include market related risks such as market downturn, interest rate movements, deflation/inflation and exchange rate movements. The Portfolio Manager’s success or failure to protect and increase the Company’s assets against this background is core to the Company’s continued success. Most of the Company’s assets and income are denominated in yen. However, the functional currency of the Company in which it reports its results is sterling. Consequently, it is subject to currency risk on exchange rate movements between the yen and sterling. exposed in the market risk category are included in Note 16 to the Financial Statements below together with summaries of the policies for managing these risks. It is the Company’s policy not to hedge against currency risks. Further details can be found in
Note 16 to the Financial Statements below.
Investment Performance and Gearing Risks The Portfolio Manager is responsible for actively monitoring the portfolio selected in accordance with the asset allocation parameters and seeks to ensure that individual stocks meet an acceptable risk/reward profile. The emphasis is on long-term
The portfolio is actively managed and performance risk is inherent in the investment process. The achievement of the Company’s investment performance objective relative to the market requires the taking of risk, such as strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the Reference Index. The portfolio has unlisted investments which, by their very nature, involve a higher degree of valuation and performance uncertainties, liquidity risks and possible delays in listing until market conditions are favourable. investment performance as there is a risk for the Company of volatility of performance in the shorter-term. The Board closely monitors the valuations of the unlisted investments through the Manager’s Fair Value Committee, which includes input from
Fidelity’s analysts covering the unlisted companies as well as Fidelity’s unlisted investment specialist. In addition, advice is obtained from a third-party valuation specialist company (Kroll). Details of the unlisted investments valuation process is in
the Annual Report. The Board sets limits and guidelines for the Portfolio Manager as to how much of the Company’s net assets can be held in unlisted securities. The limit approved by shareholders is 20% of net assets. As at 31 December 2023, the Company’s
unlisted investments represented 6.3% of net assets.
The Company has the option to make use of loan facilities or to use CFDs to invest in equities. The principal risk is that the Portfolio Manager may fail to use gearing effectively. Other risks are that the cost of gearing may be too high or that the term of the gearing is inappropriate in relation to market conditions. The Company gears through the use of long CFDs which are currently cheaper than bank loans and provide greater flexibility. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Portfolio Manager must operate.
Discount Control and Demand Risks The market value of the Company’s shares and its discount to NAV are factors which are not wholly within the Board’s total control. The Company’s share price, NAV and discount volatility are monitored daily by the Manager and the Company’s Broker and
There is a risk that the Company’s shares trade at a persistent and significant discount to the NAV. considered by the Board regularly. The Board endeavours to exercise some short-term influence over the discount through share repurchases, but it can prove challenging if market sentiment is not supportive of Japanese equities. The demand for shares is
influenced by the appeal of Japanese markets and through good performance and an active investor relations program. The Board reviews analysis of the shareholder register at each Board meeting which allows the Board to monitor the relevance of the
Company’s mandate to shareholders and remain abreast of market sentiment.
There is a risk that the demand for the Company’s shares may fall due to poor performance, changes in investor sentiment and attitudes towards investment in Japan.
Key Person Risk The Manager identifies key dependencies which are then addressed through succession plans. Fidelity has succession plans in place for portfolio managers and these are discussed regularly with the Board. The Board meets regularly with the Portfolio Manager
The loss of the Portfolio Manager or other key individuals could lead to potential performance, operational or regulatory issues. There is a risk that the Manager has an inadequate succession plan for key individuals, particularly the Portfolio Manager with stock selection expertise in Japanese markets. and key members of the investment team to gauge any dissatisfaction or potential flight risk. The investment team in Japan work closely in a collaborative manner and fully understand the investment approach of the Portfolio Manager.
Environmental, Social and Governance (ESG) Risks The Board notes that the Manager has embedded ESG factors, including climate change, in its investment decision-making process. Fidelity has a climate change investing policy which details its plans to work with stakeholders to reduce climate risk across
There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including the impact of climate change risk which continues to be one of the most critical issues confronting asset managers and their investors. Japan has a material exposure to acute weather events such as earthquakes. ESG risks also include investor expectations and how the Company is positioned from a marketing perspective. all investment strategies. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through Fidelity’s Proprietary Sustainability Rating which is designed to generate forward-looking assessments of
companies ESG risks and opportunities based on sector-specific key performance indicators across many individual and unique sub-sectors. The Portfolio Manager is also active in analysing the effects of ESG when making investment decisions. The Board
continues to monitor developments in this area and reviews the positioning of the portfolio considering ESG factors. ESG ratings and carbon emissions of the companies within the Company’s portfolio compared to the MSCI are provided in the Annual Report.
Further detail on ESG considerations in the investment process and sustainable investment is in the Annual Report.
Business Continuity Risk The Manager continues to take all reasonable steps to meet its regulatory obligations, assess its ability to continue operating and the steps it needs to take to support its clients, including the Board and has an appropriate control environment in place.
There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The top risks globally are cybersecurity, geopolitical events and natural disasters. There are also ongoing risks from the Russia/Ukraine war, specifically regarding cyberattacks and the potential loss of power and/or broadband services. Variants of Covid continue to evolve and some risks remain. The Company relies on a number of third-party service providers, principally the Registrar, Custodian and Depositary. They are all subject to a risk-based programme of risk oversight and internal audits by the Manager and their own internal controls reports are received by the Board on an annual basis and any concerns are investigated. The third-party service providers have also confirmed the implementation of appropriate measures to ensure no business disruption. The Manager has provided the Board with assurance that the Company has appropriate operational resilience and business continuity plans and the provision of services has continued to be supplied without interruption. Risks associated with third-party
service providers are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company. These are mitigated through operational resilience frameworks.
Cybercrime and Information Security Risks The Manager’s technology and risk teams have developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat. The risk is regularly re-assessed by Fidelity’s information security teams and
The operational risk and business impact from heightened external levels of cybercrime and the risk of data loss is significant. Cybercrime threats evolve rapidly. A cyber attack could result in the loss of confidential information or cause a significant disruption to the Company’s operations. Risks also remain due to the Russia/Ukraine conflict and the trend to more working from home following the pandemic. These primarily relate to phishing, ransomware, remote access threats, extortion and denial-of-services attacks. risk frameworks are continuously enhanced. This has resulted in the implementation of additional tools and processes, including improvements to existing ones. Fidelity has a dedicated cybersecurity team which provides continuous oversight, regular
awareness updates and best practice guidance. The Board receives regular updates from the Manager in respect of the type and possible scale of cyber attacks. The Manager has dedicated detect and respond resources specifically to monitor the cyber threats
associated within the workplace and there are a number of mitigating actions in place including, control strengthening, geo-blocking and phishing mitigants, combined with enhanced resilience and recovery options. The Company’s third-party service providers
are also subject to regular oversight and provide assurances and have similar control measures in place to detect and respond to cyber threats and activity.
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with tax and regulatory
requirements. A breach of Section 1158 of the Corporation Tax Act 2010 could
lead to a loss of investment trust status resulting in the Company being
subject to tax on capital gains.
The Board monitors tax and regulatory changes at each Board meeting and
through active engagement with regulators and trade bodies by the Manager.
Continuation Vote
A continuation vote takes place every three years. There is a risk that
shareholders do not vote in favour of continuation of the Company during
periods when performance of the Company’s NAV and the share price is poor.
At the Company’s AGM on 17 May 2022, 99.94% of the votes cast by
shareholders were in favour of the continuation of the Company. The next
continuation vote will take place at the AGM in 2025.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the “Going Concern” basis. The Company
is an investment trust with the objective of achieving long-term capital
growth. The Board considers that five years is an appropriate investment
horizon to assess the viability of the Company, although the life of the
Company is not intended to be limited to this or any other period.
In making an assessment on the viability of the Company, the Board has
considered the following:
· The ongoing relevance of the investment objective in prevailing market
conditions;
· The Company’s level of gearing;
· The Company’s NAV and share price performance compared to its Reference
Index;
· The principal and emerging risks and uncertainties facing the Company and
their potential impact as set out above;
· The future demand for the Company’s shares;
· The Company’s share price discount to the NAV;
· The liquidity of the Company’s portfolio;
· The level of income generated by the Company;
· Future income and expenditure forecasts; and
· The Company will offer its shareholders a continuation vote at the AGM in
2025.
The Company outperformed the Reference Index over the five year reporting
period to 31 December 2023, with a NAV total return of 47.3% and a share price
total return of 45.7% compared to the Reference Index total return of 39.1%.
The Board regularly reviews the investment policy and considers whether it
remains appropriate. The Board has concluded that there is a reasonable
expectation that the Company will be able to continue in operation and meet
its liabilities as they fall due over the next five years based on the
following considerations:
· The Investment Manager’s compliance with the Company’s investment
objective and policy, its investment strategy and asset allocation;
· The portfolio mainly comprises readily realisable securities which can be
sold to meet funding requirements if necessary; and
· The ongoing processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company’s total assets.
In preparing the Financial Statements, the Directors have considered the
impact of climate change as detailed above. The Board has also considered the
impact of regulatory changes and unforeseen market events and how this may
affect the Company.
In addition, the Directors’ assessment of the Company’s ability to operate
in the foreseeable future is included in the Going Concern Statement which can
be found below.
GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company’s
portfolio of investments (being mainly securities which are readily
realisable) and the projected income and expenditure, are satisfied that the
Company is financially sound and has adequate resources to meet all of its
liabilities and ongoing expenses and continue in operational existence for the
foreseeable future. The Board has, therefore, concluded that the Company has
adequate resources to continue to adopt the going concern basis for the period
to 31 March 2025 which is at least twelve months from the date of approval of
the Financial Statements. This conclusion also takes into account the
Board’s assessment of the ongoing risks of earthquakes in Japan, the war in
Ukraine, the Middle East conflict and significant market events.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
The prospects of the Company over a period longer than twelve months can be
found in the Viability Statement above.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company
must act in a way they consider, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole,
and in doing so have regard (amongst other matters) to the likely consequences
of any decision in the long-term; the need to foster relationships with the
Company’s suppliers, customers and others; the impact of the Company’s
operations on the community and the environment; the desirability of the
Company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the Company.
As an externally managed investment company, the Company has no employees or
physical assets, and a number of the Company’s functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services by the Manager, but other professional service providers
support the Company by providing administration, custodial, banking and audit
services. The Board considers the Company’s key stakeholders to be the
existing and potential shareholders, the externally appointed Manager (FIL
Investment Services (UK) Limited) and other third-party professional service
providers. The Board considers that the interest of these stakeholders is
aligned with the Company’s objective of delivering long-term capital growth
to investors, in line with the Company’s stated objective and strategy,
while providing the highest standards of legal, regulatory and commercial
conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy
and reviews this on a regular basis. In order to ensure good governance of the
Company, the Board has set various limits on the investments in the portfolio,
whether in the maximum size of individual holdings, the use of derivatives,
the level of gearing and others. These limits and guidelines are regularly
monitored and reviewed and are set out in the Annual Report.
The Board receives regular reports from the Company’s Broker which covers
market activity, how the Company compares with its peers in the Japan sector
on performance, discount and share repurchase activity, an analysis of the
Company’s share register and market trends.
The Board places great importance on communication with shareholders. The
Annual General Meeting provides the key forum for the Board and the Portfolio
Manager to present to the shareholders on the Company’s performance and
future plans and the Board encourages all shareholders to attend in person or
virtually and raise any questions or concerns. The Chairman and other Board
members are available to meet shareholders as appropriate. Shareholders may
also communicate with Board members at any time by writing to them at the
Company’s registered office at FIL Investments International, Beech Gate,
Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary at the
same address or by email at investmenttrusts@fil.com.
The Portfolio Manager meets with major shareholders, potential investors,
stock market analysts, journalists and other commentators throughout the year.
These communication opportunities help inform the Board in considering how
best to promote the success of the company over the long-term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of
strong governance, while encouraging open and constructive debate, in order to
ensure appropriate and regular challenge and evaluation. This aims to enhance
service levels and strengthen relationships with service providers, with a
view to ensuring shareholders’ interests are best served, by maintaining the
highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board recognises the
importance of considering the impact of the Company’s investment strategy on
the wider community and environment. The Board believes that a proper
consideration of ESG issues aligns with the Company’s objective to deliver
long-term capital growth, and the Board’s review of the Manager includes an
assessment of its ESG approach which is set out in the Annual Report.
In addition to ensuring that the Company’s investment objective was being
pursued, key decisions and actions taken by the Board during the reporting
year, and up to the date of this report, have included:
· Authorising the repurchase of 3,615,644 ordinary shares into Treasury when
market conditions permitted in order to keep the Company’s discount in
single digits. Since the year ended 31 December 2023 and up to the latest
practicable date of this report, a further 3,351,529 ordinary shares were
repurchased;
· Meeting with the Company’s key shareholders during the reporting year;
· The decision to hold a hybrid AGM in 2023 (and again this year) in order
to make it more accessible to those shareholders who are unable to or prefer
not to attend in person;
· The decision to appoint Seiichi Fukuyama to the Board as Dominic
Ziegler’s replacement with effect from 1 March 2024; and
· Meeting with the Portfolio Manager and the investment team during the
Board’s Due Diligence trip to Tokyo in June 2023.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial period. Under that law, the Directors have elected to prepare the
Financial Statements in accordance with UK Generally Accepted Accounting
Practice (UK Accounting Standards and applicable law), including Financial
Reporting Standard FRS 102: The Financial Reporting Standard applicable in the
UK and Republic of Ireland (FRS 102). Under company law, the Directors must
not approve the Financial Statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Company and of the profit
or loss for the reporting period.
In preparing these Financial Statements, the Directors are required to:
· Select suitable accounting policies in accordance with Section 10 of FRS
102 and then apply them consistently;
· Make judgements and accounting estimates that are reasonable and prudent;
· Present information, including accounting policies, in a fair and balanced
manner that provides relevant, reliable, comparable and understandable
information;
· State whether applicable UK Accounting Standards, including FRS 102, have
been followed, subject to any material departures disclosed and explained in
the Financial Statements; and
· Prepare the Financial Statements on the going concern basis, unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time, the financial position of the Company and to
enable them to ensure that the Company and 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.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors’ Report, a Corporate Governance
Statement and a Directors’ Remuneration Report which comply with that law
and those regulations.
The Directors have delegated the responsibility for the maintenance and
integrity of the corporate and financial information included on the
Company’s pages of the Manager’s website at www.fidelity.co.uk/japan to
the Manager. Visitors to the website need to be aware that legislation in the
UK governing the preparation and dissemination of the Financial Statements may
differ from legislation in their own jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with UK Generally
Accepted Practice, including FRS 102, give a true and fair view of the assets,
liabilities, financial position and loss of the Company;
· The Annual Report, including the Strategic Report, includes a fair review
of the development and performance of the business and the position of the
Company, together with a description of the principal risks and uncertainties
it faces; and
· The Annual Report and Financial Statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Company’s performance, business model and
strategy.
The Statement of Directors’ Responsibility was approved by the Board on 26
March 2024 and signed on its behalf by:
DAVID GRAHAM
Chairman
FINANCIAL STATEMENTS
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2023
Year ended 31 December 2023 Year ended 31 December 2022
Notes Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Gains/(losses) on investments 9 – 12,376 12,376 – (64,577) (64,577)
Gains/(losses) on derivative instruments 10 – 14,299 14,299 – (11,568) (11,568)
Income 3 4,218 – 4,218 3,209 – 3,209
Investment management fees 4 (344) (1,018) (1,362) (334) (1,264) (1,598)
Other expenses 5 (708) (4) (712) (690) (15) (705)
Foreign exchange losses – (642) (642) – (365) (365)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before finance costs and taxation 3,166 25,011 28,177 2,185 (77,789) (75,604)
Finance costs 6 (27) (106) (133) (27) (106) (133)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before taxation 3,139 24,905 28,044 2,158 (77,895) (75,737)
Taxation on return/(loss) on ordinary activities 7 (347) – (347) (260) – (260)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities after taxation for the year 2,792 24,905 27,697 1,898 (77,895) (75,997)
========= ========= ========= ========= ========= =========
Return/(loss) per ordinary share 8 2.17p 19.33p 21.50p 1.46p (60.01p) (58.55p)
========= ========= ========= ========= ========= =========
The Company does not have any other comprehensive income. Accordingly, the net
return/(loss) on ordinary activities after taxation for the year is also the
total comprehensive income for the year and no separate Statement of
Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes below form an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2023
Note Share Share Capital Other Capital Revenue Total
capital premium redemption reserve reserve reserve shareholders’
£’000 account reserve £’000 £’000 £’000 funds
£’000 £’000 £’000
Total shareholders’ funds at 31 December 2022 34,041 20,722 2,767 46,658 140,511 (8,327) 236,372
Repurchase of ordinary shares 13 – – – (6,276) – – (6,276)
Net return on ordinary activities after taxation for the year – – – – 24,905 2,792 27,697
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total shareholders’ funds at 31 December 2023 34,041 20,722 2,767 40,382 165,416 (5,535) 257,793
========= ========= ========= ========= ========= ========= =========
Total shareholders’ funds at 31 December 2021 34,041 20,722 2,767 46,942 218,406 (10,225) 312,653
Repurchase of ordinary shares 13 – – – (284) – – (284)
Net (loss)/return on ordinary activities after taxation for the year – – – – (77,895) 1,898 (75,997)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total shareholders’ funds at 31 December 2022 34,041 20,722 2,767 46,658 140,511 (8,327) 236,372
========= ========= ========= ========= ========= ========= =========
The Notes below form an integral part of these Financial Statements.
BALANCE SHEET AS AT 31 DECEMBER 2023
Company number 2885584
Notes 2023 2022
£’000 £’000
Fixed assets
Investments 9 253,843 230,680
--------------- ---------------
Current assets
Derivative instruments 10 1,216 838
Debtors 11 708 613
Cash collateral held with brokers 16 – 276
Cash at bank 3,073 5,556
--------------- ---------------
4,997 7,283
========= =========
Current liabilities
Derivative instruments 10 (53) (1,100)
Other creditors 12 (994) (491)
--------------- ---------------
(1,047) (1,591)
========= =========
Net current assets 3,950 5,692
========= =========
Net assets 257,793 236,372
========= =========
Capital and reserves
Share capital 13 34,041 34,041
Share premium account 14 20,722 20,722
Capital redemption reserve 14 2,767 2,767
Other reserve 14 40,382 46,658
Capital reserve 14 165,416 140,511
Revenue reserve 14 (5,535) (8,327)
--------------- ---------------
Total shareholders’ funds 257,793 236,372
========= =========
Net asset value per ordinary share 15 204.46p 182.24p
========= =========
The Financial Statements above and below were approved by the Board of
Directors on 26 March 2024 and were signed on its behalf by:
DAVID GRAHAM
Chairman
The Notes below form an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
1 PRINCIPAL ACTIVITY
Fidelity Japan Trust PLC is an Investment Company incorporated in England and
Wales with a premium listing on the London Stock Exchange. The Company’s
registration number is 2885584, and its registered office is Beech Gate,
Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has
been approved by HM Revenue & Customs as an Investment Trust under Section
1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice (UK GAAP), including FRS 102 “The
Financial Reporting Standard applicable in the UK and Republic of Ireland”,
issued by the Financial Reporting Council (FRC). The Financial Statements have
also been prepared in accordance with the Statement of Recommended Practice:
Financial Statements of Investment Trust Companies and Venture Capital Trusts
(SORP) issued by the Association of Investment Companies (AIC) in July 2022.
The Company is exempt from presenting a Cash Flow Statement as a Statement of
Changes in Equity is presented and substantially all of the Company’s
investments are highly liquid and are carried at market value.
a) Basis of accounting
The Financial Statements have been prepared on a going concern basis and under
the historical cost convention, except for the measurement at fair value of
investments and derivative instruments. The Directors have a reasonable
expectation that the Company has adequate resources to continue in operational
existence up to 31 March 2025 which is at least twelve months from the date of
approval of these Financial Statements. In making their assessment the
Directors have reviewed income and expense projections, reviewed the liquidity
of the investment portfolio and considered the Company’s ability to meet
liabilities as they fall due. This conclusion also takes into account the
Directors’ assessment of the risks faced by the Company as detailed in the
Going Concern Statement above.
In preparing these Financial Statements, the Directors have considered the
impact of climate change risk as an emerging and principal risk as set out
above, and have concluded that there was no further impact of climate change
to be taken into account as the investments are valued based on market
pricing. 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 the
balance sheet date. Investments which are unlisted are priced using
market-based valuation approaches. All investments therefore reflect the
market participants view of climate change risk on the investments held by the
Company.
The Company’s Going Concern Statement above takes account of all events and
conditions up to 31 March 2025 which is at least twelve months from the date
of approval of these Financial Statements.
b) Significant accounting estimates, assumptions and judgements
The preparation of the Financial Statements requires the use of estimates,
assumptions and judgements. These estimates, assumptions and judgements affect
the reported amounts of assets and liabilities at the reporting date. While
estimates are based on best judgement using information and financial data
available, the actual outcome may differ from these estimates.
The key sources of estimation and uncertainty relate to the fair value of the
unlisted investments.
Judgements
The Directors consider whether each fair value is appropriate following
detailed review and challenge of the pricing methodology. The judgement
applied in the selection of the methodology used (see Note 2(j) below) for
determining the fair value of each unlisted investment can have a significant
impact upon the valuation.
Estimates
The key estimate in the Financial Statements is the determination of the fair
value of the unlisted investments by the Manager’s Fair Value Committee
(FVC), with support from the external valuer, for detailed review and
appropriate challenge by the Directors. This estimate is key as it
significantly impacts the valuation of the unlisted investments at the Balance
Sheet date. When no recent primary or secondary transaction in the company’s
shares have taken place, the fair valuation process involves estimation using
subjective inputs that are unobservable (for which market data is
unavailable). The estimates involved in the valuation process may include the
following:
(i) The selection of appropriate comparable companies. Comparable companies
are chosen on the basis of their business characteristics and growth patterns;
(ii) The selection of a revenue metric (either historical or forecast);
(iii) The selection of an appropriate illiquidity discount factor to reflect
the reduced liquidity of unlisted companies versus their listed peers;
(iv) The estimation of the likelihood of a future exit of the position
through an initial public offering (IPO) or a company sale;
(v) The selection of an appropriate industry benchmark index to assist with
the valuation; and
(vi) The calculation of valuation adjustments derived from milestone analysis
(i.e. incorporating operational success against the plans/ forecasts of the
business into the valuation).
As the valuation outcomes may differ from the fair value estimates a price
sensitivity analysis is provided in Other Price Risk Sensitivity in Note 16
below to illustrate the effect on the Financial Statements of an over or under
estimation of fair value.
The risk of an over or under estimation of fair value is greater when
methodologies are applied using more subjective inputs.
Assumptions
The determination of fair value by the FVC involves key assumptions dependent
upon the valuation techniques used. The valuation process recognises that the
price of a recent investment may be an appropriate starting point for
estimating fair value. The Multiples approach involves subjective inputs and
therefore presents a greater risk of over or under estimation, particularly in
the absence of a recent transaction.
c) Segmental reporting
The Company is engaged in a single segment business and, therefore, no
segmental reporting is provided.
d) Presentation of the Income Statement
In order to better reflect the activities of an investment company and in
accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and capital nature
has been prepared alongside the Income Statement. The net revenue
return/(loss) after taxation for the year is the measure the Directors believe
appropriate in assessing the Company’s compliance with certain requirements
set out in Section 1159 of the Corporation Tax Act 2010.
e) Income
Income from equity investments is accounted for on the date on which the right
to receive the payment is established, normally the ex-dividend date. Overseas
dividends are accounted for gross of any tax deducted at source. Amounts are
credited to the revenue column of the Income Statement. Where the Company has
elected to receive its dividends in the form of additional shares rather than
cash, the amount of the cash dividend foregone is recognised in the revenue
column of the Income Statement. Any excess in the value of the shares received
over the amount of the cash dividend is recognised in the capital column of
the Income Statement. Special dividends are treated as a revenue receipt or a
capital receipt depending on the facts and circumstances of each particular
case.
Derivative instrument income received from dividends on long Contracts for
Difference (CFDs) is accounted for on the date on which the right to receive
the payment is established, normally the ex-dividend date. The amount net of
tax is credited to the revenue column of the Income Statement.
f) Investment management fees and other expenses
Investment management fees and other expenses are accounted for on an accruals
basis and are charged as follows:
· The base investment management fee is allocated 20% to revenue and 80% to
capital to reflect the Company’s focus on capital growth to generate
returns;
· The variable investment management fee is charged/credited to capital, as
it is based on the performance of the net asset value per share relative to
the Reference Index; and
· All other expenses are allocated in full to revenue with the exception of
those directly attributable to share issues or other capital events.
g) Functional currency and foreign exchange
The functional and reporting currency of the Company is UK sterling, which is
the currency of the primary economic environment in which the Company
operates. Although the Company invests in yen denominated investments, it has
been determined that the functional currency is UK sterling as the entity is
listed on a sterling stock exchange in the UK, and its share capital is
denominated and its expenses are paid in UK sterling. Transactions denominated
in foreign currencies are reported in UK sterling at the rate of exchange
ruling at the date of the transaction. Assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the Balance Sheet
date. Foreign exchange gains and losses arising on translation are recognised
in the Income Statement as a revenue or a capital item depending on the nature
of the underlying item to which they relate.
h) Finance costs
Finance costs comprises interest on bank overdrafts and collateral and finance
costs paid on long CFDs, which are accounted for on an accruals basis. Finance
costs are allocated 20% to revenue and 80% to capital to reflect the
Company’s focus on capital growth to generate returns.
i) Taxation
The taxation charge represents the sum of current taxation and deferred
taxation.
Current taxation is taxation suffered at source on overseas income less
amounts recoverable under taxation treaties. Taxation is charged or credited
to the revenue column of the Income Statement, except where it relates to
items of a capital nature, in which case it is charged or credited to the
capital column of the Income Statement. The Company is an approved Investment
Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for
UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or
substantively enacted when the taxation is expected to be payable or
recoverable. Deferred tax assets are only recognised if it is considered more
likely than not that there will be sufficient future taxable profits to
utilise them.
j) Investments
The Company’s business is investing in financial instruments with a view to
profiting from their total return in the form of income and capital growth.
This portfolio of investments is managed and its performance evaluated on a
fair value basis, in accordance with a documented investment strategy, and
information about the portfolio is provided on that basis to the Company’s
Board of Directors. Investments are measured at fair value with changes in
fair value recognised in profit or loss, in accordance with the provisions of
both Section 11 and Section 12 of FRS 102. The fair value of investments is
initially taken to be their cost and is subsequently measured as follows:
· Listed investments are valued at bid prices, or last market prices,
depending on the convention of the exchange on which they are listed; and
· Investments which are not quoted, or are not frequently traded, are stated
at the best estimate of fair value. The Manager’s Fair Value Committee
(FVC), which is independent of the Portfolio Manager’s team, and with
support from the external valuer and Fidelity’s unlisted investments
specialist, provides recommended fair values to the Directors. These are based
on the principles outlined in Note 2 (b). The unlisted investments are valued
at fair value following a detailed review and appropriate challenge by the
Directors of the pricing methodology used by the FVC.
The techniques applied by the FVC when valuing the unlisted investments are
predominantly market-based approaches. The market-based approaches are set out
below and are followed by an explanation of how they are applied to the
Company’s unlisted portfolio:
· Multiples;
· Industry Valuation Benchmarks; and
· Available Market Prices.
The nature of the unlisted investment will influence the valuation technique
applied. The valuation approach recognises that the price of a recent
investment, if resulting from an orderly transaction, generally represents
fair value as at the transaction date and may be an appropriate starting point
for estimating fair value at subsequent measurement dates. However,
consideration is given to the facts and circumstances as at the subsequent
measurement date, including changes in the market or performance of the
investee company. Milestone analysis is used where appropriate to incorporate
the operational progress of the investee company into the valuation.
Consideration is also given to the input received from the Fidelity analyst
that covers the company, Fidelity’s unlisted investments specialist and an
external valuer. Additionally, the background to the transaction must be
considered. As a result, various multiples-based techniques are employed to
assess the valuations particularly in those companies with established
revenues. An absence of relevant industry peers may preclude the application
of the Industry Valuation Benchmarks technique and an absence of observable
prices may preclude the Available Market Prices approach.
The unlisted investments are valued according to a three month cycle of
measurement dates. The fair value of the unlisted investments will be reviewed
before the next scheduled three monthly measurement date on the following
occasions:
· At the year end and half year end of the Company; and
· Where there is an indication of a change in fair value (commonly referred
to as ‘trigger’ events).
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within gains/(losses) on
investments in the capital column of the Income Statement and has disclosed
these costs in Note 9 below.
k) Derivative instruments
When appropriate, permitted transactions in derivative instruments are used.
Some of the Company’s portfolio exposure to Japanese equities is achieved by
investment in long CFDs. Long CFDs are classified as other financial
instruments and are initially accounted and measured at fair value on the date
the derivative contract is entered into and subsequently measured at fair
value as follows:
· Long CFDs are the difference between the strike price and the value of the
underlying shares in the contract.
l) Debtors
Debtors include securities sold for future settlement, accrued income, other
debtors and prepayments incurred in the ordinary course of business. If
collection is expected in one year or less (or in the normal operating cycle
of the business, if longer) they are classified as current assets. If not,
they are presented as non-current assets. They are recognised initially at
fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
m) Cash collateral held with brokers
These are amounts held in segregated accounts on behalf of brokers as
collateral against open derivative contracts. These are carried at amortised
cost.
n) Other creditors
Other creditors include securities purchased for future settlement, investment
management fees, other creditors and expenses accrued in the ordinary course
of business and amounts payable for repurchase of shares. If payment is due
within one year or less (or in the normal operating cycle of the business, if
longer) they are classified as current liabilities. If not, they are presented
as non-current liabilities. They are recognised initially at fair value and,
where applicable, subsequently measured at amortised cost using the effective
interest rate method.
o) Other reserve
The full cost of ordinary shares repurchased and held in Treasury is charged
to the other reserve.
p) Capital reserve
The following are accounted for in the capital reserve:
· Gains and losses on the disposal of investments and derivative
instruments;
· Changes in the fair value of investments and derivative instruments held
at the year end;
· Foreign exchange gains and losses of a capital nature;
· Dividends receivable which are capital in nature;
· 80% of base investment management fees and finance costs;
· Variable investment management fees; and
· Other expenses which are capital in nature.
Technical guidance issued by the Institute of Chartered Accountants in England
and Wales in TECH 02/17BL, guidance on the determination of realised profits
and losses in the context of distributions under the Companies Act 2006,
states that changes in the fair value of investments which are readily
convertible to cash, without accepting adverse terms at the Balance Sheet
date, can be treated as realised. Capital reserves realised and unrealised are
shown in aggregate as capital reserve in the Statement of Changes in Equity
and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company
consisted of investments listed on a recognised stock exchange and derivative
instruments contracted with counterparties having an adequate credit rating,
and the portfolio was considered to be readily convertible to cash, with the
exception of the level 3 investments which had unrealised investment holding
losses of £5,630,000 (2022: losses of £1,635,000). See Note 16 below for
further details on the level 3 investments.
3 INCOME
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
Investment income
Overseas dividends 3,475 2,625
Derivative income
Dividends received on long CFDs 743 584
--------------- ---------------
Total income 4,218 3,209
========= =========
No special dividends have been recognised in capital during the reporting year
(2022: £47,000).
4 INVESTMENT MANAGEMENT FEES
Year ended 31 December 2023 Year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Investment management fees – base 344 1,377 1,721 334 1,336 1,670
Investment management fees – variable 1 – (359) (359) – (72) (72)
--------------- --------------- --------------- --------------- --------------- ---------------
344 1,018 1,362 334 1,264 1,598
========= ========= ========= ========= ========= =========
1 For the calculation of the variable management fee element, the Company’s
NAV return was compared to the Reference Index return on a daily basis. The
period used to assess the performance is on a rolling three year basis.
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International (FII). Both companies are Fidelity group companies.
FII charges base investment management fees at an annual rate of 0.70% of net
assets. In addition, there is a +/- 0.20% variation fee based on performance
relative to the Reference Index over a three year rolling period. Fees are
payable monthly in arrears and are calculated on a daily basis.
The base investment management fee has been allocated 80% to capital reserve
in accordance with the Company’s accounting policies.
Further details of the terms of the Management Agreement are given in the
Annual Report.
5 OTHER EXPENSES
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
Allocated to revenue:
AIC fees 18 20
Secretarial and administration fees payable to the Investment Manager 50 50
Custody fees 13 19
Depositary fees 24 23
Directors’ expenses 43 29
Directors’ fees 1 160 131
Legal and professional fees 70 82
Marketing expenses 166 177
Printing and publication expenses 61 70
Registrars’ fees 33 30
Other expenses 17 12
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 53 47
--------------- ---------------
708 690
Allocated to capital:
Legal and professional fees – unlisted investments 4 15
--------------- ---------------
Other expenses 712 705
========= =========
1 Details of the breakdown of Directors’ fees are provided in the
Directors’ Remuneration Report in the Annual Report.
6 FINANCE COSTS
Year ended 31 December 2023 Year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Interest paid on long CFDs 24 94 118 24 94 118
Interest paid on collateral and deposits 1 3 12 15 3 12 15
--------------- --------------- --------------- --------------- --------------- ---------------
27 106 133 27 106 133
========= ========= ========= ========= ========= =========
1 Due to negative interest rates during the current and prior year, the
Company paid interest on its collateral and deposits.
Finance costs have been allocated 80% to capital reserve in accordance with
the Company’s accounting policies.
7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
a) Analysis of the taxation charge for the year
Overseas taxation 347 260
--------------- ---------------
Taxation charge for the year (see Note 7b) 347 260
========= =========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 25.00% (2022: 19.00%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
Net return/(loss) on ordinary activities before taxation 28,044 (75,737)
--------------- ---------------
Net return/(loss) on ordinary activities before taxation multiplied by the blended rate of UK corporation tax of 23.52% (2022: 19.00%) 6,596 (14,390)
Effects of:
Capital (gains)/losses not taxable 1 (6,123) 14,537
Income not taxable (817) (499)
Expenses not deductible 23 19
Excess management expenses not utilised 321 333
Overseas taxation 347 260
--------------- ---------------
Taxation charge for the year (see Note 7a) 347 260
========= =========
1 The Company is exempt from UK taxation on capital gains as it meets the HM
Revenue & Customs criteria for an investment company set out in Section 1159
of the Corporation Tax Act 2010.
c) Deferred taxation
A deferred taxation asset of £8,886,000 (2022: £8,544,000), in respect of
excess expenses of £35,543,000 (2022: £34,176,000) has not been recognised
as it is unlikely that there will be sufficient future profits to utilise
these expenses.
The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023.
The rate of 25.00% has been applied to calculate the unrecognised deferred tax
asset for the current year (2022: 25.00%).
8 RETURN/(LOSS) PER ORDINARY SHARE
Year ended Year ended
31.12.23 31.12.22
Revenue return per ordinary share 2.17p 1.46p
Capital return/(loss) per ordinary share 19.33p (60.01p)
--------------- ---------------
Total return/(loss) per ordinary share 21.50p (58.55p)
========= =========
The return/(loss) per ordinary share is based on the net return/(loss) on
ordinary activities after taxation for the year divided by the weighted
average number of ordinary shares held outside of Treasury during the year, as
shown below:
£’000 £’000
Net revenue return on ordinary activities after taxation 2,792 1,898
Net capital return/(loss) on ordinary activities after taxation 24,905 (77,895)
--------------- ---------------
Net total return/(loss) on ordinary activities after taxation 27,697 (75,997)
========= =========
Number Number
Weighted average number of ordinary shares held outside of Treasury 128,843,583 129,812,318
========== ==========
9 INVESTMENTS
2023 2022
£’000 £’000
Listed investments 237,440 211,747
Unlisted investments 16,403 18,933
--------------- ---------------
Investments at fair value 253,843 230,680
========= =========
Opening book cost 242,067 265,540
Opening investment holding (losses)/gains (11,387) 42,198
--------------- ---------------
Opening fair value 230,680 307,738
========= =========
Movements in the year
Purchases at cost 158,947 153,886
Sales – proceeds (148,160) (166,367)
Gains/(losses) on investments 12,376 (64,577)
--------------- ---------------
Closing fair value 253,843 230,680
========= =========
Closing book cost 244,383 242,067
Closing investment holding gains/(losses) 9,460 (11,387)
--------------- ---------------
Closing fair value 253,843 230,680
========= =========
The Company received £148,160,000 (2022: £166,367,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£156,631,000 (2022: £177,359,000). 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.
Investment transaction costs
Transaction cost incurred in the acquisition and disposal of investments,
which are included in the gains/(losses) on investments above, were as
follows:
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
Purchases transaction costs 57 61
Sales transaction costs 63 59
--------------- ---------------
120 120
========= =========
The portfolio turnover for the year was 63.6% (2022: 68.9%). The portfolio
turnover rate measures the Company’s trading activity. It is calculated by
taking the average of the total amount of securities purchased and the total
amount of the securities sold in the reporting year divided by the average
fair value of the investment portfolio of the Company.
10 DERIVATIVE INSTRUMENTS
Year ended Year ended
31.12.23 31.12.22
£’000 £’000
Gains/(losses) on derivative instruments
Gains/(losses) on long CFD positions closed 12,874 (11,017)
Movement in investment holding gains/(losses) on long CFDs 1,425 (551)
--------------- ---------------
14,299 (11,568)
========= =========
Derivative instruments recognised on the Balance Sheet
2023 2022
Fair value Portfolio Fair value Portfolio
£’000 exposure £’000 exposure
£’000 £’000
Derivative instrument assets – long CFDs 1,216 41,568 838 24,704
Derivative instrument liabilities – long CFDs (53) 21,953 (1,100) 30,162
--------------- --------------- --------------- ---------------
1,163 63,521 (262) 54,866
========= ========= ========= =========
11 DEBTORS
2023 2022
£’000 £’000
Securities sold for future settlement 361 300
Accrued income 249 193
Other debtors and prepayments 98 120
--------------- ---------------
708 613
========= =========
12 OTHER CREDITORS
2023 2022
£’000 £’000
Securities purchased for future settlement 438 164
Creditors and accruals 285 327
Amounts payable for repurchase of shares 271 –
--------------- ---------------
994 491
========= =========
13 SHARE CAPITAL
2023 2022
Number of Nominal Number of Nominal
shares value shares value
£’000 £’000
Issued, allotted and fully paid
Ordinary shares of 25 pence each held outside of Treasury
Beginning of the year 129,701,893 32,425 129,876,894 32,469
Ordinary shares repurchased into Treasury (3,615,644) (904) (175,001) (44)
----------------- ----------------- ----------------- -----------------
End of the year 126,086,249 31,521 129,701,893 32,425
========== ========== ========== ==========
Issued, allotted and fully paid
Ordinary shares of 25 pence each held in Treasury 1
Beginning of the year 6,459,802 1,616 6,284,801 1,572
Ordinary shares repurchased into Treasury 3,615,644 904 175,001 44
----------------- ----------------- ----------------- -----------------
End of the year 10,075,446 2,520 6,459,802 1,616
========== ========== ========== ==========
Total share capital 34,041 34,041
========== ==========
1 Ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
The Company repurchased 3,615,644 ordinary shares (2022: 175,001 shares) and
held them in Treasury. The £6,276,000 (2022: £284,000) cost of repurchase
was charged to the other reserve.
14 CAPITAL AND RESERVES
Share Share Capital Other Capital Revenue Total
capital premium redemption reserve reserve reserve shareholders’
£’000 account reserve £’000 £’000 £’000 funds
£’000 £’000 £’000
At 1 January 2023 34,041 20,722 2,767 46,658 140,511 (8,327) 236,372
Gains on investments (see Note 9) – – – – 12,376 – 12,376
Gains on derivative instruments (see Note 10) – – – – 14,299 – 14,299
Foreign exchange losses – – – – (642) – (642)
Investment management fees (see Note 4) – – – – (1,018) – (1,018)
Other expenses (see Note 5) – – – – (4) – (4)
Finance costs (see Note 6) – – – – (106) – (106)
Revenue return on ordinary activities after taxation for the year – – – – – 2,792 2,792
Repurchase of ordinary shares (see Note 13) – – – (6,276) – – (6,276)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 December 2023 34,041 20,722 2,767 40,382 165,416 (5,535) 257,793
========= ========= ========= ========= ========= ========= =========
Share Share Capital Other Capital Revenue Total
capital premium redemption reserve reserve reserve shareholders’
£’000 account reserve £’000 £’000 £’000 funds
£’000 £’000 £’000
At 1 January 2022 34,041 20,722 2,767 46,942 218,406 (10,225) 312,653
Losses on investments (see Note 9) – – – – (64,577) – (64,577)
Losses on derivative instruments (see Note 10) – – – – (11,568) – (11,568)
Foreign exchange losses – – – – (365) – (365)
Investment management fees (see Note 4) – – – – (1,264) – (1,264)
Other expenses (see Note 5) – – – – (15) – (15)
Finance costs (see Note 6) – – – – (106) – (106)
Revenue return on ordinary activities after taxation for the year – – – – – 1,898 1,898
Repurchase of ordinary shares (see Note 13) – – – (284) – – (284)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 December 2022 34,041 20,722 2,767 46,658 140,511 (8,327) 236,372
========= ========= ========= ========= ========= ========= =========
The capital reserve balance at 31 December 2023 includes investment holding
gains of £9,460,000 (2022: losses of £11,387,000) as detailed in Note 9. See
Note 2 (p) for further details. The capital reserve is distributable by way of
dividend. The revenue reserve could be distributed by way of dividend if it
were not in deficit.
15 NET ASSET VALUE PER ORDINARY SHARE
The calculation of the net asset value per ordinary share is based on the
total shareholders’ funds divided by the number of ordinary shares held
outside of Treasury.
2023 2022
Total shareholders’ funds £257,793,000 £236,372,000
Ordinary shares held outside of Treasury at the year end 126,086,249 129,701,893
Net asset value per ordinary share 204.46p 182.24p
=========== ============
It is the Company’s policy that shares held in Treasury will only be
reissued at net asset value per ordinary share or at a premium to net asset
value per ordinary share and, therefore, shares held in Treasury have no
dilutive effect.
16 FINANCIAL INSTRUMENTS
Management of Risk
The Company’s investment activities in pursuit of its objective involve
certain inherent risks. The Board confirms that there is an ongoing process
for identifying, evaluating and managing the risks faced by the Company. The
Board, with the assistance of the Manager, has developed a risk matrix which,
as part of the internal control process, identifies the risks that the Company
faces. Principal risks identified are: geopolitical; natural disaster; market,
economic and currency; investment performance and gearing; discount control
and demand; key person; Environment, Social and Governance (ESG); business
continuity; cybercrime and information security. Other risks identified are
tax and regulatory. Risks are identified and graded in this process, together
with steps taken in mitigation, and are updated and reviewed on an ongoing
basis. These risks and how they are identified, evaluated and managed are
shown above.
This note refers to the identification, measurement and management of risks
potentially affecting the value of financial instruments. The Company’s
financial instruments may comprise:
· Equity shares held in accordance with the Company’s investment objective
and policies;
· Derivative instruments which comprise CFDs; and
· Cash, liquid resources and short-term debtors and creditors that arise
from its operations.
The risks identified arising from the Company’s financial instruments are
market price risk (which comprises interest rate risk, foreign currency risk
and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instrument risk. The Board reviews and agrees policies for managing
each of these risks, which are summarised below. These policies are consistent
with those followed last year.
MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and reserves. In
addition, the Company has a geared exposure to Japanese equities through the
use of long CFDs. The level of gearing is reviewed by the Board and the
Portfolio Manager. The Company is exposed to a financial risk arising as a
result of any increases in yen interest rates associated with the funding of
the long CFDs.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to
movements in interest rates are shown below:
2023 2022
£’000 £’000
Exposure to financial instruments that bear interest
Long CFDs – Portfolio exposure less fair value 62,358 55,128
--------------- ---------------
62,358 55,128
========= =========
Exposure to financial instruments that earn interest
Cash collateral held with brokers – 276
Cash at bank 3,073 5,556
--------------- ---------------
3,073 5,832
========= =========
Net exposure to financial instruments that bear interest 59,285 49,296
========= =========
Foreign currency risk
The Company’s net return/(loss) on ordinary activities after taxation for
the year and its net assets may be affected by foreign exchange movements
because the Company has income and assets which are denominated in yen whereas
the Company’s functional currency is UK sterling. The Company may also be
subject to short-term exposure from exchange rate movements, for example,
between the date when an investment is purchased or sold and the date when
settlement of the transaction occurs. The Company does not hedge the sterling
value of investments or other net assets priced in yen by the use of
derivative instruments.
Three principal areas have been identified where foreign currency risk may
impact the Company:
· Movements in currency exchange rates affecting the value of investments
and long CFDs;
· Movements in currency exchange rates affecting short-term timing
differences; and
· Movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown
below:
2023
Currency Investments Long Debtors Cash at Total
held at exposure to £’000 bank £’000
fair value derivative £’000
£’000 instruments
£’000
Japanese yen 253,843 63,521 610 2,950 320,924
UK sterling – – 98 123 221
--------------- --------------- --------------- --------------- ---------------
253,843 63,521 708 3,073 321,145
========= ========= ========= ========= =========
2022
Currency Investments Long Debtor 1 Cash at Total
held at exposure to £’000 bank £’000
fair value derivative £’000
£’000 instruments
£’000
Japanese yen 230,680 54,866 769 5,556 291,871
UK sterling – – 120 – 120
--------------- --------------- --------------- --------------- ---------------
230,680 54,866 889 5,556 291,991
========= ========= ========= ========= =========
1 Debtors include cash collateral held with brokers.
Currency exposure of financial liabilities
The currency profile of the Company’s financial liabilities is shown below:
Currency 2023 2022
Other Other
creditors creditors
£’000 £’000
Japanese yen 439 165
UK sterling 555 326
--------------- ---------------
994 491
========= =========
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company’s business. It represents the
potential loss the Company might suffer through holding market positions in
the face of price movements. The Board meets quarterly to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors within the parameters of the investment objective. The Portfolio
Manager is responsible for actively monitoring the existing portfolio selected
in accordance with the overall asset allocation parameters described above and
seeks to ensure that individual stocks also meet an acceptable risk/reward
profile. Other price risks arising from derivative positions, mainly due to
the underlying exposures, are estimated using Value at Risk and Stress Tests
as set out in the Company’s internal Risk Management Process Document.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company’s
assets mainly comprise readily realisable securities and derivative
instruments which can be sold easily to meet funding commitments if necessary.
Short-term flexibility is achieved by the use of a bank overdraft, if
required.
Liquidity risk exposure
At 31 December 2023, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £53,000 (2022: £1,100,000) and other creditors of
£994,000 (2022: £491,000).
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded
on an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association’s (ISDA) market standard derivative legal
documentation. These are known as Over the Counter (OTC) trades. As a result,
the Company is subject to the risk that a counterparty may not perform its
obligations under the related contract. In accordance with the risk management
process which the Investment Manager employs, this risk is minimised by only
entering into transactions with counterparties which are believed to have an
adequate credit rating at the time the transaction is entered into, by
ensuring that formal legal agreements covering the terms of the contract are
entered into in advance, and through adopting a counterparty risk framework
which measures, monitors and manages counterparty risk by the use of internal
and external credit agency ratings and by evaluating derivative instrument
credit risk exposure.
Cash collateral
For derivative transactions, collateral is used to reduce the risk of both
parties to the contract. Collateral is managed on a daily basis for all
relevant transactions. At 31 December 2023, £1,775,000 (2022: £nil) was held
by the brokers in cash denominated in Japanese yen in a segregated collateral
account on behalf of the Company, to reduce the credit risk exposure of the
Company’s net unrealised profits on derivative positions. This collateral
comprised: J.P. Morgan Securities plc £574,000 (2022: £nil) and UBS AG
£1,201,000 (2022: £nil). At 31 December 2023, there were no amounts held by
the Company at futures clearing houses and brokers on the Balance Sheet, to
reduce the credit risk exposure of the Company’s net unrealised losses on
derivative positions (2022: £276,000). In the year to 31 December 2022, this
collateral comprised: J.P. Morgan Securities plc £276,000 in cash denominated
in Japanese yen.
Credit risk
Financial instruments may be adversely affected if any of the institutions
with which money is deposited suffer insolvency or other financial
difficulties. All transactions are carried out with brokers that have been
approved by the Manager and are settled on a delivery versus payment basis.
Limits are set on the amount that may be due from any one broker and are kept
under review by the Manager. Exposure to credit risk arises on unsettled
security transactions and long CFD contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use of long CFDs
are included within the risk categories disclosed above. Long CFDs are used by
the Manager to gain unfunded long exposure to equity markets, sectors or
single stocks. Unfunded exposure is exposure gained without an initial outflow
of capital. The risk and performance contribution of long CFDs held in the
Company’s portfolio is overseen by the Manager’s experienced, specialist
derivative instruments team that uses portfolio risk assessment and
construction tools to manage risk and investment performance.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 December
2023, an increase of 0.25% in interest rates throughout the year, with all
other variables held constant, would have decreased the Company’s net return
on ordinary activities after taxation for the year and decreased the
Company’s net assets by £148,000 (2022: increased the net loss and
decreased the net assets by £123,000). A decrease of 0.25% in interest rates
throughout the year would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31
December 2023, a 10% strengthening of the sterling exchange rate against the
yen, with all other variables held constant, would have decreased the
Company’s net return on ordinary activities after taxation for the year and
decreased the Company’s net assets by £29,134,000 (2022: increased the net
loss and decreased the net assets by £26,518,000). A 10% weakening of the
sterling exchange rate against the yen would have increased the Company’s
net return on ordinary activities after taxation for the year and increased
the Company’s net assets by £35,609,000 (2022: decreased the net loss and
increased the net assets by £32,411,000).
Other price risk – exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 December 2023, an
increase of 10% in share prices, with all other variables held constant, would
have increased the Company’s net return on ordinary activities after
taxation for the year and increased the Company’s net assets by £23,744,000
(2022: decreased the net loss and increased the net assets by £21,175,000). A
decrease of 10% in share prices would have had an equal and opposite effect.
Based on the unlisted investments held and share prices at 31 December 2023,
an increase of 10% in share prices, with all other variables held constant,
would have increased the Company’s net return on ordinary activities after
taxation for the year and increased the Company’s net assets by £1,640,000
(2022: decreased the net loss and increased the net assets by £1,893,000). A
decrease of 10% in share prices would have had an equal and opposite effect.
Other price risk – net exposure to derivative instruments sensitivity
analysis
Based on the long CFDs held and share prices at 31 December 2023, an increase
of 10% in the share prices underlying the long CFDs, with all other variables
held constant, would have increased the Company’s net return on ordinary
activities after taxation for the year and increased the Company’s net
assets by £6,352,000 (2022: decreased the net loss and increased the net
assets by £5,487,000). A decrease of 10% in share prices would have had an
equal and opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values
which are not materially different to their fair values. As explained in Notes
2 (j) and (k), investments and derivative instruments are shown at fair value.
In the case of cash at bank, book value approximates to fair value due to the
short maturity of the instruments.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data
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. The valuation techniques used by the Company are explained in
Notes 2 (j) and (k). The table below sets out the Company’s fair value
hierarchy:
2023
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
253,843
Investments 237,440 – 16,403
Derivative instrument assets – 1,216 – 1,216
--------------- --------------- --------------- ---------------
237,440 1,216 16,403 255,059
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (53) – (53)
========= ========= ========= =========
2022
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments 211,747 – 18,933 230,680
Derivative instrument assets – 838 – 838
--------------- --------------- --------------- ---------------
211,747 838 18,933 231,518
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (1,100) – (1,100)
========= ========= ========= =========
The table below sets out the fair value of the level 3 financial instruments,
all of which are unlisted investments:
Name Business Book cost 2023 2022
£’000 Level 3 Level 3
£’000 £’000
Asoview Online booking website for leisure facilities 6,602 5,740 6,872
GO Inc Japan’s largest ride-hailing company 2,378 2,487 –
iYell Mortgage Fintech company 2,641 2,189 2,469
Studyplus Online educational company 2,257 2,110 2,402
Moneytree Developer of personal asset management applications 3,016 1,832 2,564
Yoriso Online funeral planning platform 2,627 1,034 2,516
Spiber Bio-tech company 2,512 1,011 1,823
Innophys Developer of elderly care and welfare equipment – – 287
--------------- --------------- ---------------
End of the year 22,033 16,403 18,933
========= ========= =========
The valuation of GO Inc at 31 December 2023 is based on the cost of the
investment when it was purchased in November 2023 with consideration given to
the company’s financial reports, the macro-environment and benchmarking the
position to a range of comparable market data.
The valuation of all the other unlisted investments at 31 December 2023 is
based on the analysis of the company’s financial reports, the
macro-environment and benchmarking the position to a range of comparable
market data. For more details on the technique applied to the value of
unlisted investments, see Note 2 (j) in the Accounting Policies section above.
Movements in level 3 financial instruments during the year: Year ended Year ended
31.12.23 31.12.22
Level 3 Level 3
£’000 £’000
Beginning of the year 18,933 17,201
Purchases at cost 2,378 2,257
Sales proceeds – Innophys (274) –
Sales loss – Innophys (639) –
Movement in investment holding losses (including foreign exchange movement) (3,995) (525)
--------------- ---------------
End of the year 16,403 18,933
========= =========
17 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet above, and its gearing which is achieved
through the use of long CFDs. Financial resources are managed in accordance
with the Company’s investment policy and in pursuit of its objective, both
of which are detailed in the Strategic Report in the Annual Report. The
principal risks and their management are disclosed in the Strategic Report
above and in Note 16 above.
18 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International, the Investment Manager. Both
companies are Fidelity group companies.
Details of the current fee arrangements are given in the Directors’ Report
in the Annual Report and in Note 4 above. During the year, fees for portfolio
management services of £1,362,000 (2022: £1,598,000) and secretarial and
administration fees of £50,000 (2022: £50,000) were payable to FII. At the
Balance Sheet date, net fees for portfolio management services of £106,000
(2022: £102,000) and secretarial and administration fees of £13,000 (2022:
£13,000) were accrued and included in other creditors. FII also provides the
Company with marketing services. The total amount payable for these services
during the year was £166,000 (2022: £177,000). At the Balance Sheet date,
marketing services of £18,000 (2022: £39,000) were accrued and included in
other creditors.
Disclosures of the Directors’ interests in the ordinary shares of the
Company and Directors’ fees and taxable expenses relating to reasonable
travel expenses paid to the Directors are given in the Directors’
Remuneration Report in the Annual Report. In addition to the fees and taxable
expenses disclosed in the Directors’ Remuneration Report, £14,000 (2022:
£13,000) of Employers’ National Insurance Contributions was also paid by
the Company. As at 31 December 2023, Directors’ fees of £18,000 (2022:
£10,000) were accrued and payable.
ALTERNATIVE PERFORMANCE MEASURES
DISCOUNT/PREMIUM
The discount/premium is considered to be an Alternative Performance Measure.
It is the difference between the NAV per ordinary share of the Company and the
ordinary share price and is expressed as a percentage of the NAV per ordinary
share. Details of the Company’s discount are on the Financial Highlights in
the Annual Report and are both defined in the Glossary of Terms in the Annual
Report.
GEARING
Gearing is considered to be an Alternative Performance Measure. See the Fair
Value and Portfolio Exposure of Investments table in the Annual Report for
details of the Company’s gearing. Gearing is defined in the Glossary of
Terms in the Annual Report.
NET ASSET VALUE (NAV) PER ORDINARY SHARE
The NAV per ordinary share is considered to be an Alternative Performance
Measure. See the Balance Sheet on and Note 15 above for further details.
ONGOING CHARGES RATIO
The ongoing charges ratio is considered to be an Alternative Performance
Measure. It has been calculated in accordance with guidance issued by the AIC
as the total of management fees and other expenses expressed as a percentage
of the average net assets throughout the year.
2023 2022
Investment management fees (£’000) 1,721 1,670
Other expenses (£’000) 712 705
--------------- ---------------
Ongoing charges (£’000) 2,433 2,375
========= =========
Variable management fee (£’000) (359) (72)
Average net assets (£’000) 245,972 238,468
Ongoing charges ratio 0.99% 0.99%
Ongoing charges ratio including variable management fee 0.84% 0.96%
========= =========
REVENUE, CAPITAL AND TOTAL RETURN PER ORDINARY SHARE
Revenue, capital and total returns per ordinary share are considered to be
Alternative Performance Measures. See the Income Statement and Note 8 above
for further details.
TOTAL RETURN PERFORMANCE
Total return performance is considered to be an Alternative Performance
Measure.
The tables below provide information relating to the NAV per ordinary share
and the ordinary share price of the Company, the impact of the dividend
reinvestments and the total returns for the years ended 31 December 2023 and
31 December 2022.
2023 Net asset Ordinary
value per share
ordinary price
share
31 December 2022 182.24p 164.75p
31 December 2023 204.46p 185.00p
--------------- ---------------
Total return for the year +12.2% +12.3%
========= =========
2022 Net asset Ordinary
value per share
ordinary price
share
31 December 2021 240.73p 229.00p
31 December 2022 182.24p 164.75p
--------------- ---------------
Total return for the year -24.3% -28.1%
========= =========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 December 2023 are an
abridged version of the Company's full Annual Report and Financial Statements,
which have been approved and audited with an unqualified report. The 2022 and
2023 statutory accounts received unqualified reports from the Company's
Auditor and did not include any reference to matters to which the Auditor drew
attention by way of emphasis without qualifying the reports and did not
contain a statement under s.498 of the Companies Act 2006. The financial
information for 2022 is derived from the statutory accounts for 2022 which
have been delivered to the Registrar of Companies. The 2023 Financial
Statements will be filed with the Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at:
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and
additional copies will be available from the registered office of the Company
and on the Company's website: www.fidelity.co.uk/japan where up to date
information on the Company, including daily NAV and share prices, factsheets
and other information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
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