Final Results
29/09/2023 07:00
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RNS Number : 0652O Schroder Japan Trust PLC 29 September 2023
REPORT AND ACCOUNTS
Schroder Japan Trust plc (the "Company") hereby submits its Report and
Accounts for the year ended 31 July 2023, as required by the Financial
Conduct Authority's Disclosure Guidance and Transparency Rule 4.1.
The Company's Report and Accounts for the year ended 31 July 2023 are also
being published in hard copy format and an electronic copy will shortly be
available to download from the Company's website www.schroders.com/japantrust
(http://www.schroders.com/japantrust) . Please click on the following link to
view the document:
http://www.rns-pdf.londonstockexchange.com/rns/0652O_1-2023-9-28.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/0652O_1-2023-9-28.pdf)
The Company has submitted its Report and Accounts to the National Storage
Mechanism and it will shortly be available for inspection
at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
Enquiries:
Schroder Investment Management Limited
Augustine Chipungu
(Press)
020 7658 6000
Paula Lockwood (Company
Secretary)
020 7658 6000
John
Spedding
020 7658 6000
Schroder Japan Trust plc
Chairman's Statement
Performance
For my first annual statement as Chairman, I am pleased to report that for
the year under review our Manager's investment strategy has again generated
superior returns to the Japanese stock market. During the year ended 31 July
2023, the Company's net asset value ("NAV") produced a total return of 11.7%,
outperforming its benchmark index which ended the year with a total return of
9.4%. Meanwhile, the Company's share price produced a total return of 18.7%,
as its discount to NAV narrowed on the back of this encouraging performance
and improving sentiment towards the Japanese stock market. The Company's
discount averaged 11.5% over the year, compared to 11% in the year ended 31
July 2022.
Our Portfolio Manager, Masaki Taketsume, has remained disciplined within a
rising market and has positioned the portfolio to exploit opportunities in
under-valued companies. The execution of this investment strategy has now
resulted in three years of outperformance against the Company's benchmark.
Further details about the Company's investment strategy and portfolio activity
during the year can be found in the Portfolio Manager's review.
During the year, the Company changed its name to Schroder Japan Trust plc. The
Board decided to remove 'Growth' from the Company's name, to reflect more
accurately the investment approach of the Manager.
Continued action taken by the Board has begun to show signs of bearing fruit.
The Manager has produced excellent relative performance over each of the last
three financial years when market conditions have remained challenging. He has
achieved this by adopting a clear, well defined investment strategy centred on
his disciplined bottom-up stock picking approach which utilises Schroders'
resources on the ground in Japan. At the same time, Schroders has concentrated
its promotional efforts on increasing the Manager's profile and in helping to
raise awareness of his investment strategy and approach to a wider audience.
The Board supported the Company by introducing a conditional tender offer
mechanism three years ago and has continued to manage an active buy-back
programme, with the aim of assisting the reduction of volatility in the
discount. The sharp re-rating of the share price during the year, which is
reflected in an 18.7% total return, is indicative of the progress that has
been made.
Conditional Tender Offer
The Board continues to monitor the Company's performance against its tender
performance target each year. The Company has a target to deliver net asset
value total return performance of at least 2% per annum above the Benchmark
over a four-year period starting from 1 August 2020. Should this target not be
met, the Board will put to shareholders a proposal for a tender offer of 25%
of the issued share capital at a price equal to the prevailing net asset value
less costs. This would be contingent on the next continuation vote of the
Company at the AGM in 2024 being successful.
The Manager has continued to deliver strong outperformance during the third
year of the performance target, delivering a net asset value total return of
2.3% above the benchmark. As a result, over three years, the Company has now
returned 12.4% on an annualised basis, which compares favourably to the
annualised 8.2% return from the TOPIX Total Return Index.
Discount and purchase of shares for cancellation
The Board monitors the discount of the share price to net asset value and,
when necessary, implements a buyback programme. During the year, the Company
repurchased a total of 2,096,597 shares for cancellation in line with this
policy. The Board will continue to monitor the discount and will buy back
shares when required. It is therefore seeking to renew the share buyback
authority granted at the Company's AGM in December 2022 to purchase up to
14.99% of the Company's issued share capital for cancellation. Should
permission be granted, the Board will continue to use these buyback powers.
Gearing
The Company continues to maintain both a term loan and revolving credit
facility. The gearing level was 11.1% at the start of the period and ended at
9.5%, with an average gearing level of 11.6%. Gearing had a positive effect on
performance during the year. The Company's gearing continues to operate well
within its pre-agreed limit of 25% of net asset value.
Proposed change to the Investment Policy to allow for the use of Contracts
for Difference
The Company is able to utilise traditional forms of bank debt to finance
investment but, in current conditions in the lending markets, funding is more
expensive to obtain. The Board believes that it is in the best interests of
Shareholders for the Company to have the ability to employ alternative gearing
through the use of Contracts for Difference (CFDs). The cost of using CFDs to
increase investment exposure is currently lower than the cost of traditional
borrowing.
CFDs are defined as a contract between two parties which stipulates that the
buyer will receive from the seller, or the seller will pay to the buyer, the
difference between the value of an asset at the time the parties enter into
the contract and the value at the time the contract is closed, depending on
whether the price of such asset increases or falls. The amount due under the
contract is held in cash within a collateral account, which is updated on a
daily basis. The Investment Manager already uses CFDs for other accounts which
it manages.
A resolution to amend the Company's investment policy to allow for investment
in CFDs will be included in the Notice of the Annual General Meeting.
Revenue and dividend
Revenue during the year increased from 4.97p to 5.41p per share. In line with
its stated policy, the Board will continue to pay out substantially all income
to shareholders. The Board has therefore declared a final dividend for the
year ended 31 July 2023 of 5.40p per share, representing an increase of 10%
over the final dividend paid in 2022. This dividend will be paid on 8 December
2023 to shareholders on the register on 3 November 2023 subject to approval by
shareholders at the Annual General Meeting ("AGM") on 5 December 2023.
Ten years ago, the Board highlighted the growing contribution from the yield
paid by Japanese companies to the Company's own total return. At that time, it
took action to ensure that it could pay out to its shareholders substantially
all the income it received for each financial year.
Growth in yield has indeed been a feature of the market in recent years and
dividend income paid out to shareholders, while still modest in terms of
yield, has increased by 64.2% over the 10 years to 31 July 2023.
Outlook
I have been involved in the Japanese equity market for over forty years and
have seen many false dawns when market performance has failed to match up to
investor expectations. Over the last year, foreign investors have shown
growing interest in Japan and the market has performed well. Inevitably,
therefore, the question arises whether this performance will continue. In
other words, will it be different this time?
My fellow Directors and I continue to be excited about the Company's
prospects, because we see two major developments which should continue to
drive equity performance over the medium to long term. Firstly, corporate
governance and stock market reforms in recent years have stimulated a tectonic
shift in the attitude of many Japanese companies towards improving returns for
shareholders. Secondly, the reappearance of inflation could signal the end of
the deflationary spiral which has, for example, constrained consumer spending
in Japan over the last two decades. The country's central bank, the Bank of
Japan, has explicitly stated that its accommodative monetary policy is being
pursued to achieve sustained, stable 2% inflation.
Against this macroeconomic background, there remain significant opportunities
for our high conviction, bottom-up strategy to identify and exploit market
opportunities and drive positive relative performance.
AJ Bell Investment Awards winner
I am very pleased to announce that the Company has recently been notified that
it is the winner of the 2023 AJ Bell Investment Awards in the Japan Equity -
Active category. Recognition of the Company by a major provider of platform
services to retail clients should help to further increase our profile within
the retail investor community.
The AGM and shareholder engagement
The AGM will be held at 1.00 pm on Tuesday, 5 December 2023. Shareholders
are asked to cast their votes by proxy. The Manager will be presenting at a
webinar separately from the AGM on 5 December 2023 at 1p.m. and all
shareholders are encouraged to sign up on the Company's website so that they
can hear the portfolio manager's view and ask questions. Shareholders can also
sign up using this link: https://www.schroders.events/sjg23
(https://www.schroders.events/sjg23) . The Board would like shareholders to
get in touch via the Company Secretary with any questions or comments, so that
the Board can address them in advance of the AGM. To email, please use:
amcompanysecretary@schroders.com or write to us at the Company's registered
office address (Company Secretary, Schroder Japan Trust plc, 1 London Wall
Place, London EC2Y 5AU). For regular news about the trust, shareholders are
also encouraged to sign up to the Manager's investment trusts update by
visiting the Company's website.
Philip Kay
Chairman
28 September 2023
Investment Manager's Review
For the financial year to 31 July 2023, the Company's net asset value
increased by 11.7%, while its benchmark rose by 9.4%.(1) Before we delve more
deeply into the drivers of performance, we would like to explain the
investment philosophy and approach that sits behind our decision-making. This
should provide some important context to help you understand why the portfolio
is positioned the way it is, and what you should expect in terms of future
performance.
Our investment approach
We believe the Japanese equity market ultimately acts efficiently in
reflecting the intrinsic value of companies. In the short to medium-term,
however, considerable inefficiencies are frequently evident in individual
stocks. These inefficiencies provide repeatable opportunities to identify and
invest in undervalued stocks, with the aim of delivering a better return than
the market as a whole on a rolling three-to-five year view.
Our investment resource is entirely devoted to this aim, focusing on
individual company fundamentals to understand the true worth of a stock and
investing in a portfolio of 60-70 of the highest conviction ideas. These then
tend to be held for the long term, with value being realised as the market
gradually reflects their true value more efficiently.
Portfolio holdings tend to fall into three categories of inefficiency:
1. Market misperception - companies with self-improving
credentials, with management initiatives to sustainably enhance operational
performance, being under-appreciated by other investors.
2. Market oversight - undervalued companies, especially among
small and mid caps where research coverage is less widespread, with strong and
defendable business franchises in niche product areas.
3. Short-term overreaction - ideas arising from abrupt but
transitory events which push valuations of quality companies temporarily to
unsustainably low levels.
Outside these three categories, the balance of the portfolio represents "best
in class" stocks with reasonable valuations. The weighting given to each of
these segments evolves over time, but a reasonable exposure to each category
ensures a good level of diversification for the portfolio as a whole.
Meanwhile, the approach tends to result in a bias towards value stocks(2) and
smaller companies, as well as an overall focus on quality.
The portfolio tends to exhibit a high "active share", which means that its
constituents deviate significantly from the benchmark index. Gearing
(financial leverage) typically ranges between 10% and 17.5%,3 allowing
shareholders to potentially benefit even more as the inefficiencies we have
identified become more appropriately priced by the market.
Portfolio strategy
So, what does this mean for current portfolio strategy and positioning?
Currently, the biggest category within the portfolio is market misperception
which accounts for almost 40% of assets. This includes companies such as
Hitachi, Seven & I and Toyota Motors, where we see the prospect of
sustainable improvements in returns from management efforts that are not yet
reflected in valuations.
In the case of Toyota, the market views the business as a "dinosaur" in an
industry that is rapidly shifting towards electric vehicles (EV). We believe
this to be a market misperception, however, because the market underestimates
Toyota's capabilities in EV. It has been accumulating knowledge and
technologies in EV since launching its first hybrid vehicle, the Prius, in
1997. It is already profitable across its hybrid (HEV), plug-in (PHEV) and
battery (BEV) powered vehicle range and, as it continues to reveal further
details of its EV strategy, we expect investors gradually to re-evaluate its
competitive strengths in EV, which should ultimately result in a deservedly
higher market multiple.
Almost 30% of the portfolio is in market oversights, such as Fukushima Galilei
and Hosokawa Micron, where we find highly competitive smaller businesses
trading at a significant discount to their large cap and global peers. As the
leading global provider of high-quality powder manufacturing machines,
Hosokawa Micron is an excellent example of the type of market oversights we
are able to find in Japan. It dominates its niche and is also benefiting from
growing demand for its high-quality powders, which are used in fast growing
product areas such as lithium-ion batteries. Nevertheless, its shares trade at
an unwarranted discount to the shares of similar businesses elsewhere in the
world.
14% of the portfolio is invested in short-term overreactions, including
out-of-favour technology opportunities such as Nomura Research Institute (NRI)
and Ibiden. These businesses are beneficiaries of long-term structural
tailwinds but their shares were sold down aggressively - in our view, too
aggressively - last year. NRI is one of the highest quality IT service
companies in Japan. With its strong consulting capabilities, it is well
positioned to capture rising demand from Japanese companies that are looking
to digitally transform their business models. Its growth prospects therefore
continue to look positive, but its valuation contracted significantly in 2022,
during the widespread sell-off in technology and "growth stocks" more
generally. This looks like a classic short-term overreaction to us, which we
took advantage of by adding the shares to the portfolio.
The remaining portfolio is invested in what we consider to be best-in-class
operators, such as Sumitomo Mitsui Financial Group, Asahi Group Holdings,
Orix, and NTT.
From a sector perspective, this results in a bias towards Machinery, Glass
& Ceramic Products, Other Financing Business, and Information &
Communication. As is typical, the portfolio is also overweight towards small
and mid cap stocks, where valuations look particularly attractive as the
domestic Japanese economy recovers.
Recent performance drivers
Despite some weakness during the early months of the period under review, the
Japanese stock market has performed strongly during 2023, reaching new 33-year
highs in recent months. In sterling terms, however, the market's return was
reduced somewhat by yen weakness. Value stocks outperformed growth stocks, but
smaller companies generally lagged against larger caps. Meanwhile, there was a
beneficial impact from the Company's gearing, and helpful contributions to
relative performance also came from a range of individual stocks as we explain
below. On balance, these factors were helpful to performance during the
period, as reflected in the positive NAV return and the modest outperformance
of the benchmark. Over three years, the Company has now returned 12.4% on an
annualised basis, which compares favourably to the 8.2% return from the TOPIX
Total Return Index.(3)
The strongest market influence came from developments in monetary policy, with
resilient inflation data and stronger wage growth allowing the Bank of Japan
(BOJ) to commence a process of "policy normalisation", which effectively marks
the end of a prolonged period of ultra-low interest rates and yield curve
control. This year's market rally has been driven by greater interest from
foreign investors, attracted by positive momentum in the Japanese macroeconomy
and ongoing expectations of corporate governance reforms.
Financial stocks generally performed well in this environment, with the
portfolio's holdings in "mega bank" Sumitomo Mitsui Financial Group and
insurance company T&D Holdings contributing positively. General trading
companies also performed well, perhaps buoyed by news that Warren Buffett was
building stakes in them. The portfolio holds a position in Mitsui & Co,
which contributed strongly to performance and is, in our view, the most
attractive of the general trading companies, thanks to its more favourable
shareholder remuneration policy.
The biggest positive contribution to performance, however, came from a
short-term overreaction stock. Ibiden is a mid cap electronic component maker,
which specialises in providing foundational materials used in the construction
of powerful central and graphics processing units (CPUs and GPUs). These are
heavily used in cloud computing and artificial intelligence data centres. The
exponential growth in these markets has driven stronger-than-expected results
from Ibiden, leading to significant share price growth and a full recovery
from last year's weakness which had allowed us to build a position in the
shares.
Meanwhile, Disco Corporation, which sits within the market oversight category,
also added value. Disco has a dominant market share in providing equipment for
integrated circuit (IC) packaging, which is a process of enclosing
semiconductors in protective, high-performance casements. The added value of
IC packaging is becoming increasingly apparent in the semiconductor industry
and, as a result, Disco is currently enjoying very significant volume growth
as well as commanding higher prices.
By contrast, Mitsui Fudosan, one of Japan's largest property groups,
disappointed amid concern about how the change in monetary policy may impact
the Japanese property market. Meanwhile, Kureha, a small cap speciality
chemicals company, and Aeon Financial Services, a small cap non-bank
financial, also detracted due to weaker earnings progress.
(1) Source: Morningstar, cum-income NAV with dividends reinvested, 31
July 2023 data, net of fees. Past performance is not a guide to future
performance and may not be repeated.
(2) The term "value stocks" refers to shares that appear to trade at a lower
price than justified by company fundamentals, such as dividends, earnings,
sales and book value.
(3) Source: Morningstar, cum-income NAV with dividends reinvested, 31 July
2023 data, net of fees. Past performance is not a guide to future performance
and may not be repeated.
Attribution - stock selection
12 Months to 31 July 2023
Top 5 contributors Portfolio Benckmark(1) Portfolio Benchmark(1) Total
weight
weight
return
return
effect
Ibiden Co Ltd 1.8 0.1 99.2 99.2 +1.14
Mitsui & Co 2.8 1.1 75.4 75.4 +0.88
Sumitomo Mitsui Fg 3.7 1.3 52.7 52.7 +0.84
Disco Corporation 1.0 0.2 125.2 125.2 +0.59
T&D Holdings Inc 1.8 0.2 43.2 43.2 +0.48
Top 5 detractors Portfolio Benckmark(1) Portfolio Benchmark(1) Total
weight
weight
return
return
effect
Mitsubishi Corp 0.0 1.1 0.0 70.5 -0.57
Mitsubishi Ufj Fin 0.0 1.8 0.0 42.8 -0.55
Mitsui Fudosan Co 1.6 0.4 -10.3 -10.3 -0.47
Kureha Corporation 1.2 0.0 -22.5 -22.5 -0.44
Aeon Financial Ser 1.2 0.0 -18.5 -18.5 -0.39
Past performance is not a guide to future performance and may not be
repeated. The value of investment can go down as well as up and is not
guaranteed.
The return may increase or decrease as a result of currency fluctuations.
Source: FactSet, GBP, Gross. 1. Stocks mentioned are shown for illustrative
purposes only and should not be viewed as a recommendation to buy/sell.
Portfolio activity
Our research team has continued to focus on individual stock ideas where we
can identify positive, company-specific drivers for future performance. During
the period, there were a number of changes to the portfolio that reflect our
ongoing efforts to maintain an appropriate portfolio balance that provides
exposure to our highest conviction ideas.
One new idea that was introduced to the portfolio during the year is Kyoritsu
Maintenance, a small cap service company that operates reasonably-priced
hotels under the Dormy Inn brand. We view the company as a key beneficiary of
economic reopening and the return of inbound tourists to Japan. This bodes
well for volume increases and potential price rises. The Dormy Inn brand has a
strong competitive position and the company is maintaining higher occupancy
and utilisation ratios in its hotels. We do not believe the market fully
acknowledges the company's existing strengths, nor does it appreciate its
growth prospects. Consequently, we initiated a position in June as a new
market oversight idea.
We also initiated a position in Mitsui Chemicals, a mid cap diversified
chemical company. For some time now, Mitsui Chemicals has been engaged in the
process of transforming its business model and portfolio with the aim of
improving profitability and better insulating its financial performance from
the impact of the commodity cycle. We believe the company's strategy is
sensible and comprehensive, and it is now beginning to realise the benefits of
this transformation. During the current cyclical slowdown in its end markets,
Mitsui's earnings have been much more resilient when compared to both history
and its peers. Nevertheless, the shares remain considerably undervalued. A
single digit price-earnings ratio and a price-to-book ratio of less than one
suggest the market has not yet reflected the company's positive
transformation, making this a new market misperception idea.
In terms of exits, we decided to take profits in Itochu and shift the
portfolio towards stocks that we view as more attractively valued. Itochu has
performed well for the portfolio, in part perhaps thanks to the news that
Warren Buffet had added to his position in the shares.
We also sold out of East Japan Railway. We continue to view it as a
best-in-class stock in the Transportation & Logistics sector, which is
well-positioned to benefit from the reopening of the domestic economy.
However, the pace of its earnings recovery has been held back by cost
increases and regulatory headwinds. In combination with a relatively solid
share price performance, we have concluded that its near-term earnings
recovery prospects are already reflected in the share price. Meanwhile, we
have several other positions that are more directly exposed to the domestic
reopening theme, so we decided to reallocate capital towards those other
positions in which we have stronger conviction.
Outlook
We believe that the Japanese equity market currently provides one of the
most attractive opportunities, particularly for long-term investors. Several
developments that are unique to Japan should combine to support sustained
corporate earnings growth and increasing valuation multiples in the years
ahead.
From an economic perspective, we should see a continued cyclical recovery
following the lifting of Covid restrictions. More importantly, after more than
two decades of deflationary pressure, the emergence of "positive" inflation,
led by wage growth, is immensely encouraging. Not all inflation can be viewed
as positive, but Japan is experiencing lower rates of inflation than in many
other parts of the world. This suggests that the re-emergence of inflation in
Japan can be viewed as an opportunity rather than a threat.
Indeed, the implications of this positive inflation should not be
under-estimated for corporate Japan. This is an environment in which Japanese
companies can regain pricing power (the ability to raise prices in response to
inflation) which, when coupled with improved consumer purchasing power through
wage increases, should drive healthy levels of corporate earnings growth. An
element of these higher profits can then be recycled back into the economy
through further wage increases, driving a positive cycle of broader economic
progress that has been largely absent from Japan for a generation.
Meanwhile, corporate governance reforms are likely to remain a structural
driver of the Japanese equity market in the years ahead. Historically, the
structure of corporate Japan has been dominated by the keiretsu system of
cross-shareholdings and close relationships between customers, suppliers,
their banks and competitors. This system has been increasingly criticised from
a governance perspective because it can lead to inefficient capital allocation
and poor decision-making. In recent years, however, we have begun to see
meaningful change, with companies, investors and regulators such as the Tokyo
Stock Exchange, working together to raise corporate governance standards, with
the aim of improving returns and growth prospects. The success of these
initiatives is reflected in the level of dividends and share buybacks from
Japanese companies. These have been rising steadily in recent years and
currently stand at record levels, but there remains scope for considerable
further positive progress as the corporate governance revolution unfolds.
The Japanese stock market has reached multi-decade highs in recent months in
response to these positive domestic developments. Nevertheless, the equity
market as a whole looks attractively valued when compared to other regions'
markets and in the context of history. Many listed Japanese companies continue
to trade below their book value despite the ongoing corporate governance
movement. This suggests the market is not yet fully reflecting the progress
that many businesses are making to improve returns. We are confident we can
continue to find selective opportunities for businesses to transform both
their growth prospects and their market rating through better capital
allocation and by considering the needs of all their stakeholders,
shareholders included. These opportunities remain concentrated at the lower
end of the market cap spectrum, where valuations are also even more
attractive, despite the high quality of many businesses and their superior
growth potential.
To conclude, there are many reasons to believe that we may be entering a
period of sustained outperformance from the Japanese stock market. We are
seeing renewed appetite for Japanese equity from global investors and this
demand should continue to grow as the positive domestic story becomes better
understood. This represents a fertile environment for active, high conviction
stock pickers, and we are excited at the opportunity that lies ahead for
investors in the company.
Strategic Report
Principal risks and uncertainties
The Board is responsible for the Company's system of risk management and
internal control and for reviewing its effectiveness. The Board has adopted a
detailed matrix of principal risks affecting the Company's business as an
investment trust and has established associated policies and processes
designed to manage and, where possible, mitigate those risks, which are
monitored by the audit and risk committee on an ongoing basis. This system
assists the Board in determining the nature and extent of the risks it is
willing to take in achieving the Company's strategic objectives. Both the
principal risks and the monitoring system are also subject to robust
assessment at least annually. The last assessment took place in September
2023.
Although the Board believes that it has a robust framework of internal control
in place this can provide only reasonable, and not absolute, assurance against
material financial misstatement or loss and is designed to manage, not
eliminate, risk.
Actions taken by the Board and, where appropriate, its committees, to manage
and mitigate the Company's principal risks and uncertainties are set out in
the table below.
Emerging risks and uncertainties
During the year, the Board also discussed and monitored a number of risks
that could potentially impact the Company's ability to meet its strategic
objectives. These were political risk and climate change risk. The Board has
determined they are not currently, as detailed below, sufficiently material
for the Company to be categorised as independent principal risks. The Board
receives updates from the Manager, Company Secretary and other service
providers on other potential risks that could affect the Company. The Board
were mindful of emerging risks during the year including the escalation or
expansion of the conflict in Ukraine, rising inflation, the threat of a global
recession and energy prices although they are not factors which explicitly
impacted the Company's performance.
Political risk includes the impact of geopolitical risk, regional tensions,
trade wars and sanctions against companies. Currency rates and borrowings
drawn down by the Company, as well as markets generally, may be affected by
geopolitical developments. Currency rate and borrowings drawn down by the
Company may be affected by geopolitical developments particularly in relation
to movements in sterling versus the yen. Note 20 of the financial statements
provides more information on the effect of currency and market price
movements.
Climate change risk includes how climate change could affect the Company's
investments, and potentially shareholder returns. The Board notes the Manager
has integrated ESG considerations, including climate change, into the
investment process as detailed in the Strategic Report. The Board will
continue to monitor this.
*The "Change" column on the right highlights at a glance the Board's
assessment of any increases or decreases in risk during the year after
mitigation and management. The arrows show if the risks increased, decreased
or remained the same.
Risk Mitigation and management Change
Strategic è
The Company's investment objectives may become out of line with the The appropriateness of the Company's investment remit is periodically
requirements of investors, resulting in a wide discount of the share price to reviewed and the success of the Company in meeting its stated objectives is
underlying NAV per share. monitored.
The share price relative to NAV per share is monitored and the use of buy back
authorities is considered on a regular basis.
The marketing and distribution activity is actively reviewed.
Proactive engagement with shareholders.
The Company's cost base could become uncompetitive, particularly in light The ongoing competitiveness of all service provider fees is subject to è
of open-ended alternatives. periodic benchmarking against their competitors.
Annual consideration of management fee levels.
Investment management è
The Manager's investment strategy, if inappropriate, may result in the Review of the Manager's compliance with its agreed investment restrictions,
Company underperforming the market and/or peer group companies, leading to the investment performance and risk against investment objectives and strategy;
Company and its objectives becoming unattractive to investors. relative performance; the portfolio's risk profile; and whether appropriate
strategies are employed to mitigate any negative impact
of substantial changes in markets.
Annual review of the ongoing suitability of the Manager is undertaken.
Financial and currency è
The Company is exposed to the effect of market fluctuations due to the The risk profile of the portfolio considered appropriate strategies to
nature of its business. A significant fall in Japanese equity markets could mitigate any negative impact of substantial changes in markets discussed with
have an adverse impact on the market value of the Company's underlying the Manager.
investments and, as the Company invests predominantly in assets which are
denominated in yen, its exposure to changes in the exchange rate between The Board considers overall hedging policy on a regular basis.
sterling and yen has the potential to have a significant impact on returns.
Custody è
Safe custody of the Company's assets may be compromised through control The depositary reports on safe custody of the Company's assets, including
failures by the Depositary. cash, and portfolio holdings independently reconciled with the Manager's
records.
The review of audited internal controls reports covering custodial
arrangements is undertaken.
Regular reports from the depositary on its activities, including matters
arising from custody operations is received.
Gearing and leverage è
The Company utilises credit facilities. These arrangements increase the Gearing is monitored daily and strict restrictions on borrowings are
funds available for investment through borrowing. While this has the potential imposed: gearing continues to operate within pre-agreed limits so as not to
to enhance investment returns in rising markets, in falling markets the impact exceed 25% of shareholders' funds.
could be detrimental to performance.
Accounting, legal and regulatory è
In order to continue to qualify as an investment trust, the Company must The confirmation of compliance with relevant laws and regulations by key
comply with the requirements of Section 1158 of the Corporation Tax Act 2010. service providers is reviewed.
Breaches of the UK Listing Rules, the Companies Act or other regulations with Shareholder documents and announcements, including the Company's published
which the Company is required to comply, could lead to a number of detrimental annual report, are subject to stringent review processes.
outcomes.
Procedures are established to safeguard against the disclosure of inside
information.
Service provider è
The Company has no employees and has delegated certain functions to a Service providers are appointed subject to due diligence processes and with
number of service providers, principally the Manager, Depositary and clearly-documented contractual arrangements detailing service expectations.
Registrar. Failure of controls, and poor performance of any service provider
could lead to disruption, reputational damage or loss.
Regular reporting is provided by key service providers and monitoring of the
quality of their services provided. The Directors also receive presentations
from the Manager, depositary and custodian, and the registrar on an annual
basis.
Review of annual audited internal controls reports from key service providers,
including confirmation of business continuity arrangements and IT controls,
and follow up of remedial actions as required.
Cyber é
The Company's service providers are all exposed to the risk of cyber Service providers report on cyber risk mitigation and management at least
attacks. Cyber attacks could lead to loss of personal or confidential annually, which includes confirmation of business continuity capability in the
information or disrupt operations. event of a cyber attack.
In addition, the Board received presentations from the Manager, depositary and
custodian, and the registrar on cyber risk.
The Board noted that following the invasion of Ukraine by Russia, cyber risk
was assessed to be higher, and the Board sought further assurance from its
service providers that they were able to manage the heightened threat.
Risk assessment and internal controls review by the board
Risk assessment includes consideration of the scope and quality of the
systems of internal control operating within key service providers, and
ensures regular communication of the results of monitoring by such providers
to the audit and risk committee, including the incidence of significant
control failings or weaknesses that have been identified at any time and the
extent to which they have resulted in unforeseen outcomes or contingencies
that may have a material impact on the Company's performance or condition.
No significant control failings or weaknesses were identified from the audit
and risk committee's ongoing risk assessment which has been in place
throughout the financial year and up to the date of this report. The Board is
satisfied that it has undertaken a detailed review of the risks facing the
Company and that an appropriate controls framework is in place.
A full analysis of the financial risks facing the Company is set out in note
20 to the accounts on pages 57 to 61 of the 2023 report and accounts.
Viability statement
The Directors have assessed the viability of the Company over a five-year
period, taking into account the Company's position at 31 July 2023 and the
potential impacts of the principal risks and uncertainties it faces for the
review period. The Directors have assessed the Company's operational
resilience and they are satisfied that the Company's outsourced service
providers will continue to operate effectively, following the implementation
of their business continuity plans.
A period of five years has been chosen as the Board believes that this
reflects a suitable time horizon for strategic planning, taking into account
the investment policy, liquidity of investments, potential impact of economic
cycles, nature of operating costs, dividends and availability of funding.
In its assessment of the viability of the Company, the Directors have
considered each of the Company's principal risks and uncertainties detailed on
pages 23 and 24 of the 2023 report and accounts and in particular the impact
of a significant fall in Japanese equity markets on the value of the Company's
investment portfolio. The Directors also considered the beneficial tax
treatment the Company is eligible for as an investment trust. If changes to
these taxation arrangements were to be made it would affect the viability of
the Company to act as an effective investment vehicle.
Whilst the Company's articles of association require that a proposal for the
continuation of the Company be put forward at the AGM in 2024, the Directors
have no reason to believe such a resolution will not be passed by
shareholders.
The Directors have considered the Company's income and expenditure projections
and the fact that the Company's investments comprise of readily realisable
securities which can be sold to meet funding requirements if necessary and on
that basis consider that five years is an appropriate time period.
The Directors also considered a stress test in which the Company's NAV dropped
by 50% and noted that, based on the assumptions in the test, the Company would
continue to be viable over a five year period.
Based on the Company's processes for monitoring operating costs, the Board's
view that the Manager has the appropriate depth and quality of resource to
achieve superior returns in the longer term, the portfolio risk profile,
limits imposed on gearing, counterparty exposure, liquidity risk and financial
controls, the Directors have 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 five year period of their assessment.
Going concern
The Directors have assessed the principal risks, the impact of the emerging
risks and uncertainties and the matters referred to in the viability
statement. Based on the work the Directors have performed, they have not
identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Company's
ability to continue as a going concern for the period assessed by the
Directors, being the period to 31 October 2024 which is at least 12 months
from the date the financial statements were authorised for issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
28 September 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report and the
financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
and applicable law). Under company law the Directors must not approve the
financial statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or loss of the
Company for that period. In preparing the financial statements, the Directors
are required to:
- select suitable accounting policies and then apply them
consistently;
- state whether applicable United Kingdom Accounting
Standards, comprising FRS 102, have been followed, subject to any material
departures disclosed and explained in the financial statements;
- make judgements and accounting estimates that are
reasonable and prudent; 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
enable them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006.
The Directors are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Manager is responsible for the maintenance and integrity of the webpage
dedicated to the Company. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
The Directors consider that the annual report and accounts, taken as a whole,
are fair, balanced and understandable and provides the information necessary
for shareholders to assess the Company's performance, business model and
strategy.
Each of the Directors, whose names and functions are listed in the Board of
Directors on pages 26 and 27 of the 2023 report and accounts confirm that, to
the best of their knowledge:
- the Company financial statements, which have been
prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
and applicable law), give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and
- the Strategic Report includes a fair review of the
development and performance of the business and the position of the Company,
together with a description of the principal risks and uncertainties that it
faces.
On behalf of the Board
Philip Kay
Chairman
28 September 2023
Income Statement for the year ended 31 July 2023
2023 2022
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments held at fair value through profit or loss 2 - 22,484 22,484 - (3,439) (3,439)
Net foreign currency gains - 3,920 3,920 - 2,076 2,076
Income from investments 3 8,766 - 8,766 8,208 - 8,208
Other interest receivable and similar income 3 20 - 20 3 - 3
Gross return/(loss) 8,786 26,404 35,190 8,211 (1,363) 6,848
Investment management fee 4 (607) (1,416) (2,023) (599) (1,399) (1,998)
Administrative expenses 5 (653) - (653) (637) - (637)
Net return/(loss) before finance costs and taxation 7,526 24,988 32,514 6,975 (2,762) 4,213
Finance costs 6 (86) (200) (286) (81) (189) (270)
Net return/(loss) before taxation 7,440 24,788 32,228 6,894 (2,951) 3,943
Taxation 7 (877) - (877) (821) - (821)
Net return/(loss) after taxation 6,563 24,788 31,351 6,073 (2,951) 3,122
Return/(loss) per share 8 5.41p 20.45p 25.86p 4.97p (2.42)p 2.55p
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income and
therefore the net return/(loss) after taxation is also the total comprehensive
income for the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
The notes on pages 49 to 62 of the 2023 report and accounts form an integral
part of these accounts.
Statement of Changes in Equity for the year ended 31 July 2023
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 July 2021 12,214 7 287 3 91,540 173,298 6,510 283,859
Repurchase of the Company's own shares for cancellation (14) - 14 - (303) - - (303)
Net (loss)/return after taxation - - - - - (2,951) 6,073 3,122
Dividend paid in the year 9 - - - - - - (5,249) (5,249)
At 31 July 2022 12,200 7 301 3 91,237 170,347 7,334 281,429
Repurchase of the Company's own shares for cancellation (210) - 210 - (4,359) - - (4,359)
Net return after taxation - - - - - 24,788 6,563 31,351
Dividend paid in the year 9 - - - - - - (5,961) (5,961)
At 31 July 2023 11,990 7 511 3 86,878 195,135 7,936 302,460
The notes on pages 49 to 62 of the 2023 report and accounts form an
integral part of these accounts.
Statement of Financial Position at 31 July 2023
2023 2022
Note £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 10 331,756 313,454
Current assets
Debtors 11 1,113 1,113
Cash at bank and in hand 4,081 5,626
5,194 6,739
Current liabilities
Creditors: amounts falling due within one year 12 (1,669) (1,872)
Net current assets 3,525 4,867
Total assets less current liabilities 335,281 318,321
Creditors: amounts falling due after more than one year 13 (32,821) (36,892)
Net assets 302,460 281,429
Capital and reserves
Called-up share capital 14 11,990 12,200
Share premium 15 7 7
Capital redemption reserve 15 511 301
Warrant exercise reserve 15 3 3
Share purchase reserve 15 86,878 91,237
Capital reserves 15 195,135 170,347
Revenue reserve 15 7,936 7,334
Total equity shareholders' funds 302,460 281,429
Net asset value per share 16 252.25p 230.68p
These accounts were approved and authorised for issue by the Board of
Directors on 28 September 2023 and signed on its behalf by:
Philip Kay
Chairman
The notes on pages 49 to 62 of the 2023 report and accounts form an
integral part of these accounts.
Registered in England and Wales
Company registration number: 02930057
Notes to the Accounts
1. Accounting Policies
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland", and with the
Statement of Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the Association
of Investment Companies in July 2022. All of the Company's operations are of a
continuing nature.
2. Income
2023 2022
£'000 £'000
Income from investments:
Overseas dividends 8,766 8,208
Other interest receivable and similar income
Deposit interest 20 3
Total income 8,786 8,211
3. Investment management fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 607 1,416 2,023 599 1,399 1,998
The basis for calculating the investment management fee is set out in the
Report of the Directors on page 28 of the 2023 report and accounts and details
of all amounts payable to the Manager are given in note 17 on page 56 of the
2023 report and accounts.
4. Return/(loss) per share
2023 2022
£'000 £'000
Revenue return 6,563 6,073
Capital return/(loss) 24,788 (2,951)
Total return 31,351 3,122
Weighted average number of ordinary shares in issue during the year 121,214,425 122,078,782
Revenue return per share 5.41p 4.97p
Capital return/(loss) per share 20.45p (2.42)p
Total return per share 25.86p 2.55p
5. Dividends
Dividend paid and proposed
2023 2022
£'000 £'000
2022 final dividend of 4.90p (2021: 4.30p) paid out of revenue profits 5,961(1) 5,249
2023 2022
£'000 £'000
2023 final dividend proposed of 5.40p (2022: 4.90p) to be paid out 6,475 5,978
of revenue profits
(1)The 2022 final dividend amounted to £5,978,000. However the amount
actually paid was £5,961,000 as shares were repurchased and cancelled, after
the accounting date, but prior to the dividend Record Date.
The proposed dividend amounting to £6,475,000 (2022: £5,978,000) is the
amount used for the basis of determining whether the Company has satisfied the
distribution requirements of Section 1158 of the Corporation Tax Act 2010. The
revenue available for distribution by way of dividend for the year is
£6,563,000 (2022; £6,073,000).
6. Creditors: amounts falling due within one year
2023 2022
£'000 £'000
Securities purchased awaiting settlement 951 1,177
Other creditors and accruals 718 695
1,669 1,872
7. Creditors: amounts falling due after more than one
year
2023 2022
£'000 £'000
Bank loan 32,821 36,892
The bank loan is a yen 6.0 billion three-year term loan from SMBC Bank
International plc (formerly Sumitomo Mitsui Banking Corporation Europe
Limited), expiring in January 2025 and carrying a floating interest rate,
calculated at the daily Compounded Risk Free Rate, plus a margin. The loan is
unsecured, but is subject to certain undertakings and restrictions, all of
which have been complied with. The Directors consider that the carrying amount
of the loan approximates to its fair value.
In addition to the term loan detailed above, the Company has a yen
2.0 billion credit facility available from Sumitomo Mitsui Banking
Corporation, London Branch, which was undrawn at the year end (2022: undrawn).
Further details of the facility are given in note 20 on page 59 of the 2023
report and accounts.
8. Called-up share capital
2023 2022
£'000 £'000
Ordinary shares allotted, called-up and fully paid:
Opening balance of 122,000,562 (2022: 122,143,262) ordinary shares of 10p each 12,200 12,214
Repurchase and cancellation of 2,096,597 (2022: 142,700) shares (210) (14)
Closing balance of 119,903,965 (2022: 122,000,562) shares 11,990 12,200
During the year, the Company purchased 2,096,597 of its own shares, nominal
value £209,660, for cancellation, for a total consideration of £4,359,000,
representing 1.72% of the shares outstanding at the beginning of the year. The
reason for these share repurchases was to seek to manage the volatility of the
share price discount to net asset value per share.
9. Net asset value per share
2023 2022
Net assets attributable to shareholders (£'000) 302,460 281,429
Shares in issue at the year end 119,903,965 122,000,562
Net asset value per share 252.25p 230.68p
10. Transactions with the Manager
Under the terms of the AlFM Agreement, the Manager is entitled to receive a
management fee, a marketing support fee and a company secretarial fee. Details
of the AIFM agreement are given in the Report of the Directors on page 28 of
the 2023 report and accounts. Any investments in funds managed or advised by
the Manager or any of its associated companies are excluded from the assets
used for the purpose of the management fee calculation and therefore incur no
fee.
The management fee payable in respect of the year ended 31 July 2023 amounted
to £2,023,000 (2022: £1,998,000), of which £535,000 (2022: £502,000) was
outstanding at the year end. The marketing support fee payable to the Manager
amounted to £50,000 (2022: £50,000) of which £13,000 (2022: £13,000) was
outstanding at the year end. The company secretarial fee payable to the
Manager amounted to £90,000 (2022: £90,000) of which £23,000 (2022:
£23,000) was outstanding at the year end. Outstanding amounts to the Manager
are short-term in nature, these amounts are unsecured and not subject to
interest charges.
11. Disclosures regarding financial instruments measured at
fair value
The Company's financial instruments within the scope of FRS 102 that are
held at fair value comprise its investment portfolio. The Company currently
holds no derivative financial instruments.
FRS 102 requires financial instruments to be categorised into a hierarchy
consisting of the three levels below.
Level 1 - valued using unadjusted quoted prices in active markets for
identical assets.
Level 2 - valued using observable inputs other than quoted prices included
within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the valuation techniques used by the Company are given in note 1(b)
on page 49 of the 2023 report and accounts.
At 31 July 2023, all investments in the Company's portfolio are categorised
as Level 1 (2022: same).
At 31 July 2021, all investments in the Company's portfolio are categorised as
Level 1 (2020: same).
The following table sets out the fair value measurements using the FRS 102
hierarchy at 31 July:
2023
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial instruments held at fair value through profit or loss
Equity investments 331,756 - - 331,756
2022
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial instruments held at fair value through profit or loss
Equity investments 313,454 - - 313,454
Status of announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the
published Annual Report and Accounts for the period ended 31 July 2022 and do
not constitute the statutory accounts for that year. The 2022 Annual Report
and Accounts have been delivered to the Registrar of Companies and included
the Report of the Independent Auditors which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual
Report and Accounts for the year ended 31 July 2023 and do not constitute the
statutory accounts for the year. The 2023 Annual Report and Accounts include
the Report of the Independent Auditors which is unqualified and does not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2023 Annual Report and Accounts will be delivered to
the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website
accessible from hyperlinks on the Company's webpages (or any other website) is
incorporated into, or forms part of, this announcement.
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