Last checked at 
24 Jan 2023 07:00
CC JAPAN INCOME & GROWTH TRUST PLC
LEI: 549300FZANMYIORK1K98
ANNUAL FINANCIAL REPORT ANNOUNCEMENT
INVESTMENT OBJECTIVE
The investment objective of the CC Japan Income & Growth Trust Plc (the "Company") is to provide Shareholders with dividend income combined with capital growth, mainly through investment in equities listed or quoted in Japan.
FINANCIAL INFORMATION |
|
|
| As at | As at |
| 31 October | 31 October |
| 2022 | 2021 |
Net assets (millions) | £203.6 | £222.9 |
Net asset value ("NAV") per Ordinary Share ("Share")1 | 151.1p | 165.4p |
Share price | 138.8p | 154.0p |
Share price discount to NAV2 | 8.1% | 6.9% |
Transferable Subscription Share price | 0.53p | 3.50p |
Ongoing charges2 | 1.06% | 1.05% |
Gearing (net)2 | 20.9% | 21.1% |
1 Measured on a cum income basis. | ||
2 This is an Alternative Performance Measure ('APM'). Definitions of APMs used in this report, together with how these measures have been calculated are disclosed in the Annual Report. | ||
PERFORMANCE SUMMARY |
|
|
| For the year to | For the year to |
| 31 October | 31 October |
| 2022 | 2021 |
| % change1 | % change1 |
NAV ex-income total return per Share2 | -6.3% | +25.1% |
NAV cum-income total return per Share2 | -5.9% | +24.3% |
Share price total return2 | -7.1% | +32.7% |
Tokyo Stock Exchange Price Index ("TOPIX") total return | -9.5% | +11.9% |
Revenue return per Share (Undiluted) | 5.14p | 4.75p |
Dividends per Share: | ||
First Interim dividend | 1.40p | 1.40p |
Second interim dividend | 3.50p | 3.35p |
Total dividends per Share for the year | 4.90p | 4.75p |
1Total returns are stated in GBP sterling, including dividend reinvested. 2 These are APMs. | ||
Source: Coupland Cardiff Asset Management LLP - The Company's Factsheet October 2022
| ||
PERFORMANCE SUMMARY
Launch to | Year to | Year to | Year to | Year to | Year to | Year to | |
Oct 2016* | Oct 2017 | Oct 2018 | Oct 2019 | Oct 2020 | Oct 2021 | Oct 2022 | |
Share price | 122.40p | 152.00p | 153.00p | 150.00p | 119.50p | 154.00p | 138.75p |
Share price total return | +23.5% | +27.2% | +2.8% | +0.7% | -17.3% | +32.7% | -7.1 |
NAV per Share | 123.90p | 146.00p | 148.60p | 158.90p | 136.80p | 165.40p | 151.09p |
NAV (cum-income) total return per Share | +24.9% | +20.7% | +4.1% | +9.9% | -11.1% | +24.3% |
-5.9% |
TOPIX Index total return in GBP sterling | +32.7% | +10.1% | -0.4% | +7.2% | +0.3% | +11.9% |
-9.5% |
Revenue return per Share (Undiluted) | 3.60p | 4.06p | 4.55p | 5.26p | 5.04p | 4.75p |
5.14p |
Dividends per Share | 3.00p | 3.45p | 3.75p | 4.50p | 4.60p | 4.75p | 4.90p** |
* Period from the Company's launch on 15 December 2015 to 31 October 2016.
** Includes second interim dividend of 3.50p for the year ended 31 October 2022.
CHAIRMAN'S STATEMENT
Performance
During the year to 31 October 2022, in sterling terms, the Net Asset Value of the Company ("NAV") declined by
5.9% as measured by total return including income. The Ordinary Share price, again measured by total return
fell by 7.1%. This is disappointing, particularly after the strong set of results in the year to 31 October 2021,
where NAV increased by 24.3% and the share price rose 32.7%. However, I can report that in the last year, we
outperformed the TOPIX Total Return Index which fell 9.5% in sterling terms during the period.
Our long-term track record and relative performance against the AIC Japan investment trust peer group
remains robust and underscores the validity of our investment mandate which seeks dividend income
combined with capital growth. Since launch in December 2015 until the recent financial year end, the Company's
NAV total return, including dividend distributions, recorded an 82.8% increase, considerably outperforming
the sterling adjusted TOPIX total return index, which rose 58.0%. Over the same period, the share price has
risen 65.7% again measured by total return in sterling, including an aggregate distribution of 25.45p per
Ordinary Share of dividends paid to Shareholders.
It has been another difficult year given the challenges presented by Russia's invasion of Ukraine, while
Japan continued to be impacted by successive waves of Covid-19 infections and a cautious policy towards
reopening the economy and its borders. As the world's Central Banks led by the US Federal Reserve have
increased interest rates and pursued a more hawkish monetary policy to combat inflation, the Bank of Japan
("BOJ") has been an exception in continuing to provide liquidity to the markets and remains wedded
to Yield Curve Control. This drove the Japanese Yen down at one time trading below Y150 to the US$. Our
Investment Manager, Richard Aston, has handled the market volatility with great discipline by retaining focus
within the scope of the investment mandate which seeks total return. Richard has looked through market
volatility retaining confidence in portfolio holdings with solid prospects while continuing to find companies
which have growth trajectories, improving cash flow and dividends; some of which have already benefitted
from the prospect of a full reopening of the domestic Japanese economy. Over a 12-month and 5-year view,
our investment performance is a leader in the AIC Japanese investment trust peer group as Richard's
confidence in the intrinsic value of portfolio holdings has been rewarded. However, our premium share price
rating has not recovered with the NAV closing the year at an 8.1% discount compared to a 6.9% discount at the
previous year end. At the time of writing the discount stands at 8.3%.
Growing the Company
The Ordinary Share price discount means that until we can restore our premium to NAV, we are not able to issue any new shares.
Furthermore, world events and their impact on markets have conspired against any real rerating of the Ordinary
Shares which might have allowed for the successful exercise of the Transferable Subscription Shares ("TSS")
issued as a 1 for 5 free bonus to Ordinary Shareholders in February 2021. Unless we see a Lester Piggott
type late run in NAV performance, the TSS will expire worthless on the last business day of February 2023.
This is also the last quarterly exercise date. At the time of writing, the NAV per Ordinary Share has nudged
above the Subscription Price set at £1.61, hence "in the money" whereas the Ordinary Share trails below
that price, still "out of the money". So, there is a small possibility of successful exercise of these entitlements at
the last opportunity.
The TSS scheme was designed by the Board potentially to raise a further £40 million as a "Covid-19 recovery"
warrant which if successfully executed would not only have increased our size and spread costs but
also offered significant leverage into the Ordinary Shares so that TSS holders could make some money
as recompense from the depressed valuations during Covid-19. Although the TSS entitlements were allocated
as a free bonus and the scheme cost less than 0.34p per Ordinary Share at the time of issue, I would like
to apologise for the administrative inconvenience this has caused not least in TSS holders receiving
quarterly exercise notices, (a regulatory requirement of the custodian, but not the Company) when it was uneconomic
to do so. The Scheme had the best of intentions and if validated by better markets would have
been a good way to grow the Company.
The Board has invested in various marketing initiatives to raise the profile of the Company by way
of webinars hosted by third parties and continue to update our website, which you can visit
at:- https://ccjapanincomeandgrowthtrust.com/
Besides regular meetings with wealth managers and major Shareholders, we continue to focus on improving
content together with web and media distribution to raise awareness of our differentiated mandate which
represents a great opportunity for investors to capture total return from Japan with appreciable and stable
growth in portfolio income streams.
Income and Dividends
It is pleasing to see Japanese companies continuing to pursue enlightened distribution policies driven not
only through governance reforms but also by cash rich Japanese corporate balance sheets. Furthermore,
despite difficult trading conditions, Japanese management teams have tended to commit to their
dividend projections, and in some cases surprised on the upside by exceeding expectations.
For the year to 31 October 2022, the revenue return per Ordinary Share increased by 8.2% to 5.14p per Ordinary
Share. The result demonstrates the underlying trend of Japanese dividend growth despite the vicissitudes
of currency volatility where the Yen to Sterling cross rate has been under pressure. The yen has fluctuated
between Y149 = £1 to Y172 = £1 during the year with an average exchange rate of Y159. Our clearly stated
policy is not to hedge our yen exposure. We translate dividend income into sterling on receipt. Thus, revenue
is potentially at risk from a strengthening of sterling although conversely, a weaker yen tends to stimulate
Japanese corporate earnings.
The Board has declared a second interim dividend of 3.50p per Ordinary Share (an increase of 4.5%
over last year's second interim dividend) making a full year distribution of 4.90p per Ordinary Share and
representing a 3.2% improvement over last year. This will be paid on 3 March 2023 to those shareholders
on the register as at 3 February 2023 with an ex-date of 2 February 2023. We are maintaining our policy of
paying a second interim dividend in substitution for a final dividend.
While the Board is committed to growing the dividend, it considers it prudent to continue to build the revenue
reserve in uncertain times, which will stand at 2.20p per Ordinary Share after the payment of the second interim
dividend. Shareholders should also be reminded that the Company has a Special reserve of £64.6 million
available for distribution in circumstances where there is an unforeseen revenue shortfall.
This is the seventh year of dividend increase for the Company with the annual dividend increasing by 63%
since launch in December 2015. We currently pay a 3% dividend yield from Japanese equities out of
covered income. Investors looking for equity income can continue to look to Japan.
Board Succession & Composition
The Board has a succession plan in place whereby, subject to re-election by Shareholders at this year's
Annual General Meeting ("AGM"), I intend to step down as Chairman at the AGM in March 2024 having
served since launch in 2015. It is also the intention that Mr. Peter Wolton, Senior Independent Director, also
one of the original members of the Board at launch, will retire before the end of 2023.
A Search Consultant will be appointed during 2023 to identify a new candidate for the Board with complementary
skills. I should point out that the Board composition meets the recommendations of the AIC code and Hampton
Alexander review as far as gender and ethnic diversity representation is concerned. Our diversity policy can be found
in the Annual Report.
Change of Auditor
Ernst & Young LLP ("EY") have served as the Company's Auditors since launch but in line with the requirement to
conduct a tender at least every 10 years and in view of the projected increase in audit fees, the Audit and Risk
Committee held a tender process to look for a more competitive solution. Consequently, Johnston Carmichael will be
appointed as the Company's new Auditors, subject to Shareholder approval at the forthcoming AGM. The Board is
confident that Johnston Carmichael will provide a high level of service at a reduced cost. We would like to thank EY
for their service as Auditor of the Company for the past seven years. Further details can be found in the Report of the
Audit and Risk Committee.
Annual General Meeting ("AGM")
In line with the requirements of the Companies Act 2006, the Company will hold an AGM of Shareholders
to consider the resolutions laid out in the Notice of Meeting. The Board encourages Shareholders to
attend and participate in the Company's forthcoming AGM on 1 March 2023 at the offices of
Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH. Our Investment Manager, Richard Aston, will
provide an update on the portfolio and take questions after the formal business of the meeting. The Board will
also be available to meet shareholders and discuss the Company. I do hope that you will join us.
We recognise it is not possible for everyone to attend the AGM and I would remind Shareholders that any
questions relating to the business of the AGM, can be sent by email to ukfundcosec@sannegroup.com. To the
extent that it is appropriate to do so, the Company will respond to any questions received in a Q&A which will
be posted on the Company's website.
If Shareholders are unable to attend the meeting in person, they are strongly encouraged to vote by proxy
and to appoint the "Chairman of the AGM" as their proxy. Details of how to vote, either electronically, by
proxy form or through CREST, can be found in the Notes to the Notice of AGM. The lodging of
a form of proxy (or an appointment of a proxy through CREST) will not however prevent a shareholder from
attending the AGM and voting in person if they so wish.
Outlook
The long period of disinflation and free money is over. Collective Central Bank policy led by the US Federal Reserve is firmly aimed at reducing inflation at a time when the pricing power of labour in the USA and Europe is in the ascendant. As interest rates rise on the back of a collapse in monetary aggregates in the USA, it looks as if the risks of global recession are rising. With the high levels of debt embedded in the world economy, tightening policy beyond a certain point could also potentially expose credit problems. Global market sentiment will, as ever, be driven by the perception of policy direction emanating from the US Federal Reserve.
Japan too, is facing similar inflationary pressures, although these are largely due to the war and hence
exogenous. As elsewhere, the labour market is tight, reflecting an ageing demographic and shrinking
workforce. Both the BOJ and Government are keen to encourage wage growth which has been static for
so long. Indeed, Prime Minister Kishida has urged employers to increase wages by more than 3% as part
of his "new economic capitalism" plans with Consumer Price Inflation (CPI) running at its highest for 30 years.
After a long period of deflation, some inflation will be good for Japan. Any increase in wages should benefit
domestic consumption.
Just before Christmas, the BOJ announced a relaxation of the bands for controlling the yield on the 10-year bond.
This is seen as a first step to normalising monetary policy and has sparked a sharp rally in the yen. However,
the BOJ has had to absorb massive liquidation of Japanese Government Bonds (JGBs) by stepping in to
buy bonds to defend the new yield level. Hence, rather than tightening monetary policy, the BOJ are now forced
to expand their balance sheet and appear chained to loose monetary policy. We can expect interest rates
and the Yield Curve Control Band to rise further in the months ahead and the market will be looking closely for
pointers as to further policy direction, particularly with the appointment of a new BOJ Governor in April 2023.
A weak yen has deterred foreign buying of Japanese securities, and a rebound in its value could help
stimulate foreign interest which has always provided a catalyst for buying the stock market. Equally, it should
be noted that TOPIX index companies now produce an income dividend yield higher than inflation, which could
tempt domestic savers earning no interest on deposits. Moreover, the Government has announced measures
to try and mobilise savings by offering incentives for people to invest.
Although Japan's domestic economy is steadily reopening for business, it is frustrating to see that yet
another Covid-19 wave in China may further delay a recovery in tourist visitor arrivals. Nevertheless, the
overall economic outlook appears favourable. The wild card remains geopolitics and the stability of the region.
GDP forecasts show higher expectations for Japanese growth compared to other developed economies
while there is growing confidence in better corporate earnings guidance. Continuing commitment to corporate governance reforms should also underpin rising dividend distributions.
Our focus on income will continue to be an important part of our total return which clearly differentiates our mandate from most other funds investing in Japan. Richard Aston and his colleagues are finding no shortage of investment opportunities.
Harry Wells
Chairman
23 January 2023
INVESTMENT MANAGER'S REPORT
Performance Review
The investment landscape has become increasingly complex over the last twelve months with a number
of developments challenging the relatively favourable conditions for investors in a variety of assets in recent
years. This has resulted, and simplified by many, as an outperformance of 'value' over 'growth' across equity
markets with Japan being no exception. The rapid emergence of inflationary trends around the world,
at levels not seen for decades, and the subsequent attempts by Central Banks worldwide to regain
control by raising interest rates has been a significant contributory factor to this change of market direction.
Additionally, political tensions have added to the elevated levels of risk. Sentiment has been severely
impacted by the ongoing war in the Ukraine. The ramifications have played out in a number of ways
with Russia's increasing international isolation, rising energy prices and credit concerns amongst the factors
most relevant to Japanese companies. The direct trade between Japan and Russia is limited to less than 1% of
Japan's international total and for most companies any direct country exposure is a very small component of
their overall revenues.
Furthermore, as one of the main drivers for global growth in recent years, the performance of the Chinese
economy has had an important bearing on international trends. A combination of political discord with the USA,
concerns about the real estate market and a tough stance on managing Covid-19 outbreak has resulted
in a dramatic slowdown in the country's immediate prospects and international trade.
In recent years, global 'risk on' investor sentiment has been accompanied by a strengthening of the Yen.
Fundamental factors that may have contributed to this notably different trend are 1) the impact of higher
oil prices of the foreign exchange market (given that Japan is an importer of energy raw materials) and 2)
confirmation verbally and via market intervention that the Bank of Japan intends to continue with an
accommodative monetary policy for the time being despite central banks in other regions indicating a
withdrawal of components of their respective easy monetary programmes.
Despite these many uncertainties and challenges to the perceived orthodoxy of recent years, portfolio
attribution has been positive and continued its post pandemic recovery. It has been especially pleasing
to see the strong share price performance of longstanding holdings in Mitsubishi UFJ Financial Group,
Tokio Marine Holdings and Sumitomo Mitsui Financial Group (financials sector), Itochu Corp, Mitsubishi Corp
(wholesale sector), Nippon Telegraph & Telephone (telecommunications sector) and more recently Nippon
Parking Development (service sector). These are all companies that faced considerable and unexpected operational challenges during the pandemic but have remained committed to their shareholder return policies
throughout with increases in annual dividends and opportunistic share buyback programmes underpinning
the confidence in their business future.
It is this ability to compound returns through a business cycle which we believe to be the most relevant and
differentiating factor of Japanese equities for foreign investors. It is extremely encouraging to see these
attributes ultimately rewarded for those willing to be patient.
The weakest performers for the year include a number of companies whose contribution had been notably positive in the first half and reflects a significant downturn in expectations for technology companies in particular as fears of a global recession have intensified. Shin-Etsu Chemical, Murata and Tokyo Electron have all exemplified the characteristic we identify as important for long term performance and as recently as their FY21 results raised dividends to a level higher than originally expected. These companies are all industry leaders with strong balance sheets and clear shareholder return policies which we believe justifies taking a long-term investment perspective and weathering any short-term adjustments.
We are somewhat disappointed in the recent share price performance of Carta Holdings, the online advertiser,
which had been a strong performer since initial inclusion in the portfolio. The company has embarked
on an investment phase which has been detrimental to earnings in the near term on the basis of higher
expectations for newly identified projects. There is no immediate risk to the shareholder return objective which
is based on a stable distribution reflecting the strength of the company's balance sheet. However, we will be
mindful that this investment must enhance the value of the Company over the medium term.
Portfolio Positioning
We believe that the current economic realities increase the importance of bottom-up analysis in investment decision-making as many companies now face a very different operating environment from anything experienced in recent years. Rising raw material prices and higher energy costs, tighter monetary conditions, stricter environmental regulation, digitalisation and changing customer behaviour are amongst the prevailing trends that create varying challenges and opportunities for individual companies. We remain steadfast in the belief of the investment principles that underpin the strategy as established when the Company was launched. Namely, consistent returns via dividends and share buybacks are a key component of total shareholder return that investors in Japan should now consider. We are consequently encouraged by the increased recognition for companies able to compound these returns over time. Furthermore, we believe that through initiatives such as the Japanese Corporate Governance Code and consistent shareholder engagement, there is much wider acknowledgement of its importance amongst company management. As a consequence, the number of companies seeking to offer these attractive characteristics continues to increase and the portfolio has continued to evolve throughout the year seeking to take advantage of this expanding investment universe.
New holdings have been established in Zozo, Intage and Benefit One, smaller domestically focused companies
with leading market positions which operate in areas we believe offer good growth potential. Importantly
this is accompanied by a greater recognition by management of the role of stable shareholders, which
has led, in our view, to better corporate governance and friendlier shareholder return policies. Zozo operates
Japan's largest online fashion websites and is benefiting from the low market penetration of e-commerce in
Japan. The company has suffered in the past from the erratic corporate governance of its founder, but his
departure has seen a more consistent approach to both operational and shareholder management consistent
with our own expectations. Intage provides marketing research services for a diverse range of clients and
sees future opportunities in data analytics and international expansion. Coincidently, it is seeking to
improve its shareholder relations and capital efficiency through an uplift in annual dividend distribution and
share buybacks. Benefit One provides a number of outsourced services such as childcare, healthcare and
leisure activities to a range of corporate clients. The company targets a high level of annual distribution to its
shareholders based on the strength of its cashflow and balance sheet strength.
For the first time in a number of years, we participated in an Initial Public Offering. Socionext was founded in
2015 as a result of a merger between the SoC (Systemon-Chip) divisions of Fujitsu and Panasonic, and an
investment received from the Development Bank of Japan. It is a fabless SoC solution provider, meaning
they design their own chips but contract out their production, covering both software development as well
as semiconductor logic/physical design. In stark contrast to many companies listed in recent years, the company
is debt free, has valuations that were attractive relative to its growth prospects besides a clear intention to pay
dividends to its shareholders from the start.
The rising interest rate environment and falling valuations elsewhere in the market have lowered the
attraction of Real Estate Investment Trusts and the overall weighting in these specialist investment vehicles
has fallen, with the disposal of holdings in Japan GLP REIT and Star Asia REIT. We also exited holdings in Japan
Exchange Group (operator of the Tokyo and Osaka Stock Exchanges), Exeo (telecommunications infrastructure) and Hikari Tsushin (small company business services) as greater risks have emerged to their business prospects and ultimately their ability to maintain a shareholder return profile consistent with previous expectations.
Outlook
The global economic backdrop appears increasingly challenging with the recent debate over the
sustainability of inflationary trends and prospect of a new era of rising interest rates shifting notably to rapidly
falling expectations for economic growth and the risk of global recession. Japan, on a relative basis, is set to offer
many interesting opportunities given that its economic cycle is no longer in sync with other major economies,
primarily as a consequence of its delayed domestic recovery following the Covid-19 pandemic. There are
reasons to be optimistic about the expected economic rebound in Japan in 2023 given the experience of other
economies as consumer behaviour returned to normal. The recent Yen weakness that has accompanied these
developments only adds to the attraction of Japanese equities over the medium term.
The investment strategy employed by the Company is not dependent on any economic outcome nor correlated
with a particular investment style - it is one that seeks to capture a total and compounding shareholder return
over time regardless of short-term economic variations. This seems a particularly relevant consideration for
investors in these more uncertain times and we believe that Japanese equites now offer a differentiated and
compelling opportunity in this regard. A combination of strong balance sheets, healthy dividend cover and,
most importantly, changing attitudes have created a new investment landscape. The benefit has been
demonstrated clearly over the past three years with companies in Japan offering robust levels of distribution
to shareholders despite the sluggish trends in the domestic and global economies.
As a result, dividends and share buybacks are set to establish new records during the current fiscal year, with
minimal strain on balance sheets and dividend cover ratios. A further revision to the Japanese Corporate
Governance Code in June 2022 and the restructuring of the main Tokyo Stock Exchange indices in April
2022 were consistent with the previously established objectives of improving capital efficiency and corporate
governance which have underpinned the favourable progression of shareholder returns. We believe that the
benefits of Prime Minister Kishida's goal of doubling asset-based income places further pressures on
companies to continue the trajectory of improvement and that shareholders in Japanese companies will
consequently continue to reap the rewards.
Richard Aston
Coupland Cardiff Asset Management LLP
23 January 2023
INVESTMENT POLICY, RESULTS AND OTHER INFORMATION
Investment policy
The Company intends to invest in equities listed or quoted in Japan. The Company may also invest in exchange traded funds in order to gain exposure to such equities. Investment in exchange traded funds shall be limited to not more than 20 per cent. of Gross Assets at the time of investment. The Company may also invest in listed Japanese real estate investment trusts ("J-REITs").
The Company may enter into long only contracts for difference or equity swaps for gearing and efficient portfolio management purposes.
No single holding (including any derivative instrument) will represent more than 10 per cent. of Gross Assets at the time of investment and, when fully invested, the portfolio is expected to have between 30 to 40 holdings, although there is no guarantee that this will be the case and it may contain a lesser or greater number of holdings at any time.
The Company will have the flexibility to invest up to 10 per cent. of its Gross Assets at the time of investment in unquoted or untraded companies.
The Company will not be constrained by any index benchmark in its asset allocation.
Borrowing policy
The Company may use borrowings for settlement of transactions, to meet on-going expenses and may be geared through borrowings and/or by entering into long only contracts for difference or equity swaps that have the effect of gearing the Company's portfolio to seek
to enhance performance. The aggregate of borrowings and long only contracts for difference and equity swap exposure will not exceed 25 per cent. of Net Asset Value at the time of drawdown of the relevant borrowings or entering into the relevant transaction, as appropriate, although the Company's normal policy will be to utilise and maintain gearing to a lower limit of 20 per cent. of Net Asset Value at the time of drawdown of the relevant borrowings or entering into the relevant transaction, as appropriate. It is expected that any borrowings entered into will principally be denominated in Yen.
Hedging policy
The Company does not currently intend to enter into any arrangements to hedge its underlying currency exposure to investment denominated in Yen, although the Investment Manager and the Board may review this from time to time.
Results and dividend
The Company's revenue return after tax for the financial year amounted to £6,930,000 (2021: £6,404,000). In August 2022, the Company paid an interim dividend of 1.40p (2021: 1.40p) per Ordinary Share. On 20 January 2023, the Directors declared a second interim dividend for the year ended 31 October 2022 of 3.50p (2021: 3.35p) per Ordinary Share, which will be paid on 3 March 2023 to Shareholders on the register at 3 February 2023. Therefore, the total dividend in respect of the financial year to 31 October 2022 will be 4.90p (2021: 4.75p) per Ordinary Share.
The Company made a capital loss after tax of £19,818,000 (2021: capital gain of £38,673,000). The total return, including income, after tax for the year was a loss of £12,888,000 (2021: gain of £45,077,000).
The Company's Purpose, Values and Culture
The primary focus of the Company is to generate total returns for Shareholders by investing in equities quoted on the recognised exchanges in Japan. The Investment Manager identifies companies which are undervalued, have strong balance sheets, strong business franchises, and favourable attitudes to shareholder returns in the form of sustainable and growing dividends and share buyback policies.
The Company aims to meet the needs of investors through the Investment Manager's dual mandate of generating income and capital growth. The Company has been investing in Japanese equities since launch in 2015. Whilst the Company does not have a benchmark, the Board measures performance against the TOPIX Total Return Index and High Yield Indices.
To achieve this, the Board of Directors has engaged Coupland Cardiff Asset Management LLP, who have the appropriate capability, resources and controls in place to actively manage the Company's assets in order to meet its investment objective. The Investment Manager has a well-defined investment strategy and process which is regularly and rigorously monitored and reviewed by the Board. As the Company has no employees and acts through its service providers, its culture is represented by the values and behaviour of the Board and third parties to which it delegates.
To ensure that the Company's purpose, values, strategy and culture are aligned, the Board comprises independent non-executive Directors from a diverse background, who together bring a wide range of knowledge, skills and experience. The Board members contribute to a transparent culture ensuring effective oversight, critical support and challenge to the Investment Manager, and all other third-party suppliers. For more information, please refer to the Company's section 172 statement.
Key performance indicators ("KPIs")
The Board measures the Company's success in attaining its investment objective by reference to the following KPIs:
(i) Long-term capital growth
The Board considers the Company's Net Asset Value ("NAV") total return figures to be the best indicator of performance over time and this therefore is the main indicator of performance used by the Board. The NAV cum-income total return for the year to 31 October 2022 fell by 5.9% (2021: +24.3%) but the NAV total return from the Company's inception in December 2015 to 31 October 2022 increased by 18.9%.
The Chairman's Statement incorporates a review of the highlights during the year. The Investment Manager's Report gives details on investments made during the year and how performance has been achieved.
(ii) Revenue return per Share and dividends
he Company's revenue return per Ordinary Share, based on the weighted average number of shares in issue during the year, was 5.14p (2021: 4.75p). The Company's proposed total dividend payable in respect of the year ended 31 October 2022, including an interim dividend of 1.40p per Ordinary Share paid on 5 August 2022 and a second interim dividend of 3.50p payable on 3 March 2023 is 4.90p (2021: 4.75p) per Ordinary Share.
(iii) Discount/premium to NAV
The discount/premium relative to the NAV per share represented by the share price is closely monitored by the Board. The share price closed at a 8.1% discount to the NAV as at 31 October 2022 (2021: 6.9% discount). This is addressed in the Chairman's Statement.
(iv) Control of the level of ongoing charges
The Board monitors the Company's operating costs carefully. Growing the size of the Company offers many benefits, as not all of the Company's operating costs increase in line with the Company's assets under management. Based on the Company's average net assets for the year ended 31 October 2022, the Company's ongoing charges figure calculated in accordance with the AIC methodology was 1.06% (2021: 1.05%).
Other information
Modern slavery disclosure
The Company aims to act to the highest standards and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery is an important part of good corporate governance.
As an investment trust, the Company does not offer goods or services to consumers and deals predominantly with professional advisers and service providers in the financial services industry. As such the Board considers that the Company is out of scope of the Modern Slavery Act 2015.
Greenhouse Gas Emissions and Streamlined Energy and Carbon Reporting ("SECR")
The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little to no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. As the Company has no material operations and therefore has little energy use, it falls below the threshold to produce an energy and carbon report. The Company's ESG policy is contained in the Annual Report.
Employees
The Company has no employees. As at 31 October 2022, the Company had five Directors, comprising three males (60%) and two females (40%). On 1 February 2022, June Aitken and Craig Cleland joined the Board, bringing with them a wealth of experience and skills. As part of the recruitment process, the Board was mindful of the Company's policy on diversity which is contained in the Corporate Governance statement.
Anti-bribery, Corruption and Tax Evasion
It is the Company's policy to conduct all of its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery, corruption and tax evasion and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. Taking account of the nature of the Company's business and operations, the Board has adopted policies and procedures that allow it to have reasonable assurance that persons associated with the Company are prevented from engaging in bribery, corruption or tax evasion; and has adopted the same standard of zero tolerance.
Viability Statement
The Directors have assessed the viability of the Company for the period until 31 October 2027 (the "'Period'') taking into account the long-term nature of the Company's investment strategy and the principal risks and emerging risks. The Board has chosen a five-year period to assess the Company's viability because of the expected long-term nature of equity investment, the Investment Manager's holding period and the fact that the investment objective is unlikely to change significantly over this period. Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the Period.
In their assessment of the prospects of the Company, the Directors have considered each of the principal and emerging risks and uncertainties and the liquidity and solvency of the Company. The Directors have considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which could, if necessary, be sold to meet the Company's funding requirements. Portfolio activity and market developments are discussed at quarterly Board meetings. The internal control framework of the Company is subject to a formal review on at least an annual basis.
The Directors do not expect there to be any material increase in the annual ongoing charges of the Company over the Period. The Company's income from investments and cash realisable from the sale of its investments provide substantial cover to the Company's operating expenses, and any other costs likely to be faced by the Company over the period of their assessment.
The Chairman's Statement and Investment Manager's Report present a positive long-term investment case for Japanese equities, which also underpins the Company's viability for the Period.
The continuation of the Company is subject to approval by Shareholders every three years with the next continuation vote due to be held at the AGM in 2025.
This assessment takes into account the impact that higher levels of global inflation are having on portfolio companies and the investment environment as discussed in the Chairman's Statement, the Investment Manager's Report and in the Principal and Emerging Risks section.
Outlook
The outlook for the Company is discussed in the Chairman's Statement.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of Directors on 23 January 2023.
RISK AND RISK MANAGEMENT
Principal and emerging risks and uncertainties
The Board is responsible for the management of risks faced by the Company and delegates this role to the Audit and Risk Committee (the "Committee").
The Committee carries out, at least annually, a robust assessment of principal and emerging risks and uncertainties and monitors the risks on an ongoing basis. The Committee has a dynamic risk management register in place to help identify key risks in the business and oversee the effectiveness of internal controls and processes.
The risk management register and associated risk heat map provide a visual reflection of the Company's identified principal and emerging risks. These fall into three categories: strategic and business risk, financial and operational risk, and regulatory and compliance risk. The Committee considers both the impact and the probability of each risk occurring and ensures appropriate controls are in place to reduce risk to an acceptable level. During the year under review the Committee was particularly concerned with the increase in geopolitical risk following the outbreak of war in the Ukraine. The subsequent rise in global energy prices, inflation and rising interest rates worldwide have led to a more uncertain investment environment. The increase in exchange rate volatility has had a particular impact on the values of Japanese portfolio holdings and the dividend income received. The Japanese (and Asian) economies have also taken longer to recover from the Covid-19 pandemic than those in Europe and America. The Committee continues to review the processes in place to mitigate risk; and to ensure that these are appropriate and proportionate in the current market environment.
The Company's ability to operate as a going concern and the Company's longer-term viability can be found in the Annual Report.
The principal and emerging risks, together with a summary of the processes and internal controls used to manage and mitigate risks where possible are outlined below.
Principal Risks | Mitigation | Movement During the Year |
Poor investment performance The Company's investment performance depends on the Investment Manager's ability to identify successful investments in accordance with the Company's investment policy. | The Investment Manager has a well-defined investment strategy and process which is regularly and rigorously reviewed by the Board. The Board monitors the Company's investment performance against its peer group over a range of periods. Whilst the Company does not have a benchmark, the Board measures performance for reference purposes against the TOPIX and High Yield Indices. At each meeting, the Board discusses the Japanese investment environment. The Investment Manager reports on the composition of the portfolio, any recent sales and purchases, and expectations of dividend income. The Company's investment policy states that no single holding will represent more than 10 per cent. of the Company's Gross Assets at the time of investment and the portfolio is expected to have between 30 to 40 holdings although there is no guarantee that this will be the case and it may contain a lesser or greater number of holdings at any time. An investment management contract is in place which defines the duties and responsibilities of the Investment Manager. Safeguards include the provision to terminate the Management Agreement with 6 months' notice and in line with AIC guidance, the Investment Manager's appointment is considered on an annual basis. |
|
Principal Risks | Mitigation | Movement During the Year |
Currency Risk The Company's investments are denominated in Japanese Yen. Changes in the Yen / Sterling exchange rate may impact returns and lead to a devaluation of the Company's assets when translated into sterling. Income is received from investee companies in Yen. Exchange rate fluctuations could impact distributable income available for dividends. | The currency risk is explained to shareholders in the prospectus and the annual and interim reports. The Board regularly reviews the level of foreign currency exposure and monitors forecast revenues. The revenue forecast presented to the board includes a Yen sensitivity analysis. The Company's policy is not to hedge against any foreign currency movements. Income received from investee companies is translated into sterling on receipt. The Company has built up a revenue reserve and the Board regularly reviews the net income available for distribution using the Investment Manager's sensitivity analysis of revenue estimates. The Company also has a Special reserve available for distribution in the event of unforeseen revenue shortfall. |
Currency risk increased in the year under review as the Yen continued to fall against the dollar and sterling. This impacts the sterling value of revenues received and presents both opportunities and threats to the portfolio. |
Share price does not reflect underlying net asset value ("NAV") The market value of the Company's shares can fluctuate and may not always reflect their underlying value. Returns achieved are reliant primarily upon the performance of the Company's portfolio and the Company may experience fluctuations in its operating results due to a number of factors. Such variability may lead to volatility in the trading price of the Company's shares, in excess of levels acceptable to the Board or shareholders. | The Board closely monitors the Company's share price relative to NAV and the Company's discount / premium relative to their peer group, and recognises the importance that investors attach to the ordinary shares not trading at a significant discount or premium to the prevailing NAV. Should the shares trade at a significant discount to the prevailing NAV, the Board will consider whether the Company should purchase its own ordinary shares, pursuant to the general authority renewed at each AGM. Conversely, the Board will issue new Ordinary Shares should the shares trade at a premium to their prevailing NAV, pursuant to the general authority renewed at each AGM. Extensive marketing is carried out by the Company's Investment Manager, Broker and a specialist PR company. An investment research consultant is engaged to provide independent research for retail shareholders. |
The share price continued to trade at a discount during the year under review despite improving performance. In the uncertain market environment, the discount is in line with the peer group. |
Principal Risks | Mitigation | Movement During the Year |
Market Risk Changes in the investment, economic or political conditions in Japan, and/or in the countries in which the Company's investee companies operate could substantially and adversely affect the Company's prospects. In addition to changing economic factors such as interest rates, employment, industry conditions and competition, unpredictable factors such as natural disasters, earthquakes and diplomatic events may impact market risk. Geopolitical instability in the region may threaten global economic growth and, consequently, companies in the portfolio. | The Directors acknowledge that market risk is inherent in the investment process. The Company maintains a diversified portfolio of quoted investments. The Board has imposed guidelines within its investment policy to limit exposure to individual holdings and limits the level of gearing. Further information on financial instruments and risk can be found in note 16 to the Financial Statements. In addition to regular market updates from the Investment Manager and reports at Board meetings, the Board convenes more often during periods of extreme volatility. Japan (and Asia) have taken longer to emerge from the Covid-19 restrictions than European and American markets. However, the Board is encouraged by the scope for recovery as Japan emerges from the pandemic. |
The invasion of Ukraine, the consequent escalation in energy prices, rising interest rates, global inflation and rising geopolitical tensions in Asia, have all led to a more uncertain environment for equity investments. The Manager's emphasis on companies which can pay sustainable dividends has helped alleviate the impact. |
Excess leverage The Company may use borrowings to seek to enhance investment returns. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance. | An ability to gear is a unique advantage of closed-end companies and structural gearing is a clearly stipulated component of the Company's investment policy. This is highlighted in shareholder communications. Gearing is monitored and strict restrictions on borrowings are imposed: gearing continues to operate within a limit of 25% of NAV at the time of investment. |
|
Principal Risks | Mitigation | Movement During the Year |
Underperforming key service providers The Company's service providers including the Investment Manager, Depositary, the Custodian and the Administrator could fail to provide accurate timely information to the Board. External events, such as cyber- crime, natural disasters or pandemics may lead to business interruption and mean service providers are unable to meet their contractual obligations. | The Board has appointed an experienced independent professional Investment Manager, Depositary, Custodian and Administrator. All key service providers produce annual internal control reports for review by the Audit and Risk Committee. These reviews include consideration of their business continuity plans and the associated cyber security risks. Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber- attack. Penetration testing is carried out by the Investment Manager and key service providers at least annually. |
|
Emerging risk | ||
ESG and Climate Change Potential reputational damage from non-compliance with regulations or incorrect disclosures. Climate change leads to additional costs and risks for portfolio companies. The Company could suffer as a result of increased investor demand for products which promote ESG investments. | The Company's ESG Policy, which is updated annually is published on the Company's website and the AIC website. The Company's approach to ESG, including the ESG factors that are considered in the investment process, such as climate change, where they are relevant and have a material impact on stock performance, is included in the Annual Report. It also includes examples of responsible engagement. Coupland Cardiff Asset Management LLP (the Investment Manager) is a signatory to the Principles of Responsible Investment Initiative ("PRI") and reports annually according to the PRI reporting framework. The Investment Manager also complies with the obligations of both the UK Stewardship Code and the Japan Stewardship Code. Investment trusts are currently exempt from the Task Force on Climate-Related Financial Disclosures ("TCFD") disclosure, but the Board will continue to monitor the situation. |
Shareholders expect relevant ESG factors and sustainability to be taken into account in investment decisions. Climate change is impacting operating conditions of portfolio companies and their reporting obligations. |
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 102, which is The Financial Reporting Standard applicable to the UK and Republic of Ireland and applicable law. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of the Company's affairs as at the end of the year and of the net return for the year. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates, which are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Company Reports and Accounts are published on its website at www.ccjapanincomeandgrowthtrust. com which is maintained by the Company's Investment Manager. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since being initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' confirmation statement
The Directors each confirm to the best of their knowledge that:
(a) the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
(b) this Annual Report includes a fair review of the development and performance of the business and position of the Company, together with a description of the principal risks and uncertainties that it faces.
Having taken advice from the Audit and Risk Committee, the Directors consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.
For and on behalf of the Board
Harry Wells
Chairman
23 January 2023
FINANCIAL STATEMENTS
INCOME STATEMENT
FOR THE YEAR ENDED 31 OCTOBER 2022
| Year ended 31 October 2022 | Year ended 31 October 2021 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
(Losses)/gains on investments | 3 | - | (18,118) | (18,118) | - | 39,373 | 39,373 |
Currency (losses)/gains | - | (209) | (209) | - | 734 | 734 | |
Income | 4 | 8,878 | - | 8,878 | 8,241 | - | 8,241 |
Investment management fee | 5 | (327) | (1,306) | (1,633) | (318) | (1,273) | (1,591) |
Other expenses | 6 | (664) | - | (664) | (634) | - | (634) |
Return on ordinary activities before finance costs and taxation |
| 7,887 | (19,633) | (11,746) | 7,289 | 38,834 | 46,123 |
Finance costs | 7 | (69) | (185) | (254) | (61) | (161) | (222) |
Return on ordinary activities before taxation |
| 7,818 | (19,818) | (12,000) | 7,228 | 38,673 | 45,901 |
Taxation | 8 | (888) | - | (888) | (824) | - | (824) |
Return on ordinary activities after taxation |
| 6,930 | (19,818) | (12,888) | 6,404 | 38,673 | 45,077 |
Return per Ordinary Share-undiluted | 13 | 5.14p | (14.71)p | (9.57)p | 4.75p | 28.70p | 33.45p |
Return per Ordinary Share-diluted | 13 | 4.29p | (12.26)p | (7.97)p | 3.96p | 23.92p | 27.88p |
The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. | |||||||
|
|
|
|
|
|
|
|
Both the supplementary revenue and capital columns are prepared under guidance from the Association of Investment Companies. There is no other comprehensive income and therefore the return for the year is also the total comprehensive income for the year. The Company's "Ordinary Shares - diluted" is due to the issuance of 26,946,122 Subscription Shares issued on 18 February 2021.
| |||||||
|
|
|
|
|
|
|
|
STATEMENT OF FINANCIAL POSITION
AT 31 OCTOBER 2022
| 31 October 2022 | 31 October 2021 | |
Note | £'000 | £'000 | |
Fixed assets | |||
Investments at fair value through profit or loss | 3 | 199,642 | 220,271 |
Current assets | |||
Cash and cash equivalents | 1,413 | - | |
Cash collateral in respect of Contracts for Difference ("CFDs") | 433 | - | |
Amounts due in respect of CFDs | 2,680 | 443 | |
Other debtors | 10 | 4,434 | 3,264 |
8,960 | 3,707 | ||
Creditors: amounts falling due within one year | |||
Cash and cash equivalents-Bank overdraft | - | (48) | |
Cash collateral in respect of CFDs | - | (18) | |
Amounts payable in respect of CFDs | (2,780) | (738) | |
Other creditors | 11 | (2,240) | (304) |
(5,020) | (1,108) | ||
Net current assets |
| 3,940 | 2,599 |
Total assets less current liabilities |
| 203,582 | 222,870 |
Net assets |
| 203,582 | 222,870 |
Capital and reserves | |||
Share capital | 12 | 1,348 | 1,348 |
Share premium | 98,067 | 98,067 | |
Special reserve | 64,671 | 64,671 | |
Capital reserve | |||
-Revaluation gains on non-derivative investments held at year end | 3 | 5,841 | 26,628 |
-Other capital reserves | 26,182 | 25,213 | |
Revenue reserve | 7,473 | 6,943 | |
Total Shareholders' funds |
| 203,582 | 222,870 |
NAV per share - Ordinary Shares - undiluted (pence) | 14 | 151.10p | 165.42p |
NAV per share - Ordinary Shares - diluted (pence) | 14 | 152.75p | 164.68p |
Approved by the Board of Directors and authorised for issue on 23 January 2023 and signed on their behalf by:
Harry Wells | |||
Director | |||
CC Japan Income & Growth Trust plc is incorporated in England and Wales with registration number 9845783. | |||
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 OCTOBER 2022
| Share capital | Share premium | Special reserve | Capital reserve | Revenue reserve | Total | |
Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 1 November 2021 |
| 1,348 | 98,067 | 64,671 | 51,841 | 6,943 | 222,870 |
Return on ordinary activities after taxation | - | - | - | (19,818) | 6,930 | (12,888) | |
Dividends paid | 9 | - | - | - | - | (6,400) | (6,400) |
Balance at 31 October 2022 |
| 1,348 | 98,067 | 64,671 | 32,023 | 7,473 | 203,582 |
For the year ended 31 October 2021 |
|
|
|
|
|
| |
| Share capital | Share premium | Special reserve | Capital reserve | Revenue reserve | Total | |
Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 1 November 2020 |
| 1,348 | 98,437 | 64,671 | 13,168 | 6,736 | 184,360 |
Return on ordinary activities after taxation | - | - | - | 38,673 | 6,404 | 45,077 | |
Dividends paid | 9 | - | - | - | - | (6,197) | (6,197) |
Subscription Shares issue costs | - | (370) | - | - | - | (370) | |
Balance at 31 October 2021 |
| 1,348 | 98,067 | 64,671 | 51,841 | 6,943 | 222,870 |
The Company's distributable reserves consist of the Special reserve, Revenue reserve and Capital reserve attributable to realised profits. | |||||||
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 OCTOBER 2022
| Year ended 31 October 2022 | Year ended 31 October 2021 |
£'000 | £'000 | |
Operating activities cash flows |
|
|
Return on ordinary activities before finance costs and taxation* | (11,746) | 46,123 |
Adjustment for: | ||
Losses/(gains) on investments | 18,106 | (28,306) |
Movements in CFD transactions | (646) | (1,601) |
Increase in other debtors | (6) | (293) |
Increase in other creditors | 3 | 89 |
Tax withheld on overseas income | (888) | (824) |
Net cash flow from operating activities | 4,823 | 15,188 |
Investing activities cash flows | ||
Purchases of investments | (43,572) | (100,687) |
Proceeds from sales of investments | 46,864 | 89,778 |
Net cash flow from/(used in) investing activities | 3,292 | (10,909) |
Financing activities cash flows | ||
Subscription Share issue costs paid | - | (370) |
Equity dividends paid | (6,400) | (6,197) |
Finance costs paid | (254) | (223) |
Net cash used in financing activities | (6,654) | (6,790) |
Increase/(decrease) in cash and cash equivalents | 1,461 | (2,511) |
Cash and cash equivalents at the beginning of the year | (48) | 2,463 |
Cash and cash equivalents at the end of the year | 1,413 | (48) |
* Cash inflow from dividends was £8,038,000 (2021: £7,083,000). | ||
NOTES TO THE ACCOUNTS
1. GENERAL INFORMATION |
CC Japan Income & Growth Trust plc (the "Company") was incorporated in England and Wales on 28 October 2015 with registered number 9845783, as a closed-ended investment company. The Company commenced its operations on 15 December 2015. The Company carries on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.
The Company's investment objective is to provide Shareholders with dividend income combined with capital growth, mainly through investment in equities listed or quoted in Japan.
The Company's shares were admitted to the Official List of the Financial Conduct Authority with a premium listing on 15 December 2015. On the same day, trading of the Ordinary Shares commenced on the London Stock Exchange.
In 2021, the Company's 26,946,122 TSS were admitted to the London Stock Exchange with the ticker CCJS.
The Company's registered office is 6th Floor, 125 London Wall, London EC2Y 5AS.
2. ACCOUNTING POLICIES
The principal accounting policies followed by the Company are set out below:
(a) Basis of accounting
The financial statements have been prepared in accordance with FRS 102 ("the Financial Reporting Standard applicable in the UK and Republic of Ireland") issued by the Financial Reporting Council, with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in April 2021 and the Companies Act 2006. The financial statements have been prepared on the historical cost basis except for the modification to a fair value basis for certain financial instruments as specified in the accounting policies below.
They have also been prepared on the assumption that approval as an investment trust will continue to be granted. As required by its Articles of Association, the Company's continuation vote was passed at the AGM in 2022 and will next put forward a vote for its continuation at the AGM in 2025.
The financial statements have been prepared on a going concern basis. In forming this opinion, the Directors have considered any potential impact of the war in Ukraine and the ongoing impact of the Covid-19 pandemic on the going concern and viability of the Company. In making their assessment, the Directors have reviewed income and expense projections and the liquidity of the investment portfolio, and considered the mitigation measures which key service providers, including the Investment Manager, continue to have in place to maintain operational resilience.
The Company's ability to continue as a going concern for the period assessed by the Directors, being the period to 31 January 2024 which is at least 12 months from the date the financial statements were authorised for issue.
The financial statements have been presented in GBP sterling (£), which is also the functional currency as this is the currency of the primary economic environment in which the Company operates. The Board, having regard to the currency of the Company's share capital and the predominant currency in which it pays distributions, expenses and its shareholders operate, has determined that sterling is the functional currency.
In preparing these financial statements the Directors have considered the impact of ESG and climate change risk as an emerging risk and have concluded that while climate change impacts operating conditions of portfolio companies and increases obligations, it does not have a material impact on the value of the Company's investments. In line with FRS 102, investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at 31 October 2022 and therefore reflect market participants' view of climate change risk.
(b) Investments
As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, financial assets are held at fair value through profit or loss in accordance with FRS 102 Section 11: 'Basic Financial Instruments', and Section 12: 'Other Financial Instruments'. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided on this basis to the Board of Directors.
Upon initial recognition, investments are classified by the Company as "at fair value through profit or loss". They are recognised on the date they are traded and are measured initially at fair value, which is taken to be their transaction price, excluding expenses incidental to purchases which are expensed to capital on acquisition. Subsequently investments are revalued at fair value which is the bid market price for listed investments over the time until they are sold, any unrealised gains/losses are included in the fair value of the investments.
Changes in the fair value of investments held at fair value through profit or loss and gains or losses on disposal are included in the capital column of the income statement within "gains on investments held at fair value".
(c) Derivatives
Derivatives comprise Contracts for Difference ("CFD"), which are measured at fair value and valued by reference to the underlying market value of the corresponding security. CFDs are held for investment purposes. Where the fair value is positive the CFD is presented as a current asset, and where the fair value is negative the CFD is presented as a current liability. Gains or losses on these derivative transactions are recognised in the Income Statement. They are recognised as capital and are shown in the capital column of the Income Statement if they are of a capital nature and are recognised as revenue and shown in the revenue column of the Income Statement if they are of a revenue nature. To the extent that any gains or losses are of a mixed revenue and capital nature, they are apportioned between revenue and capital accordingly. The CFD balance is made up of transactions in relation to the underlying equity held by the Company, with the risks embedded in the CFDs disclosed in Note 16.
(d) Foreign currency
Transactions denominated in foreign currencies including dividends are translated into sterling at actual exchange rates as at the date of the transaction. Assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Foreign exchange movements on investments and derivatives are included in the Income Statement within gains on investments. Any other gain or loss is included as an exchange gain or loss to capital or revenue in the Income Statement as appropriate.
(e) Income
Investment income has been accounted for on an ex-dividend basis or when the Company's right to the income is established. Special dividends are credited to capital or revenue in the Income Statement, according to the circumstances surrounding the payment of the dividend. Overseas dividends are included gross of withholding tax recoverable.
Interest receivable on deposits is accounted for on an accrual basis.
(f) Dividend payable
Interim dividends are recognised when the Company pays the dividend. Final dividends are recognised in the period in which they are approved by the shareholders. This year, as was also the case last year, a second interim dividend is being paid in substitution for the final dividend.
(g) Expenses
All expenses are accounted for on an accruals basis and are charged as follows:
• the basic investment management fee is charged 20% to revenue and 80% to capital;
• CFD finance costs are charged 20% to revenue and 80% to capital;
• investment transactions costs are allocated to capital; and
• other expenses are charged wholly to revenue.
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that were applicable at the financial reporting date.
Where expenses are allocated between capital and revenue any tax relief in respect of the expenses is allocated between capital and revenue returns on the marginal basis using the Company's effective rate of corporation taxation for the relevant accounting period.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the financial reporting date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the financial reporting date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the timing differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise.
(i) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short term in nature and are accordingly stated at their nominal value.
(j) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being that of an investment trust, as disclosed in note 1.
(k) Accounting estimates, judgements and assumptions
The preparation of financial statements requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly.
There have not been any instances requiring any significant estimates or judgements in the year.
(l) Cash and cash equivalents
Cash comprises cash and demand deposits. Cash equivalents, include bank overdrafts, and short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to insignificant risks of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
3. INVESTMENTS (a) Summary of valuation | ||
As at 31 October 2022 £'000 | As at 31 October 2021 £'000 | |
Investments listed on a recognised overseas investment exchange | 199,642 | 220,271 |
199,642 | 220,271 | |
(b) Movements | ||
During the year ended 31 October 2022 | ||
2022 £'000 | 2021 £'000 | |
Book cost at the beginning of the year | 193,643 | 166,181 |
Revaluation gains on non-derivative investments held at beginning of the year | 26,628 | 14,746 |
Valuation at beginning of the year | 220,271 | 180,927 |
Purchases at cost | 45,505 | 100,687 |
Sales: | ||
- proceeds | (48,028) | (89,649) |
- gains on investment holdings sold during the year | 2,681 | 16,424 |
Movements in revaluation (losses)/gains on investment held at year end | (20,787) | 11,882 |
Valuation at end of the year | 199,642 | 220,271 |
Book cost at end of the year | 193,801 | 193,643 |
Revaluation gains on non-derivative investment held at year end | 5,841 | 26,628 |
Valuation at end of the year | 199,642 | 220,271 |
Transaction costs on investment purchases for the year ended 31 October 2022 amounted to £17,000 (2021: £46,000) and on investment sales for the year amounted to £19,000 (2021: £39,000).
The Company received £48,028,000 (2021: £89,649,000) from investments sold during the year. The book cost of these investments when they were purchased was £45,347,000 (2021: £73,225,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
c) (Losses)/gains on investments
Year ended | Year ended | |
31 October 2022 | 31 October 2021 | |
£'000 | £'000 | |
Gains on non-derivative investment holdings sold during the year | 2,681 | 16,424 |
Movements in revaluation (losses)/gains on investment held at year end | (20,787) | 11,882 |
Other capital losses | (23) | (27) |
Total (losses)/gains on non-derivative investments held at fair value | (18,129) | 28,279 |
Realised (losses)/gains on CFD assets and liabilities | (184) | 9,434 |
Unrealised gains on CFD assets and liabilities | 195 | 1,660 |
Total (losses)/gains on investments held at fair value | (18,118) | 39,373 |
4. INCOME | ||
Year ended 31 October 2022 £'000 | Year ended 31 October 2021 £'000 | |
Income from investments: | ||
Overseas dividends | 8,878 | 8,241 |
Total | 8,878 | 8,241 |
Overseas dividend income is translated into sterling on receipt. | ||
5. INVESTMENT MANAGEMENT FEE | ||
Year ended 31 October 2022 £'000 | Year ended 31 October 2021 £'000 | |
Basic fee: | ||
20% charged to revenue | 327 | 318 |
80% charged to capital | 1,306 | 1,273 |
Total | 1,633 | 1,591 |
The Company's Investment Manager is Coupland Cardiff Asset Management LLP. The Investment Manager is entitled to receive a management fee payable monthly in arrears and is at the rate of one-twelfth of 0.75% of Net Asset Value per calendar month. There is no performance fee payable to the Investment Manager.
6. OTHER EXPENSES |
| ||||
| Year ended 31 October 2022 £'000 | Year ended 31 October 2021 £'000 |
| ||
Secretarial services | 48 | 48 |
| ||
Administration and other expenses | 420 | 416 |
| ||
Auditor's remuneration - statutory audit services | 50 | 45 |
| ||
Directors' fees | 146 | 125 |
| ||
Other expenses - Revenue | 664 | 634 |
| ||
7. FINANCE COSTS | |||||
| Year ended 31 October 2022 £'000 | Year ended 31 October 2021 £'000 | |||
Interest paid - 100% charged to revenue | 23 | 21 | |||
CFD finance cost and structuring fee - 20% charged to revenue | 45 | 39 | |||
Structuring fees - 20% charged to revenue | 1 | 1 | |||
69 | 61 | ||||
CFD finance cost and structuring fee - 80% charged to capital | 181 | 157 | |||
Structuring fees - 80% charged to capital | 4 | 4 | |||
185 | 185 | ||||
Total finance costs | 254 | 222 | |||
8. TAXATION
Year ended 31 October 2022 Year ended 31 October 2021 | ||||||
Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
(a) Analysis of tax charge in the year: | ||||||
Overseas withholding tax | 888 | - | 888 | 824 | - | 824 |
Total tax charge for the year (see note 8 (b)) | 888 | - | 888 | 824 | - | 824 |
| |||||||||||||
Effective UK corporation tax at 19.00% (2021: 19.00%) | 1,485 | (3,765) | (2,280) | 1,373 | 7,348 | 8,721 |
Effects of: | ||||||
Overseas withholding tax suffered | 888 | - | 888 | 824 | - | 824 |
Non-taxable overseas dividends | (1,687) | - | (1,687) | (1,566) | - | (1,566) |
Capital losses/(gains) not subject to tax | - | 3,482 | 3,482 | - | (7,620) | (7,620) |
Finance costs not tax deductible | 13 | 35 | 48 | 12 | 31 | 43 |
Movement in unutilised management expenses | 189 | 248 | 437 | 181 | 241 | 422 |
Total tax charge for the year | 888 | - | 888 | 824 | - | 824 |
The Company has an unrecognised deferred tax asset of £1,218,000 (2021: £904,000) based on the long-term prospective corporation tax rate of 25% (2021: 25%). This asset has accumulated because deductible expenses exceeded taxable income for the year ended 31 October 2022. No asset has been recognised in the accounts because, given the composition of the Company's portfolio, it is unlikely that this asset will be utilised in the foreseeable future. The Company has not provided for deferred tax on any tax losses.
9. DIVIDEND | ||
(i) Dividends paid during the financial year | ||
| Year ended 31 October 2022 £'000 | Year ended 31 October 2021 £'000 |
Second Interim - year ended 31 October 2021 3.35p (2020: 3.20p) | 4,514 | 4,311 |
Interim dividend - year ended 31 October 2022 1.40p (2021: 1.40p) | 1,886 | 1,886 |
Total | 6,400 | 6,197 |
(ii) The dividend relating to the year ended 31 October 2022, which is the basis on which the requirements of
Section 1159 of the Corporation Tax Act 2010 are considered is detailed below:
Year ended 31 October 2022 Year ended 31 October 2021 Pence per Pence per Ordinary Ordinary | ||||
Share | £'000 | Share | £'000 | |
Interim dividend | 1.40p | 1,886 | 1.40p | 1,886 |
Second interim dividend* | 3.50p | 4,716 | 3.35p | 4,513 |
4.90p | 6,602 | 4.75p | 6,399 | |
* Not included as a liability in the year ended 30 October 2022 accounts.
The Directors have declared a second interim dividend for the financial year ended 31 October 2022 of 3.50p per Ordinary Share. The dividend will be paid on 3 March 2023 to Shareholders on the register at the close of business on 3 February 2023.
10. OTHER DEBTORS | ||
| As at 31 October 2022 £'000 | As at 31 October 2021 £'000 |
Accrued income | 3,146 | 3,194 |
Sales for settlement | 1,184 | 20 |
VAT receivable | 62 | 19 |
Prepayments and other receivables | 42 | 31 |
Total | 4,434 | 3,264 |
11. OTHER CREDITORS | ||
| As at 31 October 2022 £'000 | As at 31 October 2021 £'000 |
Amounts falling due within one year: | ||
Purchases for future settlement | 1,933 | - |
Accrued finance costs | 7 | 7 |
Accrued expenses | 300 | 297 |
Total | 2,240 304 |
12. SHARE CAPITAL
Share capital represents the nominal value of shares that have been issued. The share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium.
| As at 31 October 2022 No. of shares |
£'000 | As at 31 October 2021 No. of shares |
£'000 |
Allotted, issued & fully paid: | ||||
Ordinary Shares of 1p | ||||
Opening balance | 134,730,610 | 1,348 | 134,730,610 | 1,348 |
Closing balance | 134,730,610 | 1,348 | 134,730,610 | 1,348 |
Since the year end, the Company has issued no Ordinary Shares, with 134,730,610 Ordinary Shares in issue as at 23 January 2023.
Transferable Subscription SharesOn at the year end and the date of this report, the Company had 26,946,122 TSS in issue at a Subscription Price of £1.61. The TSS were issued as a free bonus to Shareholders on the basis of 1 Subscription Share for every 5 Ordinary Shares owned. The TSS have a limited life but can be exercised by paying the Subscription Price of £1.61 for new Ordinary Shares on a quarterly basis on the last business day of May, August, November and February up until the last business day of February 2023, whereupon they expire. As of 31 October 2022, none of the TSS have been exercised.
13. RETURN PER ORDINARY SHARETotal return per Ordinary Share is based on the return on ordinary activities, including income, a loss for the year after taxation of £12,888,000 (2021: profit of £45,077,000) and the weighted average number of Ordinary Shares-undiluted in issue for the year to 31 October 2022 of 134,730,610 (2021: 134,730,610); Ordinary Shares-diluted in issue for the year to 31 October 2022 of 161,676,732 (2021: 134,730,610). The Company's Ordinary Shares-diluted is due to the 26,946,122 Subscription Shares in issue for the year to 31 October 2022.
The returns per Ordinary Share were as follows:
As at Revenue | 31 | October 2022 Capital Total | As at Revenue | 31 | October Capital | 2021 Total | |||
Return per Ordinary Share - undiluted |
5.14p |
(14.71)p |
(9.57)p |
4.75p |
28.70p |
33.45p | |||
Return per Ordinary Share - diluted* |
4.29p |
(12.26)p |
(7.97)p |
3.96p |
23.92p |
27.88p | |||
*Diluted assumes that all the TSS in issue are fully subscribed for at the price of £1.61p per TSS
14. NET ASSET VALUE PER SHARETotal Shareholders' funds and the net asset value ("NAV") per share attributable to the Ordinary Shareholders at the year end calculated in accordance with the Articles of Association were as follows:
NAV per Ordinary Share - undiluted
| As at 31 October 2022 | As at 31 October 2021 |
Net Asset Value (£'000) | 203,582 | 222,870 |
Ordinary Shares in issue | 134,730,610 | 134,730,610 |
NAV per Ordinary Share - undiluted | 151.10p | 165.42p |
NAV per Ordinary Share - diluted | ||
| As at 31 October 2022 | As at 31 October 2021 |
Subscription shares issue | 26,946,122 | 26,946,122 |
Proceeds from exercise of TSS (£'000) | 43,383 | 43,400 |
Adjusted Net Asset Value for exercise of TSS (£'000) | 246,954 | 266,270 |
Ordinary Shares - post exercise of TSS | 161,676,732 | 161,676,732 |
NAV per Ordinary Share - diluted | 152.75p | 164.68p |
As at the year end, there was no dilution effect on the NAV per share.
15. RELATED PARTY TRANSACTIONSTransactions with the Investment Manager and the Alternative Investment Fund Investment Manager ("AIFM")
The Company provides additional information concerning its relationship with the Investment Manager and AIFM, Coupland Cardiff Asset Management LLP. The fees for the period are disclosed in note 5 and amounts outstanding at the year ended 31 October 2022 were £134,000 (2021: £141,000).
Research purchasing agreement
MiFID II treats investment research provided by brokers and independent research providers as a form of "inducement" to investment managers and requires research to be paid separately from execution costs. In the past, the costs of broker research were primarily borne by the Company as part of execution costs through dealing commissions paid to brokers. With effect from 3 January 2018, this practice has changed, as brokers subject to MiFID II are now required to price, and charge for, research separately from execution costs. Equally, the rules require the Investment Manager, as an investment Manager, to ensure that the research costs borne by the Company are paid for through a designated Research Payment Account ("RPA") funded by direct research charges to the Investment Manager's clients; including the Company.
The research charge for the year 1 January 2022 to 31 December 2022, as agreed between the Investment Manager and the Company, was £34,000 (31 December 2021: £28,000). The research charge for the year 1 January 2023 to 31 December 2023, as budgeted by the Investment Manager, is £28,000.
Directors' fees and shareholdings
The Directors' fees and shareholdings are disclosed in the Directors' Remuneration Implementation Report.
16. FINANCIAL INSTRUMENTS AND CAPITAL DISCLOSURES
Risk Management Policies and Procedures
As an investment trust the Company invests in equities and equity related derivatives for the long-term so as to secure its investment objective. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for dividends.
These risks, include market risk (comprising currency risk, interest rate risk, and other price risk), liquidity risk, and credit risk, and the Directors' approach to the management of them are set out follows.
The objectives, policies and processes for managing the risks, and the methods used to measure the risks, are set out below.
(a) Market Risk Overview
Economic conditions
Changes in economic conditions in Japan (for example, interest rates and rates of inflation, industry conditions, competition, political and diplomatic events and other factors) and in the countries in which the Company's investee companies operate could substantially and adversely affect the Company's prospects. The Company is subject to concentration risk as it only invests in Japanese companies but has diversified investments across the different sectors in the Japanese market.
Sectoral diversification
The Company has no limits on the amount it may invest in any sector. This may lead to the Company having significant concentrated exposure to portfolio companies in certain business sectors from time to time.
Concentration of investments in any one sector may result in greater volatility in the value of the Company's investments and consequently its NAV and may materially and adversely affect the performance of the Company and returns to Shareholders.
Unquoted companies
The Company may invest in unquoted companies from time to time. Such investments, by their nature, involve a higher degree of valuation and performance uncertainties and liquidity risks than investments in listed and quoted securities and they may be more difficult to realise. However, the Company does not currently hold and has never held any unquoted securities.
Management of market risk
The Company is invested in a diversified portfolio of investments. The Company's investment policy states that no single holding (including any derivative instrument) will represent more than 10% of the Company's Gross Assets at the time of investment and, when fully invested, the portfolio is expected to have between 30 to 40 holdings although there is no guarantee that this will be the case and it may contain a lesser or greater number of holdings at any time. A maximum of 10% of the Company's Gross Assets at the time of investment may be invested in unquoted or untraded companies at time of investment.
The Investment Manager's approach will in most cases achieve diversification across a number of sectors as shown in the Holdings in Portfolio.
(b) Currency risk
The majority of the Company's assets will be denominated in a currency other than sterling (predominantly in yen) and changes in the exchange rate between sterling and yen may lead to a depreciation of the value of the Company's assets as expressed in sterling and may reduce the returns to the Company from its investments and, therefore, negatively impact the level of dividends paid to shareholders.
Management of currency risk
The Investment Manager monitors the currency risk of the Company's portfolio on a regular basis. Foreign currency exposure is regularly reported to the Board by the Investment Manager. The Company does not currently intend to enter into any arrangements to hedge its underlying currency exposure to investment denominated in yen, although the Investment Manager and the Board will keep this approach under regular review.
Foreign currency exposures
An analysis of the Company's assets and liabilities denominated in yen are as follows:
| As at 31 October 2022 £'000 | As at 31 October 2021 £'000 |
Equity Investments: Yen | 199,642 | 220,271 |
Receivables (due from brokers, dividends, and other income receivable) | 4,330 | 3,214 |
CFD: yen (fair value of open positions) | (100) | (295)* |
Cash and cash equivalent: yen | (1,927) | (3,360) |
Total | 201,945 | 219,830 |
Foreign currency sensitivity
If the Japanese Yen had appreciated or depreciated by 10% as at 31 October 2022 (2021: 10%) then the returns of the company as at that date would have increased or decreased as shown below:
Increase in Fair Value As at 31 October 2022 £'000 | Decrease in Fair Value As at 31 October 2022 £'000 | Increase in Fair Value As at 31 October 2021 £'000 | Decrease in Fair Value As at 31 October 2021 £'000 | |
Impact on capital return - increase/(decrease) | 20,195 | (20,195) | 21,983 | (21,983) |
Return after taxation - increase/(decrease) | 20,195 | (20,195) | 21,983 | (21,983) |
* Within the foreign currency exposures table, the 31 October 2021 figure for CFDs was previously reported as £44,055,000 which represented the CFDs absolute exposure, rather than the fair value of open positions. The corresponding foreign currency sensitivity was previously reported as +/- £26,418,000.
(c) Leverage riskDerivative instruments
The Company may utilise long only CFDs or equity swaps for gearing and efficient portfolio management purposes. Leverage may be generated through the use of CFDs or equity swaps. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument. This is due to the fact that, generally, only a very small portion (and in some cases none) of the value of the underlying security or instrument is required to be paid in order to make such leveraged investments. As a result of any leverage employed by the Company, small changes in the value of the underlying assets may cause a relatively large change in the Net Asset Value of the Company. Many such financial instruments are subject to variation or other interim margin requirements, which may force premature liquidation of investment positions.
Borrowing risks
The Company may use borrowings to seek to enhance investment returns. While the use of borrowings can enhance the total return on the Ordinary Shares where the return on the Company's underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company's underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the Ordinary Shares. As a result, the use of borrowings by the Company may increase the volatility of the Net Asset Value per Ordinary Share. The Company had no borrowings at the year end.
Any reduction in the value of the Company's investments may lead to a correspondingly greater percentage reduction in its Net Asset Value (which is likely to adversely affect the price of an Ordinary Share). Any reduction in the number of Ordinary Shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in the Company's level of gearing.
To the extent that a fall in the value of the Company's investments causes gearing to rise to a level that is not consistent with the Company's gearing policy or borrowing limits, the Company may have to sell investments in order to reduce borrowings, which may give rise to a significant loss of value compared to the book value of the investments, as well as a reduction in income from investments.
Management of leverage risk
The aggregate of borrowings and long only CFD and equity swap exposure will not exceed 25% of Net Asset Value at the time of drawdown of the relevant borrowings or entering into the relevant transaction, as appropriate, although the Company's normal policy will be to utilise and maintain gearing to a lower limit of 20% of Net Asset Value at the time of drawdown of the relevant borrowings or entering into the relevant transaction, as appropriate. It is expected that any borrowings entered into will principally be denominated in Yen.
The Company's level of gearing as at 31 October 2022 is disclosed in the Alternative Performance Measures section of this Annual Report.
(d) Interest rate riskThe Company is exposed to interest rate risk specifically through its cash holdings and on positions within the CFD portfolio. Interest rate movements may affect the level of income receivable from any cash at bank and on deposits. The effect of interest rate changes on the earnings of the companies held within the portfolio may have a significant impact on the valuation of the Company's investments. Movements in interest rates will also have an impact on the valuation of the CFD derivative contracts. Interest receivable on cash balances or paid on overdrafts is at fixed rate.
Management of interest rate risk
The possible effects on Fair Value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. Derivative contracts are not used to hedge against the exposure to interest rate risk.
Interest income earned on deposits and paid on overdraft by the Company is primarily derived from fixed interest rates, as such do not have a material exposure to interest rate risk.
The bank overdraft is an integral part of cash management and the Company has a legal right of offset and has the intention to settle this at net.
Interest rate exposure
The exposure at 31 October 2022 of financial assets and liabilities to interest rate risk is shown by reference to floating interest rates - when the interest rate is due to be reset. Due to the current low interest rate environment in Japan, no sensitivity analysis is shown as the total impact will not be material.
As at 31 October 2022 due within one year | As at 31 October 2021 due within one year | |
£'000 | £'000 | |
Exposure to floating interest rates: CFD derivative contract - (absolute exposure) | 39,926 | 44,055 |
Collateral paid in respect of CFDs | 433 | - |
( e ) Credit risk
Credit risk is the possibility of a loss to the Company due to the failure of the counterparty to a transaction discharging its obligations under that transaction.
Cash and other assets held by the Depositary
The cash and other assets held by the Depositary, or its sub-custodians are subject to counterparty credit risk as the Company's access to its cash could be delayed should the counterparties become insolvent or bankrupt.
Derivative instruments
The Company's holdings in CFD contracts present counterparty credit risks, with the risk of the counter party (Morgan Stanley & Co International plc) defaulting.
Management of credit risk
Cash and other assets held by the Depositary
Cash and other assets that are required to be held in custody will be held by the depositary or its sub-custodians. Cash and other assets may not be treated as segregated assets and will therefore not be segregated from any custodian's own assets in the event of the insolvency of a custodian. Cash held with any custodian will not be treated as client money subject to the rules of the Financial Conduct Authority ('FCA') and may be used by a custodian in the course
of its own business. The Company will therefore be subject to the creditworthiness of its custodians. In the event of the insolvency of a custodian, the Company will rank as a general creditor in relation thereto and may not be able to recover such cash in full, or at all. The Company has appointed Northern Trust Investor Services Limited as its
depositary. The credit rating of Northern Trust was reviewed at time of appointment and will be reviewed on a regular basis by the Investment Manager and/or the Board. The Fitch's credit rating of Northern Trust is AA-.
Derivative instruments
Where the Company utilises CFDs or equity swaps, it is likely to take a credit risk with regard to the parties with whom it trades and may also bear the risk of settlement default. These risks may differ materially from those entailed in exchange-traded transactions that generally are backed by clearing organisation guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between counterparties generally do not benefit from such protections and expose the parties to the risk of counterparty default. CFD contracts generally require variation margins and the counterparty credit risk is monitored by the Investment Manager.
The Investment Manager monitors the Company's exposure to its counterparties on a regular basis and the position is reviewed by the Directors at Board meetings. Investment transactions are carried out with a number of brokers, whose credit-standing is reviewed periodically by the Investment Manager, and limits are set on the amount that may be due from any one broker.
In summary, the exposure to credit risk as at 31 October 2022 was as follows:
As at 31 October 2022 3 months or less | As at 31 October 2021 3 months or less | |
£'000 | £'000 | |
Cash at bank | 1,413 | - |
Amounts due in respect of CFDs | 2,680 | 443 |
Collateral paid in respect of CFDs | 433 | - |
Debtors | 4,434 | 3,264 |
Total | 8,960 | 3,707 |
None of the above assets or liabilities were impaired or past due but not impaired.
( f ) Other Price RiskOther price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting similar financial instruments traded in the market.
The Company is exposed to market price risk arising from its equity investments and its exposure to the positions within the CFD portfolio. The movements in the prices of these investments result in movements in the performance of the Company.
The Company's exposure to other changes in market prices at 31 October 2022 on its equity investments was
£199,631,000 (2021: £220,271,000).
In addition, the Company's gross market exposure to these price changes through its CFD portfolio was £39,926,000 through long positions (2021: £44,055,000).
The Company uses CFDs, as part of its investment policy. These instruments can be highly volatile and potentially expose investors to a higher risk of loss. The low initial margin deposits normally required to establish a position in such instruments permit a high degree of leverage. As a result, a relatively small movement in the price of a contract may result in a profit or loss which is high in proportion to the value of the net exposures in the underlying CFD positions. In addition, daily limits on price fluctuations and speculative position limits on exchanges may prevent prompt liquidation of positions resulting in potentially greater losses.
The Company limits the gross market exposure, and therefore the leverage, of this strategy to approximately 200% of the Company's net assets. The CFDs utilised have a linear performance to referenced stocks quoted on exchanges and therefore have the same volatility profile to the underlying stocks.
Market exposures to derivative contracts are disclosed below.
The Company's exposure to CFDs is the aggregate of long CFD Positions. The gross and net market exposure is the same as the Company does not hold Short CFD Positions.
Exposures are monitored daily by the Investment Manager. The Company's Board also reviews exposures regularly.
The gross underlying notional exposures within the CFD portfolio as at 31 October 2022 were:
As | at 31 October 2022 % of net £'000 assets | As | at 31 October 2021 % of net £'000 assets | |||
CFDs - (absolute exposure) | 39,926 | 19.61% | 44,055 | 19.77% | ||
CFDs - (net exposure) | 39,926 | 19.61% | 44,055 | 19.77% | ||
The Board of Directors manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance. The Board monitors the Investment Manager's compliance with the Company's objective.
Concentration of exposure to other price risk
A sector breakdown of the portfolio is contained in the Portfolio.
Other price risk sensitivity
The following table illustrates the sensitivity of the profit after taxation for the period to an increase or decrease of 10% in the fair values of the Company's equities and CFDs. This level of change is considered to be reasonably possible based on observation of current market conditions. The sensitivity analysis is based on the notional exposure of the Company's equities investments and long CFDs.
As at 31 October 2022 As at 31 October 2021 Increase in Decrease in Increase in Decrease in Fair Value Fair Value Fair Value Fair Value £'000 £'000 £'000 £'000 | ||||
Impact on capital return - increase/(decrease) | 23,967 | (23,967) | 26,462 | (26,462) |
Return after taxation - increase/(decrease) | 23,967 | (23,967) | 26,462 | (26,462) |
The securities of small-to-medium-sized (by market capitalisation) companies may have a more limited secondary market than the securities of larger companies. Accordingly, it may be more difficult to effect sales of such securities at an advantageous time or without a substantial drop in price than securities of a company with a large market capitalisation and broad trading market. In addition, securities of small-to-medium-sized companies may have greater price volatility as they can be more vulnerable to adverse market factors such as unfavourable economic reports.
Management of liquidity risk
The Company's Investment Manager monitors the liquidity of the Company's portfolio on a regular basis.
Liquidity risk exposure
The undiscounted gross cash outflows of the financial liabilities as at 31 October 2022, based on the earliest date on which payment can be required, were as follows:
As at 31 October 2022 less than 3 months | As at 31 October 2021 less than 3 months | |
£'000 | £'000 | |
Bank overdraft | - | 48 |
Amounts payable in respect of CFDs | 2,780 | 756 |
Other payables | 2,240 | 304 |
Total | 5,020 | 1,108 |
The Company is exposed to liquidity risks from the leverage employed through exposure to long only CFD positions. However, timely sale of trading positions can be impaired by many factors including decreased trading volume and increased price volatility. As a result, the Company could experience difficulties in disposing of assets to satisfy liquidity demands. Liquidity risk is minimised by holding sufficient liquid investments which can be readily realised to meet liquidity demands. The Company's liquidity risk is managed on a daily basis by the Investment Manager in accordance with established policies and procedures in place.
( h) Fair Value Measurements of Financial Assets and Financial LiabilitiesThe financial assets and liabilities are either carried in the balance sheet at their Fair Value, or the balance sheet amount is a reasonable approximation of Fair Value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash and cash equivalents).
The valuation techniques for investments and derivatives used by the Company are explained in the accounting policies notes 2 (b and c).
The table below sets out Fair Value measurements using Fair Value Hierarchy.
Level 1 Level 2 Level 3 Total | ||||
As at 31 October 2022 | £'000 | £'000 | £'000 | £'000 |
Assets: | ||||
Equity investments | 199,642 | - | - | 199,642 |
CFDs - Unrealised Fair Value gains | - | 2,680 | - | 2,680 |
Liabilities: | ||||
CFDs - Unrealised Fair Value losses | - | (2,780) | - | (2,780) |
Total | 199,642 | (100) | - | 199,542 |
Level 1 Level 2 Level 3 Total | ||||
As at 31 October 2021 | £'000 | £'000 | £'000 | £'000 |
Assets: | ||||
Equity investments | 220,271 | - | - | 220,271 |
CFDs - Unrealised Fair Value gains | - | 443 | - | 443 |
Liabilities: | ||||
CFDs - Unrealised Fair Value losses | - | (738) | - | (738) |
Total | 220,271 | (295) | - | 219,976 |
There were no transfers between levels during the year (2021: same).
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the Fair Value measurement of the relevant asset as follows:
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs including quoted prices.
Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data. There were no Level 3 investments as at 31 October 2022 (2021: nil).
(i) Capital Management Policies and ProceduresThe Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going concern; and
- to provide dividend income combined with capital growth, mainly through investment in equities listed or quoted in Japan and by utilising the leverage effect of CFD.
The key performance indicators are contained in the strategic report.
The Company is subject to several externally imposed capital requirements:
- As a public company, the Company has to have a minimum share capital of £50,000.
- In order to be able to pay dividends out of profits available for distribution by way of dividends, the Company has to be able to meet one of the two capital restriction tests imposed on investment companies by company law.
The Company's capital at 31 October 2022 comprises called up share capital and reserves totalling £203,582,000 (2021:£222,870,000).
The Board regularly monitors and has complied with the capital requirements.
17. DISTRIBUTABLE RESERVES
The Company's distributable reserves consist of the Special reserve, Revenue reserve and Capital reserve attributable to realised profits. As at 31 October 2022 the total Capital reserve distributable is £26,182,000 (2021: £25,213,000), total Capital reserve not distributable is £5,841,000 (2021: £26,628,000).
Special reserve: As stated in the Company's prospectus dated 13 November 2015, in order to increase the distributable reserves available to facilitate the flexibility and source of future dividends, the Company resolved that, conditional upon First Admission to listing on the London Stock Exchange and the approval of the Court, the net amount standing to the credit of the share premium account of the Company immediately following completion of the First Issue be cancelled and transferred to a special distributable reserve. Following approval by the Court, the cancellation became effective on 23 March 2016 and an amount of £64,671,250 was transferred to the above Special reserve at that time.
The Special reserve may be used to fund dividend payments.
18. SUBSEQUENT EVENTS
There were no post balance sheet events other than those already disclosed in this report.
ANNUAL GENERAL MEETING
The Annual General Meeting will be held on 1 March 2023 at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH. Investment Manager, Richard Aston, will provide an update on the investments and take questions after the formal business of the meeting. Members of the Board, will also be available to discuss the Company.
24 January 2023
Secretary and registered office:
Apex Listed Companies Services (UK) Limited
6th Floor, 125 London Wall
London
EC2Y 5AS
For further information contact:
Apex Listed Companies Services (UK) Limited
Tel: 020 3327 9270
END