Last checked at 10 Dec 2021 15:11
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN JAPANESE INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 30TH SEPTEMBER 2021
Legal Entity Identifier: 549300JZW3TSSO464R15
Information disclosed in accordance with the DTR 4.1.3
CHAIRMAN'S STATEMENT
Investment Performance
As highlighted in my 2020 Chairman's statement and mentioned in the 2021 Half-Yearly statement, the Manager's high conviction, unconstrained approach focused on finding the best investment ideas in Japan will from time to time lead to periods of underperformance. And this is indeed what happened in the recent fiscal year.
The arrival of several effective COVID-19 vaccines in November 2020 sparked hope that the world would be able to return to some form of normality and triggered a major shift in financial market sentiment, in favour of cyclical and value companies expected to benefit most from the improved economic outlook. However, companies set to gain from this temporary upsurge in demand are not generally the kind of names your Company invests in, given its focus on quality stocks with strong growth prospects over the longer-term.
Thus, the Company experienced a period of underperformance during the first half of the 2020/21 fiscal year, and then outperformed the benchmark in the second half of 2021. This resulted in underperformance over the full financial year ended 30th September 2021, in net asset value terms, of -4.6%. versus the benchmark, even though performance over the financial year ended 30th September 2021 was strong in absolute terms.
The Company's total return on net assets, with debt calculated at fair value1, was +10.7%, compared with a total return of +15.3% on the Company's benchmark index, the Tokyo Stock Exchange First Section (TOPIX) Index (in sterling terms), over the same period. The share price total return, with dividends reinvested was +11.0%.
The Company's longer-term performance however remains strong, in both absolute and relative terms. It has outperformed the benchmark index decisively over 3, 5 and 10 years by 23.1%, 34.3% and 64.4%, respectively.
Since the end of the financial year, the Company's net asset value has decreased by 0.93% as at 7th December 2021, compared to a benchmark decrease of 2.25%, while the share price decreased by 0.29%.
The Investment Managers' report on the following pages 9 to 14 of the Company's Annual Report & Financial Statements for the year ended 30th September 2021 discusses performance, the investment rationale behind recent portfolio activity and the outlook in more detail.
1 As disclosed in the Company's 2020 Annual Report, the AIC has recommended that investment trusts with long-term fixed rate debt prepare a measure of their NAV that value this debt at 'fair value' rather than using par value. This reflects that the economic value of this debt may differ materially from the par of accounting value of the debt instrument and the belief that this value may be of interest to shareholder and potential investors. Accordingly, the Board has decided to use this measurement when reporting NAV returns within the Company's financial report going forward; this is also in line with the basis of the NAV released to the London Stock Exchange every business day.
Gearing
The Board of Directors believes that gearing can be beneficial to performance and sets the overall strategic gearing policy and guidelines and reviews these at each Board meeting. The Investment Managers then manage the gearing within these agreed limits. The Investment Managers' permitted gearing limit is within the range of 5% net cash to 20% geared in normal market conditions. During the period, gearing ranged from 11.9% to 15.4%, with an average of 14.0%. As at 30th September 2021, gearing was equivalent to 12.7% (2020: 14.8%) of net assets.
Revenues and Dividends
Income received during the year rose year-on-year, with earnings per share for the full year of 5.99p (2020: 5.21p) reflecting a recovery in the level of dividends paid and the strong balance sheets of portfolio companies.
The Board's dividend policy is to pay out the majority of the revenue available each year. The Board therefore proposes, subject to shareholders' approval at the Annual General Meeting, to pay a final dividend of 5.3p per share (2020: 5.1p) on 28th January 2022 to shareholders on the register at the close of business on 31st December 2021 (ex-dividend date 30th December 2021). This increase in dividends follows last year's 2% increase, which was the first since 2017.
We hope to be able to continue increasing the dividend in future years.
Discount Management/Share repurchases
The Board monitors the discount to NAV at which the Company's shares trade and believes that, over the long term, for the Company's shares to trade close to NAV the focus has to remain on consistent, strong investment performance over the key one, three and five year timeframes, combined with effective marketing and promotion of the Company.
The Board recognises that a widening of, and volatility in, the Company's discount is seen by some investors as a disadvantage of investments trusts. The Board has restated its commitment over the long run to seek a stable discount or premium commensurate with investors' appetite for Japanese equities and the Company's various attractions, not least the quality of the investment team and the investment process, and the strong long term performance these have delivered. Since 2020, this commitment has resulted in both increased marketing spend and a series of targeted buybacks.
As at 30th September 2021 the discount was 6.8%, very close to the level of 7.0% where it closed the previous year. Over the past financial year, the discount ranged from 9.2% to a premium of 1.5% and the average discount was 3.9%. During the fiscal year 2020, the discount ranged from 5.6% to 19.9% and the average discount was 10.4%.
Since the end of the financial year, the Board has repurchased a further 445,795 shares and the discount stood at 6.2% as at 8th December 2021.
Shares are only repurchased at a discount to the prevailing net asset value, which increases the Company's net asset value per share. Shares may either be cancelled or held in Treasury for possible re-issue at a premium to net asset value.
Environmental, Social and Governance Considerations
As detailed in the Investment Managers' Report, Environmental, Social and Governance ('ESG') considerations are fully integrated into their investment process. The Board shares the Investment Managers' view of the importance of ESG factors when making investments for the long term and the necessity of continued engagement with investee companies over the duration of the investment. Further information on JPMorgan's ESG process and engagement is set out in the ESG Report on pages 15 to 20 of the Company's Annual Report & Financial Statements for the year ended 30th September 2021 ('2021 Annual Report').
The Board
During the past year, the Board sought to ensure that it followed best practice within the investment trust sector, so as to maximise its ability to protect and serve the interests of our shareholders. As a result, in July 2021 the Board announced the appointment of Sir Stephen Gomersall, a Non-Executive Director of the Company since 2013, as the Senior Independent Director of the Company with immediate effect. At the same time the Board announced the immediate establishment of a new Remuneration Committee to be chaired by George Olcott, a Non-Executive Director of the Company since 2016. The Nomination and Remuneration Committee will be renamed the Nomination Committee and I will remain its chair.
Yoko Dochi resigned as a Director of the Company with effect from 1st October 2021 for personal reasons. On behalf of the board, I would like to thank Yoko for the contribution she made to the work of the Board since she joined. We wish her well for the future.
The Board has commenced a recruitment process to find a replacement Director. It will continue to ensure that its members have the appropriate balance of skills and knowledge. The recruitment process will also have regard for the AIC Code of Corporate Governance and other appropriate guidance concerning board composition and succession.
Annual General Meeting and Shareholder Contact
The Company's Annual General Meeting (AGM) will be held on 13th January 2022 at 12.30 pm at 60 Victoria Embankment, London EC4Y 0JP.
As you will recall, COVID-19 restrictions prevented the holding of the Company's AGM in 2021 in the usual format. Current indications are that a more familiar format for the AGM may be permissible in January next year and shareholders will be able to attend the AGM.
We strongly advise all shareholders to take account of the Government regulations in force on the day and to consider their own personal circumstances before attending the AGM in person. For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register, together with access details, will be available shortly on the Company's website: www.jpmjapanese.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
As is normal practice, all voting on the resolutions will be conducted by a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we therefore encourage all shareholders, and particularly those who cannot attend physically, to exercise their votes in advance of the meeting by completing and submitting their form of proxy.
Shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.
If there are any changes to these arrangements for the AGM, the Company will update shareholders via the Company's website, and, if appropriate, through an announcement on the London Stock Exchange.
Outlook
Your Board shares the Investment Managers' confidence about the outlook for the Japanese economy and excitement about the many appealing opportunities in the Japanese market whilst remaining mindful of the recent and ongoing challenges resulting from COVID-19. Furthermore, the Board is confident that the Investment Managers' disciplined investment process and careful approach to risk management, supported by JPMorgan's extensive research resources, will continue to identify these opportunities and deliver attractive long-term returns for shareholders.
On behalf of the Board, I would like to thank you for your ongoing support.
Christopher Samuel
Chairman
10th December 2021
investment managers' report
Background
Japan has suffered less than many other developed countries during the coronavirus pandemic, although it was forced first to postpone the Olympics and Paralympics for a year and then to hold them without spectators, which dramatically limited their commercial success. Japan's state of emergency has now been lifted, and over 75% of the population is fully vaccinated.
In Japan, as elsewhere, investors greeted news of viable vaccines with enthusiasm, as at the time of writing Japan's vaccination rate is 75.8% (of total population), the highest of the G7 nations (Canada is next with 75.4%). The TOPIX index rose sharply in late 2020 and early 2021, and market sentiment shifted in favour of companies expected to benefit from the vaccine rollout and economic re-opening. As in other major equity markets, there was a rotation into cyclical and value stocks. In the half-year report, we cited as an example the case of department store operators. Shares in these companies rose in anticipation of a surge in business as customers returned to stores to buy household and personal goods they were unable to purchase during lockdowns. But such a one-off, short-lived increase in activity is unlikely to move this sector off its trajectory of long-term structural decline, as consumers embrace online shopping with increasing enthusiasm.
The broader post-pandemic surge in demand will, by its nature, be temporary, and quickly exhausted, and gains in these recovery stocks may prove equally short-lived. Indeed, by the second quarter of this year, the TOPIX's recovery rally appeared to have lost momentum and the index has traded broadly sideways during the second half of the Company's financial year.
Inflation has accelerated sharply in several countries as economic recovery, supply side constraints and energy prices have combined. So far the impact on Japan has been much more muted and we see little sign of wage inflation. While a policy response of rising interest rates elsewhere might slow global demand the impact on the portfolio should be relatively muted given the focus on longer term growth companies. Additionally we believe that premium and quality companies have the pricing power to be able to cope with inflationary pressures. Nevertheless prolonged global inflation may have an impact on equity valuations globally and this may also include Japan.
Portfolio Themes
Japan has long lagged some countries in the adoption of technology, but COVID-19 is driving and accelerating change. Japan has embarked on a digital and IT revolution. Looking ahead, we expect to see industry consolidation and productivity growth through trends such as more flexible working practices, automation, artificial intelligence and cloud data storage. Information technology will be increasingly integrated into many aspects of daily life via online shopping, cashless payments, digital signatures and remote healthcare.
This trend is being encouraged by the Japanese government. Former Prime Minister Yoshihide Suga mandated the adoption of digitalisation within the government sector and we expect his successor, Fumio Kishida, whose position was confirmed in October's general election, to maintain the reforms implemented by the Abe and Suga administrations. Digitalisation is now one of the portfolio's key themes.
Environment is another theme which we have added over the past year, after former Prime Minister Suga made a commitment to reduce Japan's carbon emissions to net zero by 2050. This announcement significantly increased public attention on the environment and the urgent need for climate change mitigation and we expect Prime Minister Kishida to stand by his predecessor's promise. Currently, around one third of Japan's energy is generated from coal, and it is also heavily reliant on natural gas. Renewable energy sources provide a relatively small part of Japan's energy needs compared to Europe, so Japan is still at a very early stage in its transition to greener energy sources. There is therefore scope for rapid growth in this sector. Although there are political and technical challenges to be overcome, we expect the contribution of wind, solar, biomass and geothermal power to Japan's energy requirements to rise steadily over time.
Japan is only at the beginning of the road to digitalisation and renewable energy, but these trends are already spawning many exciting new businesses, especially in the small and mid-cap space. Such growth-oriented companies will gather momentum over time and provide resilient, long-term sources of returns for investors. For example, our holdings in OBIC, a software company providing business administrative systems, Bengo4.com, Japan's leading digital signature provider, and telemedicine company Medley are already benefitting from this trend, while we expect our position in Tokyo Electron, the semiconductor equipment supplier, to gain from associated increases in demand for data processing and storage. Over the past year we have initiated positions in several companies set to benefit from Japan's transition to renewable energy (see details below).
Long term structural changes including digitalisation and renewable energy underpin our stock selection and as at 30th September 2021, the thematic breakdown of the portfolio is shown on page 10 of the 2021 Annual Report.
This shows the inclusion of 'Environment' as a theme, replacing 'Improving corporate governance'. That is not because we are less focused on governance in the portfolio companies, but because Japanese companies generally are now increasing the number of outside directors, paying higher dividends and implementing share buybacks to return capital to shareholders - and the associated benefits are now widely recognised by the market.
Our Investment philosophy and process
In our search for companies we adopt a bottom-up approach, focused on individual listed stocks. We look for high quality, innovative businesses, with a competitive advantage, free cash flow, robust balance sheets, sustainable margins and strong management, which we believe have the potential to grow earnings over the long-term. We look both for companies that will grow for their own specific reasons and also for those that will benefit from the longer term themes we have discussed above. We find that many such companies are typically not the well-known names covered by most analysts and those included in the index, which is home to many larger companies in structurally impaired sectors such as department stores, steel production, and printing, which are vulnerable to long-term declines in demand. Rather, as mentioned above, they tend to be small and mid-sized companies, sometimes new businesses, usually poorly covered by most analysts, and thus little known. Valuations are important to us, but we will not buy a company whose short-term valuation looks low, unless it also has a strong long-term growth outlook.
We focus on making long-term investments. As an illustration of this, at the end of the year, the portfolio held 31 stocks (66.6% of the portfolio) that we have held for at least three years. Twenty of these stocks (46% of the portfolio) have been held for five years or more.
In identifying potential investments we are supported by JPMorgan Asset Management's well-resourced investment team on the ground in Tokyo. Its members are ideally placed to identify emerging themes and interesting new companies overlooked by other analysts. We believe this has been a particular advantage during the pandemic, when other managers have not been able to visit the country. As a result, the Company's portfolio can, and does, look very different from the benchmark. As at end September 2021, it had an active share of 93.7% (on a geared basis).
Our focus on quality companies is also reflected in the fact that the portfolio companies had, at the end of the review period, an average return on equity ('ROE')A of 13.1%, compared to 8% for the index. Their price to earnings ratio ('PE')A was 33x compared to 15x for the market. We believe the higher multiple is justified by the significantly better growth prospects of the companies that we hold, compared to others in traditional, declining sectors.
How we rate companies we consider for investment
This quality growth focus is the core of our investment process. We assign a strategic classification to each company, based on desk-based research and company meetings. The highest rating is 'Premium', followed by 'Quality', and then 'Trading'. When assigning these ratings, in addition to assessing companies on fundamentals such as balance sheet strength, free cash flow, market position and growth prospects, we also consider governance issues, as well as potential risks arising from environmental and social (ESG) considerations. Only businesses with sound governance practices and corporate behaviour consistent with our ESG criteria will receive a Premium or Quality rating, and the bar is high. Within the investable universe of Japanese companies, we rate only about 20% as Premium or Quality, whereas Premium or Quality names comprise around 90% of our portfolio.
This rating system means that we incorporated ESG considerations into our strategic and valuation analysis of individual companies and into our investment decisions. However, we are continually improving the ways in which we consider ESG factors and integrate them into our investment process and we are pleased with recent progress in this direction. The Environmental, Social and Governance Report on pages 15 to 20 of the 2021 Annual Report provides more detail.
Performance
Against this background, for the year ended 30th September 2021, the Company returned +11.0% in GBP terms, on a share price basis, underperforming its benchmark, the TOPIX index, which returned +15.3%. The Company returned +10.7% on a net asset basis (NAV). This underperformance occurred in the first half of financial year, during the post-vaccine recovery rally. In the six months to end March 2021, the Company returned +4.6% on a share price basis and +0.5% on an NAV basis, compared to a benchmark return of +8.5%. Performance saw a significant recovery in NAV performance in the second half of the year. Over this period, the Company returned +5.3% on a share price basis and +7.8% on a NAV basis, with the NAV outperforming the index return of +6.6%.
The Company's longer-term performance remains strong. It has outperformed its benchmark by over 7 percentage points a year over the past three years, by 6 percentage points a year over five years and 5 percentage points a year over ten years. Annualised returns over one, five and ten years can be found on page 4 of the 2021 Annual Report.
Our underperformance over the financial year was driven by the outperformance of economically sensitive and value companies during the recovery rally. These stocks are often low-quality, and thus not the kind of companies we invest in. This meant that our quality and growth holdings lagged the market.
Despite this near-term setback, we remain focused on Japan's economic transformation and the dynamic new generation of quality companies which is emerging and the merits of our strategy have begun to reassert themselves. Once the recovery rally had ran its course, performance began to improve in the second half of the review period.
PERFORMANCE ATTRIBUTION
YEAR ENDED 30TH SEPTEMBER 2021
% | % | |
Contributions to total returns | ||
Benchmark return | 15.3 | |
Stock selection | -8.3 | |
Gearing /Cash | 3.9 | |
Investment Manager contribution | -4.4 | |
Portfolio return A | 10.9 | |
Management fee/other expenses | -0.6 | |
Share Buy-Back/Issuance | 0.1 | |
Other effects | -0.5 | |
Return on net assets - Debt at par value A | 10.4 | |
Impact of fair value of debt | 0.3 | |
Return on net assets - Debt at fair value A | 10.7 | |
Return to shareholders A | 11.0 |
Source: JPMAM and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
A Alternative Performance Measure ('APM').
A glossary of terms and APMs is provided on pages 94 and 95 of the 2021 Annual Report.
Portfolio Activity
At the end of the financial year, the portfolio held 63 stocks, compared to 65 at the end of the previous year. Annualised portfolio turnover during the past year was 18.3%, versus 38% during the previous period, which had been boosted by the extraordinary opportunities arising at the onset of the pandemic. The market rotation into cyclical and value stocks, which came at the expense of quality growth names, generated a new round of opportunities to invest in the companies we favour, at more attractive levels.
Purchases
Our Digitalisation theme inspired several acquisitions, including small-cap companies, Yappli, SpiderPlus, WealthNavi and Minkabu the Infonoid. Yappli is a software company that builds ecommerce apps and should benefit from the rising popularity of internet retail. SpiderPlus helps construction companies digitise their processes, thus easing labour shortages and speeding up completion times. WealthNavi is an on-line asset management company and Japan's number one provider of robo-advisory services, which help users make investment decisions. Minkabu the Infonoid is a popular and rapidly growing website where retail investors can obtain stock market information.
At the other end of the market cap spectrum, but still within the digitalisation theme, we bought consumer electronics giant Sony, following its upgrade to 'Quality' within our stock rating system. After years of restructuring, we believe the company now has much improved corporate governance and capital discipline.
Under the Environment theme, we purchased Renova, Canadian Solar Infrastructure and Hitachi, which are all set to benefit from Japan's transition to renewable energy sources. Renova is the only Japanese utility company focused solely on renewable energy. It owns wind, solar and biomass assets. Canadian Solar Infrastructure is a REIT specialising in solar power and renewable energy facilities in Japan. We bought Hitachi, an industrial conglomerate, following its acquisition of ABB Power Grids, which positions Hitachi as a global leader in the production of power transmission lines. Demand for this equipment will rise in line with the supply of renewable energy, because green energy is often produced in relatively remote locations and thus requires much more infrastructure than thermal power to ensure production units are connected to the national grid.
Various other acquisitions included Benefit One, Japan's leading staffing and employment services company that offers fringe benefits to employees, improving worker retention; and two biotech companies, Modalis Therapuetics and Healios, which should see significant growth if the drugs they have developed are approved.
Sales
The purchases above were funded by a number of disposals. We sold Relo Group, an employee services company, to purchase its more successful rival, Benefit One, mentioned above. Z Holdings, an internet retailer, recently purchased the messaging site Line. We sold this name outright on disappointment with its plans to integrate Line with its core internet search engine business, Yahoo Japan. We sold Hikari Tsushin, a communications services company, as it continued to invest in the shares of many listed companies, while we feel it should concentrate on growing its existing, highly cash generative business. We sold our position in Nexon, a games company, for a similar reason, and because of repeated delays to the release of new titles. We also sold our position in Kao, Japan's leading consumer goods company, due to its poor operational performance over some years.
We took profits on a few companies whose valuations had improved significantly, including Oriental Land, a theme park and hotel operator which runs Tokyo Disneyland, and V-Cube, a communications equipment company. We also sold our very long-standing position in Pan Pacific, a discount store operator, on doubts about the new management. Similar concerns prompted the sale of Grace Technology, which creates and translates technical documents and manuals, following the death of its chairman and founder.
Gearing
The company can use borrowing to gear the portfolio within a range of 5% net cash to 20% geared in normal market conditions. Over the review period, gearing averaged 15%, and ended the year at 12.7% (compared to 14.8% at the end of September 2020). The level of gearing reflects our conviction in the near-term outlook for the market and the portfolio. It is not driven by any macroeconomic view.
Significant Contributors and Detractors to performance
The main contributors to performance over the financial year ended 30th September 2021 included:
1. Recruit Holdings (Investment Theme - Internet), which owns the world's top employment website, Indeed. Recruit has steadily gained market share during the pandemic and is now benefiting from the improvement in labour markets.
2. Tokyo Electron, Lasertec and Hoya (Investment Theme - Automation and Stock Specific), which are all global leaders in the production of semiconductor equipment and components. They benefited as leading semiconductor manufacturers TSMC, Intel, ASML and Samsung announced major increases in capital expenditures to meet growing demand.
3. Benefit One (Investment Theme - Aging Population), Japan's leading employment services company, which was purchased during the year. Its shares performed well on news that it planned to acquire JTB Benefit Service, the number three player in the industry.
4. Renova (Investment Theme - Environment), Japan's leading pure play on renewable energy and another recent acquisition. Its outlook improved materially following Japan's commitment to carbon neutrality by 2050.
However, the positive contributions to relative performance from these holdings were offset by the adverse impact of several positions which suffered pullbacks on profit-taking following strong performances in 2020. These included:
1. Bengo4.com (Investment Theme - Internet), Japan's the leading digital signature provider. Its share price had been boosted by the government's decision to switch to digital signatures, before succumbing to profit-taking. We trimmed the position on concerns over intensifying competition.
2. Hikari Tsushin (Investment Theme - Stock Specific), a supplier of communications products. As discussed above, we sold this company due to dissatisfaction with its corporate strategy.
3. MonotaRO (Investment Theme - Internet), Japan's leading B2B ecommerce operator. Despite the pullback in its valuation, we still have conviction in the investment case for this company and continue to hold.
4. Square Enix and Nintendo (Investment Theme - Japan Brand). These gaming companies performed well during the pandemic, as demand for home entertainments increased during lockdowns. Many gamers downloaded games for the first time during this period, rather than playing on consoles, and we expect them to keep doing so in the long-term. More recently, earnings moment weakened. We continue to hold.
Outlook
The arrival and rapid rollout of viable vaccines has greatly improved the global economic outlook, and although its borders are still largely closed, Japan's prospects are significantly better than this time last year. The economic recovery is underway and should gather momentum into next year. Japan's longer-term growth prospects may be supported by government policies encouraging the spread of digitalisation and information technology, which should deliver substantial productivity gains across the economy over time.
It remains our view that Japanese equity markets are much more vibrant than some investors appreciate, with many new and interesting listings on the Tokyo stock exchange each year, especially in the small and mid-cap space. We believe it is an attractive market in which to build a portfolio different from the pack, particularly for active, bottom-up investors like us, supported by a large, Tokyo-based research team.
The Company has an unconstrained strategy looking for the very best quality and growth ideas over the long-term. It has a high active share and as such typically looks very different to the benchmark. This inevitably leads to some volatility in relative performance, as we have seen over the past year. However, over the last ten years the strategy has generated returns well in excess of the benchmark and we are confident in the portfolio's ability to continue rewarding patient investors and outperforming the benchmark over the long term.
Nicholas Weindling
Miyako Urabe
Investment Managers
10th December 2021
Principal and Emerging Risks
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of JPMF, the Audit Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below. The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below. The Board believes the COVID-19 pandemic to be an existing risk, rather than emerging risks and regards the risk arising from COVID-19 to be in the category of Market and Economic Risk and/or Outsourcing Risk.
Principal Risk | Description | Mitigating Activities |
Investment Management | ||
and Performance | ||
Underperformance | Poor implementation of the investment strategy, for example as to thematic exposure, sector allocation, stock selection, undue concentration of holdings, factor risk exposure or the degree of total portfolio risk, may lead to underperformance against the Company's benchmark index and peer companies. | The Board manages these risks by monitoring the Investment Managers diversification of investments and through its investment restrictions and guidelines, which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, at least one of whom usually attends all Board meetings, and reviews data which show measures of the Company's risk profile. The Investment Managers employ the Company's gearing tactically, within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year. |
Widening Discount | A widening of the discount could result in loss of value for shareholders. | The Board monitors the level of both the absolute and sector relative premium/discount at which the shares trade. The Board reviews both sales and marketing activity and sector relative performance, which it believes are the primary drivers of the relative discount level. In addition, the Company has authority to buy back its existing shares to enhance the NAV per share for remaining shareholders when deemed appropriate. |
Market and Economic Risk | Market risk arises from uncertainty about the future prices of the Company's investments, which might result from economic, fiscal, climate, regulatory change, including the impact from pandemics. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Board considers thematic and factor risks, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Manager. | The Board believes that shareholders expect that the Company will and should be fairly fully invested in Japanese equities at all times. The Board therefore would normally only seek to mitigate market risk through guidelines on gearing given to the Manager. The Board receives regular reports from the Manager's strategists and Investment Managers regarding market outlook and gives the Investment Mangers discretion regarding acceptable levels of gearing and/or cash. Currently the Company's gearing policy is to operate within a range of 5% net cash to 20% geared. The Board also receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decision-making. |
Currency Risk | Currency risk arises from currency volatility and/or significant currency movements, principally in the yen:sterling rate. | The majority of the Company's assets, liabilities and income are denominated in yen rather than in the Company's functional currency of sterling (in which it reports). As a result, movements in the yen:sterling exchange rate may affect the sterling value of those items and therefore impact on reported results and/or financial position. Therefore, there is an inherent risk from these exchange rate movements. It is the Company's policy not to undertake foreign currency hedging. Further details about the foreign currency risk may be found in note 22 on pages 78 and 79 of the 2021 Annual Report. |
Loss of Investment Team or Portfolio Manager | A sudden departure of a Portfolio Manager or several members of the investment management team could result in a short term deterioration in investment performance. | The Board seeks assurance that the Manager takes steps to reduce the risk arising from such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel. The Board engages with the senior management of the Manager in order to mitigate this risk. |
Global Inflation | Global Government/Central Bank fiscal/monetary responses to COVID-19 could result in significant levels of inflation in 2-4 years' time affecting global economic growth directly and/or valuation levels and exchange rates. | The Manager's market strategists are available for the Board and can discuss market trends. External consultants and experts can be accessed by the Board. The Board can, with shareholder approval look to amend the investment policy and objectives of the Company, if required, to enable investment in companies which are less impacted by inflation risks. |
Outsourcing | Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Depositary or Custodian's records may prevent accurate reporting and monitoring of the Company's financial position or a misappropriation of assets. | Details of how the Board monitors the services provided by JPM and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Controls section of the Corporate Governance Statement on pages 45 and 46 of the 2021 Annual Report. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption (including and disruption resulting from the COVID-19 pathogen. Since the introduction of the COVID-19 restrictions, Directors have received assurances that the Manager and its key third party service providers have all been able to maintain service levels. |
Cyber Crime | The threat of cyber attack, in all guises, is regarded as at least as important as more traditional physical threats to business continuity and security. | The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard. |
Corporate Governance | ||
Loss of Investment Trust Status | In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. | The Section 1158 qualification criteria are continually monitored by the Manager and the results reported to the Board each month. |
Statutory and Regulatory Compliance | The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure Guidance and Transparency Rules ('DTRs'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. | The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act 2006, the UKLA Listing Rules, DTRs, MAR and AIFMD. Details of the Company's compliance with Corporate Governance best practice, are set out in the Corporate Governance Statement on pages 41 to 44 of the 2021 Annual Report. |
Environmental | ||
Climate Change | Climate change has become one of the most critical issues confronting companies and their investors. Climate change can have a significant impact on the business models, sustainability and even viability of individual companies, whole sectors and even asset classes. | The Board receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decision-making, so as to mitigate risk at the level of stock selection and portfolio construction. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of the Company's services providers will come under greater scrutiny. |
Emerging Risk | Description | Mitigating Activities |
Specific to Japan | ||
Natural Disasters | Although natural disasters anywhere in the world could impact individual companies, the Board believes the largest such impact could arise from an earthquake causing general economic damage to Japan and to the operations of specific companies in the portfolio. The Japanese government believes there is a 70% probability of an earthquake, registering a magnitude seven on the Richter Scale, hitting Tokyo over the next 30 years. | The Manager reports on Business Continuity Plans ('BCPs') and other mitigation plans in place for itself and other key service providers. BCPs plans are regularly tested and applied, including split teams, relocations and limiting access to/meetings with third parties. The Manager discusses BCPs with investee companies. |
Global | ||
Social Dislocation & Conflict | Social dislocation/civil unrest may threaten global economic growth and, consequently, companies in the portfolio. | The Manager's market strategists are available for the Board and can discuss market trends. External consultants and experts can be accessed by the Board. The Board can, with shareholder approval, look to amend the investment policy and objectives of the Company to gain exposure to or mitigate the risks arising from geopolitical instability although this is limited if it is truly global. |
Global Recession | Government/Central Bank fiscal/monetary response to COVID-19 could be ineffective in stimulating global recovery meaning rising debt levels lead to deflation and recession. | The Manager's market strategists are available for the Board and can discuss market trends. External consultants and experts can be accessed by the Board. The Board can, with shareholder approval look to amend the investment policy and objectives of the Company, if required, to enable investment in companies which are not impacted by inflation risks. |
Long Term Viability
The Company is an investment trust with an objective of achieving long term capital growth. Taking account of the Company's current position, the principal and emerging risks that it faces, including the COVID-19 pandemic, and their potential impact on its future development and prospects, the Directors have assessed the prospects of the Company, to the extent that they are able to do so, over the next five years. They have made that assessment by considering those principal and emerging risks, the Company's investment objective and strategy, the liquidity of the Company's portfolio, the capabilities of the Manager and the current outlook for the Japanese economy and equity market.
In addition to the above, the Company carried out stress testing in connection with the Company's principal risks. The stress tests and scenarios considered the impact of severe market volatility on shareholders' funds. This included modeling substantial market falls, and significantly reduced market liquidity. The scenarios assumed that there would be no recovery in asset prices.
The results demonstrated the impact on the Company's NAV, its expenses and its ability to meet its liabilities. In even the most stressed scenario, the Company was shown to have sufficient cash, or to be able to liquidate a sufficient portion of its listed holdings, in order to meet its liabilities as they fall due.
In determining the appropriate period of assessment the Directors had regard to their view that, given the Company's objective of achieving capital growth, shareholders should consider the Company as a long term investment proposition. This is consistent with advice provided by independent financial advisers and wealth managers, that investors should consider investing in equities for a minimum of five years. Accordingly, the Directors consider five years to be an appropriate time horizon to assess the Company's viability.
The Directors confirm that they have a reasonable expectation, on the assumption that the principal risks identified above, including investment underperformance, are managed or mitigated effectively, that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.
By order of the BoardNira Mistry,for and on behalf ofJPMorgan Funds Limited,Secretary
10th December 2021
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report on page 39 of the 2021 Annual Report. The management fee payable to the Manager for the year was £5,930,000 (2020: £4,865,000) of which £nil (2020: £nil) was outstanding at the year end.
Included in administration expenses in note 6 on page 69 of the 2021 Annual Report are safe custody fees amounting to £125,000 (2020: £112,000) payable to JPMorgan Chase Bank, N.A., of which £58,000 (2020: £21,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities for the year was £2,000 (2020: £1,000) of which £nil (2020: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £4,000 (2020: £5,000) were payable to JPMorgan Chase Bank N.A. during the year of which £2,000 (2020: £nil) was outstanding at the year end.
At the year end, total cash of £8,299,000 (2020: £3,806,000) was held with JPMorgan Chase. A net amount of interest of £nil (2020: £nil) was receivable by the Company during the year from JPMorgan Chase of which £nil (2020: £nil) was outstanding at the year end.
Stock lending income amounting to £1,551,000 (2020: £1,428,000) was receivable by the Company during the year. JPMAM commissions in respect of such transactions amounted to £172,000 (2020: £159,000).
Full details of Directors' remuneration and shareholdings can be found on pages 50 and 51 and in note 6 on page • of the 2021 Annual Report.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report & Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom generally accepted accounting practice (United Kingdom Accounting Standards) including FRS 102 'The Financial Reporting Standards applicable in the UK and Republic of Ireland' and applicable laws. Under company law the Directors must not approve the financial statements unless they are satisfied that, taken as a whole, Annual Report & Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the 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 accounts are published on the www.jpmjapanese.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditors accept no responsibility for any changes that have occurred to the accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, Strategic Report, Statement of Corporate Governance and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed on page •, confirms that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with United Kingdom Accounting Standards, and applicable law), (United Kingdom Generally Accepted Accounting Practice) give a true and fair view of the assets, liabilities, financial position and net return or loss of the Company; and
• the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
The Board confirms that it is satisfied that the annual report and financial statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period.
For and on behalf of the BoardChristopher SamuelChairman
10th December 2021
statement of comprehensive income
for the year ended 30th September 2021
2021 | 2020 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Gains on investments held at fair value through profit or loss | - | 89,356 | 89,356 | - | 266,253 | 266,253 |
Net foreign currency gains1 | - | 16,117 | 16,117 | - | 1,614 | 1,614 |
Income from investments | 11,452 | - | 11,452 | 10,014 | - | 10,014 |
Other interest receivable and similar income | 1,551 | - | 1,551 | 1,428 | - | 1,428 |
Gross return | 13,003 | 105,473 | 118,476 | 11,442 | 267,867 | 279,309 |
Management fee | (1,186) | (4,744) | (5,930) | (973) | (3,892) | (4,865) |
Other administrative expenses | (846) | - | (846) | (790) | - | (790) |
Net return before finance costs and taxation | 10,971 | 100,729 | 111,700 | 9,679 | 263,975 | 273,654 |
Finance costs | (295) | (1,179) | (1,474) | (290) | (1,161) | (1,451) |
Net return before taxation | 10,676 | 99,550 | 110,226 | 9,389 | 262,814 | 272,203 |
Taxation | (1,140) | - | (1,140) | (999) | - | (999) |
Net return after taxation | 9,536 | 99,550 | 109,086 | 8,390 | 262,814 | 271,204 |
Return per share | 5.99p | 62.54p | 68.53p | 5.21p | 163.24p | 168.45p |
1 Foreign currency gains are due to Yen denominated loan notes and bank loans.
statement of changes in equity
for the year ended 30th September 2021
Called up | Capital | |||||
share | redemption | Other | Capital | Revenue | ||
capital | reserve1 | reserve1 | reserves1 | reserve1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 30th September 2019 | 40,312 | 8,650 | 166,791 | 587,495 | 13,422 | 816,670 |
Repurchase of shares into Treasury | - | - | - | (7,648) | - | (7,648) |
Net return | - | - | - | 262,814 | 8,390 | 271,204 |
Dividend paid in the year (note 3) | - | - | - | - | (8,062) | (8,062) |
At 30th September 2020 | 40,312 | 8,650 | 166,791 | 842,661 | 13,750 | 1,072,164 |
Repurchase of shares into Treasury | - | - | - | (18,561) | - | (18,561) |
Net return | - | - | - | 99,550 | 9,536 | 109,086 |
Dividend paid in the year (note 3) | - | - | - | - | (8,145) | (8,145) |
At 30th September 2021 | 40,312 | 8,650 | 166,791 | 923,650 | 15,141 | 1,154,544 |
1 In accordance with the Company's Articles of Association and with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the
Companies Act 2006, the Capital reserves may be used as distributable profits for all purposes and, in particular, the repurchase by the Company of its ordinary
shares and for payments as dividends.
The £923,650,000 Capital reserves are made up of net gains on the sale of investments of £391,485,000, a gain on the revaluation of investments still held of
£522,480,000 and an exchange gain on the foreign currency loans of £9,685,000. The £9,685,000 of Capital reserves arising on the exchange gain on the foreign
currency loan is not distributable. The remaining amount of Capital reserves totalling £913,965,000 is subject to fair value movements, may not be readily realisable
at short notice and as such may not be entirely distributable.
The Capital redemption reserve is not distributable under the Companies Act 2006.
The Other reserve of £166,791,000 was created during the year ended 30th September 1999, following a cancellation of the share premium account, and forms part
of the Company's distributable reserves.
The investments are subject to financial risks included in note 22 of the Annual Report and Financial Statements, as such Capital reserves (arising on investments sold) and Revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
statement of financial position
at 30th September 2021
2021 | 2020 | |
£'000 | £'000 | |
Fixed assets | ||
Investments held at fair value through profit or loss | 1,300,867 | 1,230,620 |
Current assets | ||
Derivative financial instruments | - | 2 |
Debtors | 8,402 | 2,875 |
Cash and cash equivalents | 8,299 | 3,806 |
16,701 | 6,683 | |
Current liabilities | ||
Creditors: amounts falling due within one year | (3,999) | (776) |
Net current assets | 12,702 | 5,907 |
Total assets less current liabilities | 1,313,569 | 1,236,527 |
Creditors: amounts falling due after more than one year | (159,025) | (164,363) |
Net assets | 1,154,544 | 1,072,164 |
Capital and reserves | ||
Called up share capital | 40,312 | 40,312 |
Capital redemption reserve | 8,650 | 8,650 |
Other reserve | 166,791 | 166,791 |
Capital reserves | 923,650 | 842,661 |
Revenue reserve | 15,141 | 13,750 |
Total shareholders' funds | 1,154,544 | 1,072,164 |
Net asset value per share | 735.5p | 670.8p |
statement of cash flows
for the year ended 30th September 2021
2021 | 2020 | |
£'000 | £'000 | |
Net cash outflow from operations before dividends and interest | (5,516) | (4,093) |
Dividends received | 9,624 | 9,289 |
Interest paid | (1,456) | (1,417) |
Net cash inflow from operating activities | 2,652 | 3,779 |
Purchases of investments | (231,668) | (369,028) |
Sales of investments | 249,509 | 327,535 |
Settlement of forward currency contracts | 65 | (41) |
Net cash inflow/(outflow) from investing activities | 17,906 | (41,534) |
Repurchase of shares into Treasury | (18,975) | (7,216) |
Dividends paid | (8,145) | (8,062) |
Drawdown of bank loan | 10,943 | 68,726 |
Repayment of bank loan | - | (14,964) |
Net cash (outflow)/inflow from financing activities | (16,177) | 38,484 |
Increase in cash and cash equivalents | 4,381 | 729 |
Cash and cash equivalents at start of year | 3,806 | 3,073 |
Exchange movements | 112 | 4 |
Cash and cash equivalents at end of year | 8,299 | 3,806 |
Increase in cash and cash equivalents | 4,381 | 729 |
Cash and cash equivalents consist of: | ||
Cash and short term deposits | 8,299 | 3,806 |
Notes to the financial statements
1. Accounting policies
Basis of accounting
The financial statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. In forming this opinion, the directors have considered any potential 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 Manager, have in place to maintain operational resilience particularly in light of COVID-19. The disclosures on long term viability and going concern on pages 33 and 47 of the 2021 Annual Report form part of these financial statements.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return per share
2021 | 2020 | ||
£'000 | £'000 | ||
Revenue return | 9,536 | 8,390 | |
Capital return | 99,550 | 262,814 | |
Total return | 109,086 | 271,204 | |
Weighted average number of shares in issue during the year | 159,166,121 | 160,995,239 | |
Revenue return per share | 5.99p | 5.21p | |
Capital return per share | 62.54p | 163.24p | |
Total return per share | 68.53p | 168.45p |
3. Dividends
Dividends paid and proposed
2021 | 2020 | ||
£'000 | £'000 | ||
Dividend paid | |||
2020 final dividend paid of 5.1p (2019: 5.0p) per share | 8,145 | 8,062 | |
Dividend proposed | |||
2021 final dividend proposed of 5.3p (2020: 5.1p) per share | 8,320 | 8,152 |
All dividends paid and proposed in the year are and will be funded from the revenue reserve.
The dividend proposed in respect of the year ended 30th September 2021 is subject to shareholder approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 30th September 2022.
4. Net asset value per share
2021 | 2020 | ||
Net assets (£'000) | 1,154,544 | 1,072,164 | |
Number of shares in issue | 156,980,434 | 159,839,078 | |
Net asset value per share | 735.5p | 670.8p |
5. Status of results announcement
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 30th September 2020 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Register of Companies in due course.
2021 Financial Information
The figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 30th September 2021 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
10th December 2021
For further information:
Nira Mistry,
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the 2021 Annual Report will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The 2020 Annual Report will shortly be available on the Company's website at www.jpmjapanese.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
JPMORGAN FUNDS LIMITED