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RNS

Annual Financial Report

Released 07:00 30-May-2019

RNS Number : 5236A
Aberdeen Japan Investment Trust PLC
30 May 2019
 

ABERDEEN JAPAN INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT FOR THE YEAR ENDED 31 MARCH 2019

 

 

FINANCIAL HIGHLIGHTS

 

 

 

 Figures to 31 March 2019

1 year

return

Return since 8 October 2013

(change of mandate)

Net asset value{A}

-10.2%

69.0%

Index

-1.8%

68.6%

Share price{A}

-9.1%

60.3%

{A} Alternative Performance Measure (see below)

 

 

 

 

 

Year to

Year to

 

31 March 2019

31 March 2018

Ongoing charges ratio{A}

1.10%

1.18%

Discount to net asset value{A}

13.6%{B}

14.6%

Dividend per share

5.40p

5.20p

{A} Alternative Performance Measure (see below)

 

{B} Discount ranged between 6.3% and 14.7% during the year ended 31 March 2019.

 

 

STRATEGIC REPORT 

 

CHAIRMAN'S STATEMENT

Performance

For the year under review, on a total return basis, your Company's net asset value (NAV) fell by 10.2% compared to the Topix benchmark, which declined by 1.8%. The share price fell by 9.1% as the discount to NAV per share marginally tightened from 14.6% to 13.6%.

 

These results reflect the Company's weighting to Japanese stocks with exposure to international trade, particularly with China.  Over the longer term, since the change to a Japan-only mandate, the Company has delivered results in line with the index. The Board believes that the Company will reverse its recent underperformance as the external environment develops, and over time deliver excess returns. 

 

Overview

Despite Japanese share prices hitting a 27-year high last autumn, the past year has been challenging for the market. The return of volatility that buffeted the first half was followed by a global sell-off in the latter six months. Worsening trade tensions between the world's two largest economies, the US and China, along with the deceleration in economic activity in China undermined investor sentiment and saw risk aversion spike in the second half. The deteriorating outlook forced corporations, particularly those with major capital investments pending, to defer their commitments. This exacerbated the economic slowdown, while impacting those businesses with a significant exposure to the Chinese market. 

 

On a separate note, technology sector stocks were hurt by Washington's attempts to thwart Beijing's rapid advance in the development of 5G wireless technology, as well as sluggish smartphone sales amid marginally incremental innovations in recent product launches. Although the US Federal Reserve's pause in monetary policy normalisation at the end of 2018 provided a boost to global stock markets, the rebound in Japanese stocks was more muted due to a less certain outlook.  Sentiment among large manufacturers fell to the lowest level in two years.

 

Against this difficult backdrop, your Company's portfolio underperformed.  Heavy selling in the market was particularly prevalent among the better-quality names that also tend to be more liquid.  Such stocks are held by a larger proportion of foreign shareholders who are quick to re-allocate cash elsewhere. Notably, companies with an exposure to the Chinese economy de-rated. 

 

Your Manager remains convinced of the fundamentals of the portfolio's holdings and feels that the degree of pessimism, especially in the latter half-year, has been unwarranted. Details of your Company's performance for the year under review are discussed in the Investment Manager's Review on page 7.

 

The Manager continues to adhere to its approach of detailed due diligence and engagement with the management of the companies held in the portfolio. The domestic Japanese market remains under researched compared to other developed markets. However, corporate governance standards, though gradually improving, continue to lag other advanced economies.  Your Manager invests only in companies that are relatively transparent and whose valuations can be readily analysed. The Manager's ongoing engagement also seeks to ensure that these companies' objectives remain aligned with that of minority shareholders including this Company, and that efforts are made to improve shareholders' returns over the long term. 

 

Management Fee

I am pleased to report that the Board has agreed with the Manager a change to the basis on which the management fee is calculated. Effective from 1 June 2019, the fee of 0.75% per annum will be charged on the lesser of the Company's net asset value or market capitalisation (as defined below), rather than on purely the net asset value. This will offer an immediate saving to the Company helping to reduce further the Ongoing Charges Ratio. The interests of the Manager will be more closely aligned with those of shareholders which is to reduce or eliminate the discount to NAV. The fee will continue to be payable monthly in arrears. Market capitalisation is defined as the closing share price quoted on the London Stock Exchange multiplied by the number of shares in issue (less the number of any shares held in Treasury), as determined on the last business day of the applicable calendar month to which the remuneration relates.

 

Dividend

The Company's revenue return per share for the financial year marginally increased to 6.83p (2018 - 6.59p).

 

In the past the Board has paid a dividend marginally greater than that required to maintain investment trust status. It intends to maintain that policy for the current year. In consequence the dividend proposed to be payable on 12 July 2019 is 5.4p. However there are a number of factors which lead the board to propose a new, enhanced dividend policy for the year ahead and these are considered below. 

 

Alongside an increased focus on governance, Japanese companies are increasingly aware of the benefits of returning income to shareholders by way of dividends and share buybacks and this has enabled the Company to build up a reasonable level of revenue reserves. 

 

Investors increasingly are taking a total return view of their investments and the Board recognises the importance of income to our shareholders. Investors are seeking reliable income alongside capital growth,  influenced by the current low interest rate environment and the recent changes to the pension rules. The Board believes that investors will welcome a higher level of distributions, without changing the investment policy of your Company.

 

Rather than reliance on share buybacks to limit share price volatility, the Board believes that a regular, sustainable dividend will help the Company to broaden the shareholder base and help to maintain the discount at reasonable levels.  The revised dividend policy, which will be put to shareholders at the forthcoming AGM for their approval, should improve the Company's appeal amongst investors.

 

 

If the policy change, as set out in the table of resolutions, is endorsed at the AGM, the Board expects to pay an enhanced distribution to shareholders, which would consist of the Company's earnings for the year, 3p from revenue reserves plus an amount from capital reserves. As a guide, by using the Company's financial results for the year to 31 March 2019, a minimum distribution of 15.0p for the year ending 31 March 2020 is anticipated. This assumes a payment from capital of at least 5.2p (minimum of 0.85% of net assets). Dividend distributions will be made on a semi-annual basis. 

 

Gearing

The Company continued to make use of its ability to gear during the financial year.  The Company renewed its loan facility with ING Bank which comprises two parts:- a Yen 1.3 billion one year fixed term and a Yen 1.0 billion one year floating rate term which both now expire in January 2020.  The Board continues to monitor the level of gearing and considers a gearing level of around 10% to be appropriate, although, with market fluctuations, this may range between 5% and 15%.  Net gearing as at 31 March 2019 was 11.6%. 

 

Discounts and Share Buybacks

During the period, discount volatility continued to feature within the investment trust sector, including the Company's peer group.  The Board monitors closely the discount level of the Company's shares in relation to the NAV and has in place a mechanism to buy back shares at certain levels.  

 

During the financial year, 244,838 shares were bought back into treasury at a cost of £1.35 million.  Since the period end, a further 200 shares have been bought back into treasury.  Overall, the discount averaged 9.4% over the last 90 days of the Company's financial year and there is no requirement under the articles therefore for the Company to put forward a continuation vote to shareholders.  The discount at the end of March 2019 was 13.6% compared to 14.6% at the previous year end and an average of 11.4% for the year.  

 

Board Composition

The Board regularly undertakes a review of its performance and structure to ensure that it has the appropriate mix of relevant skills, diversity and experience for the effective operation of the Company's business.  As part of the Board's succession planning, Claire Boyle was appointed as a non-executive Director on 1 February 2019.  Claire, a qualified chartered accountant, has over 17 years' experience working in finance and equity investment management running portfolios over a wide range of sectors.

 

Neil Gaskell retired from the Board on 31 March 2019 and I would like to thank Neil on behalf of the Board and all shareholders for his leadership and invaluable contribution over 15 years to the Board.   

 

Environmental, Social & Corporate Governance ('ESG') 

The Company is a 'tier 1' signatory of the UK Stewardship Code which aims to enhance the quality of engagement by investors with investee companies in order to improve their socially responsible performance and the long term investment return to shareholders. The Board works closely with the Investment Manager to ensure the appropriate active engagement with the companies in which the Company invests.  During the year the Manager has continued to  integrate its engagement of ESG issues into the investment process, reporting the results regularly to the Board and has disinvested from one company as a result of unacceptable governance.

 

Outlook

In the near term, your Manager expects that market sentiment will continue to be dictated by slowing global growth and the challenges of trade negotiations. Share prices are likely to be affected by the proposed increase in  the planned consumption tax later this year and concerns over the impact of decelerating growth in China, especially on companies with significant exposure to the mainland. Nevertheless, the Japanese stock market remains attractive over the longer term.

 

Japanese companies across the market-cap spectrum, particularly many of those held in the Company's portfolio, are world leaders in their industries, run by experienced, conservative management who invest consistently to maintain their competitive advantage. Many have established operations in markets overseas to circumvent potential trade barriers as well as to be nearer to their end markets. While forays abroad often come with steep learning curves, it places these companies on a solid footing for their next phase of growth. 

 

As part of the Company's All-Cap investment mandate, the Manager has taken advantage of the increasing number of investment opportunities it is now seeing within the Small-Cap sector.  This sector, which has been relatively under-researched, has the potential to provide superior alpha returns. As smaller Japanese companies show increasing awareness that pursuing good governance policies can lead to greater support from investors and a consequent improvement in the rating of their shares, the pool of potential investee companies has grown. The Company's Small-Cap exposure has increased more recently and, at the date of this report, represented 19.5% of the portfolio.

 

What is important is for investors to be able to discern between market noise caused by short-term, cyclical events and the deep structural changes in markets that present rewarding opportunities over the medium term.

 

Your Manager believes in the quality of our investee companies, their resilience in volatile markets and the solidity of their finances which should underpin growth for the future.

 

Karen Brade

Chairman

29 May 2019

 

 

MANAGER'S REVIEW

Overview

Japanese equities weakened in the year under review. The market traded range-bound in the first half of the period before plunging in the last quarter of 2018, when a spike in US Treasury yields compelled investors to re-assess global stock valuations. Subsequently, as the year turned, stocks climbed steadily, bolstered by expectations of a normalisation of trade flows despite the hiccup in ongoing US-China trade talks and the US Federal Reserve's pivot towards a dovish policy stance.

 

At home, economic growth slowed in the summer due to a series of natural disasters. It then rebounded, thanks to a recovery in capital investments. Still, as trade friction worsened, exports fell toward the end of the review period.

 

Portfolio review

The portfolio's net asset value per share fell by 10.2% on a total return basis, compared to the benchmark index's total return which declined by 1.8%. The equity holdings returned -9.1%, excluding the sterling hedge effect of -0.4%.  The year under review was a difficult one for markets, and your Company's underperformance can be better understood in the context of the US-China trade war, as well as the China's economic slowdown resulting from the government-induced deleveraging. Industrial and tech stocks suffered the brunt of these, and hence were the biggest detractors from the portfolio's performance. Foreign investors' flight from the broader market - the worst outflows since 1987 - further exacerbated the slide in share prices, especially in the better-quality and more liquid stocks that your Company holds.

 

Specifically, robot-maker Fanuc and precision reduction gear-maker Nabtesco were indiscriminately sold off, particularly in the first half of the review period. Tightening credit in China caused Chinese firms to defer capital spending, affecting the duo's orderbooks. As previously mentioned in the interim report, we remain confident of their longer-term prospects: there is a growing need for manufacturers globally to adopt robotics technologies for efficiency, product quality and environmental reasons. Indeed, our conviction was reaffirmed by their recovery in recent months, with Nabtesco becoming a major stock-level contributor in the past six months. We are also pleased with the performance of Keyence, which has remained resilient despite the difficult economic outlook as its automation products help companies reduce costs, especially in challenging times. With Sino-US trade relations turning up and China's economy appearing to be on the mend, the outlook for these industrial holdings is improving.

 

Separately, Yahoo Japan was lacklustre as its heavy upfront investments into e-payments and e-commerce weighed on earnings. We remain positive about its long-term prospects. The diverse offerings on its portal, ranging from earthquake alerts to online auctions, gives it a solid competitive edge - one that will be enhanced in future by data from its new businesses. We are also encouraged by management's increasingly pro-active approach in communicating with investors and increased transparency. Previously, it had described profit targets only in qualitative terms, causing some investors to lose faith in its ongoing investments. Following our engagement with the CEO where we expressed our desire for a clearer account of future profit expectations, the firm subsequently disclosed its medium-term profit target for the first time.

 

Medical equipment supplier Sysmex was another detractor, posting sluggish sales due to slowing fundamentals and one-off issues. We believe the quality of the business remains intact, and that growing healthcare needs will result in rising demand for medical diagnostics. Nevertheless, your Company's other healthcare holdings in drugmakers Chugai Pharmaceutical and Shionogi, as well as medical-equipment manufacturer Asahi Intecc, more than made up for its negative performance. All told, the healthcare sector contributed the most to your Company's returns in the period.

 

Chugai was one of the portfolio's standout performers. The drugmaker received breakthrough-therapy status from US regulators for its treatment of an auto-immune disease that affects optic nerves and the spinal cord. In all, the firm has been granted this designation seven times for four drugs, underscoring its prowess in research and development; Chugai has the most drugs with this designation among local peers. Adding to the positive momentum for Chugai is its haemophilia drug Helimbra which, following the nod from US regulators, also received approval from European regulators for treating all haemophilia A patients. The drug has recorded higher-than-expected sales, and is one step closer to becoming the blockbuster that management envisaged.

 

Meanwhile, Shionogi received early approval for its new flu drug Xofluza, the first to be given the green light by US authorities in nearly two decades. Following that, it raised its full-year operating profit outlook, with the bullish forecast surprising the market. Xofluza is more palatable compared to rival treatments, requiring only a single dose instead of multiple doses daily for several days. In addition, Asahi Intecc held up well on expectations that the maker of medical guidewires will cement its leading position in Japan, and also gain market share in the US following a successful switch from using a third-party distributor to a direct-sales model.

 

During the period, we remained actively engaged with the companies in which we invest. This, we believe, not only improves governance but also shareholder returns, and we believe our on-the-ground presence and active voting of shares bolsters these efforts. Having raised the topic of capital allocation with Shin-Etsu's Chemical's management, we were heartened when it decided to lift its dividend forecast and also discussed share buybacks. Similarly, Keyence doubled its dividend payout which increased its payout ratio to 10.6%. While this can be further improved given the firm's good cashflows and large cashpile, it is a step in the right direction.

 

Meanwhile, Kansai Paint appointed two new independent directors, after we urged its board to improve governance and oversight standards. In all, the new board will feature six internal directors and three external ones. All of them have relevant business experience, and can be expected to represent minority shareholders fairly. In other portfolio activity, market volatility during the year afforded opportunities for us to introduce attractively valued companies that we have been eyeing.

 

The portfolio historically has had a higher exposure towards larger-cap stocks for quality reasons. However, we believe that the opportunity is broadening for the portfolio. An increasing number of smaller-cap companies are meeting our criteria, after efforts to raise governance and improve transparency in recent years, and market volatility has afforded opportunities to invest in companies that we believe are attractive for the long term. With this backdrop, we have been selectively shifting a proportion of the trust to capture these opportunities, whilst remaining true to our criteria.

 

These include Elecom, which designs and sells PCs and smartphone accessories. With its superior development capabilities, the company is able to launch new products quickly to respond to fast-changing demand for consumer electronics. Its network of low-cost outsourced manufacturers gives it a competitive edge, along with its focus on profitability. Elecom drives quality improvements at these external suppliers by embedding employees with them. Founder Junji Hada aims to grow the company's fee-based business such as digital signages, and to catch up with competition in the e-commerce space. Elecom was also among your portfolio's top stock-level contributors this past year, an endorsement by investors who fancy its growth prospects.

 

Aside from small caps, we continue to find opportunities amongst larger companies. We initiated a position in Tokio Marine, the most progressive of the three largest local property and casualty insurers. While the trio's dominance allows each to produce stable cashflow, Tokio Marine uses its cash pile to fuel its overseas forays in niche segments. Almost half of its profits are derived abroad, while its overseas operations allow it to spread its risks. Of note is its positive view on shareholder returns, which we expect will grow gradually as it makes further inroads abroad that add value to its business.

 

Against these, we divested online fashion retailer Zozo, which experienced issues with the rollout of its private brand and faced a backlash from brand partners against its discount-based membership scheme. We also exited Hoshizaki Electric, which was troubled by reports of falsified sales. Although management noted that the associated earnings impact is likely to be minimal, the news demonstrates weak internal controls and raises concerns that its ambitious sales targets may be incentivising employees to engage in fraudulent behaviour.

 

Outlook

Japanese equities are likely to face more weakness in the near term, but there may be better days further ahead. At the time of writing, the corporate earnings season was just getting underway, and companies' forecasts for the year ahead suggested that earnings growth will probably weaken in the first half of 2019 before recovering after. Leading macroeconomic indicators are also pointing to a rebound, or at least stabilisation, in China's economy, a major export market for many Japanese companies.

 

The case for investing in Japanese stocks remains intact: many of them are global leaders in their industries, have solid franchises, and are operating in areas of long-term structural growth - whether robotics, consumer staples or healthcare innovation. They are in also good financial health: balance sheets are robust, and cashflows sustainable. Encouragingly, these corporates are increasingly improving shareholder returns, in line with better corporate governance standards.

 

Aberdeen Standard Investments (Japan) Limited

Investment Manager

29 May 2019

 

 

OVERVIEW OF STRATEGY

Business Model

This report provides shareholders with details of the Company's business model and strategy as well as the principal risks and challenges it faces.

 

The Company is an investment trust which seeks to deliver a competitive return to its shareholders through the investment of its funds in accordance with the investment policy as approved by shareholders. 

 

The Board appoints and oversees an investment manager, decides the appropriate financial policies to manage the assets and liabilities of the Company, ensures compliance with legal and regulatory requirements and reports objectively to shareholders on performance.

 

The Directors do not envisage any change in this model in the foreseeable future.

 

Investment Objective

To achieve long-term capital growth principally through investment in listed Japanese companies which are believed by the Investment Manager to have above average prospects for growth.  

 

The Board's strategy is represented by its investment policy, financial policies, and risk management policies.

 

Investment Policy

The Company primarily invests in the shares of companies which are listed in Japan.  The portfolio is constructed through the identification of individual companies of any market capitalisation size and in any business sector, which offer long-term growth potential. 

 

The portfolio is selected from the 3,500 listed stocks in Japan and is actively managed to contain between 30 and 70 stocks which, in the Manager's opinion, represent the best basis for producing higher returns than those of the market as a whole in the long term. There will therefore inevitably be periods in which the Company's portfolio both outperforms and also underperforms the market as represented by the Company's benchmark.

 

The Board does not impose any restrictions on these shorter term performance variations from the benchmark, nor any limits on the concentration of stock or sector weightings within the portfolio, except that no individual shareholding shall exceed 10% of the Company's portfolio at the time of purchase, although market movements may subsequently increase this percentage.

 

The full text of the Company's investment policy is provided on page 67 of the published 2019 Annual Report.

 

Benchmark Index

Topix (in Sterling terms)

 

Investment Approach

The Investment Manager's investment philosophy is that markets are not always efficient. The Investment Manager's approach is therefore that superior investment returns are attainable by investing in companies with good fundamentals and above average growth prospects that in the Investment Manager's opinion drive share prices over the long-term.  The Investment Manager follows a bottom-up investment process based on a disciplined evaluation of companies through active engagement, at least twice a year, with management on performance including environmental, social and governance issues by its fund managers who are based in Japan and supported by the Manager's Asian investment team in Singapore. The Manager estimates a company's worth in two stages, quality, defined by reference to management, business focus, the balance sheet and corporate governance, and then price  calculated by reference to key financial ratios, the market, the peer group and business prospects.  The selection of the portfolio of shares is the major source of the good performance of the portfolio and no stock is bought without the fund managers having first met management.

 

Stock selection is key in constructing a diversified portfolio of companies with macroeconomic, political factors and benchmark weightings being secondary.  

 

Given the long-term fundamental investment philosophy, the Manager expects to hold most companies in which the Company invests for extended periods of time and this accounts for the relatively low level of activity within the portfolio.

 

Financial Policies

The Board's main financial policies cover the management of shareholder capital, risk management of the Company's asset and liabilities, including currency risk, the use of gearing and the reporting to shareholders of the Company's performance and financial position.

 

Management of Shareholder Capital

The Board's policy for the management of shareholder capital is primarily to ensure its long term growth. This growth will reflect both the Manager's investment performance and from time to time the issue of shares when sufficient demand exists to do this without diluting the value of existing shareholder capital. 

 

Following the change of mandate in 2013, the Board's dividend policy was to pay a dividend marginally greater than the minimum required to maintain investment trust status.  Following a review, the Board has proposed a revised enhanced dividend policy which is subject to shareholder approval at the AGM in July 2019.  Going forward, the dividend distribution to shareholders would be paid semi-annually and consist of the Company's earnings for the year, 3.0p released from the revenue reserves and an amount from the capital reserves.  

 

The Board will authorise the buyback of shares in order to avoid excessive variability in the discount and if, despite this, the average discount exceeds 10% during the 90 day period preceding its financial year end, the Board will offer shareholders the opportunity to wind up the Company at the next AGM.

 

Risk Management

The policy for risk management is primarily focused on the investment risk in the portfolio using the Manager's risk management systems and risk parameters, overseen by the Board.

 

Derivatives

The Company may use derivatives from time to time for the purpose of mitigating risk in its investments. The performance of the Company is subject to fluctuations in the Yen/£ exchange rate. The Company's exposure to Yen fluctuations is partially offset by the natural hedge provided by any borrowing in Yen as well as by investments in Japanese companies which have significant sources of income from exports of goods or from non-Japanese operations. 

 

The wider corporate risks, including those arising from the increasingly regulated and competitive market place, are managed directly by the Board.  The principal risks are more fully described under the paragraph 'Principal Risks and Uncertainties'.

 

Use of Gearing

Gearing is the amount of borrowing used to increase the Company's portfolio of investments in order to enhance returns when and to the extent it is considered appropriate to do so or to finance share buybacks when necessary. The level of borrowing is subject to a maximum of 25% of net assets but will normally be set at a stable and lower level than the maximum. The Board has currently established a gearing level of around 10% of net assets although, with stock market fluctuations, this may range between 5% and 15%.

 

Principal Risks and Uncertainties

The Company's risks are regularly monitored at Audit Committee meetings and the Board believes that the Company is resilient to most short term operational risks which are effectively mitigated by the internal controls of the Manager and Depositary.  Identification and mitigation of other longer term and strategic risks which might threaten its business model, future performance or solvency are robustly assessed by the Audit Committee and managed by the Board. The principal risks and uncertainties faced by the Company are described in the table below, together with the mitigating actions.

 

Description

Mitigating Action

Investment strategy risk

The Company and its investment objective may become unattractive to investors. The value of Japanese equities may be affected by factors not associated with the UK, including the general health of the Japanese economy and political events in and around Japan, which can affect investor demand.

 

The Board monitors longer term trends in investor demand and, if appropriate, can propose changes to the investment objective to the shareholders.

Investment risk

Investment risk arises from the Company's exposure to variations of share prices within its portfolio in response to individual company and to wider Japanese or international factors. Investment in a focussed portfolio of shares can lead to greater short term changes in the portfolio's value than in a larger portfolio of stocks and these variations will be amplified by the use of gearing.

 

The Board regularly monitors the investment performance of the portfolio and the performance of the Manager in operating the investment policy against the long term objectives of the Company and, where appropriate, has in place mitigation measures.

 

Reputation

The attractiveness of the Company to investors is based on the good reputation of the Manager as well as of investment trusts generally. Were investment trusts to fall out of favour as a route for investors or the Manager's reputation to weaken, it is likely that investor demand would decline.

 

The Board monitors shareholder sentiment regularly and would be able to take remedial action were its reputation to be threatened.

 

Regulatory compliance risk

The Company operates under a complex regulatory environment.  Serious breaches of regulations, such as Section 1158 of the Corporation Tax Act 2010, the UKLA Listing Rules, Companies Act 2006 and the Alternative Investment Fund Managers Directive could lead to a number of detrimental outcomes and reputational damage.

 

 

The Board is active in ensuring that it fully complies with all applicable laws and regulation and is assisted by the Manager and other advisers in doing this. The Board believes that, while the consequences of non-compliance can be severe, the control arrangements it has put in place reduce the likelihood of this happening.

Performance risk

Inappropriate investment decisions may result in the Company's underperformance against the benchmark index and Peer Group and a widening of the Company's discount.

 

The Board regularly reviews performance data and attribution analysis and other relevant factors and, were any underperformance seen as likely to be sustained, would be able to take remedial measures.

Gearing - The Company uses its ability to gear.   Gearing has the effect of exacerbating market falls and gains.

 

The maximum level of borrowing permitted by the Company's investment policy is 25% of net assets In order to manage the level of gearing, the Board has established a gearing level of around 10% of net assets although, with stock market fluctuations, this may range between 5% and 15%.  The Board regularly reviews the Company's gearing levels and its compliance with bank covenants.

 

In addition to these risks, the outcome and potential impact of the UK Government's negotiations with the European Union on Brexit is still unclear at the date of this report.  This remains an economic risk for the Company, principally in relation to the potential impact of Brexit on currency volatility and the Manager's operations.  Aberdeen Standard Investments has a significant Brexit program in place aimed at ensuring that they can continue to satisfy their clients' investment needs post Brexit. 

 

In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.

 

Key Performance Indicators (KPIs)

The key performance indicators (KPIs) which the Board uses to monitor the Company's performance are established industry measures, and are as follows:

 

KPI

Achievement of KPI

-     NAV (total return) relative to the Company's benchmark index (3 years)

No

-     Share price (total return) vs Peer Group (3 years)

No

-     Discount or premium of the share price to NAV vs Peer Group on an annual average (1 year).

No

-     Ongoing Charges Ratio (1 year)

Yes

 

Performance is compared against the Company's benchmark index and its Peer Group.  In view of the Manager's style of investing, there can be, in the short-term, considerable divergence from both comparators.  The Board uses a three year rolling performance for the following KPIs:- total NAV return against the benchmark index and share price total return compared with the Peer Group. The KPI for the discount comparison to its Peer Group is over one year.  The Company's Ongoing Charges Ratio is compared with the Peer Group, taking into account its size, to ensure that total running costs remain competitive.

 

An analysis of the KPIs is provided below.  Over the three year period to 31 March 2019, the Company's NAV and share price return underperformed its KPI.  This was largely attributable to the relative underperformance of the Trust's investment portfolio in the financial year to 31 March 2019 and the loss on the Currency Hedge in the financial year to 31 March 2017 caused by the sharp depreciation of sterling following the Brexit Referendum. 

 

The discount KPI also underperformed.  The Trust's OCR reduced over the year to 31 March 2019 to 1.10% and is competitive within its Peer Group relative to its size of total assets. 

 

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective element of achieving this is through participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management.

 

The purpose of the programme is both to enable the Company to communicate the long-term attractions of the Company effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. The Company also supports the Aberdeen Group's investor relations programme of regional roadshows, promotional and public relations campaigns. 

 

In addition, the Company's website contains a daily update on the latest portfolio performance and a monthly summary of investment performance together with information about the Japanese market, details of the principal risks of investing in the Company and any other significant developments within the Company.   

 

Investors should be aware that, under the PRIIPS Regulation, the Manager is required to prepare a key information document ("KID") in respect of the Company. This KID must be made available to retail investors prior to them making any investment decision and a link to it is available from the Company's website. The information and the procedures for calculating the risks, costs and potential returns contained in the KID are prescribed by the law. Investors should note that the figures in the KID may not reflect the expected returns for the Company and anticipated performance returns cannot be guaranteed.

 

Board Diversity

The Board recognises the importance of having a diverse group of Directors with the right mix of competencies to allow the Board to fulfil its obligations. At 31 March 2019 there were three male Directors and two female Directors, all of whom bring different experience and skills and contribute distinctively to the Board's performance. The Board's statement on diversity is set out on page 28 of the published 2019 Annual Report.

 

Employee, Environmental, Social & Human Rights Issues

The Company has no employees as it has delegated operational management to the Manager. There are therefore no disclosures to be made in respect of employees.  The Company's socially responsible investment policy is outlined on page 30 of the published 2019 Annual Report.

 

Modern Slavery Act

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

 

Viability Statement

The Company's business model is designed to deliver long term capital growth to its shareholders through investment in large and liquid stocks in the global equity markets. Its plans are therefore based on having no fixed or limited life provided the global equity markets continue to operate normally.

 

The Board has assessed the Company's prospects over a three year period in accordance with the UK Corporate Governance Code.  The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.  In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

 

-    The principal risks detailed in the strategic report (above) and the steps taken to mitigate these risks;

-    The ongoing relevance of the Company's investment objective in the current environment;

-    The level of revenue surplus generated by the Company;

-    The level of gearing is closely monitored by the Board;

-    The Company has the ability to renew or repay its gearing. The Company has a loan facility totalling JPY 2.3 billion in place until January 2020;

-    The liquidity of the Company's portfolio and the impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values; and

-    The Company is invested in readily realisable listed securities.

 

Matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio or changes in investor sentiment, all of which could have an impact on the Company's prospects and viability in the future.

 

As an investment trust with a Japanese mandate, the Company's portfolio is unlikely to be adversely impacted as a direct result of Brexit although some currency volatility could arise.

 

Accordingly, taking into account the Company's current position and its prospects, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report.

 

The Strategic Report was approved by the Board of Directors and signed on its behalf for Aberdeen Japan Investment Trust PLC by:

 

Karen Brade

Chairman

29 May 2019

 

 

RESULTS

Financial Highlights

 

31 March 2019

31 March 2018

% change

Total assets (as defined on page 71 of the published 2019 Annual Report.)

£99,810,000

£111,863,000

-10.8

Total equity shareholders' funds (net assets)

£88,025,000

£100,472,000

-12.4

Market capitalisation

£76,022,000

£85,775,000

-11.4

Share price (mid market)

525.00p

582.50p

-9.9

Net asset value per share

607.89p

682.31p

-10.9

Discount to net asset value{A}

13.6%

14.6%

 

Net gearing{A}

11.6%

10.5%

 

 

 

 

 

Operating costs

 

 

 

Ongoing charges ratio{A}

1.10%

1.18%

 

 

 

 

 

Earnings

 

 

 

Total return per share

(70.63p)

75.83p

 

Revenue return per share

6.83p

6.59p

 

Proposed final dividend per share

5.40p

5.20p

 

Revenue reserves (prior to payment of proposed final dividend)

£2,839,000

£2,604,000

 

 

 

{A} Considered to be an Alternative Performance Measure. See below for more information.

 

 

 

KEY PERFORMANCE INDICATORS

 

 

 

 

Return since

 

1 year

3 year

5 year

8 October 2013

 

return

return

return

(change of mandate)

Net asset value{A}

-10.2%

+21.8%

+67.5%

+69.0%

Index

-1.8%

+41.3%

+75.1%

+68.6%

Share price{A}

-9.1%

+20.6%

+67.9%

+60.3%

Peer Group share price

-7.8%

+44.3%

+101.0%

+88.8%

Average discount - Company

-11.4%

-11.6%

-9.9%

-9.8%

Average discount - Peer Group

-5.0%

-5.0%

-5.3%

-5.4%

 

 

 

 

Source: Standard Life Aberdeen, Lipper & Morningstar.

 

 

 

{A} Considered to be an Alternative Performance Measure. See below for further details.

Based on share price and NAV per Morningstar (ie as available in the market, not including the annual report NAV).

Peer Group is the Japan sector of Morningstar.

Index represents the MSCI AC Asia Pacific (including Japan) Index (in Sterling terms) up to 7 October 2013 and the TOPIX (in Sterling terms) from 8 October 2013.

           

 

 

DIVIDENDS

 

Rate

Ex-dividend date

Record date

Payment date

Proposed final dividend 2019

5.40p

13 June 2019

14 June 2019

12 July 2019

Final dividend 2018

5.20p

14 June 2018

15 June 2018

13 July 2018

 

 

INVESTMENT PORTFOLIO

Top Ten Investments as at 31 March 2019

 

 

Valuation

Total

Valuation

 

 

2019

assets

2018

Company

Sector

£'000

%

£'000

Keyence Corporation

 

 

 

 

The leading maker of sensors has a cash generative business and is backed by a strong balance sheet and technological expertise.

Electronic & Electrical Equipment

4,925

4.9

5,306

Chugai Pharmaceutical Company

 

 

 

 

Roche's subsidiary in Japan, Chugai has a strong pipeline of drugs and is able to leverage its parent's portfolio and research.

Pharmaceuticals & Biotechnology

3,942

3.9

2,699

Sysmex Corporation

 

 

 

 

The medical-equipment maker has a leading position in niche markets, particularly its dominance in the field of haematology. It also has a solid balance sheet and resilient business.

Health Care Equipment & Services

3,774

3.8

4,127

Shin-Etsu Chemical Company

 

 

 

 

Despite the challenging environment, the Japanese maker of specialised chemicals remains a leader in its industry, due to its technological edge and a greater focus on profits than most Japanese rivals.

Chemicals

3,597

3.6

5,825

Yamaha Corporation

 

 

 

 

After years of difficult restructuring, Yamaha Corp has narrowed its business focus to only musical instruments, where it has a solid global market share, and audio equipment, given its competitive edge in sound-synthesis technology.

Leisure Goods

3,521

3.5

            1,298

Daikin Industries

 

 

 

 

The air-conditioning equipment manufacturer has a solid global presence, particularly in China, where it leverages its environmentally-friendly range.

Industrial Engineering

3,368

3.4

            3,145

Ashai Intecc Company

 

 

 

 

A leading developer of interventional guide wires and catheters, with market-leading positions across the world. Its products are renowned for their quality, while demand for minimally-invasive surgery is growing.

Health Care Equipment & Services

3,347

3.4

2,621

Japan Exchange Group Inc.

 

 

 

 

The company operates both the Tokyo and Osaka stock exchanges, which are essentially monopolistic businesses with high operating leverage. It has also been proactive in returning excess cash to shareholders.

Financial Services

3,000

3.0

2,906

Shionogi & Company

 

 

 

 

The pharmaceutical company specialises in infectious diseases, amongst other therapies, and is a global leader in the treatment of HIV. It has a strong in-house pipeline of compounds, which we believe bodes well for its medium to longer-term prospects.

Pharmaceuticals & Biotechnology

2,966

3.0

1,548

Shiseido Company

 

 

 

 

One of Japan's biggest cosmetics groups with a strong portfolio that is increasingly weighted to lucrative prestige brands, supported by good management and decent governance.

Personal Goods

2,820

2.8

3,877

Top ten investments

 

35,260

35.3

 

 

 

INVESTMENT PORTFOLIO

Other Investments as at 31 March 2019

 

 

Valuation

Total

Valuation

 

 

2019

assets

2018

Company

Sector

£'000

%

£'000

Nippon Paint Holdings Company

Chemicals

2,678

2.7

2,763

KDDI Corporation

Mobile Telecommunications

2,644

2.7

3,183

Pigeon Corporation

Personal Goods

2,627

2.6

3,861

Makita Corporation

Household Goods & Home Construction

2,533

2.6

3,496

SCSK Corporation

Software & Computer Services

2,470

2.5

1,829

Amada Holdings Company

Industrial Engineering

2,429

2.4

3,980

Seven & I Holdings Company

General Retailers

2,287

2.3

3,637

Otsuka Corporation

Software & Computer Services

2,228

2.2

-

Nabtesco Corporation

Industrial Engineering

2,121

2.1

3,490

Tokio Marine Holdings Inc.

Nonlife Insurance

2,044

2.0

-

Top twenty investments

 

59,321

59.4

 

Misumi Group Inc.

Industrial Engineering

2,038

2.0

-

Kansai Paint Company

Chemicals

2,018

2.0

1,817

Stanley Electric Company

Automobiles & Parts

1,999

2.0

2,683

Elecom Company

Technology Hardware & Equipment

1,891

1.9

-

Aeon Financial Service Company

Financial Services

1,717

1.7

2,047

USS Company

General Retailers

1,680

1.7

1,498

Mani Inc.

Health Care Equipment & Services

1,648

1.7

1,713

Denso Corporation

Automobiles & Parts

1,601

1.6

2,884

Pilot Corporation

Household Goods & Home Construction

1,584

1.6

555

Nitori Holdings

General Retailers

1,535

1.5

1,890

Top thirty investments

 

77,032

77.1

 

Fanuc Corporation

Industrial Engineering

1,491

1.5

4,515

San-A Company

Food & Drug Retailers

1,474

1.5

2,051

Daibiru Corporation

Real Estate Investment & Services

1,469

1.5

1,667

Yahoo Japan Corporation

Software & Computer Services

1,460

1.5

3,661

Japan Tabacco Inc.

Tobacco

1,437

1.4

2,814

Welcia Holdings Company

Food & Drug Retailers

1,404

1.4

-

AIN Holdings Inc.

Food & Drug Retailers

1,383

1.4

1,860

Net One Systems Company

Software & Computer Services

1,311

1.3

-

Toyota Motor Corporation

Automobiles & Parts

1,075

1.1

1,371

Sho-Bond Holdings Company

Construction & Materials

971

1.0

-

Top forty investments

 

90,507

90.7

 

Sakai Moving Service Company

Industrial Transportation

969

1.0

-

Sanken Electric

Technology Hardware & Equipment

941

0.9

996

Mandom Corporation

Personal Goods

926

0.9

1,548

Resorttrust Inc.

Travel & Leisure

913

0.9

1,063

Komatsu

Industrial Engineering

890

0.9

1,698

Renesas Electronics Corporation

Technology Hardware & Equipment

756

0.8

2,056

Aeon Fantasy Company

Travel & Leisure

623

0.6

-

Honda Motor Company

Automobiles & Parts

477

0.5

2,191

Calbee Inc.

Food Producers

403

0.4

1,710

As One Corporation

Health Care Equipment & Services

304

0.3

-

Total investments

 

97,709

97.9

 

Net current assets{A}

 

2,101

2.1

 

Total assets

 

99,810

100.0

 

{A} Excludes bank loans of £11,785,000.

Unless otherwise stated, foreign stock is held and all investments are equity holdings.

In the 2018 valuation column "-" denotes stock not held at last year end.

 

 

GOING CONCERN

The Company's assets consist of equity shares in companies listed on recognised stock exchanges and in most circumstances are realisable within a short timescale. 

 

The Company does not have a fixed life. However, under the articles of association, if, in the 90 days preceding the Company's financial year-end (31 March), the Ordinary shares have been trading, on average, at a discount in excess of 10% to the underlying NAV over the same period, notice will be given of an ordinary resolution to be proposed at the following AGM to approve the continuation of the Company.  In the 90 days to 31 March 2019, the Ordinary shares traded at an average discount of 9.4% to the underlying NAV.  Accordingly, no resolution on the continuation of the Company will be put to the Company's shareholders at the Annual General Meeting.

 

The Company has in place loan facilities to the value of Yen 2.3 billion, available until January 2020 of which Yen 1.7 billion was drawn down at the year end. The Board has set limits for borrowing and regularly reviews the Company's gearing levels and its compliance with bank covenants.  In advance of expiry of these facilities in January 2020, replacement options for the Company's gearing would be sought or, should the Board decide not to do so, any outstanding borrowing would be repaid through the proceeds of equity sales as required.

 

After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of these financial statements. This takes account of the liquidity of the Company's investments, and that the earliest date that the Company may be subject to a continuation vote is at the Annual General Meeting of the Company to be held in 2020. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. 

 

 

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 year.  Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland

 

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 its profit or loss for that period.  In preparing these financial statements, the Directors are required to: 

 

-       select suitable accounting policies and then apply them consistently; 

-       make judgements and estimates that are reasonable and prudent; 

-       state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 

-       assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and 

-       use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

 

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 its financial statements comply with the Companies Act 2006.  They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. 

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 

 

Responsibility statement of the Directors in respect of the annual financial report 

We confirm that to the best of our knowledge: 

 

-     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and 

-     the strategic report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face. 

 

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. 

 

For and on behalf of Aberdeen Japan Investment Trust PLC

 

Karen Brade

Chairman

29 May 2019

 

 

FINANCIAL STATEMENTS

The following is the unaudited preliminary statement for the year to 31 March 2019 which was approved by the Board on 29 May 2019. The Board of Aberdeen Japan Investment Trust PLC is recommending to the Annual General Meeting of the Company to be held on 9 July 2019 the payment of a final dividend of 5.4p (2018 - 5.20p) per ordinary share making a total of  5.4p (2018 - 5.20p) paid and proposed for the year ended 31 March 2019.

 

STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Year ended 31 March 2019

Year ended 31 March 2018

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

(Losses)/gains on investments

10

-

(9,972)

(9,972)

-

6,829

6,829

Income

3

1,839

-

1,839

1,879

-

1,879

Exchange (losses)/gains

14

-

(857)

(857)

-

4,104

4,104

Investment management fee

4

(282)

(424)

(706)

(339)

(508)

(847)

Administrative expenses

5

(331)

(11)

(342)

(326)

(15)

(341)

 

 

_____

_____

_______

______

______

_____

Net return before finance costs and taxation

 

1,226

(11,264)

(10,038)

1,214

10,410

11,624

 

 

 

 

 

 

 

 

Finance costs

6

(44)

(65)

(109)

(42)

(63)

(105)

 

 

_____

_____

_______

______

______

_____

Net return before taxation

 

1,182

(11,329)

(10,147)

1,172

10,347

11,519

 

 

 

 

 

 

 

 

Taxation

7

(184)

-

(184)

(188)

-

(188)

 

 

_____

_____

_______

______

______

_____

Net return after taxation

 

998

(11,329)

(10,331)

984

10,347

11,331

 

 

_____

_____

_______

______

______

_____

 

 

 

 

 

 

 

 

Return per Ordinary share (pence)

9

6.83

(77.46)

(70.63)

6.59

69.24

75.83

 

 

_____

_____

_______

______

______

_____

 

 

 

 

 

 

 

 

The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

The accompanying notes are an integral part of the financial statements.

 

 

STATEMENT OF FINANCIAL POSITION

 

 

31 March 2019

31 March 2018

 

Notes

£'000

£'000

Fixed assets

 

 

 

Investments held at fair value through profit or loss

10

97,709

110,414

 

 

___________

___________

Current assets

 

 

 

Debtors

11

1,359

743

Cash at bank and in hand

 

1,516

881

 

 

___________

___________

 

 

2,875

1,624

 

 

___________

___________

Creditors: amounts falling due within one year

 

 

 

Foreign currency bank loans

12

(11,785)

(2,681)

Other creditors

12

(774)

(175)

 

 

___________

___________

 

 

(12,559)

(2,856)

 

 

___________

___________

Net current liabilities

 

(9,684)

(1,232)

 

 

___________

___________

Total assets less current liabilities

 

88,025

109,182

 

 

 

 

Creditors: amounts falling due in more than one year

 

 

 

Foreign currency bank loans

12

-

(8,710)

 

 

___________

___________

Net assets

 

88,025

100,472

 

 

___________

___________

Share capital and reserves

 

 

 

Called-up share capital

13

1,582

1,582

Share premium

 

6,656

6,656

Capital redemption reserve

 

2,273

2,273

Capital reserve

14

74,675

87,357

Revenue reserve

 

2,839

2,604

 

 

___________

___________

Equity shareholders' funds

 

88,025

100,472

 

 

___________

___________

 

 

 

 

Net asset value per Ordinary share (pence)

15

607.89

682.31

 

 

___________

___________

 

 

STATEMENT OF CHANGES IN EQUITY

 

For the year ended 31 March 2019

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

Share

Share

redemption

Capital

Revenue

 

 

 

capital

premium

reserve

reserve

reserve

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 March 2018

 

1,582

6,656

2,273

87,357

2,604

100,472

Return after taxation

 

-

-

-

(11,329)

998

(10,331)

Dividend paid

8

-

-

-

-

(763)

(763)

Purchase of Ordinary shares to be held in treasury

13

-

-

-

(1,353)

-

(1,353)

 

 

______

______

_____

_____

_____

______

Balance at 31 March 2019

 

1,582

6,656

2,273

74,675

2,839

88,025

 

 

______

______

_____

_____

_____

______

 

 

 

 

 

 

 

 

For the year ended 31 March 2018

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

Share

Share

redemption

Capital

Revenue

 

 

 

capital

premium

reserve

reserve

reserve

Total

 

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 March 2017

 

1,582

6,656

2,273

79,137

2,520

92,168

Return after taxation

 

-

-

-

10,347

984

11,331

Dividend paid

8

-

-

-

-

(900)

(900)

Purchase of Ordinary shares to be held in treasury

13

-

-

-

(2,127)

-

(2,127)

 

 

______

______

_____

_____

_____

______

Balance at 31 March 2018

 

1,582

6,656

2,273

87,357

2,604

100,472

 

 

______

______

_____

_____

_____

______

 

 

STATEMENT OF CASHFLOWS

 

Year ended

Year ended

 

31 March 2019

31 March 2018

 

£'000

£'000

Operating activities

 

 

Net return before taxation

(10,147)

11,519

Adjustment for:

 

 

Losses/(gains) on investments

9,972

(6,829)

(Decrease)/increase in other creditors

(12)

12

Finance costs

109

105

Expenses taken to capital reserve

11

15

Foreign exchange losses/(gains)

337

(690)

Overseas withholding tax

(184)

(188)

Decrease/(increase) in accrued dividend income

50

(4)

Decrease in other debtors

3

8

 

______

______

Net cash inflow from operating activities

139

3,948

 

______

______

Investing activities

 

 

Purchases of investments

(29,080)

(29,919)

Sales of investments

31,755

28,994

Expenses allocated to capital

(11)

(15)

 

______

______

Net cash inflow/(outflow) from investing activities

2,664

(940)

 

______

______

Financing activities

 

 

Bank and loan interest paid

(109)

(105)

Equity dividend paid

(763)

(900)

Purchase of own shares to treasury

(1,353)

(2,127)

 

______

______

Net cash outflow from financing activities

(2,225)

(3,132)

 

______

______

Increase/(decrease) in cash

578

(124)

 

______

______

 

 

 

Analysis of changes in cash during the year

 

 

Opening balance

881

1,007

Effects of exchange rate fluctuations on cash held

57

(2)

Increase/(decrease) in cash as above

578

(124)

 

______

______

Closing balance

1,516

881

 

______

______

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 March 2019

 

 

1.

Principal activity

 

The Company is a closed-end investment company, registered in England and Wales No 3582911, with its Ordinary shares being listed on the London Stock Exchange.

 

2.

Accounting policies

 

(a)

Basis of accounting and going concern

 

 

The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018 with consequential amendments (applicable for accounting periods beginning on or after 1 January 2019 but adopted early). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further details are included in the Directors' Report (unaudited) on page 24 of the published 2019 Annual Report.

 

 

 

 

 

The Company's financial statements are presented in Sterling, which is also the functional currency as it is the basis upon which shareholders operate and expenses are generally paid. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

 

The accounting policies applied are unchanged from the prior year and have been applied consistently.

 

 

 

 

(b)

Valuation of investments

 

 

The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets 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 internally on that basis to the Company's Board of Directors. Accordingly, upon initial recognition the Company designates the investments 'at fair value through profit or loss'. Fair value is taken to be the investment's cost at the trade date (excluding expenses incidental to the acquisition which are written off in the Statement of Comprehensive Income, and allocated to 'capital' at the time of acquisition).

 

 

 

 

 

Subsequent to initial recognition, investments continue to be designated at fair value through profit or loss, which is deemed to be bid prices, where the bid price is available, or otherwise at fair value based on published price quotations.

 

 

 

 

(c)

Income  

 

 

Dividends, including taxes deducted at source, are included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are reviewed on a case-by-case basis and may be credited to capital, if circumstances dictate. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserves. Interest receivable on bank balances is dealt with on an accruals basis.

 

 

 

 

 

Where applicable the dividend income is disclosed net of irrecoverable taxes deducted at source. UK dividend income is recorded net of tax credits.

 

 

 

 

(d)

Expenses

 

 

All expenses are accounted for on an accruals basis. Expenses are allocated to revenue in the Statement of Comprehensive Income except as follows:

 

 

-         expenses are allocated and borne by capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the investment management fee is allocated 40% to revenue and 60% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth; and

 

 

-           transactions costs are charged to capital.

 

 

 

 

(e)

Taxation

 

 

The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the  Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 7 for a more detailed explanation). The Company has no liability for current tax.

 

 

 

 

 

Deferred taxation

 

 

Deferred taxation is provided on all timing differences, that have originated but not reversed at the Statement of Financial Position date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Statement of Financial Position date, measured on an undiscounted basis and based on tax rates expected to apply in the period that the timing differences reverse. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

 

 

 

 

(f)

Nature and purpose of reserves

 

 

Called-up share capital

 

 

The Ordinary share capital on the Statement of Financial Position relates to the number of shares in issue and in treasury. Only when the shares are cancelled, either from treasury or directly, is a transfer made to the capital redemption reserve. This reserve is not distributable.

 

 

 

 

 

Share premium account

 

 

The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity share capital comprising Ordinary shares of 10p. This reserve is not distributable.

 

 

 

 

 

Capital redemption reserve

 

 

The capital redemption reserve is used to record the amount equivalent to the nominal value of any of the Company's own shares purchased and cancelled in order to maintain the Company's capital. This reserve is not distributable.

 

 

 

 

 

Capital reserve

 

 

Gains or losses on disposal of investments and changes in fair values of investments are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve. The costs of share buybacks to be held in treasury are also deducted from this reserve. The capital reserve, to the extent that the gains are deemed realised, is distributable

 

 

 

 

 

Revenue reserve

 

 

This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

 

 

 

 

(g)

Foreign currencies

 

 

Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction.

 

 

 

 

 

Foreign currency asset and liability balances are translated to Sterling at the middle rate of exchange at the year end. Differences arising from translation are treated as capital gain or loss to capital or revenue within the Statement of Comprehensive Income depending upon the nature of the gain or loss.

 

 

 

 

(h)

Dividends payable

 

 

Final dividends are recognised in the financial statements in the period in which they are paid.

 

 

 

 

(i)

Borrowings

 

 

All secured borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable, after initial recognition, all interest bearing borrowings are subsequently measured at amortised cost.  The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method and are charged 40% to revenue and 60% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth. 

 

 

 

 

(j)

Derivative financial instruments

 

 

The Company used forward foreign exchange contracts to manage currency risk arising from investment activity. On 10 July 2018, the Company amended its investment policy to no longer use forward foreign exchange contracts and no derivative positions were held at the year end.

 

 

 

 

 

Derivatives are measured at fair value calculated by reference to forward exchange rates for contracts with similar maturity profiles.

 

 

 

 

 

Changes in the fair value of derivatives are recognised in the Statement of Comprehensive Income as revenue or capital depending on their nature.

 

 

 

 

(k)

Significant estimates and judgements

 

 

The Directors do not believe that any accounting judgements or estimates have been applied to these financial statements that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. The Directors believe that there is one key judgement. The Company's investments and borrowings are made in Japanese yen, however the Board considers the Company's functional currency to be Sterling. In arriving at this conclusion, the Board considered that the shares of the Company are listed on the London Stock Exchange, it is regulated in the United Kingdom, principally having its shareholder base in the United Kingdom and also, pays dividends and expenses in sterling.

 

 

 

2019

2018

3.

Income

£'000

£'000

 

Income from investments

 

 

 

Overseas dividends

1,838

1,879

 

 

 

 

 

Other income

 

 

 

Deposit interest

1

-

 

 

______

______

 

Total income

1,839

1,879

 

 

______

______

 

 

 

2019

2018

 

 

Revenue

Capital

Total

Revenue

Capital

Total

4.

Management fee

£'000

£'000

£'000

£'000

£'000

£'000

 

Management fee

282

424

706

339

508

847

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

For further details see note 19 Related party transactions and transactions with the Manager.

 

 

 

2019

2018

 

 

Revenue

Capital

Total

Revenue

Capital

Total

5.

Administrative expenses

£'000

£'000

£'000

£'000

£'000

£'000

 

Promotional fees

56

-

56

70

-

70

 

Directors' fees

93

-

93

88

-

88

 

Depositary fees

15

-

15

16

-

16

 

Transaction costs on investment purchases

-

11

11

-

15

15

 

Auditor's remuneration (excluding irrecoverable VAT):

 

 

 

 

 

 

 

- fees payable to the Company's auditor for the audit of the annual accounts

23

-

23

19

-

19

 

Other

144

-

144

133

-

133

 

 

______

______

______

______

______

______

 

 

331

11

342

326

15

341

 

 

______

______

______

______

______

______

 

 

 

 2019

 2018

 

 

Revenue

Capital

Total

Revenue

Capital

Total

6.

Finance costs

£'000

£'000

£'000

£'000

£'000

£'000

 

Bank loans

44

65

109

42

63

105

 

 

______

______

______

______

______

______

 

 

 

2019

2018

 

 

Revenue

Capital

Total

Revenue

Capital

Total

7.

Taxation

£'000

£'000

£'000

£'000

£'000

£'000

 

(a)

Analysis of charge for the year

 

 

 

 

 

 

 

 

Irrecoverable overseas taxation

184

-

184

188

-

188

 

 

 

______

______

______

______

______

______

 

 

Total tax charge

184

-

184

188

-

188

 

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

 

(b)

Factors affecting current tax charge for the year

 

 

The tax assessed for the year is lower than the standard rate of corporation tax in the UK. The differences can be explained below:

 

 

 

 

 

 

2019

2018

 

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

Net return before taxation

1,182

(11,329)

(10,147)

1,172

10,347

11,519

 

 

 

______

______

______

______

______

______

 

 

Net return multiplied by standard rate of corporation tax in the UK of 19% (2018 - 19%)

225

(2,153)

(1,928)

223

1,966

2,189

 

 

Effects of:

 

 

 

 

 

 

 

 

Losses/(gains) on investments not taxable

-

1,897

1,897

-

(1,272)

(1,272)

 

 

Currency losses/(gains) not taxable

-

163

163

-

(802)

(802)

 

 

Irrecoverable overseas withholding tax

184

-

184

188

-

188

 

 

Excess management expenses

124

93

217

134

108

242

 

 

Non-taxable overseas dividends

(349)

-

(349)

(357)

-

(357)

 

 

 

______

______

______

______

______

______

 

 

Total tax charge for the year

184

-

184

188

-

188

 

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

 

(c)

Provision for deferred taxation

 

 

 

At 31 March 2019 the Company had surplus management expenses and loan relationship debits with a tax value of £2,057,000 (2018 - £1,863,000) based on enacted tax rates in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in the future in excess of deductible expenses of that future period, and accordingly, it is unlikely that the Company will generate taxable revenue in the future and therefore will be unable to utilise the existing surplus expenses.

 

 

 

2019

2018

8.

Dividends

£'000

£'000

 

Amounts recognised as distributions to equity holders in the year:

 

 

 

Final dividend 2018 - 5.20p (2017 - 6.00p)

763

900

 

 

______

______

 

 

 

 

 

In order to comply with the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 the Company is required to make a dividend distribution.

 

 

 

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability. It is proposed that the final dividend will be paid on 12 July 2019 to shareholders on the register at the close of business on 14 June 2019.

 

 

 

The table below sets out the total dividends proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158 -1159 are considered. The revenue available for distribution by way of dividend for the year is £998,000 (2018 - £984,000). Presently, only the revenue reserve can be used for the distribution of dividends.

 

 

 

 

 

 

2019

2018

 

 

£'000

£'000

 

Proposed final dividend for 2019 - 5.4p per Ordinary share (2018 - 5.20p)

782

763

 

 

______

______

 

 

 

2019

2019

2018

2018

9.

Return per Ordinary share

p

£'000

p

£'000

 

Returns per share are based on the following figures:

 

 

 

 

 

Revenue return

6.83

998

6.59

984

 

Capital return

(77.46)

(11,329)

69.24

10,347

 

 

______

______

______

 

Total return

(70.63)

75.83

11,331

 

 

______

______

______

______

 

Weighted average number of Ordinary shares in issue

 

 

14,942,878

 

 

 

 

_________

 

 

 

2019

2018

10.

Investments held at fair value through profit or loss

£'000

£'000

 

Opening book cost

79,521

70,899

 

Opening investment holding gains

30,893

31,894

 

 

______

______

 

Opening fair value

110,414

102,793

 

Movements in the year:

 

 

 

Purchases at cost (excluding transaction costs)

29,691

29,786

 

Sales - proceeds (net of transaction costs)

(32,424)

(28,994)

 

Sales - gains on sales

3,572

7,830

 

Decrease in investment holding gains

(13,544)

(1,001)

 

 

______

______

 

Closing fair value

97,709

110,414

 

 

______

______

 

 

 

 

 

 

2019

2018

 

 

£'000

£'000

 

Closing book cost

80,360

79,521

 

Closing investment holding gains

17,349

30,893

 

 

______

______

 

 

97,709

110,414

 

 

______

______

 

 

 

 

 

 

2019

2018

 

(Losses)/gains on investments

£'000

£'000

 

Gains on sales

3,572

7,830

 

Decrease in investment holding gains

(13,544)

(1,001)

 

 

______

______

 

 

(9,972)

6,829

 

 

______

______

 

 

 

 

 

As at 31 March 2019, all investments held are in quoted stocks (2018 - same).

 

 

 

 

 

 

Transaction costs

 

 

 

During the year expenses were incurred in acquiring or disposing of investments designated as fair value through profit or loss. Expenses incurred in acquiring investments have been expensed through capital and are included within administration expenses in the Statement of Comprehensive Income, whilst expenses incurred in disposing of investments have been expensed through capital and are included within (losses)/gains on investments in the Statement of Comprehensive Income. The total costs were as follows:

 

 

 

 

 

 

2019

2018

 

 

£'000

£'000

 

Purchases

11

15

 

Sales

11

9

 

 

______

______

 

 

22

24

 

 

______

______

 

 

 

 

 

The above transaction costs are calculated in line with the AIC SORP. The transaction costs in the Company's Key Information Document are calculated on a different basis and in line with the PRIIPs regulations.

 

 

 

2019

2018

11.

Debtors: amounts falling due within one year

£'000

£'000

 

Amounts due from brokers

669

-

 

Prepayments and accrued income

690

742

 

Other loans and receivables

-

1

 

 

______

______

 

 

1,359

743

 

 

______

______

 

 

 

 

 

All financial assets are included at amortised cost.

 

 

 

2019

2018

12.

Creditors

£'000

£'000

 

(a)

Foreign currency bank loans

 

 

 

 

Falling due within one year

11,785

2,681

 

 

Falling due after more than one year

-

8,710

 

 

 

______

______

 

 

 

11,785

11,391

 

 

 

______

______

 

 

 

 

 

 

 

The Company entered into a two year credit facility with ING Bank in January 2018. At the year end, JPY1,300,000,000 (2018 - JPY1,300,000,000) equivalent to £9,012,000 (2018 - £8,710,000) had been drawn down at an all-in interest rate of 0.7865% (2018 - 0.7865%) which is due to mature on 23 January 2020.

 

 

 

 

 

In addition, on 23 January 2019, the Company entered into a one year JPY1,000,000,000 revolving credit facility with ING Bank which rolls over quarterly and has a final maturity on 23 January 2020. At the year end JPY400,000,000, equivalent to £2,773,000, had been drawn down at an all-in interest rate of 0.70%. At the date of this Report the Company had drawn down JPY400,000,000 at an all-in interest rate of 0.70%.

 

 

 

 

 

The terms of both loan facilities with ING Bank contain a covenant that total borrowings should not exceed 35% of the adjusted net asset value of the Company at any time and that the net asset value should not fall below £40,000,000 at any time. The Company has met these covenants throughout the period.

 

 

 

 

 

 

 

 

2019

2018

 

(b)

Other creditors falling due within one year

£'000

£'000

 

 

Amounts due to brokers

611

-

 

 

Sundry creditors

163

175

 

 

 

______

______

 

 

 

774

175

 

 

 

______

______

 

 

 

2019

2018

13.

Called-up share capital

Number

£'000

Number

£'000

 

Allotted, called-up and fully paid

 

 

 

 

 

Ordinary shares of 10p each

14,480,439

1,448

14,725,277

1,472

 

Held in treasury

1,341,133

134

1,096,295

110

 

 

________

______

________

______

 

 

15,821,572

1,582

15,821,572

1,582

 

 

________

______

________

______

 

 

 

Ordinary shares

Treasury shares

Total

 

 

 

Number

Number

Number

 

Opening balance

 

14,725,277

1,096,295

15,821,572

 

Ordinary shares bought back for holding in treasury

 

(244,838)

244,838

-

 

 

 

________

________

________

 

Closing balance

 

14,480,439

1,341,133

15,821,572

 

 

 

________

________

________

 

 

 

 

 

 

 

During the year 244,838 Ordinary shares (2018 - 349,320) were bought back and held in treasury at a cost of £1,353,000 (2018 - £2,127,000). Subsequent to the year end a further 200 Ordinary shares were bought back at a cost of £1,000.

 

 

 

2019

2018

14.

Capital reserve

£'000

£'000

 

At 1 April 2018

87,357

79,137

 

Losses over cost arising on movement in investment holdings

(13,544)

(1,001)

 

Gains on realisation of investments at fair value

3,572

7,830

 

Currency (losses)/gains

(857)

4,104

 

Administrative expenses charged to capital

(11)

(15)

 

Management fee charged to capital

(424)

(508)

 

Buyback of Ordinary shares for holding in treasury

(1,353)

(2,127)

 

Finance costs charged to capital

(65)

(63)

 

 

________

________

 

At 31 March 2019

74,675

87,357

 

 

________

________

 

 

 

 

 

The capital reserve includes investment holding gains amounting to £17,349,000 (2018 - gains of £30,893,000) as disclosed in note 10.

 

 

 

Net currency losses arising during the year of £857,000 (2018 -  gains of £4,104,000) are analysed further in the table below.

 

 

 

 

 

 

2019

2018

 

 

£'000

£'000

 

(Losses)/gains on forward foreign exchange contracts

(522)

3,544

 

(Losses)/gains on revaluation of bank loan

(392)

810

 

Gains/(losses) on cash deposits

57

(250)

 

 

________

________

 

 

(857)

4,104

 

 

________

________

 

15.

Net asset value per share

 

The net asset value per share and the net asset values attributable to Ordinary shareholders at the year end calculated in accordance with the Articles of Association were as follows:

 

 

 

 

Net asset value per share

Net asset values attributable

 

 

2019

2018

2019

2018

 

 

p

p

£'000

£'000

 

Ordinary shares

607.89

682.31

88,025

100,472

 

 

________

________

________

________

 

 

 

 

 

 

 

The movements during the year of the assets attributable to the Ordinary shares were as follows:

 

 

 

 

 

 

2019

2018

 

 

£'000

£'000

 

Net assets attributable at 1 April 2018

100,472

92,168

 

Capital return for the year

(11,329)

10,347

 

Revenue after taxation

998

984

 

Dividend paid

(763)

(900)

 

Purchase of Ordinary shares to be held in treasury

(1,353)

(2,127)

 

 

________

________

 

Net assets attributable at 31 March 2019

88,025

100,472

 

 

________

________

 

 

 

The net asset value per Ordinary share is based on net assets, and on 14,480,439 (2018 - 14,725,277) Ordinary shares, being the number of Ordinary shares in issue, after deducting 1,341,133 (2018 - 1,096,295) shares held in treasury, at the year end.

 

16.

Financial instruments

 

Risk management

 

The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments comprise securities and other investments, cash balances, loans, debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income.

 

 

 

Certain risk management functions have been delegated to Aberdeen Standard Fund Managers Limited ("ASFML" or "Manager") under the terms of the management agreement (further details of which are included under note 19). The Board regularly reviews and agrees policies for managing each type of risk, are summarised below. This approach has been applied throughout the year within the Manager's risk management framework which is described below and has not changed since the previous accounting period.

 

 

 

Risk management framework

 

The directors of Aberdeen Standard Fund Managers Limited collectively assume responsibility for ASFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year.

 

 

 

ASFML is a fully integrated member of the Standard Life Aberdeen Group ("the Group"), which provides a variety of services and support to ASFML in the conduct of its business activities, including in the oversight of the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to Aberdeen Asset Management Asia Limited, which is responsible for ensuring that the Company is managed within the terms of its investment guidelines and the limits set out in its pre-investment disclosures to investors (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the Company.

 

 

 

The Manager conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the CEO of the Group. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SHIELD").

 

 

 

The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group's CEO and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment.

 

 

 

The Group's corporate governance structure is supported by several committees to assist the board of directors of the Group, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference.

 

 

 

Risk management

 

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, price risk and currency risk), (ii) liquidity risk and (iii) credit risk.

 

 

 

Market risk

 

The fair value or future cash of a financial instrument held by the Company may fluctuate because of changes in market prices. This market price risk comprises three elements - interest rate risk, price risk and currency risk. 

 

 

 

Interest rate risk

 

Interest rate movements may affect:

 

- the level of income receivable on cash deposits; and

 

- interest payable on the Company's variable rate borrowings.

 

 

 

Management of the risk

 

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

 

 

 

Interest rate sensitivity

 

Movements in interest rates would not significantly affect net assets attributable to the Company's shareholders and total profit due to there being no investments in fixed interest securities during the year and a relatively low level of bank borrowings.

 

 

 

Price risk

 

Price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of quoted investments.

 

 

 

Management of the risk

 

It is the Board's investment policy for the Company's assets to be invested in a selected portfolio of securities in quoted companies as explained below. The Manager has a dedicated investment management process, which ensures that the risk inherent in this investment policy is controlled. Underlying the process is the belief that risk is not that individual stock prices fluctuate in the short term, or that movement in the value of the portfolio deviates from the benchmark but that risk is investment in poorly managed expensive companies which the Manager does not understand. In-depth research and stock selection procedures are in place based on this risk control philosophy. The portfolio is reviewed on a periodic basis by the Manager's Investment Committee and by the Board.

 

 

 

Price sensitivity

 

If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 March 2019 would have increased/(decreased) by £9,771,000 (2018 increased/(decreased) by £11,041,000) and equity reserves would have increased/(decreased) by the same amount.

 

 

 

Foreign currency risk

 

The Company primarily invests in the shares of companies which are listed in Japan but can include companies listed on other stock markets which earn significant revenue from trading in Japan or hold net assets predominantly in Japan. The Statement of Financial Position, therefore, can be significantly affected by movements in foreign exchange rates.

 

 

 

Management of the risk

 

The Company may, from time to time, match specific overseas investment with foreign currency borrowings. The Company's borrowings, as detailed in note 12, are also in foreign currency. In addition, the Company sought to ensure that that the Company's Yen net exposure is appropriately Sterling-hedged through the use of rolling forward currency contracts. On 10 July 2018, the Company amended its investment policy and no longer use forward currency contracts. During the year, a net loss of £522,000 (2018 - gain of £3,544,000) was realised from the use of such contracts.

 

 

 

The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.

 

 

 

Foreign currency risk exposure by currency of denomination:

 

 

 

 

 31 March 2019

 31 March 2018

 

 

 

Net

Total

 

Net

Total

 

 

Overseas

monetary

currency

Overseas

monetary

currency

 

 

investments{A}

assets

exposure

investments{A}

assets

exposure

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

Japanese Yen

97,709

(9,662)

88,047

59,814

(9,838)

49,976

 

 

________

________

________

________

________

________

 

 

 

 

 

 

 

 

 

{A} Overseas investment is stated net of forward currency contracts with a net Sterling equivalent amount of nil (2018 - £50,600,000)

 

 

 

Foreign currency sensitivity

 

The following table details the positive impact to a 10% decrease in Sterling against the foreign currency in which the Company has exposure (based on exposure >5% of total exposure including foreign exchange contracts). The sensitivity analysis includes foreign currency denominated monetary items and adjusts their translation at the year end for a 10% change in foreign currency rates. In the event of a 10% increase in Sterling then there would be a negative impact on the Company's returns.

 

 

 

 

 

 

 

 

2019

2019

2018

2018

 

 

Revenue

Equity{A}

Revenue

Equity{A}

 

 

£'000

£'000

£'000

£'000

 

Japanese Yen

184

188

10,058

 

 

________

________

________

________

 

 

 

 

 

 

 

{A} Represents equity exposure to relevant currencies. 

 

 

 

Liquidity risk

 

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

 

 

 

Management of the risk

 

Liquidity risk is not considered to be significant as the Company's assets mainly comprise readily realisable securities which can be sold to meet funding requirements if necessary and flexibility is achieved through the use of loan facilities, details of which may be found in note 12.

 

 

 

Liquidity risk exposure

 

At 31 March 2019, the Company had a short term bank loan of £9,012,000 (2018 - £8,710,000) which is due to mature on 23 January 2020 with interest due on the principal every six months. The Company also had a rolling facility of £2,773,000 (2018 - £2,681,000) which matured on 23 April 2019 with interest payable at maturity.

 

 

 

Credit risk

 

This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

 

 

 

Management of the risk

 

Investment transactions are carried out with a large number of brokers of good quality credit standing, and cash is held only with reputable banks with high quality external credit enhancements.

 

 

 

In addition, both stock and cash reconciliations to the Depositary's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis.

 

 

 

None of the Company's financial assets is secured by collateral or other credit enhancements and none are past due or impaired.

 

 

 

Credit risk exposure

 

The amount of cash at bank and in hand of £1,516,000 (2018 - £881,000) and debtors of £1,359,000 (2018 - £743,000) in the Statement of Financial Position represent the maximum exposure to credit risk at 31 March.

 

 

 

Fair values of financial assets and financial liabilities

 

The fair value of borrowings has been calculated at £11,785,000 as at 31 March 2019 (2018 - £11,414,000) compared to an accounts value in the financial statements of £11,785,000 (2018 - £11,391,000) (note 12), due to the short-term maturity. The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. The carrying value of all other assets and liabilities is an approximation of fair value.

                       

 

17.

Capital management policies and procedures

 

The Company's capital management objectives are:

 

-        to ensure that the Company will be able to continue as a going concern; and

 

-        to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 15% of net assets.

 

 

 

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.

 

 

 

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period and year end positions are presented in the Statement of Financial Position.

 

18.

Fair value hierarchy

 

FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following classifications:

 

 

 

Level 1 - unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.

 

Level 2 - inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.

 

Level 3 - inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

 

 

 

All of the Company's investments are in quoted equities actively traded on a recognised stock exchange, with their fair value being determined by reference to their quoted bid prices at the reporting date (2018 - same). The total value of the investments (2019 - £97,709,000; 2018 - £110,414,000) have therefore been deemed as Level 1.

 

19.

Related party transactions and transactions with the Manager

 

Directors' fees and interests

 

Fees payable during the year to the Directors and their interest in shares of the Company are disclosed within the Directors' Remuneration Report on page 35 of the published 2019 Annual Report.

 

 

 

Transactions with the Manager

 

The Company has agreements with ASFML to provide management, accounting, administrative and secretarial duties. The agreement for provision of management services has been delegated to Aberdeen Investment Management Kabushiki Kaisha.

 

 

 

The Company has an agreement with ASFML for the provision of promotional activities in relation to the Company's participation in the Aberdeen Standard Investment Trust Share Plan and ISA. The total fees paid and payable under the agreement were £56,000 (2018 - £70,000) and the accrual to ASFML at the year end was £13,000 (2018 - £18,000).

 

 

 

The management fee is payable at a rate of 0.75% per annum of the value of the Company's net assets, and is payable monthly in arrears. The balance due to ASFML at the year end was £55,000 (2018 - £71,000).

 

 

20.

Subsequent events

 

Effective from 1 June 2019, the management fee of 0.75% per annum will be charged on the lesser of the Company's net asset value or market capitalisation (as defined below), rather than on purely the net asset value. The fee will continue to be payable monthly in arrears. Market capitalisation is defined as the closing share price quoted on the London Stock Exchange multiplied by the number of shares in issue (less the number of any shares held in Treasury), as determined on the last business day of the applicable calendar month to which the remuneration relates.

 

 

21.       Additional notes to Annual Financial Report:

The final dividend, subject to shareholder approval, will be paid on 12 July 2019 to shareholders on the register at the close of business on 14 June 2019. The ex-dividend date is 13 June 2019.

 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006

 

The statutory accounts for the financial year ended 31 March 2019 have been approved by the Board and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 11.00am on 9 July 2019 at Bow Bells House, One Bread Street, London EC4M 9HH.

 

The Annual Report will be posted to shareholders in June 2019 and copies will be available from the Manager or from the Company's website (www.aberdeen-japan.co.uk*).

 

 

 

ALTERNATIVE PERFORMANCE MEASURES

Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes FRS 102 and the AIC SORP. The Directors assess the Company's performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies.

 

Total return

Total return is considered to be an alternative performance measure. NAV and share price total returns show how the NAV and share price has performed over a period of time in percentage terms, taking into account both capital returns and dividends paid to shareholders. NAV total return involves investing the net dividend in the NAV of the Company with debt at fair value on the date on which that dividend goes ex-dividend. Share price total return involves reinvesting the net dividend in the share price of the Company on the date on which that dividend goes ex-dividend.

 

The tables below provide information relating to the NAVs and share prices of the Company on the dividend reinvestment dates during the years ended 31 March 2019 and 31 March 2018.

 

 

 

 

 

Dividend

 

Share

2019

rate

NAV

price

31 March 2018

N/A

682.31p

582.50p

14 June 2018

5.20p

703.94p

620.00p

31 March 2019

N/A

607.89p

525.00p

Total return

 

-10.2%

-9.1%

 

 

 

 

 

Dividend

 

Share

2018

rate

NAV

price

31 March 2017

N/A

611.41p

547.50p

15 June 2017

6.00p

642.73p

574.50p

31 March 2018

N/A

682.31p

582.50p

Total return

 

+12.6%

+7.5%

 

 

 

 

Discount to net asset value per Ordinary share 

The discount is the amount by which the share price of 525.00p (2018 - 582.50p) is lower than the net asset value per share of 607.89p (2018 - 682.31p), expressed as a percentage of the net asset value.

 

Net gearing 

Net gearing measures the total borrowings of £11,785,000 (31 March 2018 - £11,391,000) less cash and cash equivalents of £1,574,000 (31 March 2018 - £881,000) divided by shareholders' funds of £88,025,000 (31 March 2018 - £102,472,000), expressed as a percentage. Under AIC reporting guidance cash and cash equivalents includes amounts due and to brokers at the year end as well as cash and cash equivalents. These balances can be found in notes 11 and 12.

 

Ongoing charges 

Ongoing charges is considered to be an alternative performance measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses and expressed as a percentage of the average net asset values with debt at fair value throughout the year.

 

 

 

 

2019

2018

Investment management fees (£'000)

706

847

Administrative expenses (£'000)

342

341

Less: transaction costs on investment purchases (£'000)

(11)

(15)

 

______

______

Ongoing charges (£'000)

1,037

1,173

 

______

______

Average net assets (£'000)

94,269

99,497

 

______

______

Ongoing charges ratio

1.10%

1.18%

 

______

______

 

At 31 March 2019 the Company's OCR was 1.10% as above compared to the Peer Group weighted average OCR of 0.85% (average net assets at 31 March 2019 - £361 million)(Source AIC).The ongoing charges ratio provided in the Company's Key Information Document is calculated in line with the PRIIPs regulations.

 

 

 

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

 

*Neither the Company's website nor the content of any website accessible from hyperlinks on that website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

 

For Aberdeen Japan Investment Trust PLC

Aberdeen Asset Management PLC, Secretary

 

END


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Annual Financial Report - RNS