Baillie Gifford Shin - Final Results

Over the year the Company's net asset value per share (after deducting borrowings at book value) fell by 6.1% compared to a 7.8% fall in the comparative index*. The share price fell by 7.2%.

In sterling terms over three years, the Company's comparative index is up 45.4%, whilst the net asset value (with borrowings at fair value) and share price are up by 83.8% and 91.0% respectively.

 

¾  Weak Chinese demand over the past year had a negative impact on some Japanese small caps.

¾  However, many of the rapid growth, online businesses that the Company owns performed well.

¾  Bengo4.com, which operates a website that connects lawyers with individuals and businesses seeking legal advice, was the largest positive contributor to performance.

¾  New investments included Raksul, which has developed an online, cloud-based system that connects service providers with clients in real-time; Akatsuki, a mobile gaming company; and Uzabase, a financial software company.

¾  The Company is seeking shareholder approval to permit investment in unlisted companies at a level of up to 10% of the portfolio (measured at time of investment).

 

Shin Nippon aims to achieve long term capital growth through investment principally in small Japanese companies which are believed to have above average prospects for growth. At 31 January 2019 the Company had total assets of £486.1m (before deduction of bank loans of £52.0m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £187 billion under management and advice as at 14 March 2019.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. The Company has borrowed money to make further investments. This is commonly referred to as gearing. The risk is that, when this money is repaid by the Company, the value of these investments may not be enough to cover the borrowing and interest costs, and the Company makes a loss. If the Company's investments fall in value, gearing will increase the amount of this loss. The more highly geared the Company, the greater this effect will be.

The year to 31 January 2019 was challenging for investors and the Company's net asset value per share* (NAV) and share price fell by 6.0% and 7.2% respectively, slightly ahead of the return of the comparative index (MSCI Japan Small Cap Index, total return in Sterling terms), which fell by 7.8%. 

Your Board continues to review performance over a rolling three-year period.  Over this period, the Company's NAV rose by 83.8% and its share price by 91.0% versus the comparative index return of 45.4%. 

At 31 January 2019 the premium of the share price over the net asset value was 8.0%, slightly lower than the 9.3% of the previous year. The Board continues to monitor this premium carefully and will continue to manage this imbalance between buyers and sellers by issuing shares appropriately as noted below.

 

Share Split and Share Issuance

The Interim Management Report in July acknowledged the subdivision of the ordinary shares of the Company.  This five for one split of five new ordinary shares of 2 pence replacing each ordinary share of 10 pence was approved at last year's AGM.

Also, during the year, the Company issued 36,025,000 shares (15.2% of share capital at 31 January 2018) at a premium to NAV raising net proceeds of £68.7m. The Board believes that both the share split and the continuing issuance of new shares will improve the liquidity of the stock and its appeal to a wider range of shareholders.

 

Borrowings

The Board continues to support the strategy of using gearing to enhance portfolio performance.  Gearing at both the start and end of the year remained fairly constant at 10.5% and 10.6% respectively.  Total borrowings throughout the year remained unchanged at ¥7.45bn.  During the year the Yen strengthened against Sterling by 8.4%. Last year it weakened by almost the same amount.  The Company continues with its policy of not engaging in currency hedging.

 

Revenue

During the year the Board announced a reduction in the annual management fee payable to Baillie Gifford & Co Limited, the Company's Managers and Secretaries.  With effect from 1 January 2019 the Company's annual management fee will be calculated at 0.75% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remainder (previously the first £50m tier was calculated at 0.95%). 

The revenue return per share increased from a deficit of 0.11p to a surplus of 0.04p.  Gross portfolio income rose by 45.7% but the management fee rose 34.7% due to the increase in average NAV over the year.  Certain other expenses increased by 17.8%.  That said, I am delighted that our ongoing charges fell from 0.89% to 0.77%.

 

AGM

At this year's AGM we are again seeking authority to issue new shares on a non pre-emptive basis of up to 10% of the issued share capital of the Company.  Any shares issued would be for cash and only at a premium to net asset value thus enhancing the net asset value to the existing shareholders.

As with issuing shares at a premium, the Board will again be seeking your approval to buy back shares should they start trading at a substantial discount either in absolute terms or in relation to its peers.  Similarly, if required this activity would enhance the net asset value attributable to existing shareholders.

This year, your Board proposes an additional resolution to amend the investment policy to permit investment in unlisted companies at a level of up 10% of the portfolio (at the time of purchase) and to increase the maximum number of holdings from 75 to 80.  Although we currently have made only one investment in an unlisted company, the Managers are seeing more unlisted opportunities and the Board is of the view that this is an appropriate moment to provide clarity for shareholders on the maximum level such investments might reach.

 

Governance

Francis Charig and Iain McLaren both retire from the Board at May's AGM.  Both have served the Company with great distinction and have seen the Company grow hugely to its present level.  Francis brought great knowledge and wisdom from his experience and Japanese contacts and Iain's control of Audit Committee matters has been exemplary.  Both individuals will be sadly missed.

I am delighted to report that Professor Sethu Vijayakumar and Jamie Skinner CA have been appointed to the Board.  Sethu is Professor of Robotics at Edinburgh University as well as a visiting professor at both Kyoto and Tokyo Universities.  Sethu not only speaks Japanese but also writes it!

Jamie will assume the role of Audit Committee Chairman.  Jamie spent most of his recent working career with Martin Currie in Edinburgh and I regard him as an investment trust professional. 

I welcome both Sethu and Jamie to the Board and look forward to working with them in the years ahead.

 

Outlook

As a UK listed company, the Board and Managers have considered the implications of Brexit. Around half of the Company's investments are domestically focussed within Japan and the remaining holdings have minimal exposure to the UK. The Board is therefore not concerned about the impact of Brexit on the portfolio. Although the Y/£ exchange rate may react according to the market's view on the Brexit outcome reached, which would affect the value of the Company's shares, its borrowings are denominated in Yen so any exchange movements impacting the loans would be more than offset by opposite exchange movements affecting the portfolio. Additionally, there is the possibility of turbulence on the London Stock Exchange. Spikes in supply or demand for the Company's shares can however, be managed by share issuance or buybacks as appropriate.    

More broadly, there seems to be greater uncertainty in the world regarding global growth than at any time over the last 10 years.  However, the Company's strategy of seeking to identify smaller Japanese companies with strong growth potential means that the performance is more dependent on the ability of those companies to take advantage of their opportunities than on the global economy.

Similar themes to last year are still prevalent.  There is still an ongoing labour shortage and access to experienced labour is arguably one of the biggest issues for companies in Japan.  Retaining staff and introducing mechanisms and technologies to assess employee satisfaction and reward performance are massive challenges.

There is some cyclical slowdown in certain sectors but corporate Japan's mood is generally positive but cautious. Inbound tourism remains strong and there is strong growth in infrastructure projects supporting the Rugby World Cup in 2019 and the Olympic and Paralympic Games in 2020.  Companies are also gradually seeing the need to invest capital expenditure for the future and are taking a less short-term view.

We remain positive.  The start up environment for companies on our radar is changing.  Government policies are more supportive.  There is generally better access to capital and more importantly there is a new attitude to creating wealth and starting exciting, disruptive technology businesses.  The Board and the Managers remain encouraged by the outlook.

Income statement (unaudited)

 

The following is the unaudited preliminary statement for the year to 31 January 2019 which was approved by the Board on 14 March 2019. No dividend is payable.

 

For the year ended

31 January 2019

For the year ended

31 January 2018

 

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

(Losses)/gains on investments*

(32,225)

(32,225)

108,387

108,387 

Currency (losses)/gains (note 2)

(3,875)

(3,875)

3,591

3,591 

Income

5,092 

5,092 

3,496 

-

3,496 

Investment management fee (note 3)

(2,871)

(2,871)

(2,131)

-

(2,131)

Other administrative expenses

(601)

(601)

(510)

-

(510)

Net return before finance costs and taxation

1,620 

(36,100)

(34,480)

855 

111,978

112,833 

Finance costs of borrowings (note 4)

(1,005)

(1,005)

(732)

-

(732)

Net return on ordinary activities before taxation

615 

(36,100)

(35,485)

123 

111,978

112,101 

Tax on ordinary activities

(509)

(509)

(350)

-

(350)

Net return on ordinary activities after taxation

106 

(36,100)

(35,994)

(227)

111,978

111,751 

Net return per ordinary share# (note 6)

0.04p

(13.98p)

(13.94p)

(0.11p)

52.31p

52.20p