FIDELITY JAPAN TRUST PLC
Annual Report for the year ended 31
December 2020
Financial Highlights:
- The net asset value (“NAV”) of the Company increased by +24.8%
for the year ended 31 December 2020,
significantly outperforming the Reference Index, which returned
+9.5%.
- The discount held steady over the year, closing at 6.8%. As a
result, share price total return was +24.6%.
- Coconala, an online consumer to consumer platform and unlisted
holding in the portfolio, listed on the Tokyo Stock Exchange on
19 March 2021. As a result, the
valuation increased by 351% from £3,164,000 as at 31 December 2020 to £14,269,000. If the increase
in value had been applied at 31 December
2020, the net assets of the Company would have increased by
3.6%.
- Over the Chairman’s tenure on the Board, Shareholders’ Funds
have increased from £65m to £309m. Over the same period, the NAV
has increased by 247.8% and the share price by 283.5%. This
compares with a rise of 125.6% by the Reference Index.
Contacts
For further information, please
contact:
Natalia de
Sousa
Company Secretary, FIL Investments
International
01737 837846
CHAIRMAN’S STATEMENT
PERFORMANCE REVIEW
In a period of extraordinary global turmoil precipitated by the
coronavirus pandemic, the Japanese equity market experienced both
the biggest drawdown and sharpest recovery of recent decades. Key
indices entered bear territory in early March 2020, as risk assets were sold off globally
on fears over the social and economic costs of the virus. However,
a swift response from governments and central banks provided
significant fiscal and monetary stimulus, spurring a recovery in
financial markets. The intermittent reopening of economies, coupled
with positive vaccine developments, accelerated the recovery. The
rally saw key indices in Japan
reach multi-decade highs towards the end of the year, though the
uptrend was relatively narrow, led by mid-to-large cap companies
across the technology, communications and health care sectors.
Smaller companies and traditional value sectors lagged the broader
market.
I’m pleased to report that, despite the Company’s share price
falling nearly 40% by 23 March 2020,
the performance over the full year was excellent, both relative to
peers and on an absolute returns basis. The NAV per share rose by
24.8% in sterling terms and the share price by 24.6%, significantly
outperforming the Reference Index, which returned 9.5%. The
discount held steady over the year, closing at 6.8%, despite the
turbulent first half of 2020. As the Company’s Portfolio Manager,
Nicholas Price, notes in his review,
the Company continues to lead its peers in performance over a
five-year horizon.
DISCOUNT MANAGEMENT, SHARE REPURCHASES
AND TREASURY SHARES
Over the reporting year, the Company’s shares traded between a
discount of 1.6% and 20.2%. It widened very slightly from 6.6% at
the start of the year to 6.8% as at 31
December 2020 but remained in line with the Company’s
discount management policy of maintaining the discount in single
digits in normal market conditions, as set out in the 2019 Report
and Accounts.
In the reporting year, 2,652,164 ordinary shares were
repurchased for holding in Treasury, keeping the discount stable as
at 31 December 2020. This represented
1.9% of the issued share capital. Since the year end and up to
26 March 2021, the Company has
repurchased a further 223,032 ordinary shares into Treasury.
At the forthcoming Annual General Meeting (“AGM”), the Board is
seeking to renew the annual authority to repurchase up to 14.99% of
the Company’s shares, to be either cancelled or held in Treasury,
as it has done each year previously.
COCONALA IPO
I am delighted to confirm that on 19
March 2021, online consumer to consumer (C2C) platform,
Coconala, listed on the Tokyo Stock Exchange following a successful
initial public offering. As a result, the valuation increased by
351% from £3,164,000 as at 31 December
2020 to £14,269,000. If the increase in value had been
applied at 31 December 2020, the net
assets of the Company would have increased by 3.6%.
APPOINTMENT OF AN ASSISTANT PORTFOLIO
MANAGER
With effect from 1 September 2020,
the Board agreed with Fidelity to appoint Cenk Simsek as Assistant Portfolio Manager to
work alongside Nicholas. Introducing assistant and co?portfolio
managers is a key part of Fidelity’s ongoing investment innovation
and equity strategy programmes.
SHAREHOLDER MOVEMENTS
As reported in last year’s Annual Report, it is pleasing to note
a continuing trend in shareholder activity in recent years as
demonstrated in the table below. The Company’s performance
continues to be strong and we have seen increased activity by
wealth managers, investment platforms and retail investors in
accumulating the Company’s shares since 2017. This has led to a
rise in the holdings of these investors from 32% to 50% in the
Company’s shares, whilst institutional shareholdings have declined
from 68% to 50%.
|
Q4
2017 |
Q4
2018 |
Q4
2019 |
Q4
2020 |
| Adviser Based |
3% |
4% |
4% |
5% |
| Institutional
Investors |
68% |
58% |
54% |
50% |
| Platforms |
15% |
18% |
20% |
22% |
| Wealth Managers |
14% |
20% |
22% |
23% |
|
-------------- |
-------------- |
-------------- |
-------------- |
| Total |
100% |
100% |
100% |
100% |
|
======== |
======== |
======== |
======== |
ALLOCATION OF FEES
With effect from 1 January 2020,
the Board elected to charge 80% of base management fees and finance
costs to capital and 20% to revenue, thereby reflecting the
Company’s focus on capital growth to generate returns. Prior to
this, the practice was to charge these costs in their entirety to
revenue. The change is a matter of judgement and the result of the
Board reviewing its policy on the allocation of fees. Shareholders
should note that while the new allocation of costs may lead to
Revenue Reserve surpluses, which, over time should gradually reduce
the Revenue Reserve deficit, the possible future payment of
dividends was not a major consideration in adopting the change.
CHARGES
The ongoing charge for the reporting year was 0.94% (2019:
0.98%). The variable element of the management fee was a charge of
0.10% (2019: credit of 0.15%) due to the Company’s outperformance
against its Reference Index. Therefore, the total charge, including
the variable element, was 1.04% (2019: 0.83%).
GEARING
The Company continues to gear the portfolio through the use of
long contracts for difference (“CFDs”). Throughout the course of
the year, the Board supported the Portfolio Manager in taking a
dynamic approach to gearing in order to take advantage of market
movements to the benefit of the Company’s performance. The
Portfolio Manager has the discretion to be up to 25% geared.
However, with the Board’s approval, gearing at one point in the
reporting period was increased to 27.5% in order to take advantage
of the attractive opportunities available in the market.
Total portfolio exposure at the end of the year was £381.3m,
equating to gearing of 23.5% compared with 17.0% at the end of
2019. Further information can be found in the Strategic Report. As
at 24 March 2021, gearing was
24.4%.
The Board continues to be of the view that using CFDs provides
more flexibility at a much lower cost than traditional bank debt,
despite the low level of interest rates.
VIRTUAL DUE DILIGENCE TRIP 2021
Continuing travel restrictions from the pandemic prevented the
Board from going to Japan again
this year. However, the Board did conduct a number of virtual
meetings with the Fidelity team and external market experts in
Japan during the week commencing
8 March 2021. These sessions gave us
great comfort as to the quality and depth of support Nicholas and
the investment team receive. We were also struck by the operational
resilience of the team during the ongoing pandemic and it is
particularly commendable that Nicholas attended 402 purely virtual
company meetings in 2020 compared to 310 meetings (a combination of
actual and virtual) in 2019.
SUCCESSION PLANNING AND BOARD
CHANGES
The Board has a clearly defined succession plan in place.
Philip Kay stepped down from the
Board on 31 December 2020. I would
like to take this opportunity to thank him on behalf of the Board
and all of the Company’s stakeholders for his contribution to the
Board. He takes with him our very best wishes for the future.
I am pleased to welcome David
Barron who joined the Board as a non-executive Director on
20 October 2020, allowing for a brief
overlap period before Philip retired. David spent 25 years working
in the investment management sector and was, until November 2019, Chief Executive Officer of Miton
Group PLC following six years with the firm. Prior to this, he was
Head of Investment Trusts at JP Morgan Asset Management for more
than ten years and, until 2014, a Director of the Association of
Investment Companies. He is currently Chairman of Dunedin Income
Growth Investment Trust PLC and a non-executive Director of Premier
Miton Group PLC. He is also a lay-member of the Council of
Lancaster University. He is a
Member of the Institute of Chartered Accountants of Scotland.
Sir Laurence Magnus stepped down
from the Board as a non-executive Director and Chairman of the
Audit Committee at the conclusion of the AGM on 19 May 2020. At the same time, David Graham took over as Chairman of the Audit
Committee from Sir Laurence.
Having served ten years as a non-executive Director and nearly
nine years as Chairman, I will be stepping down from the Board at
the conclusion of the AGM on 18 May
2021. It is particularly pleasing to note that during my
tenure on the Board and as at 31 December
2020, Shareholders’ Funds have increased from £65m to £309m.
Over the same period, the NAV has increased by 247.8% and the share
price by 283.5%. This compares with a rise of 125.6% by the
Reference Index. The discount has also significantly reduced from
its peak of 18.2% in 2011 to 6.8% at the end of 2020. I have
thoroughly enjoyed serving on your Board and would like to thank
shareholders, my fellow Directors and the team at Fidelity for all
the support I have been given. David
Graham will succeed me as Chairman and will step down as
Audit Committee Chairman at the same time. David Barron will take over as Chairman of the
Audit Committee on 18 May 2021.
All Directors, with the exception of myself and David Barron, are subject to annual re-election
at the AGM on 18 May 2021.
David Barron being newly appointed,
is subject to election at the AGM. Biographical details of the full
Board are included in the Annual Report to assist shareholders when
considering their voting at the AGM.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
(ESG) INVESTMENT
There continues to be increasing concern about climate change,
leading to the growth of serious efforts to counter its effects.
Businesses for their part are under pressure to ensure that their
activities are environmentally sustainable, as well as
demonstrating social responsibility and good corporate governance.
Nicholas outlines Fidelity’s approach to this important subject in
his report and what this means for the Company’s investment
portfolio. The Fidelity group of companies (including the Manager)
has embedded ESG factors in its investment decision making process
including considerations relating to the reduction of carbon
emissions by investee companies. Further details are in the Annual
Report.
CHANGES TO THE ARTICLES OF
ASSOCIATION
With the intention of providing the very best experience for
shareholders and being mindful of potential future restrictions,
the Board is proposing amendments to the Company’s Articles of
Association to enable the Company to hold ‘hybrid’ general
meetings. ‘Hybrid meetings’ involve both the physical attendance by
shareholders as well as by shareholders via electronic means. It is
the current expectation of the Board that hybrid meetings would
only be used where a solely ‘physical meeting’ is impracticable or
unworkable. By changing the Company’s Articles of Association, the
Board will have the ability to determine whether an AGM or general
meeting should be held as a ‘physical meeting’ or as a ‘hybrid
meeting’.
My fellow Directors and I greatly enjoy the opportunity to meet
and exchange views with shareholders and a physical meeting will
remain our default format as long as Government guidance permits
it, but we are also keen to provide additional virtual facilities
for those shareholders who may not, or are unable to, attend AGMs
in person.
We have also taken the opportunity to update certain other
provisions within the Articles of Association, including for
example, removing mention of the subscription shares which were
issued in 2014, retirement of Directors and regulatory restrictions
and information. The principal changes proposed to the Articles of
Association are set out in more detail in the Directors’ Report in
the Annual Report. A full tracked version of all the changes
proposed to the Articles of Association is available at
www.fidelity.co.uk/japan.
OUTLOOK
In broad terms we are cautiously optimistic about the investment
outlook for Japanese stocks in 2021. The COVID-19 pandemic clearly
poses near term risks, as new variants of the virus and rising
infection rates across the globe push governments to extend or
reimpose restrictions. However, the gradual roll out of vaccines
and continued monetary and fiscal policy stimulus are positive for
the outlook and should be supportive of Japanese equities. The
Japanese market remains fairly valued in comparison with most other
developed country markets and with the regeneration of growth in
China and Asia generally, along with the expected
recovery in the US, global conditions are positive. Against this
backdrop, we expect the market to be in an earnings driven phase,
with positive earnings surprises driving individual stocks rather
than the multiple expansion that we saw in 2020.
DAVID ROBINS
Chairman
26 March 2021
“A year in review with the Chairman and the Portfolio
Manager” and Annual General Meeting
In light of the ongoing pandemic restrictions, it unfortunately
seems unlikely that we will be able to revert to our usual
large-scale in-person AGM format this year.
Clearly it is a legal requirement to have an AGM and given that
current legal guidance is that the relaxation on the imperative for
physical meetings will probably not be renewed in April 2021, we have considered various options,
settling on the idea of a two-stage alternative solution.
We have dubbed the first stage “A year in review with the
Chairman and the Portfolio Manager”. This will comprise an
hour-long series of online presentations and live Q&A with me
and the Portfolio Manager. This event will take place virtually on
26 April 2021 at 9.30 am. We encourage all our investors to take
this opportunity to ask questions and engage with the Company. We
also feel that holding this event nearly three weeks before the
formal AGM will allow shareholders sufficient time to consider how
they wish to cast their votes before the voting deadline expires.
Details will be made available nearer the time at
www.fidelity.co.uk/japan. If anything changes then we will
advise investors via the website.
The second stage will form the official, legal AGM and will take
place on 18 May 2021 at 4.00 pm at FIL Investments International, Beech
Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey, KT20
6RP. This meeting will be restricted
to the formal business of the meeting as set out in the Notice of
Meeting in the Annual Report and voting on the resolutions therein.
It is difficult to predict what Government restrictions will be in
place by this time, but it is our intention to keep the attendance
of the meeting as restricted as possible.
Protecting the health of all investors, workforce and officers
must be paramount at the current time. We therefore urge all
shareholders to make use of the proxy form provided. If you hold
shares through the Fidelity Platform or a nominee (and not directly
in your own name), proxy forms are not provided, and you are
advised to contact the company with which you hold your shares to
determine alternative options (if available) for lodging your
voting instructions.
We thank you for your cooperation and sincerely hope to resume
the meeting’s usual format in the future.
PORTFOLIO MANAGER’S REVIEW
Nicholas
Price was appointed as Portfolio Manager of Fidelity Japan
Trust PLC on 1 September 2015. He
joined Fidelity Investments Japan in 1993 as a research analyst. He
became a portfolio manager in 1999 and has since been managing a
number of Japanese equity portfolios on behalf of both Japanese and
international clients.
Question
How has the Company performed in the period under review? What were
the key contributors and detractors?
Answer
As noted in the Chairman’s Statement, the Company’s NAV per share
increased by 24.8% in sterling terms and the share price rose by
24.6% in 2020, significantly outperforming the Reference Index,
which returned 9.5%. The discount marginally changed over the
period, closing the year at 6.8%, despite experiencing periods of
extreme volatility in the first half of 2020. The Company also
performed well versus most of its AIC Japan peer group and remains
the strongest performer over five years (as of 31 December 2020).
Returns were sharply negative in the first quarter of 2020, led
by holdings in technology related cyclicals and small cap services
stocks. However, performance recovered strongly from the second
quarter and core positions in medical technology, internet services
and factory automation related companies contributed to the
Company’s strong outperformance over the year.
The holding in Olympus, a global leader in endoscopes, was the
standout contributor to returns. The company’s share price climbed
to a record high after it announced plans to sell its loss?making
camera business to Japan Industrial Partners, a private equity
firm. The investment thesis, underpinned by the strength of its
endoscope business, a new product cycle and management’s commitment
to improving both governance and profitability, remains strong. We
expect its valuation discount to global peers to continue to
shrink.
In the transportation equipment sector, the position in Shimano,
a maker of bicycle components, was a top contributor to
performance. The stock surged on strong global demand for its
products, as more people turned to bikes in order to take exercise
and to avoid public transportation amid the pandemic. Meanwhile,
selected positions in e-commerce and software/ online services
companies, including Demae-can, Hennge and Z Holdings, did well
thanks to the pandemic and the way it changed patterns of
behaviour, including increased digitalisation
Conversely, Kotobuki Spirits, a confectionary supplier, and
Kamakura Shinsho, an operator of funeral services, were among the
most significant detractors from performance. These domestically
oriented companies experienced a deep but temporary hit to earnings
as the COVID-19 pandemic limited economic and social activity.
However, both companies have strong balance sheets and command
leading market positions. I expect them to come back stronger as
conditions gradually normalise. Elsewhere, positions in speciality
retailer Ryohin Keikaku and pharmaceuticals company Eisai
underperformed on stock-specific factors.
Question
What have been the key changes to the portfolio and where do you
see the greatest opportunities?
Answer
At the start of 2020, the portfolio had a relatively large
technology tilt, with a focus on globally competitive companies
with strong balance sheets, reasonable valuations and a secular
growth story. While I took profits in some of the more cyclical
technology stocks and naturally trimmed the winners, the overweight
exposure to the sector remains in place. Key holdings include
component makers Murata Manufacturing and TDK, both of which are
beneficiaries of rising smartphone and automobile shipments, and
increased content per unit.
Since then I have focused on domestic services stocks that are
well positioned to recover and to grow their businesses as
restrictions are lifted. Companies in the internet services,
e-commerce and educational software sectors that can benefit from
changes in the way we work, shop and play are of particular
interest. There is likely to be a longer term impact on how
companies do business together, and how their processes can become
more resilient through, for example, the use of online and cloud
computing. Japanese companies have generally been laggards in terms
of building that resilience, and the COVID-19 crisis is
highlighting the need for them to enhance their digital
capabilities. Companies that can supply some of the services to
facilitate corporate Japan’s digital transformation offer
attractive growth opportunities.
I have also looked closely at balance sheets and companies’
ability to survive over the longer term. As a result, I reduced
some of the financially leveraged names in the Company and some of
the winners in 2019 that were ready for profit taking. I also
avoided companies that had a one-time boost in pandemic related
demand, or where I thought their recovery would be severely
delayed.
Question
What are your current thoughts on gearing? And how has your use of
gearing changed over the period under review?
Answer
With the approval of the Board, I increased the level of gearing
during the first half of the year to around 25% from 17% at the end
of 2019, as the market correction created opportunities to add or
increase positions in high-conviction growth stocks across the
communications, technology and health care sectors. As the market
recovery gained traction towards the end of the year, I selectively
took profits in strong performers such as Z Holdings and Olympus
and recycled into new names. As a result, the level of gearing
declined marginally to 23.5% by the end of December and stands at
24.4% at the time of writing.
Looking forward, I am more likely to take profits in the near
term given the recent uptrend in share prices, though the level of
gearing will be dependent on the number of new ideas generated in
2021. One area that has the potential to create opportunities is
consumer/re-opening names that are likely to benefit from the
normalisation of economic and social activity as the pandemic is
gradually brought under control.
Question
Has the pandemic affected what you are seeing on the ground in
terms of corporate activity and initial public offerings
(IPOs)?
Answer
Even amid the pandemic, we saw significant company level activity
in 2020. The IPO environment picked up in the second half of the
year, with more than 90 companies coming to the market over the
twelve month period. This represented a modest uptick from 2019 and
is in line with the average over the past five years. Being on the
ground means that we see a lot of these new ideas and business
models first-hand, and continually meeting with pre-IPO companies
enables us to identify the most attractive opportunities.
At the end of the review period, the Company held three unlisted
securities. We continue to look for early-stage ideas and nascent
disruptors, particularly among fast-growing services and
internet-based companies, as well as innovative medical technology
names.
There was also a significant amount of corporate activity in
2020, especially in terms of companies buying in their listed
subsidiaries. Market reforms by the Tokyo Stock Exchange and
enhancements to the Corporate Governance Code should drive further
consolidation in 2021. There are opportunities to invest in
companies, particularly conglomerates and industrials, where
business reorganisation could drive a rerating or at least act as a
share price catalyst.
Question
What has been the impact of the new Suga administration?
Answer
Prime Minister Yoshihide Suga took
office in mid-September 2020 and
brought continuity in terms of macroeconomic and foreign policies,
but also a focus on domestic issues that raised the possibility of
accelerated reform and deregulation. One policy that stands out is
the modernising of government apparatus by digitalising the public
sector. Radical changes in government infrastructure usually elicit
strong opposition, but the COVID-19 crisis provided cover for an
overhaul of the current system.
The digitalisation drive is also creating opportunities in the
private sector, as the pandemic highlights the need for companies
to enhance their digital capabilities after years of
underinvestment in their information technology (IT)
infrastructure. The Company is exposed to this theme through
holdings in software as a service (SaaS) companies and efficiency
enablers in the mid/ small cap companies space that have a decent
runway of growth and are not well owned by other investors. Looking
forward, Suga’s commitment to reduce overall greenhouse gas
emissions to zero by 2050 has the potential to throw up new
investment opportunities in areas such as renewable energy and
infrastructure spending.
Question
What have you been seeing in terms of environmental, social and
governance (ESG) trends in general in Japan?
Answer
The Ministry of Economy Trade & Industry (METI) and the
Financial Services Agency (FSA) have enacted a number of measures
aimed at enhancing ESG-related factors, promoting effective
engagement and stewardship, as well as encouraging companies to
undertake business restructuring including spin?offs. As a member
of the Council of Experts (an advisory body of industry leaders
organised by the FSA), Fidelity provided views on various
stewardship-related issues and contributed to the drafting of new
revisions. Looking ahead, changes to the Corporate Governance Code
in 2021 will aim to increase the number and quality of outside
directors, improve capital efficiency through the elimination of
cross shareholdings and enhance group-level governance through the
dissolution of parent-subsidiary listings. Stock market reforms
planned for 2022 will also challenge companies to improve
governance, consolidate non-core businesses and unwind strategic
shareholdings.
Question
And how do you incorporate ESG factors into your investment
process? Could you provide an example of where active engagement
has brought about real change?
Answer
At Fidelity, we believe that high standards of corporate
responsibility generally make good business sense and have the
potential to protect and enhance investment returns. The investment
process undertaken by our research analysts takes ESG issues into
account when, in our view, these issues have a material impact on
either investment risk or return. ESG analysis is carried out at
the analyst level within the investment team and, as the Portfolio
Manager, I am also active in analysing the potential effects of ESG
factors when making investment decisions for the Company.
By working closely with our Sustainable Investing team on the
ground in Japan, we are able to
identify laggard companies that are implementing real change and
moving up the governance scale. This is particularly relevant for
small and mid cap companies, where third party coverage is limited
and simple disclosure, especially in English, is often limited.
When the markets recognises these companies’ efforts, there is a
good chance for them to be rerated and revalued.
As an example of our ESG-related activities, I would highlight
an excellent diversified chemicals company that the Company holds,
with which we actively engaged through the year on the themes of
climate change, waste and pollution, and governance. We engaged
with the company at the start of 2020, focusing on its low ESG
rating and potential improvement measures. We highlighted that the
quality of its business and products was not fully reflected in its
share price due to ESG-related issues. Management accepted that
this stemmed primarily from poor disclosure on chemical safety and
carbon emissions, as well as their reluctance to engage with
shareholders. The company committed to dealing with these issues.
The first positive outcome was a meeting with the CEO, who had
never met with investors before, to further discuss ESG-related
initiatives and disclosures. Following further meetings by our
investment team, the company announced new medium term financial
targets, which positively surprised the market as it represented a
first constructive commitment to shareholders. This was followed by
the company’s release of its first integrated report and a detailed
ESG data book, which now constitutes best practice and included our
recommendations: a reduction plan for CO2 emissions and the
establishment of a procurement policy that encompasses
environmental and human rights issues.
Question
Clearly we are living in extraordinary times, but what might
investors expect next and what should they be focusing on?
Answer
A number of themes present themselves. Certainly clean energy and
environmental efficiency are areas where Japan has some very competitive companies that
can supply solutions to the regulatory and productivity needs of
customers globally. This is a core part of the portfolio and I
expect related names to do well for the Company in future. As
noted, COVID-19 has also accelerated trends in e-commerce and
digitalisation. As profits recover, companies will prioritise those
areas.
I intend casting the net further and will be looking
particularly for companies with recovery potential in areas such as
leisure and travel. As we start to see better earnings
announcements in fiscal 2021, there will be an opportunity to pick
up companies that are changing into, or returning as, growth
names.
NICHOLAS PRICE
Portfolio Manager
26 March 2021
STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provisions 28 and 29 of the 2018 UK Corporate
Governance Code, the Board has a robust ongoing process for
identifying, evaluating and managing the principal risks and
emerging risks faced by the Company, including those that could
threaten its business model, future performance, solvency or
liquidity. The Board, with the assistance of the Alternative
Investment Fund Manager (FIL Investment Services (UK) Limited/ the
“Manager”), has developed a risk matrix which, as part of the risk
management and internal controls process, identifies the key
existing and emerging risks and uncertainties that the Company
faces. The Board believes the key emerging risks to be climate
change and the longer term ramifications from the pandemic.
The risks identified are placed on the Company’s risk matrix and
graded appropriately. This process, together with the policies and
procedures for the mitigation of existing and emerging risks, is
updated and reviewed regularly in the form of comprehensive reports
considered by the Audit Committee. The Board determines the nature
and extent of any risks it is willing to take in order to achieve
its strategic objectives.
The Manager also has responsibility for risk management for the
Company. It works with the Board to identify and manage the
principal risks and uncertainties and to ensure that the Board can
continue to meet its UK corporate governance obligations.
The Board considers the following as the principal risks and
uncertainties faced by the Company.
| Principal Risks |
Description and Risk Mitigation |
| Market Risk |
The Company’s assets
consist mainly of listed securities and the principal risks are,
therefore, market related such as market downturn, interest rate
movements, exchange rate movements and ESG investing, including
climate risk. The Portfolio Manager’s success or failure to protect
and increase the Company’s assets against this background is core
to the Company’s continued success.
The risk of the likely effects of COVID-19 on the markets is
discussed in the Chairman’s Statement and in the Portfolio
Manager’s Review. These risks are somewhat mitigated by the
Company’s investment trust structure which means no forced sales
will need to take place to deal with any redemptions. Therefore,
investments can be held over a longer time horizon.
Risks to which the Company is exposed in the market risk category
are included in Note 16 to the Financial Statements below together
with summaries of the policies for managing these risks. |
| Performance Risk |
The achievement of the Company’s
investment performance objective relative to the market requires
the taking of risk, such as strategy, asset allocation and stock
selection, and may lead to NAV and share price underperformance
compared to the Reference Index. The Portfolio Manager is
responsible for actively monitoring the portfolio selected in
accordance with the asset allocation parameters and seeks to ensure
that individual stocks meet an acceptable risk/reward profile. The
emphasis is on long term results such that the Company is more
exposed to volatility in the shorter term. |
| Pandemic Risk |
With the pandemic
continuing to evolve and variants of COVID-19 appearing, it is
evident that although COVID-19 is being tackled by the arrival of
vaccines, risks remain. The roll-out of vaccines globally is also
slow and the effectiveness against the variants is uncertain. There
continues to be increased focus from financial services regulators
around the world on the contingency plans of regulated financial
firms. The Manager carries on reviewing its business continuity
plans and operational resilience strategies on an ongoing basis and
continues to take all reasonable steps in meeting its regulatory
obligations and to assess operational risks, the ability to
continue operating and the steps it needs to take to serve and
support its clients, including the Board. For example, to enhance
its resilience, the Manager has mandated that all staff work from
home and has implemented split team working for those whose work is
deemed necessary to be carried out in an office. The Manager
follows the self-isolation and lock-down arrangements on staff in
line with Government recommendations and guidance.
PricewaterhouseCoopers LLP has also confirmed in the AAF Internal
Controls report issued to Fidelity that there have not been any
significant changes to Fidelity’s control environment as a result
of COVID-19.
Investment team key activities, including portfolio managers,
analysts and trading/support functions, are performing well despite
the operational challenges posed by working from home or split team
arrangements. The Company’s other third party service providers
have also confirmed the implementation of similar measures to
ensure no business disruption. |
| Economic, Geopolitical and
Natural Disaster Risks |
Political change can
impact the Company’s assets, such as US/China tensions, North
Korean aggression and strife in the Middle East. The Board is
provided with a detailed investment review which covers material
economic, market and legislative changes at each Board meeting. The
review also covers risks relating to global trade tensions,
interest rate volatility and political unrest.
Japan is extremely vulnerable to earthquakes and tsunamis.
Depending on the magnitude of such events, positions in the
portfolio may be affected. The Manager could also be impacted from
an operational perspective if the epicentre is in or near
Tokyo. |
| Discount Control Risk |
The price of the Company’s shares
and its discount to NAV are factors which are not within the
Board’s total control. However, it can have a modest influence in
the market by maintaining the profile of the Company through a
marketing campaign and, under certain circumstances, through
repurchasing shares. The Board continues to adopt a formal discount
control policy whereby it will seek to maintain the discount in
single digits in normal market conditions. The Company’s share
price, NAV and discount volatility are monitored daily by the
Manager and considered by the Board regularly. The Board continues
to adopt an active discount management policy. |
| Cybercrime Risk |
The operational risk
from cybercrime is significant. Cybercrime threats evolve rapidly
and consequently the risk is regularly re-assessed and the Board
receives regular updates from the Manager in respect of the type
and possible scale of cyberattacks. The Manager’s technology team
has developed a number of initiatives and controls in order to
provide enhanced mitigating protection to this ever increasing
threat. The risk is frequently re-assessed by Fidelity’s
information security and technology teams and has resulted in the
implementation of new tools and processes as well as improvements
to existing ones. Fidelity has also established a dedicated
cybersecurity team which provides regular awareness updates and
best practice guidance.
Risks are increased due to the COVID-19 crisis, primarily related
to phishing, remote access threats, extortion and
denial-of-services attacks. The Manager has a dedicated detect and
respond resource to specifically monitor cyber threats associated
with COVID-19. |
| Economic, Social and Governance
(“ESG”) Risk |
There is a risk that
the value of the Company’s assets are negatively impacted by ESG
related risks, including climate control. Fidelity has embedded ESG
factors in its investment decision making process. ESG integration
is carried out at the fundamental research analyst level within its
investment teams, primarily through Fidelity’s Proprietary
Sustainability Rating which is designed to generate forward-looking
and holistic assessment of a company’s ESG risks and opportunities
based on sector-specific key performance indicators across 99
individual and unique sub-sectors. The Portfolio Manager is also
active in analysing the effects of ESG when making investment
decisions.
Further detail on ESG considerations in the investment process is
in the Annual Report. |
| Key Person Risk |
There is a risk that the Manager has
an inadequate succession plan for key individuals, particularly
with stock selection expertise in Japanese markets. The loss of the
Portfolio Manager or key individuals could lead to potential
performance, operational or regulatory issues. The Manager
identifies key dependencies which are then addressed through
succession plans. Fidelity has succession plans in place for
portfolio managers and these are discussed regularly with the
Board. As explained in the Chairman’s Statement, the Board and
Fidelity have appointed an Assistant Portfolio Manager who has
extensive experience in the Japanese market and shares a common
investment approach and complementary investment experience with
the Portfolio Manager. This should help strengthen the investment
process by introducing greater challenge and also increases the
ability to meet more companies. |
| Gearing Risk |
The Company has the option to make
use of loan facilities or to use CFDs to invest in equities. The
principal risk is that the Portfolio Manager may fail to use
gearing effectively. In a rising market the Company will benefit
from gearing, whilst in a falling market the impact would be
detrimental. Other risks are that the cost of gearing may be too
high or that the term of the gearing is inappropriate in relation
to market conditions. The Company currently has no bank loans and
gears through the use of long CFDs which provide greater
flexibility and are significantly cheaper than bank loans. The
Board regularly considers the level of gearing and gearing risk and
sets limits within which the Portfolio Manager must operate. |
| Currency Risk |
Most of the Company’s assets and
income are denominated in yen. However, the functional currency of
the Company in which it reports its results is sterling.
Consequently, it is subject to currency risk on exchange rate
movements between the yen and sterling. It is the Company’s policy
not to hedge against currency risks. Further details can be found
in Note 16 to the Financial Statements below. |
Other risks facing the Company include:
TAX AND REGULATORY RISKS
There is a risk of the Company not complying with tax and
regulatory requirements. A breach of Section 1158 of the
Corporation Tax Act 2010 could lead to a loss of investment trust
status resulting in the Company being subject to tax on capital
gains.
The Board monitors tax and regulatory changes at each Board
meeting and through active engagement with regulators and trade
bodies by the Manager.
OPERATIONAL RISKS
The Company relies on a number of third party service providers,
principally the Manager, Registrar, Custodian and Depositary. It is
dependent on the effective operation of the Manager’s control
systems and those of its service providers with regard to the
security of the Company’s assets, dealing procedures, accounting
records and the compliance with regulatory and legal requirements.
The Registrar, Custodian and Depositary are all subject to a
risk-based programme of internal audits by the Manager. In
addition, service providers’ own internal controls reports are
received by the Board on an annual basis and any concerns are
investigated. Risks associated with these services are generally
rated as low, but the financial consequences could be serious,
including reputational damage to the Company.
CONTINUATION VOTE
A continuation vote takes place every three years. There is a risk
that shareholders do not vote in favour of continuation of the
Company during periods when performance of the Company’s NAV and
share price is poor. At the Company’s AGM held on 21 May 2019, 99.88% of shareholders voted in
favour of the continuation of the Company. The next continuation
vote will take place at the AGM in 2022.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance
Code, the Directors have assessed the prospects of the Company over
a longer period than the 12 month period required by the “Going
Concern” basis. The Company is an investment trust with the
objective of achieving long term capital growth. The Board
considers that five years is an appropriate investment horizon to
assess the viability of the Company, although the life of the
Company is not intended to be limited to this or any other
period.
In making an assessment on the viability of the Company, the
Board has considered the following:
· The ongoing
relevance of the investment objective in prevailing market
conditions;
· The Company’s NAV
and share price performance;
· The principal and
emerging risks and uncertainties facing the Company, as set out
above, and their potential impact;
· The future demand
for the Company’s shares;
· The Company’s share
price discount to NAV;
· The liquidity of the
Company’s portfolio;
· The level of income
generated by the Company; and
· Future income and
expenditure forecasts.
The Company’s performance has been very strong for the five year
reporting period to 31 December 2020,
with a NAV total return of 132.9% and a share price total return of
154.2% compared to a Reference Index total return of 65.1%. The
Board regularly reviews the investment policy and considers whether
it remains appropriate. The Board has concluded that there is a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the next
five years based on the following considerations:
· The Investment
Manager’s compliance with the Company’s investment objective and
policy, its investment strategy and asset allocation;
· The portfolio mainly
comprises readily realisable securities which can be sold to meet
funding requirements if necessary;
· The Board’s discount
management policy;
· The ongoing
processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company’s total
assets; and
· The Board’s
assessment of the risks arising from COVID-19 as set out in the
Principal Risks above.
In addition, the Directors’ assessment of the Company’s ability
to operate in the foreseeable future is included in the Going
Concern Statement below.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a
company must act in a way they consider, in good faith, would be
most likely to promote the success of the Company for the benefit
of its members as a whole, and in doing so have regard (amongst
other matters) to the likely consequences of any decision in the
long term; the need to foster relationships with the Company’s
suppliers, customers and others; the impact of the company’s
operations on the community and the environment; the desirability
of the Company maintaining a reputation for high standards of
business conduct; and the need to act fairly as between members of
the company.
As an externally managed Investment Trust the Company has no
employees or physical assets, and a number of the Company’s
functions are outsourced to third parties. The key outsourced
function is the provision of investment management services to the
Manager, but other professional service providers support the
Company by providing administration, custodial, banking and audit
services. The Board considers the Company’s key stakeholders to be
the existing and potential shareholders, the external appointed
Manager (Fidelity), and other third party professional service
providers. The Board considers that the interest of these
stakeholders is aligned with the Company’s objective of delivering
long term capital growth to investors, in line with the Company’s
stated investment objective and strategy, while providing the
highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall
investment strategy and reviews this at an annual strategy day
which is separate from the regular cycle of board meetings. In
order to ensure good governance of the Company, the Board has set
various limits on the investments in the portfolio, whether in the
maximum size of individual holdings, the use of derivatives, the
level of gearing and others. These limits and guidelines are
regularly monitored and reviewed and are set out in the Annual
Report.
The Board places great importance on communication with
shareholders. The Annual General Meeting provides the key forum for
the Board and Manager to present to the shareholders on the
Company’s performance and future plans and, in normal
circumstances, the Board encourages all shareholders to attend, and
raise questions and concerns. The Chairman and other Board members
are available to meet shareholders as appropriate, and shareholders
may also communicate with Board members at any time by writing to
them at the Company’s registered office or via the Company
Secretary at the address provided in the Annual Report or by email
at investmenttrusts@fil.com. The Portfolio Manager meets
with major shareholders, potential investors, stock market
analysts, journalists and other commentators during the year. These
communication opportunities help inform the Board in considering
how best to promote the success of the company over the long
term.
The Board seeks to engage with the Manager and other service
providers and advisers in a constructive and collaborative way,
promoting a culture of strong governance, while encouraging open
and constructive debate, in order to ensure appropriate and regular
challenge and evaluation. This aims to enhance service levels and
strengthen relationships with service providers, with a view to
ensuring shareholders’ interests are best served, by maintaining
the highest standards of commercial conduct while keeping cost
levels competitive.
Whilst the Company’s direct operations are limited, the Board
recognises the importance of considering the impact of the
Company’s investment strategy on the wider community and
environment. The Board believes that a proper consideration of
Environmental, Social and Governance (“ESG”) issues aligns with the
objective to deliver long term capital growth, and the Board’s
review of the Manager includes an assessment of their ESG approach,
which is set out on in the Annual Report.
In addition to ensuring that the Company’s investment objective
was being pursued, key decisions and actions taken by the Directors
during the reporting year, and up to the date of this report, have
included:
— the decision to charge 80% of
base management fees and finance costs to capital and 20% to
revenue, reflecting the Company’s focus on capital growth to
generate returns;
— authorising the repurchase of
2,652,164 ordinary shares into Treasury when market conditions
permitted in order to keep the Company’s discount in single
digits;
— the decision to revise and
accelerate the Board’s succession plans in response to the 21%
votes received against the re-election of Philip Kay. The Board discussed the matter
internally and sought views from major shareholders. Philip Kay stepped down from the Board on
31 December 2020; and
— as part of the Board’s
succession plans, the appointment and induction of David Barron to the Board took effect from
20 October 2020.
GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective,
risk management policies, liquidity risk, credit risk, capital
management policies and procedures, the nature of its portfolio
(being mainly securities which are readily realisable) and its
expenditure and cash flow projections and have concluded that the
Company has adequate resources to continue to adopt the going
concern basis for at least 12 months from the date of approving
these Financial Statements. This conclusion also takes into account
the Board’s assessment of the risks arising from COVID-19 as set
out in the Pandemic Risk statement above. The prospects of the
Company over a period longer than 12 months can be found in the
Viability Statement above.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial period. Under that law they have
elected to prepare the Financial Statements in accordance with UK
Generally Accepted Accounting Practice, including FRS 102: The
Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements
are required by law to give a true and fair view of the state of
affairs of the Company and of the profit or loss for the reporting
period.
In preparing these Financial Statements, the Directors are
required to:
· select suitable
accounting policies and then apply them consistently;
· make judgements and
estimates that are reasonable and prudent;
· state whether
applicable UK Accounting Standards have been followed, subject to
any material departures disclosed and explained in the Financial
Statements; and
· prepare the
Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in
business.
The Directors are responsible for ensuring that adequate
accounting records are kept which 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.
Under applicable law and regulations the Directors are also
responsible for preparing a Strategic Report, a Directors’ Report,
a Corporate Governance Statement and a Directors’ Remuneration
Report that comply with that law and those regulations.
The Directors have delegated to the Manager the responsibility
for the maintenance and integrity of the corporate and financial
information included on the Company’s pages of the Manager’s
website at www.fidelity.co.uk/japan. Visitors to the website
need to be aware that legislation in the UK governing the
preparation and dissemination of the Financial Statements may
differ from legislation in their own jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial
Statements, prepared in accordance with FRS 102, give a true and
fair view of the assets, liabilities, financial position and profit
of the Company; and
· The Annual 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 it faces.
The Directors consider 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 performance, business model and strategy.
Approved by the Board on 26 March
2021 and signed on its behalf by:
DAVID ROBINS
Chairman
INCOME STATEMENT FOR THE YEAR ENDED
31 DECEMBER 2020
|
|
Year ended 31 December 2020 |
Year ended 31 December 2019 |
|
Notes |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
| Gains on
investments |
9 |
– |
38,535 |
38,535 |
– |
52,982 |
52,982 |
| Gains on derivative
instruments |
10 |
– |
22,360 |
22,360 |
– |
14,155 |
14,155 |
| Income |
3 |
3,287 |
– |
3,287 |
2,906 |
– |
2,906 |
| Investment management
fees |
4 |
(358) |
(1,677) |
(2,035) |
(1,555) |
329 |
(1,226) |
| Other expenses |
5 |
(597) |
(8) |
(605) |
(600) |
– |
(600) |
| Foreign exchange
(losses)/gains |
|
– |
(475) |
(475) |
– |
16 |
16 |
| Net return on
ordinary activities before finance costs and taxation |
|
2,332 |
58,735 |
61,067 |
751 |
67,482 |
68,233 |
| Finance costs |
6 |
(26) |
(104) |
(130) |
(93) |
– |
(93) |
| Net return on
ordinary activities before taxation |
|
2,306 |
58,631 |
60,937 |
658 |
67,482 |
68,140 |
| Taxation on return on
ordinary activities |
7 |
(252) |
– |
(252) |
(261) |
– |
(261) |
| Net return on
ordinary activities after taxation for the year |
|
2,054 |
58,631 |
60,685 |
397 |
67,482 |
67,879 |
| Return per ordinary
share |
8 |
1.56p |
44.53p |
46.09p |
0.29p |
50.23p |
50.52p |
|
|
======== |
======== |
======== |
======== |
======== |
======== |
The Company does not have any other comprehensive income.
Accordingly the net return on ordinary activities after taxation
for the year is also the total comprehensive income for the year
and no separate Statement of Comprehensive Income has been
presented.
The total column of this statement represents the Income
Statement of the Company. The revenue and capital columns are
supplementary and presented for information purposes as recommended
by the Statement of Recommended Practice issued by the AIC.
No operations were acquired or discontinued in the year and all
items in the above statement derive from continuing operations.
The Notes below form an integral part of these Financial
Statements.
STATEMENT OF CHANGES IN EQUITY FOR THE
YEAR ENDED 31 DECEMBER 2020
|
Note |
Share
capital
£’000 |
Share
premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Other
reserve
£’000 |
Capital
reserve
£’000 |
Revenue
reserve
£’000 |
Total
shareholders’
funds
£’000 |
| Total shareholders’
funds at 31 December 2019 |
|
34,041 |
20,722 |
2,767 |
52,815 |
156,520 |
(14,374) |
252,491 |
| Repurchase of ordinary
shares |
13 |
– |
– |
– |
(4,370) |
– |
– |
(4,370) |
| Net return on ordinary
activities after taxation for the year |
|
– |
– |
– |
– |
58,631 |
2,054 |
60,685 |
|
|
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
| Total shareholders’
funds at 31 December 2020 |
|
34,041 |
20,722 |
2,767 |
48,445 |
215,151 |
(12,320) |
308,806 |
|
|
======== |
======== |
======== |
======== |
======== |
======== |
======== |
| Total shareholders’
funds at 31 December 2018 |
|
34,041 |
20,722 |
2,767 |
55,733 |
89,038 |
(14,771) |
187,530 |
| Repurchase of ordinary
shares |
13 |
– |
– |
– |
(2,918) |
– |
– |
(2,918) |
| Net return on ordinary
activities after taxation for the year |
|
– |
– |
– |
– |
67,482 |
397 |
67,879 |
|
|
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
| Total shareholders’
funds at 31 December 2019 |
|
34,041 |
20,722 |
2,767 |
52,815 |
156,520 |
(14,374) |
252,491 |
|
|
======== |
======== |
======== |
======== |
======== |
======== |
======== |
The Notes below form an integral part of these Financial
Statements.
BALANCE SHEET AS AT 31 DECEMBER 2020 COMPANY NUMBER 2885584
|
Notes |
2020
£’000 |
2019
£’000 |
| Fixed
assets |
|
|
|
| Investments |
9 |
303,002 |
249,099 |
| Current
assets |
|
|
|
| Derivative
instruments |
10 |
1,932 |
3,048 |
| Debtors |
11 |
668 |
899 |
| Cash collateral held
with brokers |
16 |
21 |
– |
| Cash at bank |
|
4,336 |
1,196 |
|
|
6,957 |
5,143 |
| Current
liabilities |
|
|
|
| Derivative
instruments |
10 |
(91) |
(1,075) |
| Other creditors |
12 |
(1,062) |
(676) |
|
|
(1,153) |
(1,751) |
| Net current
assets |
|
5,804 |
3,392 |
| Net assets |
|
308,806 |
252,491 |
| Capital and
reserves |
|
|
|
| Share capital |
13 |
34,041 |
34,041 |
| Share premium
account |
14 |
20,722 |
20,722 |
| Capital redemption
reserve |
14 |
2,767 |
2,767 |
| Other reserve |
14 |
48,445 |
52,815 |
| Capital reserve |
14 |
215,151 |
156,520 |
| Revenue reserve |
14 |
(12,320) |
(14,374) |
|
|
-------------- |
-------------- |
| Total shareholders’
funds |
|
308,806 |
252,491 |
|
|
======== |
======== |
| Net asset value per
ordinary share |
15 |
236.53p |
189.55p |
|
|
======== |
======== |
The Financial Statements above and below were approved by the
Board of Directors on 26 March 2021
and were signed on its behalf by:
DAVID ROBINS
Chairman
The Notes below form an integral part of these Financial
Statements.
Notes to the Financial Statements
1 PRINCIPAL ACTIVITY
Fidelity Japan Trust PLC is an Investment Company incorporated in
England and Wales with a premium listing on the London
Stock Exchange. The Company’s registration number is 2885584, and
its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth,
Surrey, KT20 6RP. The Company has been approved by HM Revenue
& Customs as an Investment Trust under Section 1158 of the
Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance
with UK Generally Accepted Accounting Practice (“UK GAAP”),
including FRS 102 “The Financial Reporting Standard applicable in
the UK and Republic of Ireland”, issued by the Financial Reporting
Council (“FRC”). The Financial Statements have also been prepared
in accordance with the Statement of Recommended Practice: Financial
Statements of Investment Trust Companies and Venture Capital Trusts
(“SORP”) issued by the Association of Investment Companies (“AIC”),
in October 2019. The Company is
exempt from presenting a Cash Flow Statement as a Statement of
Changes in Equity is presented and substantially all of the
Company’s investments are highly liquid and are carried at market
value.
a) Basis of accounting
The Financial Statements have been prepared on a going concern
basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative
instruments. The Directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence
for at least 12 months from the date of approval of these Financial
Statements. In making their assessment the Directors have reviewed
income and expense projections, reviewed the liquidity of the
investment portfolio and considered the Company’s ability to meet
liabilities as they fall due. This conclusion also takes into
account the Director’s assessment of the continuing risks arising
from COVID-19.
The Company’s Going Concern Statement above takes account of all
events and conditions up to the date of approval of these Financial
Statements.
b) Significant accounting estimates and judgements
The Directors make judgements and estimates concerning the future.
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, such as expectations of
future events, and are believed to be reasonable under the
circumstances. Actual results may differ from these estimates. The
judgements required in order to determine the appropriate valuation
methodology of level 3 financial instruments have a risk of causing
an adjustment to the carrying amounts of assets. These judgements
include making assessments of the possible valuations in the event
of a listing or other marketability related risks.
c) Segmental reporting
The Company is engaged in a single segment business and, therefore,
no segmental reporting is provided.
d) Presentation of the Income Statement
In order to reflect better the activities of an investment company
and in accordance with guidance issued by the AIC, supplementary
information which analyses the Income Statement between items of a
revenue and capital nature has been prepared alongside the Income
Statement. The net revenue return after taxation for the year is
the measure the Directors believe appropriate in assessing the
Company’s compliance with certain requirements set out in Section
1159 of the Corporation Tax Act 2010.
e) Income
Income from equity investments is accounted for on the date on
which the right to receive the payment is established, normally the
ex-dividend date. Overseas dividends are accounted for gross of any
tax deducted at source. Amounts are credited to the revenue column
of the Income Statement. Where the Company has elected to receive
its dividends in the form of additional shares rather than cash,
the amount of the cash dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of
the shares received over the amount of the cash dividend is
recognised in the capital column of the Income Statement. Special
dividends are treated as a revenue receipt or a capital receipt
depending on the facts and circumstances of each particular
case.
Derivative instrument income received from dividends on long
contracts for difference (“CFDs”) is accounted for on the date on
which the right to receive the payment is established, normally the
ex-dividend date. The amount net of tax is credited to the revenue
column of the Income Statement.
f) Investment management fees and other expenses
Investment management fees and other expenses are accounted for on
an accruals basis and are charged as follows:
· With effect from
1 January 2020, the base investment
management fee is allocated 20% to revenue and 80% to capital to
reflect the Company’s focus on capital growth to generate returns.
Prior to 1 January 2020, the base
investment management fee was allocated in full to revenue;
· The variable investment
management fee is charged/credited to capital, as it is based on
the performance of the net asset value per share relative to the
Reference Index; and
· All other expenses are
allocated in full to revenue with the exception of those directly
attributable to share issues or other capital events.
g) Functional currency and foreign exchange
The functional and reporting currency of the Company is UK
sterling, which is the currency of the primary economic environment
in which the Company operates. Transactions denominated in foreign
currencies are reported in UK sterling at the rate of exchange
ruling at the date of the transaction. Assets and liabilities in
foreign currencies are translated at the rates of exchange ruling
at the Balance Sheet date. Foreign exchange gains and losses
arising on translation are recognised in the Income Statement as a
revenue or a capital item depending on the nature of the underlying
item to which they relate.
h) Finance costs
Finance costs comprise interest on collateral, bank overdrafts and
interest paid on long CFDs, which are accounted for on an accruals
basis. With effect from 1 January
2020, finance costs are allocated 20% to revenue and 80% to
capital to reflect the Company’s focus on capital growth to
generate returns. Prior to 1 January
2020, finance costs were charged in full to revenue.
i) Taxation
The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas
income less amounts recoverable under taxation treaties. Taxation
is charged or credited to the revenue column of the Income
Statement, except where it relates to items of a capital nature, in
which case it is charged or credited to the capital column of the
Income Statement. The Company is an approved Investment Trust under
Section 1158 of the Corporation Tax Act 2010 and is not liable for
UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or
recoverable on timing differences between the treatment of certain
items for accounting purposes and their treatment for the purposes
of computing taxable profits. Deferred taxation is based on tax
rates that have been enacted or substantively enacted when the
taxation is expected to be payable or recoverable. Deferred tax
assets are only recognised if it is considered more likely than not
that there will be sufficient future taxable profits to utilise
them.
j) Investments
The Company’s business is investing in financial instruments with a
view to profiting from their total return in the form of income and
capital growth. This portfolio of investments is managed and its
performance evaluated on a fair value basis, in accordance with a
documented investment strategy, and information about the portfolio
is provided on that basis to the Company’s Board of Directors.
Investments are measured at fair value with changes in fair value
recognised in profit or loss, in accordance with the provisions
of both Section 11 and Section 12 of FRS 102. The fair value of
investments is initially taken to be their cost and is subsequently
measured as follows:
· Listed investments are
valued at bid prices, or last market prices, depending on the
convention of the exchange on which they are listed; and
· Unlisted investments are
not quoted, or are not frequently traded, and are stated at the
Directors best estimate of fair value. The Manager’s Fair Value
Committee (‘FVC’), which is independent of the Portfolio Manager’s
team, meets quarterly to determine the fair value of unlisted
investments. They review the input received from the Fidelity
analyst that covers the company and valuation reports from a third
party specialist. The FVC provide a recommendation of fair values
to the Directors based on recognised valuation techniques that take
account of the cost of the investment, recent arm’s length
transactions in the same or similar investments and financial
performance of the investment since purchase.
In accordance with the AIC SORP, the Company includes
transaction costs, incidental to the purchase or sale of
investments, within gains on investments in the capital column of
the Income Statement and has disclosed these costs in Note 9
below.
k) Derivative instruments
When appropriate, permitted transactions in derivative instruments
are used. Some of the Company’s portfolio exposure to Japanese
equities is achieved by investment in long CFDs. Long CFDs are
classified as other financial instruments and are initially
accounted and measured at fair value on the date the derivative
contract is entered into and subsequently measured at fair value as
follows:
· Long CFDs are valued at
the difference between the strike price and the value of the
underlying shares in the contract.
l) Debtors
Debtors include securities sold for future settlement, accrued
income, other debtors and prepayments incurred in the ordinary
course of business. If collection is expected in one year or less
(or in the normal operating cycle of the business, if longer) they
are classified as current assets. If not, they are presented as
non-current assets. They are recognised initially at fair value
and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
m) Cash collateral held with brokers
These are amounts held in segregated accounts on behalf of brokers
as collateral against open derivative contracts. These are carried
at amortised cost.
n) Other creditors
Other creditors include securities purchased for future settlement,
investment management fees and other creditors and expenses accrued
in the ordinary course of business. If payment is due within one
year or less (or in the normal operating cycle of the business, if
longer) they are classified as current liabilities. If not, they
are presented as non-current liabilities. They are recognised
initially at fair value and, where applicable, subsequently
measured at amortised cost using the effective interest rate
method.
o) Other reserve
The full cost of ordinary shares repurchased and held in Treasury
is charged to the other reserve.
p) Capital reserve
The following are accounted for in the capital reserve:
· Gains and losses on the
disposal of investments and derivative instruments;
· Changes in the fair value
of investments and derivative instruments held at the year end;
· Foreign exchange gains and
losses of a capital nature;
· Dividends receivable which
are capital in nature;
· With effect from
1st January 2020, 80% of base
investment management fees and finance costs;
· Variable investment
management fees; and
· Other expenses which are
capital in nature.
As a result of technical guidance issued by the Institute of
Chartered Accountants in England
and Wales in TECH 02/17BL, the
determination of realised profits and losses in the context of
distributions under the Companies Act 2006, states that changes in
the fair value of investments which are readily convertible to
cash, without accepting adverse terms at the Balance Sheet date,
can be treated as realised. Capital reserves realised and
unrealised are shown in aggregate as capital reserve in the
Statement of Changes in Equity and the Balance Sheet. At the
Balance Sheet date, the portfolio of the Company consisted of
investments listed on a recognised stock exchange and were
considered to be readily convertible to cash, with the exception of
the level 3 investments which had unrealised investment holding
losses of £54,000 (2019: unrealised foreign exchange losses of
£180,000). See Note 16 below for further details on the level 3
investments.
3 INCOME
|
Year ended
31.12.20
£’000 |
Year ended
31.12.19
£’000 |
| Investment income |
|
|
| Overseas dividends |
2,523 |
2,607 |
| Derivative income |
|
|
| Dividends received on long CFDs |
764 |
299 |
|
------------ |
------------ |
| Total income |
3,287 |
2,906 |
|
======== |
======== |
No special dividends have been recognised in capital during the
reporting year (2019: nil).
4 INVESTMENT MANAGEMENT FEES
|
Year
ended 31 December 2020 |
Year
ended 31 December 2019 |
Revenue1
£’000 |
Capital1
£’000 |
Total
£’000 |
Revenue1
£’000 |
Capital1
£’000 |
Total
£’000 |
| Investment management fees –
base |
358 |
1,429 |
1,787 |
1,555 |
– |
1,555 |
| Investment management fees –
variable2 |
– |
248 |
248 |
– |
(329) |
(329) |
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
|
358 |
1,677 |
2,035 |
1,555 |
(329) |
1,226 |
|
======= |
======= |
======= |
======= |
======= |
======= |
1 As disclosed in Note 2, base investment
management fees for the year ended 31
December 2020 were charged 20% to revenue and 80% to
capital. For the year ended 31 December
2019, base investment management fees were charged 100% to
revenue.
2 For the calculation of the variable
management fee element, the Company’s NAV return was compared to
the Reference Index return for the period from 1 July 2018 to the relevant reporting dates. The
NAV has outperformed the Reference Index and therefore there is a
charge to the Company for the current year. In the prior year the
NAV underperformed the Reference Index and therefore there was a
credit to the Company of £329,000.
FIL Investment Services (UK) Limited is the Company’s
Alternative Investment Fund Manager and has delegated portfolio
management to FIL Investments International (“FII”). Both companies
are Fidelity group companies.
FII charges base investment management fees at an annual rate of
0.70% of net assets. In addition, there is a +/- 0.20% variation
fee based on performance relative to the Reference Index. Fees are
payable monthly in arrears and are calculated on a daily basis.
Further details of the terms of the Management Agreement are
given in the Directors’ Report in the Annual Report.
5 OTHER EXPENSES
|
Year
ended
31.12.20
£’000 |
Year
ended
31.12.19
£’000 |
| Allocated to revenue: |
|
|
| AIC fees |
15 |
17 |
| Secretarial and administration fees
payable to the Investment Manager |
50 |
50 |
| Custody fees |
23 |
22 |
| Depositary fees |
25 |
21 |
| Directors’ expenses |
30 |
42 |
| Directors’ fees1 |
160 |
158 |
| Legal and professional fees |
67 |
61 |
| Marketing expenses |
97 |
101 |
| Printing and publication
expenses |
55 |
64 |
| Registrars’ fees |
25 |
21 |
| Other expenses |
16 |
14 |
| Fees payable to the Company’s
Independent Auditor for the audit of the Financial Statements |
34 |
29 |
|
------------ |
------------ |
|
597 |
600 |
|
======= |
======= |
| Allocated to capital: |
|
|
| Legal and professional fees -
unlisted investments |
8 |
– |
|
------------ |
------------ |
| Other expenses |
605 |
600 |
|
======= |
======= |
1 Details of the breakdown of Directors’ fees
are provided in the Directors’ Remuneration Report in the Annual
Report.
6 FINANCE COSTS
|
Year
ended 31 December 2020 |
Year
ended 31 December 2019 |
Revenue1
£’000 |
Capital1
£’000 |
Total
£’000 |
Revenue1
£’000 |
Capital1
£’000 |
Total
£’000 |
| Interest paid on long CFDs |
20 |
79 |
99 |
86 |
– |
86 |
| Interest paid on collateral and bank
overdrafts |
6 |
25 |
31 |
7 |
– |
7 |
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
|
26 |
104 |
130 |
93 |
– |
93 |
|
======= |
======= |
======= |
======= |
======= |
======= |
1 As disclosed in Note 2, finance costs for
the year ended 31 December 2020 were
charged 20% to revenue and 80% to capital. For the year ended
31 December 2019, finance costs were
charged 100% to revenue.
7 TAXATION ON RETURN ON ORDINARY
ACTIVITIES
|
Year
ended
31.12.20
£’000 |
Year
ended
31.12.19
£’000 |
| a) Analysis of the taxation
charge for the year |
|
|
| Overseas taxation |
252 |
261 |
|
------------ |
------------ |
| Taxation charge for the year (see
Note 7b) |
252 |
261 |
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of
UK corporation tax for an investment trust company of 19.00% (2019:
19.00%). A reconciliation of the standard rate of UK corporation
tax to the taxation charge for the year is shown below:
|
Year
ended
31.12.20
£’000 |
Year
ended
31.12.19
£’000 |
| Net return on ordinary activities
before taxation |
60,937 |
68,140 |
| Net return on ordinary activities
before taxation multiplied by the standard rate of UK corporation
tax of |
|
|
| 19.00% (2019: 19.00%) |
11,578 |
12,947 |
| Effects of: |
|
|
| Capital gains not
taxable1 |
(11,480) |
(12,759) |
| Income not taxable |
(479) |
(495) |
| Expenses not deductible |
19 |
1 |
| Excess management expenses not
utilised |
362 |
306 |
| Overseas taxation |
252 |
261 |
|
------------ |
------------ |
| Taxation charge for the year (see
Note 7a) |
252 |
261 |
|
======= |
======= |
1 The Company is exempt from UK taxation on
capital gains as it meets the HM Revenue & Customs criteria for
an investment company set out in Section 1159 of the Corporation
Tax Act 2010.
c) Deferred taxation
A deferred taxation asset of £5,613,000 (2019: £4,698,000), in
respect of excess expenses of £29,543,000 (2019: £27,638,000) has
not been recognised as it is unlikely that there will be sufficient
future profits to utilise these expenses.
8 RETURN PER ORDINARY SHARE
|
Year
ended
31.12.20 |
Year
ended
31.12.19 |
| Revenue return per ordinary
share |
1.56p |
0.29p |
| Capital return per ordinary
share |
44.53p |
50.23p |
|
------------ |
------------ |
| Total return per ordinary share |
46.09p |
50.52p |
|
======= |
======= |
The return per ordinary share is based on the net return on
ordinary activities after taxation for the year divided by the
weighted average number of ordinary shares held outside Treasury
during the year, as shown below:
|
£’000 |
£’000 |
| Net revenue return on ordinary
activities after taxation |
2,054 |
397 |
| Net capital return on ordinary
activities after taxation |
58,631 |
67,482 |
|
------------ |
------------ |
| Net total return on ordinary
activities after taxation |
60,685 |
67,879 |
|
========== |
========== |
|
|
|
|
Number |
Number |
|
----------------- |
----------------- |
| Weighted average number of ordinary
shares held outside Treasury |
131,658,973 |
134,354,398 |
|
========== |
========== |
9 INVESTMENTS
|
2020
£’000 |
2019
£’000 |
| Listed investments |
297,505 |
245,423 |
| Unlisted investments |
5,497 |
3,676 |
|
------------ |
------------ |
| Investments at fair
value |
303,002 |
249,099 |
|
======= |
======= |
| Opening book cost |
192,261 |
171,050 |
| Opening investment holding
gains |
56,838 |
14,937 |
|
------------ |
------------ |
| Opening fair value |
249,099 |
185,987 |
|
======= |
======= |
| Movements in the year |
|
|
| Purchases at cost |
171,488 |
134,440 |
| Sales - proceeds |
(156,120) |
(124,310) |
| Gains on investments |
38,535 |
52,982 |
|
------------ |
------------ |
| Closing fair value |
303,002 |
249,099 |
|
======= |
======= |
| Closing book cost |
226,195 |
192,261 |
| Closing investment holding
gains |
76,807 |
56,838 |
|
------------ |
------------ |
| Closing fair value |
303,002 |
249,099 |
|
======= |
======= |
The Company received £156,120,000 (2019: £124,310,000) from
investments sold in the year. The book cost of these investments
when they were purchased was £137,554,000 (2019: £113,229,000).
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.
Investment transaction costs
Transaction cost incurred in the acquisition and disposal of
investments, which are included in the gains on investments above,
were as follows:
|
Year
ended
31.12.20
£’000 |
Year
ended
31.12.19
£’000 |
| Purchases transaction costs |
72 |
52 |
| Sales transaction costs |
60 |
55 |
|
------------- |
------------- |
|
132 |
107 |
|
======== |
======== |
The portfolio turnover for the year was 66.9% (2019: 68.7%). The
portfolio turnover rate measures the Company’s trading activity. It
is calculated by taking the average of the total amount of
securities purchased and the total amount of the securities sold in
the reporting year divided by the average fair value of the
investment portfolio of the Company.
10 DERIVATIVE INSTRUMENTS
|
Year
ended
31.12.20
£’000 |
Year
ended
31.12.19
£’000 |
| Gains on derivative
instruments |
|
|
| Gains on long CFD positions
closed |
22,492 |
5,922 |
| Movement in investment holding
(losses)/gains on long CFDs |
(132) |
8,233 |
|
------------- |
------------- |
|
22,360 |
14,155 |
|
======== |
======== |
Derivative instruments recognised on
the Balance Sheet
|
2020 |
2019 |
Fair value
£’000 |
Portfolio
exposure
£’000 |
Fair value
£’000 |
Portfolio
exposure
£’000 |
| Derivative instrument assets – long
CFDs |
1,932 |
71,273 |
3,048 |
39,975 |
| Derivative instrument liabilities –
long CFDs |
(91) |
7,013 |
(1,075) |
6,286 |
|
------------- |
------------- |
------------- |
------------- |
|
1,841 |
78,286 |
1,973 |
46,261 |
|
======== |
======== |
======== |
======== |
11 DEBTORS
|
2020
£’000 |
2019
£’000 |
| Securities sold for future
settlement |
404 |
621 |
| Accrued income |
166 |
205 |
| Other debtors and prepayments |
98 |
73 |
|
------------- |
------------- |
|
668 |
899 |
|
======== |
======== |
12 OTHER CREDITORS
|
2020
£’000 |
2019
£’000 |
| Securities purchased for future
settlement |
689 |
385 |
| Creditors and accruals |
373 |
291 |
|
------------- |
------------- |
|
1,062 |
676 |
|
======== |
======== |
13 SHARE CAPITAL
|
2020 |
2019 |
Number of
shares |
£’000 |
Number of
shares |
£’000 |
| Issued, allotted and fully
paid |
|
|
|
|
| Ordinary shares of 25 pence each
held outside Treasury |
|
|
|
|
| Beginning of the year |
133,207,090 |
33,302 |
135,136,195 |
33,784 |
| Ordinary shares repurchased into
Treasury |
(2,652,164) |
(663) |
(1,929,105) |
(482) |
|
-------------- |
-------------- |
-------------- |
-------------- |
| End of the year |
130,554,926 |
32,639 |
133,207,090 |
33,302 |
|
======== |
======== |
======== |
======== |
| Issued, allotted and fully
paid |
|
|
|
|
| Ordinary shares of 25 pence each
held in Treasury* |
|
|
|
|
| Beginning of the year |
2,954,605 |
739 |
1,025,500 |
257 |
| Ordinary shares repurchased into
Treasury |
2,652,164 |
663 |
1,929,105 |
482 |
| End of the year |
5,606,769 |
1,402 |
2,954,605 |
739 |
|
======== |
======== |
======== |
======== |
| Total share capital |
|
34,041 |
|
34,041 |
|
======== |
======== |
======== |
======== |
* Ordinary shares held in Treasury carry
no rights to vote, to receive a dividend or to participate in a
winding up of the Company.
The Company repurchased 2,652,164 ordinary shares (2019:
1,929,105 shares) and held them in Treasury. The £4,370,000 (2019:
£2,918,000) cost of repurchase was charged to the other
reserve.
14 CAPITAL AND RESERVES
|
Share capital
£’000 |
Share premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Other reserve
£’000 |
Capital reserve
£’000 |
Revenue
reserve
£’000 |
Total
shareholders’
funds
£’000 |
| At 1 January 2020 |
34,041 |
20,722 |
2,767 |
52,815 |
156,520 |
(14,374) |
252,491 |
| Gains on investments (see Note
9) |
– |
– |
– |
– |
38,535 |
– |
38,535 |
| Gains on derivative instruments (see
Note 10) |
– |
– |
– |
– |
22,360 |
– |
22,360 |
| Foreign exchange losses |
– |
– |
– |
– |
(475) |
– |
(475) |
| Investment management fees (see Note
4) |
– |
– |
– |
– |
(1,677) |
– |
(1,677) |
| Other expenses (see Note 5) |
– |
– |
– |
– |
(8) |
– |
(8) |
| Finance costs (see Note 6) |
– |
– |
– |
– |
(104) |
– |
(104) |
| Revenue return on ordinary
activities after taxation for the year |
– |
– |
– |
– |
– |
2,054 |
2,054 |
| Repurchase of ordinary shares (see
Note 13) |
– |
– |
– |
(4,370) |
– |
– |
(4,370) |
|
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
-------------- |
| At 31 December 2020 |
34,041 |
20,722 |
2,767 |
48,445 |
215,151 |
(12,320) |
308,806 |
|
======== |
======== |
======== |
======== |
======== |
======== |
======== |
The capital reserve balance at 31
December 2020 includes investment holding gains on
investments of £76,807,000 (2019: gains of £56,838,000) as detailed
in Note 9 above. See Note 2 (p) above for further details. The
capital reserve is distributable by way of dividend. The revenue
reserve could be distributed by way of dividend if it were not in
deficit.
15 NET ASSET VALUE PER ORDINARY
SHARE
|
2020 |
2019 |
| Total shareholders’ funds |
308,806,000 |
252,491,000 |
| Ordinary shares held outside of
Treasury at year end |
130,554,926 |
133,207,090 |
| Net asset value per ordinary
share |
236.53p |
189.55p |
|
------------ |
------------ |
It is the Company’s policy that shares held in Treasury will
only be reissued at net asset value per ordinary share or at a
premium to net asset value per ordinary share and, therefore,
shares held in Treasury have no dilutive effect.
16 FINANCIAL INSTRUMENTS
MANAGEMENT OF RISK
The Company’s investment activities in pursuit of its objective
involve certain inherent risks. The Board confirms that there is an
ongoing process for identifying, evaluating and managing the risks
faced by the Company. The Board, with the assistance of the
Manager, has developed a risk matrix which, as part of the internal
control process, identifies the risks that the Company faces.
Principal risks identified are market, performance, economic,
geopolitical and natural disasters, economic, social and governance
(ESG), key person, discount control, gearing, currency, cybercrime
and pandemic risks. Other risks identified are tax and regulatory
and operational risks, including those relating to third party
service providers covering investment management, marketing and
business development, company secretarial, fund administration and
operations and support functions. Risks are identified and graded
in this process, together with steps taken in mitigation, and are
updated and reviewed on an ongoing basis. These risks and how they
are identified, evaluated and managed are shown in the Strategic
Report above.
This note refers to the identification, measurement and
management of risks potentially affecting the value of financial
instruments. The Company’s financial instruments may comprise:
· Equity shares held
in accordance with the Company’s investment objective and
policies;
· Derivative
instruments which comprise CFDs; and
· Cash, liquid
resources and short term debtors and creditors that arise from its
operations.
The risks identified arising from the Company’s financial
instruments are market price risk (which comprises interest rate
risk, foreign currency risk and other price risk), liquidity risk,
counterparty risk, credit risk and derivative instrument risk. The
Board reviews and agrees policies for managing each of these risks,
which are summarised below. These policies are consistent with
those followed last year.
MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and
reserves. In addition, the Company has a geared exposure to
Japanese equities through the use of long CFDs. The level of
gearing is reviewed by the Board and the Portfolio Manager. The
Company is exposed to a financial risk arising as a result of any
increases in yen interest rates associated with the funding of the
long CFDs.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed
to movements in interest rates are shown below:
|
2020
£’000 |
2019
£’000 |
| Exposure to financial instruments
that bear interest |
|
|
| Long CFDs – Portfolio exposure less
fair value |
76,445 |
44,288 |
| Exposure to financial instruments
that earn interest |
|
|
| Cash collateral held with
brokers |
21 |
– |
| Cash at bank |
4,336 |
1,196 |
|
4,357 |
1,196 |
|
------------ |
------------ |
| Net exposure to financial
instruments that bear interest |
72,088 |
43,092 |
|
======== |
======== |
Foreign currency risk
The Company’s net return on ordinary activities after taxation for
the year and its net assets may be affected by foreign exchange
movements because the Company has income and assets which are
denominated in yen whereas the Company’s functional currency is UK
sterling. The Company may also be subject to short term exposure
from exchange rate movements, for example, between the date when an
investment is purchased or sold and the date when settlement of the
transaction occurs. The Company does not hedge the sterling value
of investments or other net assets priced in yen by the use of
derivative instruments.
Three significant areas have been identified where foreign
currency risk may impact the Company:
· Movements in
exchange rates affecting the value of investments and long
CFDs;
· Movements in
exchange rates affecting short term timing differences; and
· Movements in
exchange rates affecting income received.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is
shown below:
Currency |
Investments
held at
fair value
£’000 |
Long
exposure to
derivative
instruments
£’000 |
Debtors1
£’000 |
Cash at
bank
£’000 |
2020
Total
£’000 |
| Japanese yen |
303,002 |
78,286 |
591 |
4,336 |
386,215 |
|
======== |
======== |
======== |
======== |
======== |
1 Debtors include cash collateral held with
brokers and excludes other debtors and prepayments of £98,000 which
are denominated in UK sterling.
Currency |
Investments
held at
fair value
£’000 |
Long
exposure to
derivative
instruments
£’000 |
Debtors1
£’000 |
Cash
at bank
£’000 |
2019
Total
£’000 |
| Japanese yen |
249,099 |
46,261 |
826 |
1,196 |
297,382 |
|
======== |
======== |
======== |
======== |
======== |
1 Excludes other debtors and prepayments of
£73,000 which are denominated in UK sterling.
Currency exposure of financial liabilities
The currency profile of these financial liabilities is shown
below:
Currency |
Other
creditors
£’000 |
2020
Total
£’000 |
| Japanese yen |
689 |
689 |
|
======== |
======== |
Currency |
Other
creditors
£’000 |
2019
Total
£’000 |
| Japanese yen |
385 |
385 |
|
======== |
======== |
Other price risk
Other price risk arises mainly from uncertainty about future prices
of financial instruments used in the Company’s business. It
represents the potential loss the Company might suffer through
holding market positions in the face of price movements. The Board
meets at least quarterly to consider the asset allocation of the
portfolio and the risk associated with particular industry sectors
within the parameters of the investment objective. The Portfolio
Manager is responsible for actively managing and monitoring the
existing portfolio, selected in accordance with the overall asset
allocation parameters described above, and seeks to ensure that
individual stocks also meet an acceptable risk/reward profile.
Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulties in meeting obligations associated with financial
liabilities. The Company’s assets mainly comprise readily
realisable securities and derivative instruments which can be sold
easily to meet funding commitments if necessary. Short term
flexibility, if required, is achieved by the use of a bank
overdraft.
Liquidity risk exposure
At 31 December 2020, the undiscounted
gross cash outflows of the financial liabilities were all repayable
within one year and consisted of derivative instrument liabilities
of £91,000 (2019: £1,075,000) and other creditors of £1,062,000
(2019: £676,000).
Counterparty risk
The long CFDs in which the Company invests are not traded on an
exchange but instead are traded between counterparties based on
contractual relationships, under the terms outlined in the
International Swaps and Derivatives Association’s (“ISDA”) market
standard derivative legal documentation. As a result, the Company
is subject to the risk that a counterparty may not perform its
obligations under the related contract. In accordance with the risk
management process which the Manager employs, the Manager will seek
to minimise such risk by only entering into transactions with
counterparties which it believes to have an adequate credit rating
at the time the transaction is entered into, by ensuring that
formal legal agreements covering the terms of the contract are
entered into in advance, and through adopting a counterparty risk
framework which measures, monitors and manages counterparty risk,
by the use of internal and external credit agency ratings and by
evaluating derivative instrument credit risk exposure.
Cash collateral
For derivative transactions, collateral is used to reduce the risk
of both parties to the contract. Collateral is managed on a daily
basis for all relevant transactions. At 31
December 2020, £1,082,000 (2019: £1,578,000) was held by UBS
AG in cash denominated in Japanese yen in a segregated collateral
account on behalf of the Company, to reduce the credit risk
exposure of the Company’s net unrealised profits on derivative
positions. £21,000 (2019: £nil), shown as cash collateral held with
brokers on the Balance Sheet, was held by the Company in a
segregated collateral account on behalf of the brokers, to reduce
the credit risk exposure of the Company’s net unrealised losses on
derivative positions. This collateral comprised of: J.P. Morgan
Securities plc £21,000 (2019: £nil) in cash denominated in Japanese
yen.
Credit risk
Financial instruments may be adversely affected if any of the
institutions with which money is deposited suffer insolvency or
other financial difficulties. All transactions are carried out with
brokers that have been approved by the Manager and are settled on a
delivery versus payment basis. Limits are set on the amount that
may be due from any one broker and are kept under review by the
Manager. Exposure to credit risk arises on unsettled security
transactions, long CFD contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use
of long CFDs are included within the risk categories disclosed
above. Long CFDs are used by the Manager to gain unfunded long
exposure to equity markets, sectors or single stocks. Unfunded
exposure is exposure gained without an initial outflow of capital.
The risk and performance contribution of long CFDs held in the
Company’s portfolio is overseen by the Manager’s experienced,
specialist derivative instruments team that uses portfolio risk
assessment and construction tools to manage risk and investment
performance.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at
31 December 2020, an increase of
0.25% in interest rates throughout the year, with all other
variables held constant, would have decreased the return on
ordinary activities after taxation for the year and decreased the
net assets of the Company by £180,000 (2019: decreased the return
and the net assets of the Company by £108,000). A decrease of 0.25%
in interest rates throughout the year would have had an equal but
opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates
at 31 December 2020, a 10%
strengthening of the sterling exchange rate against the yen, with
all other variables held constant, would have decreased the
Company’s net return on ordinary activities after taxation for the
year and decreased the Company’s net assets by £35,047,000 (2019:
decreased the Company’s net return and decreased the net assets by
£26,999,000). A 10% weakening of the sterling exchange rate against
the yen would have increased the Company’s net return on ordinary
activities after taxation for the year and increased the Company’s
net assets by £42,836,000 (2019: increased the net return and
increased the net assets by £32,999,000).
Other price risk – exposure to investments sensitivity
analysis
Based on the investments held and share prices at 31 December 2020, an increase of 10% in share
prices, with all other variables held constant, would have
increased the Company’s net return on ordinary activities after
taxation for the year and increased the net assets of the Company
by £30,300,000 (2019: increased the Company’s net return and
increased the net assets by £24,910,000). A decrease of 10% in
share prices would have had an equal and opposite effect.
Other price risk – net exposure to derivative instruments
sensitivity analysis
Based on the long CFDs held and share prices at 31 December 2020, an increase of 10% in the share
prices underlying the long CFDs, with all other variables held
constant, would have increased the Company’s net return on ordinary
activities after taxation for the year and increased the net assets
of the Company by £7,829,000 (2019: increased the Company’s net
return and increased the net assets by £4,626,000). A decrease of
10% in share prices would have had an equal and opposite
effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at
values which are not materially different to their fair values. As
explained in Notes 2 (j) and (k) above, investments and derivative
instruments are shown at fair value. In the case of cash and cash
equivalents, book value approximates to fair value due to the short
maturity of the instruments.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that
classifies its financial instruments measured at fair value at one
of three levels, according to the relative reliability of the
inputs used to estimate the fair values.
| Classification |
Input |
| Level 1 |
Valued using quoted prices in
active markets for identical assets |
| Level 2 |
Valued by reference to inputs other
than quoted prices included in level 1 that are observable (i.e.
developed using market data) for the asset or liability, either
directly or indirectly |
| Level 3 |
Valued by reference to valuation
techniques using inputs that are not based on observable market
data |
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. The valuation techniques
used by the Company are explained in Notes 2 (j) and (k) above. The
table below sets out the Company’s fair value hierarchy:
Financial assets at fair value through profit or loss |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
2020
Total
£’000 |
| Investments |
297,505 |
– |
5,497 |
303,002 |
| Derivative instrument assets |
– |
1,932 |
– |
1,932 |
|
------------ |
------------ |
------------ |
------------ |
|
297,505 |
1,932 |
5,497 |
304,934 |
|
======= |
======= |
======= |
======= |
| Financial liabilities at fair
value through profit or loss |
|
|
|
|
|
------------ |
------------ |
------------ |
------------ |
| Derivative instrument
liabilities |
– |
(91) |
– |
(91) |
|
======= |
======= |
======= |
======= |
Financial assets at fair value through profit or loss |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
2019
Total
£’000 |
| Investments |
245,423 |
– |
3,676 |
249,099 |
| Derivative instrument assets |
– |
3,048 |
– |
3,048 |
|
------------ |
------------ |
------------ |
------------ |
|
245,423 |
3,048 |
3,676 |
252,147 |
|
======= |
======= |
======= |
======= |
| Financial liabilities at fair
value through profit or loss |
|
|
|
|
|
------------ |
------------ |
------------ |
------------ |
| Derivative instrument
liabilities |
– |
(1,075) |
– |
(1,075) |
|
======= |
======= |
======= |
======= |
The table below sets out the movements in level 3 financial
instruments during the year:
|
Year
ended
31.12.20
level 3
£’000 |
Year
ended
31.12.19
level 3
£’000 |
| Beginning of the year |
3,676 |
– |
| Purchases at cost |
1,695 |
3,856 |
| Movement in investment holding
gains |
226 |
– |
| Foreign exchange movement |
(100) |
(180) |
|
------------ |
------------ |
| End of the year |
5,497 |
3,676 |
|
======= |
======= |
The level 3 investments held and the basis for their valuation
at 31 December 2020 are as
follows:
Coconala
Coconala operates a website to buy and sell knowledge, skills and
experience from users who are teaching in Japan. The valuation at 31 December 2020 is based on analysis of the
Company’s financial performance, benchmarking the position to a
range of comparable market data and the outlook for 2021 given the
impact of COVID-19. As at 31 December
2020, its fair value was £3,164,000 (2019: £2,774,000).
Since the end of the year, Coconala’s valuation has been increased.
See Note 19.
Innophys
Innophys develops elderly-care and welfare equipment designed to be
used as an exoskeleton for physical support in Japan. The valuation at 31 December 2020 is based on the Company
performance for 2020 and the outlook for 2021 given the impact of
COVID-19. As at 31 December 2020, its
fair value was £738,000 (2019: £902,000).
Moneytree
Moneytree develops personal asset management applications and
provides household account book applications and expense payment
applications in Japan. The
valuation at 31 December 2020 is
based on the cost of the investment when it was purchased in
April 2020 with consideration as to
whether there had been any significant developments impacting the
performance and future prospects of the company. As at 31 December 2020, its fair value was
£1,595,000.
17 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital
requirements. The financial resources of the Company comprise its
share capital and reserves, as disclosed in the Balance Sheet, and
its gearing which is achieved through the use of long CFDs.
Financial resources are managed in accordance with the Company’s
investment policy and in pursuit of its objective, both of which
are detailed in the Strategic Report in the Annual Report. The
principal risks and their management are disclosed in the Strategic
Report and in Note 16 above.
18 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative
Investment Fund Manager and has delegated portfolio management and
the role of company secretary to FIL Investments International
(“FII”), the Investment Manager. Both companies are Fidelity group
companies.
Details of the current fee arrangements are given in the
Directors’ Report in the Annual Report and in Note 4 above. During
the year, fees for portfolio management services of £2,035,000
(2019: £1,226,000) and secretarial and administration fees of
£50,000 (2019: £50,000) were payable to FII. At the Balance Sheet
date, fees for portfolio management services of £232,000 (2019:
£160,000) and secretarial and administration fees of £13,000 (2019:
£13,000) were accrued and included in other creditors. FII also
provides the Company with marketing services. The total amount
payable for these services during the year was £97,000 (2019:
£101,000). At the Balance Sheet date, marketing services of £6,000
(2019: £11,000) were accrued and included in other creditors.
Disclosures of the Directors’ interests in the ordinary shares
of the Company and Directors’ fees and taxable expenses relating to
reasonable travel expenses paid to the Directors are given in the
Directors’ Remuneration Report in the Annual Report. In addition to
the fees and taxable expenses disclosed in the Directors’
Remuneration Report, £15,000 (2019: £15,000) of Employers’ National
Insurance Contributions was also paid by the Company. As at
31 December 2020, Directors’ fees of
£14,000 (2019: £14,000) were accrued and payable.
19 POST BALANCE SHEET EVENT
On 19 March 2021, following a
successful initial public offering, Coconala listed on the Tokyo
Stock Exchange. As a result, the valuation increased by 351% from
£3,164,000 as at 31 December 2020 to
£14,269,000. If the increase in value had been applied at
31 December 2020, the net assets of
the Company would have increased by 3.6%.
ALTERNATIVE PERFORMANCE MEASURES
TOTAL RETURN
Total return is considered to be an Alternative Performance
Measure.
The tables below provide information relating to the NAVs and
ordinary share prices of the Company and the total returns for the
years ended 31 December 2020 and
31 December 2019.
2020 |
Net
asset
value per
ordinary
share |
Ordinary
share
price |
| 31 December 2019 |
189.55p |
177.00p |
| 31 December 2020 |
236.53p |
220.50p |
|
------------ |
------------ |
| Total return for the
year |
+24.8% |
+24.6% |
|
======= |
======= |
2019 |
Net
asset
value per
ordinary
share |
Ordinary
share
price |
| 31 December 2018 |
138.77p |
127.00p |
| 31 December 2019 |
189.55p |
177.00p |
|
------------ |
------------ |
| Total return for the year |
+36.6% |
+39.4% |
|
======= |
======= |
Ongoing charges
Ongoing charges are considered to be an Alternative Performance
Measure. The ongoing charges ratio has been calculated in
accordance with guidance issued by the AIC as the total of
investment management fees and other expenses expressed as a
percentage of the average net asset values throughout the year.
|
2020 |
2019 |
| Investment management fees
(£’000) |
1,787 |
1,555 |
| Other expenses (£’000) |
605 |
600 |
| Ongoing charges (£’000) |
2,392 |
2,155 |
| Variable management fee (£’000) |
248 |
(329) |
| Average net assets (£’000) |
255,394 |
222,332 |
| Ongoing charges ratio |
0.94% |
0.98% |
|
------------ |
------------ |
| Ongoing charges ratio including
variable management fee |
1.04% |
0.83% |
|
======= |
======= |
Gearing
Gearing is considered to be an Alternative Performance Measure. See
the Fair Value and Portfolio Exposure of Investments table in the
Annual Report for details of the Company’s gearing.
The Annual Financial Report Announcement is not the Company's
statutory accounts. The above results for the year ended
31 December 2020 are an abridged
version of the Company's full Annual Report and Financial
Statements, which have been approved and audited with an
unqualified report. The 2019 and 2020 statutory accounts received
unqualified reports from the Company's Auditor and did not include
any reference to matters to which the Auditor drew attention by way
of emphasis without qualifying the reports and did not contain a
statement under s.498 of the Companies Act 2006. The financial
information for 2019 is derived from the statutory accounts for
2019 which have been delivered to the Registrar of Companies. The
2020 Financial Statements will be filed with the Registrar of
Companies in due course.
A copy of the Annual Report will shortly be submitted to the
National Storage Mechanism and will be available for inspection at:
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders next month and
additional copies will be available from the registered office of
the Company and on the Company's website:
www.fidelityinvestmenttrusts.com where up to date
information on the Company, including daily NAV and share prices,
factsheets and other information can also be found.
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.
ENDS