Baillie Gifford Japan Trust PLC Regulatory News (BGFD)

RNS Announcement

The Baillie Gifford Japan Trust PLC

Legal Entity Identifier: 54930037AGTKN765Y741

Regulated Information Classification: Interim Financial Report

Results for the six months to 28 February 2023

The following is the unaudited Interim Financial Report for the six months to 28 February 2023 which was approved by the Board on 30 March 2023.

In the six months to 28 February 2023, The Baillie Gifford Japan Trust's net asset value total return per share was -1.2%. The share price total return was -0.6%. The TOPIX total return (in sterling terms) was +0.6%.

- There have been three positive macroeconomic developments over the past six months. First, Japan has reopened its borders following Covid both to business travellers and to tourists. Second, Japan has experienced inflation and in particular the wage rises in the last few months exceed anything we have seen in Japan for the last 30 years. Finally, there are signs that Japan is moving away from zero interest rates.

- During the period three new holdings were added to the portfolio. These were Kao (Japan's leading manufacturer of household products), Demae-can (a leading Japanese online food ordering and delivery company) and Z Holdings (an online advertising and e-commerce business).

- There remain many exciting growth businesses in Japan and expectations embedded in share prices seem low, creating firm foundations for long-term investment.

- The Company's objective is to achieve long-term capital growth. The net asset value total return per share of +4.9% over the five year period compares with the TOPIX total return of +13.2%.

Summary of Unaudited Results*

* Alternative performance measures, see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

† Source: Baillie Gifford/Refinitiv and relevant underlying data providers. See disclaimer at end of this announcement.

Interim Management Report

The six month period to the end of February 2023 was a remarkably uneventful one for returns. During the period the NAV total return of your Company was -1.2% whilst the share price return was -0.6%. The TOPIX total return (in sterling terms) was +0.6% during the same period. 

There is also little to comment on in the performance of individual holdings. The three largest positive contributors to performance were Sumitomo Mitsui Trust (+0.5%), not holding Toyota Motor (+0.5%) and Shiseido (+0.4%). The three largest negative contributors to performance were GA Technologies (-0.6%), MonotaRO (-0.5%) and not holding Mitsubishi UFJ Financial Group (-0.5%). Finally gearing contributed +0.1% to performance. These contributions are small and unremarkable relative to those that have been experienced in the past. 

More interesting are several macro-economic developments over the past six months. 

First, Japan has re-opened its borders, initially to business travel and then to tourists. This reopening improves the business prospects of many domestic holdings which have been starved of foreign visitors. It is also likely to have positive effects on societal openness and ideas flow. Although it has taken longer in Asia than the West, we are now firmly past the pandemic phase of Covid. 

Second, Japan has clearly experienced inflation. This is a continuation of its long post-bubble journey from deflation, through a period in recent years with neither significant inflation nor deflation, finally to positive inflation. Inflation can be currently seen in headline numbers, in raw material and producer prices, in consumer products, and perhaps most significantly in wages. The wage rises that we have seen being announced in the past few months alone exceed anything that we have seen in Japan for the past 30 years.

Third, there are signs that Japan may be moving away from zero interest rates, which is the logical expectation as inflation becomes embedded. The Bank of Japan made a small adjustment to its yield curve control policy in December, announcing that it would target 10-year Japanese Government Bonds to yield up to 0.5% compared to the previous limit of 0.25%. Subsequently Mr Kuroda stepped down as Governor of the Bank of Japan and Mr Ueda has taken over. 

Meantime we have continued with the steady process of trying to improve the long-term prospects of the portfolio. During the period we bought three new holdings and sold three holdings. 

The new holdings are Kao, Demae-can and Z Holdings. Kao is Japan's leading manufacturer of household products. The segments in which it operates have attractive characteristics of steady growth combined with strong entry barriers due to scale, brands and control of distribution. In the shorter term the company has experienced challenges from the lingering impacts of Covid restrictions and having to deal with rising input costs. However, we believe the company has the potential to grow its earnings substantially over the next decade by expanding into surrounding Asian markets and by improving the profitability of its domestic businesses. Demae-can is a leading Japanese online food ordering and delivery company. Following a review of the company we concluded that there remains a significant profit opportunity at scale. Meanwhile, Demae-can has continued to grow its sales rapidly and has put in place measures to strengthen its accounting systems which had been a previous concern. Given our updated view of the potential for the company, and lower expectations discounted in the share price, we decided to take a small holding again. Z Holdings was formed from the combination of Yahoo Japan and Line and has decent positions in online advertising and e-commerce. It also has exciting prospects in cashless payments through its large holding in PayPay. We expect cashless payments to show significant growth and PayPay to remain a dominant player. In the long-run the combination of businesses creates the prospects for Z Holdings to develop into a super-app comprising mutually reinforcing opportunities.

The sold holdings were Lifull, Shimano and Inpex. Lifull is a property aggregation website. In recent years it has suffered as a result of competition with Suumo, the property aggregation website of Recruit (a current holding of Japan Trust). Having come to the view that Suumo is the stronger business, we decided to sell the holding in Lifull. Shimano makes gears for bikes. While the company has a strong market position we do not believe that the market will grow rapidly enough to support high sales growth and with margins already high we think it unlikely that they can show significant expansion. We commented in the Annual Report on the sale of Inpex following strong share price performance post the Russian invasion of Ukraine. 

We maintained our optimistic stance about the potential for investment in Japan to generate good returns. Backing this conviction net gearing ended the period at 18.0%, little-changed from the position six months prior. There remain many exciting growth businesses in Japan and expectations embedded in share prices seem low, creating firm foundations for long-term investment. 

The principal risks and uncertainties facing the Company are set out are set out in Note 11 below.

Past performance is not a guide to future performance

Total return information sourced from Refinitiv/Baillie Gifford. See disclaimer at end of this document.

See Glossary of Terms and Alternative Performance Measures at the end of this announcement

Responsibility Statement

We confirm that to the best of our knowledge:

a)  the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b)  the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (being an indication of important events that have occurred during the first six months of the financial year, their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)  the Interim Financial Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

On behalf of the Board

David Kidd

Chairman

30 March 2023

Equity Portfolio by Growth Category as at 28 February 2023

1 Secular Growth: Opportunity to grow rapidly but where there are a number of potential outcomes.

2 Growth Stalwarts: Growth is less rapid but more predictable.

3 Special Situations: Performance has not been good but there is a reason to believe improvements are underway.

4 Cyclical Growth: Earnings do not rise every year but are expected to be higher from one cycle to the next.

Twenty Largest Holdings at 28 February 2023

Income Statement (Unaudited)

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

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

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

Balance Sheet (Unaudited)

* See Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Statement of Changes in Equity (unaudited)

For the six months ended 28 February 2023

For the six months ended 28 February 2022

*The capital reserve balance at 28 February 2023 includes investment holding gains on investments of £116,236,000 (28 February 2022 - gains of £164,930,000).

Condensed Cash Flow Statement (Unaudited)

*  Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

Notes to the Financial Statements

1. Basis of Accounting

The condensed Financial Statements for the six months to 28 February 2023 comprise the statements set out on the previous pages together with the related notes. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014 and updated in July 2022 with consequential amendments. They have not been audited or reviewed by the Auditor pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Financial Statements for the six months to 28 February 2023 have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 August 2022.

Going Concern

Having considered the Company's principal risks and uncertainties, as set out in Note 11, together with its current position, investment objective and policy, its assets and liabilities, and projected income and expenditure, together with the Company's dividend policy, it is the Directors' opinion that the Company has adequate resources to continue in operational existence for the foreseeable future. The Board has considered severe but plausible downside scenarios, including the impact of heightened market volatility over recent months due to macroeconomic and geopolitical concerns, including inflation, interest rates and the ongoing conflict in Ukraine, but does not believe the Company's going concern status is affected. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company. The next continuation vote will be in December 2023. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. The Company has continued to comply with the investment trust status requirements of section 1158 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements and confirm that they are not aware of any material uncertainties which may affect the Company's ability to continue to do so over a period of at least twelve months from the date of approval of these Financial Statements.

2. Financial Information

The financial information contained within this Interim Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2022 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying its report and did not contain statements under sections 498(2) or (3) of the Companies Act 2006.

3. Investment Manager

Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed by the Company as its Alternative Investment Fund Manager and Company Secretary. The investment management function has been delegated to Baillie Gifford & Co. The management agreement can be terminated on not less than 6 months' notice, or on shorter notice in certain circumstances. The annual management fee is 0.75% on the first £50 million of net assets, 0.65% on the next £200 million of net assets and 0.55% on the remaining net assets, calculated and payable quarterly.

4. Dividends

No interim dividend has been declared.

5. Net Return per Ordinary Share

Net return per ordinary share is based on the above totals of revenue and capital and the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.

6. Fair Value Hierarchy

The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement.

Level 1 - using unadjusted quoted prices for identical instruments in an active market;

Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and

Level 3 - using inputs that are unobservable (for which market data is unavailable).

The fair value of listed investments is the last traded price which is equivalent to the bid price on Japanese markets.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy. None of the financial liabilities are designated at fair value through profit or loss in the Financial Statements.

All of the Company's investments fall into Level 1 for the periods reported.

7. Bank Loans

Bank loans of £146.1 million (¥24.1 billion) have been drawn down under yen loan facilities which are repayable between August 2023 and November 2024 (31 August 2022 - £149.4 million (¥24.1 billion)).

8. Share Capital

The Company has the authority to issue shares/sell treasury shares at a premium to net asset value as well as to buy back shares at a discount to net asset value.

During the period, no shares were issued and 276,845 shares were bought back into Treasury (28 February 2022 - nil issued and nil bought back). There were 705,595 shares held in Treasury at 28 February 2023 (28 February 2022 - nil). Between 1 March 2023 and 30 March 2023 the Company bought back a further 50,000 shares into Treasury. The Company has authority remaining to buy back 13,954,276 ordinary shares.

9. Transaction Costs

Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sales proceeds, as appropriate. During the period, transaction costs on purchases amounted to £12,000 (28 February 2022 - £48,000) and transaction costs on sales amounted to £11,000 (28 February 2022 - £50,000).

10. Related Party Transactions

There have been no transactions with related parties during the first six months of the current financial year that have materially affected the financial position or the performance of the Company during that period and there have been no changes in the related party transactions described in the last Annual Report and Financial Statements that could have had such an effect on the Company during that period.

11. Principal risks and uncertainties

The principal risks facing the Company are financial risk, investment strategy risk, discount risk, smaller company risk, environmental, social and governance ('ESG') risk, leverage risk, regulatory risk, political and associated economic risk, custody and depositary risk, reliance on third party service provider risk, cyber security risk and emerging risks. An explanation of these risks and how they are managed is set out on pages 8 to 10 of the Company's Annual Report and Financial Statements for the year to 31 August 2022 and is available on the Company's website: japantrustplc.co.uk.

Glossary of Terms and Alternative Performance Measures ('APM')

An alternative performance measure is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The APMs noted below are commonly used measures within the investment trust industry and serve to improve comparability between investment trusts.

Total Assets

Total assets less current liabilities, before deduction of all borrowings at par value.

Net Asset Value ('NAV')

Also described as shareholders' funds, NAV is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue. Borrowings are valued at their nominal par value. Par value approximates to amortised cost. The Company's yen denominated loans are valued at their sterling equivalent.

Net Current Assets

Net current assets comprise current assets less current liabilities, excluding long-term borrowings at par value.

(Discount)/Premium (APM)

As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.

Total Return (APM)

The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend.

Gearing (APM)

At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

Gearing is the Company's borrowings at par less cash and cash equivalents expressed as a percentage of shareholders' funds.

Potential gearing is the Company's borrowings expressed at par as a percentage of shareholders' funds.

Leverage (APM)

For the purposes of the Alternative Investment Fund Managers (AIFM) Regulations, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.

Active Share (APM)

Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.

Further Shareholder Information

The Baillie Gifford Japan Trust aims to achieve long term capital growth principally through investment in medium and smaller sized Japanese companies which are believed to have above average prospects for growth, although it invests in larger companies when considered appropriate. At 28 February 2023, the Company had total assets of £916.2m (before deduction of bank loans of £146.1m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £225.2bn under management and advice as at 30 March 2023.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at japantrustplc.co.uk.†

The Interim Financial Report is available at japantrustplc.co.uk† and will be posted to shareholders on or around 14 April 2023.

30 March 2023

For further information please contact:

Naomi Cherry, Baillie Gifford & Co

Tel: 0131 474 5548

Jonathan Atkins, Director, Four Communications

Tel: 0203 920 0555 or 07872 495396

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

† Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Third Party Data Provider Disclaimer

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause,

or for any damages (whether direct or indirect) resulting therefrom.

No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.

Sustainable Finance Disclosures Regulation ('SFDR')

The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a direct impact in the UK due to Brexit, however, it applies to third-country products marketed in the EU. As The Baillie Gifford Japan Trust PLC is marketed in the EU by the AIFM, Baillie Gifford & Co Limited, via the National Private Placement Regime, ('NPPR') the following disclosures have been provided to comply with the high-level requirements of SFDR.

The AIFM has adopted Baillie Gifford & Co's Governance and Sustainable Principles and Guidelines as its policy on integration of sustainability risks in investment decisions. Baillie Gifford & Co's approach to investment is based on identifying and holding high quality growth businesses that enjoy sustainable competitive advantages in their marketplace. To do this it looks beyond current financial performance, undertaking proprietary research to build an in-depth knowledge of an individual company and a view on its long-term prospects. This includes the consideration of sustainability factors (environmental, social and/or governance matters) which it believes will positively or negatively influence the financial returns of an investment. More detail on the Managers' approach to sustainability can be found in the Governance and Sustainability Principles and Guidelines document, available publicly on the Baillie Gifford website bailliegifford.com.

Taxonomy Regulation

The Taxonomy Regulation establishes an EU-wide framework of criteria for environmentally sustainable economic activities in respect of six environmental objectives. It builds on the disclosure requirements under SFDR by introducing additional disclosure obligations in respect of alternative investment funds that invest in an economic activity that contributes to an environmental objective. The Company does not commit to make sustainable investments as defined under SFDR. As such, the underlying investments do not take into account the EU criteria for environmentally sustainable economic activities.

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