Company Announcements

Over the year to 31 August 2021, The Baillie Gifford Japan Trust PLC's net asset value total return^† (after deducting borrowings at fair value) was 20.9% compared to the benchmark TOPIX index total return (in sterling terms) which was 16.3%. In this period the Company's share price total return was 25.7%.

·    The largest positive contributors to performance over the year came from physical-world businesses whilst negative contributions mainly came from the internet area

·    The Board is recommending a dividend of 6.00p per share, an increase of 33.3% on last year's 4.50p

·    This year marks the 40^th anniversary of the trust. Since inception to 31 August 2021, the Company's NAV total return is 10.6% per annum compared to the TOPIX total return of 4.7% per annum

·    The Managers continue to believe in the power of a diversified mix of quality growth companies to deliver a good return to shareholders over the long-term

†   For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Source: Refinitiv/Baillie Gifford. See disclaimer at the end of this announcement.

The Baillie Gifford Japan Trust PLC aims to achieve long term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth. At 31 August 2021, the Company had total assets of £1,097.6m (before deduction of bank loans of £142.2m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £330bn under management and advice as at 12 October 2021.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. The Trust has borrowed money to make further investments (sometimes known as 'gearing' or 'leverage'). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Company will make a loss. If the Trust's investments fall in value, any invested borrowings will increase the amount of this loss. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at japantrustplc.co.uk.

Legal Entity Identifier: 54930037AGTKN765Y741

13 October 2021

For further information please contact:

Alex Blake - Client Director

Baillie Gifford & Co

Tel: 0131 275 2859

Mark Knight, Four Communications

Tel: 0203 697 4200 or 07803 758810

Last year, I reported on an extraordinary year.  The news flow was dramatic, speculation about the effects of Covid on the economy was causing enormous volatility but at least the equity market, which had plunged, continued its powerful resurgence which had begun in the spring.

This year has been characterised by a continuing strong recovery in share prices with normal concerns such as earnings trends being swept aside.  By the end of the last financial year our benchmark (the TOPIX total return in sterling terms) had recovered most of its lost ground.   The rally continued into the beginning of this calendar year before peaking in early 2021.   Since then, the market has traded within a band as investors wait for greater clarity.

Performance

In the year to 31 August, after deducting borrowings at fair value, the net asset value total return was 20.9%.  The discount, which started the year at 2.7%, moved to a premium of 1.1% leading to a share price total return of 25.7% (please see Total Return calculations at the end of this announcement).  The Benchmark total return was 16.3% over the same period.

I am not sure that there is much merit in relaying more than the bare facts about a market that fell and rebounded just as sharply.  Instead, I thought I should write about other outcomes, which, I am glad to say, were favourable for shareholders.  

First, I want to show you the returns over longer periods shown in the following table.

Compound annual returns to end of August                      5 years                                10 years

Net asset value total return (borrowings at fair value)        13.7%                                    16.8%

Share price total return                                                       14.7%                                    18.2%

TOPIX total return                                                               10.3%                                    11.2%     

After a static six months, it's instructive to reflect on longer term performance which has beaten the index and inflation handsomely. 

The Trust is enjoying its 40th Birthday this year and I thought it would be appropriate to show the performance over the period it's been in existence.

Since inception of the Trust 15 December 1981 to 31 August 2021         

I'd like to offer my sincere thanks to all the people who have helped build this tremendous record.

Gearing and borrowing        

The Board believes that borrowing will enhance returns to investors over medium and long term periods.  Borrowing normally sits at a reasonable level and will fluctuate modestly, driven by portfolio transactions. But last year was very unusual.  We had no idea what to expect and decided that the normal level of gearing was not appropriate.  A year ago, gearing was reduced to just over 4%.  By the end of August, our confidence had grown enough to allow us to raise gearing to 10%, a more normal, but not high level, reflecting a continuing high degree of uncertainty.

Portfolio Revenue and Dividend

When I started investing in Japan over 40 years ago, it was all about capital growth.   There was very little dividend income and certainly not enough to encourage investment in the stock market.  It is therefore pleasing to be able to report that gross revenues rose from £15,337,000 last year to £17,224,000 in the twelve months to 30 August 2021.   That's an increase of 12.3%.  Given that this was the outcome in a year of a battered economy, this is encouraging. 

Expenses rose by 23.1% during the year from £4,970,000 to £6,118,000.  This appears high, but most of the increase was in the fee paid to your managers reflecting the sharp recovery in the portfolio's value. 

The Trust's aim is to achieve long term capital growth. However, in order to qualify as an investment trust, the Company is not permitted to retain more than 15% of eligible investment income arising during any accounting period. Accordingly, the board's policy is to pay a single yearly dividend to satisfy this statutory requirement.

With buoyant revenues in this period, I am pleased to tell you that the board is recommending a dividend of 6.00p per share, an increase of 33.3% on last year's 4.50p.  This will be put to shareholders for approval at the Annual General Meeting to be held on 16 December 2021 and, if approved, will be paid on 21 December to shareholders on the register at close of business on 12 November 2021.   A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the company. For those shareholders electing to receive the DRIP, the last date for receipt of election is 30 November 2021 

With more companies actively wanting to raise their dividends, I hope we will have more good news to report next year.

Share Capital and Discount Management

Last year I wrote about the advantages Investment Trusts enjoy over open ended funds.  I also wrote that the Board had actively bought back shares when the opportunity arose in March 2020.  I know from speaking to shareholders that they expect us to exercise our right to buy shares back and I was pleased to have an opportunity to do just that.  This year, we issued 2,470,000 shares raising £26,500,000 to invest. At year end, your Trust was at a 1.1% premium to its NAV, remaining well ahead of the sector average which was at a discount of 4.4%. 

Your Board believes it is important that the Company retains the power to buy back equity during the year and so, at the Annual General Meeting, is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury for cash on a non pre-emptive basis. Shares are issued/reissued only at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting and we would continue to issue shares only when at a premium to net asset value. This authority would expire at the conclusion of the Annual General Meeting in 2022.

Annual General Meeting

The Annual General Meeting of the Company is scheduled to be held at Baillie Gifford's offices in Edinburgh at 12.30pm on 16 December 2021.  I do sincerely hope this will be possible, but Covid-19 may not oblige.  The Board will monitor developments and may be unable to allow shareholders to attend in person. Accordingly, the Board encourages all shareholders to exercise their votes at the AGM by completing and submitting a form of proxy. We would encourage shareholders to monitor the Company's website at japantrustplc.co.uk where any updates will be posted and market announcements will also be made, as appropriate. Should shareholders have questions for the Board or the Managers or any queries as to how to vote, they are welcome as always to submit them by email to trustenquiries@bailliegifford.com or to call 0800 917 2112.

Information on the resolutions can be found on pages 58 and 59 of the Annual Report and Financial Statements. The Directors consider that all resolutions proposed are in the best interests of shareholders and the Company as a whole and recommend that shareholders vote in their favour.

In particular, shareholders have the right to vote annually on whether the Company should continue in business and will have the opportunity to do so again this year. Last year, the Company again received support for its continuation with 99.99% of votes cast in favour. Your Directors believe there are attractive opportunities in selected, well-run Japanese companies benefiting the long-term favourable outlook for the Japan Trust. To that end, my fellow Directors and I intend, where possible, to vote our own shareholdings in favour of the resolution and hope that all shareholders will feel disposed to do likewise.

Board

Martin Paling will retire after the AGM in December.  With his great investment experience, strong sense of humour and love of challenge, we shall miss him very much. David Kidd will replace Martin as the Company's Senior Independent Director. After a thorough search, we identified an excellent replacement in the form of Simon (Sam) Davis.  Sam has a degree in Japanese Studies from Trinity College, Oxford and after 12 years with Deutsche Group in London and Tokyo, worked for Putnam Investments in Boston and London.

Outlook

It's a relief to have ended the year with the share price fully recovered and growing revenues, suggesting dividends will continue to grow.  However, the future cannot be predicted and we gaze out onto a sea of uncertainties.  At the same time as the US seems to withdraw from its global commitments and China becomes more assertive, we also face growing alarm about the need to manage the environment a lot more carefully. Japan was not as well prepared to work from home as many parts of the rest of the world and so must invest accordingly. Her huge car industry needs to embrace the switch to electric cars and labour shortages will mean a global rush to invest in productivity. Japan has lost its dominance in semiconductor technology and manufacturing which needs to be addressed. The pandemic will encourage supply chains to be made a great deal more robust. On the political front, former foreign minister Fumio Kishida replaced Yoshihide Suga in October as President of the ruling Liberal Democratic Party and Prime Minister. Representing stability and continuity, Kishida is expected to follow a path of predictable, consensus driven and incremental change in economic and financial policy.

Other people would surely have identified many other changes in matters that we have become accustomed to. Change is good as it provides lots of investment opportunities and the Board is confident that Baillie Gifford will continue to exploit these to your advantage. 

Let me close by congratulating Baillie Gifford on a very successful forty year period of investment.

Keith Falconer

Chairman

13 October 2021

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

Inevitably this has been another year where the news has been dominated by the novel coronavirus.  At a very big picture level it may be that there are three things that we have learned so far.  First, there is a pandemic.  Second, effective vaccines have been created.  Third, the endgame will likely be a new endemic virus.  In many ways what we are seeing currently in the global economy are the consequences of different countries being at different states in their immunity levels and, even where immunity is high, echoes from the pandemic and the methods used to control it continuing to ripple through the economy.

We are pleased to report that Baillie Gifford, and therefore the Japanese team, are once again able to use the office on a regular basis.  While we have learned a great deal about how to work remotely we also believe that one of our key long-term competitive edges is the quality of discussion and debate in the team and therefore it is good to be able to strengthen the long-term bonds between team members with real-world interaction.  Equally, while it is convenient and easy to talk with company management on Zoom and similar tools, we are looking forward to being able to meet with management in person again both in Japan and Edinburgh.  Meanwhile, we are ably supported by our Japanese researchers in Tokyo. 

Performance

Japan is now making reasonable progress with its vaccination programme, following a slow start, and overall case numbers remain low by global standards.  It seems likely that Japan will enter the endemic phase of the coronavirus around the same time as many other developed economies.  However, the coronavirus pandemic has been a global issue.  For example, many of the suppliers to Japanese companies are based in South-East Asia where there continue, for now, to be significant virus-related problems.  Many supply chains are complex and the temporary lack of availability of some parts can have significant knock-on impacts.  Also, on the demand side, different parts of the globe have been emerging at varying speeds creating surges in demand for certain products at different times whilst supply is sometimes intermittent.  Unsurprisingly this combination is leading to short-term difficulties that may still take some time to resolve.  Our meetings with individual companies suggest that many are having to respond by adjusting product schedules, making design modifications, and increasing prices.  Capitalism is an effective system for meeting demand but, inevitably, it will take time for all the various problems to be worked through.     

Throughout this period corporate Japan has shown admirable resilience, as demonstrated by the continuing increases in dividends being paid by the holdings of your Company.  This determination by Japanese management to continue paying dividends is a significant improvement from their actions during the global financial crisis.  Coupled with the significant cash positions of many Japanese companies it cements our view that it is quite realistic to expect growth in dividends to exceed growth in earnings, perhaps for another decade.  While our focus remains on securing capital growth it is expected that growth businesses can provide a secure and growing income stream, and as mentioned in the Chairman's statement, this will lead to a further increase in the dividend paid to shareholders this year. 

During the year, the NAV total return per share (with the borrowings deducted at fair value) was 20.9%, exceeding the total return of the Company's benchmark which was 16.3%.  Over 5 years the NAV total return has outpaced the benchmark by 3.4% p.a. and over ten years by 5.6% p.a., demonstrating the benefit to shareholders of an active, long-term, growth-orientated approach to investing. 

The largest positive contributors to performance mainly came from physical-world companies where business conditions had improved from the very difficult times that many experienced late last year.  Outsourcing (a staffing company) was the leading contributor to performance.  Run by the energetic entrepreneur Mr Doi, it has grown and internationalised its business over time to reduce its vulnerability to economic shocks and it seems that the market now has a greater understanding of how the resilience has improved.  We also had significant contributions from Raksul (logistics and printing), DENSO (Toyota group electronics company), Misumi (dies and small parts) and Topcon (positioning systems) all of which are clearly companies with substantial physical-world operations.   

Significant negative contributions mainly came from the internet area.  The share prices of these businesses had been generally good performers in the previous year as they were resilient to the challenges of the novel coronavirus and, in some cases, benefitted from increased demand.  Notable names included long-standing holdings GMO Internet (internet conglomerate), Bengo4.com (lawyers website), last year's star Softbank (internet conglomerate) and newer holding GA Technologies (online real-estate).  Calbee (potato snacks) and Colopl (mobile phone gaming) were also significant negative contributors.  For each of these companies we retain conviction in the investment case. 

Portfolio Positioning

The observant will note that the position in Softbank Group is significantly smaller than last year.  This is due to a combination of underperformance of the shares over the 12 months and a net reduction to the position size.  We continue to regard it as an attractive long-term investment prospect but its weighting is now back under 5% of the portfolio, as is our general practice. 

Over the year we bought a total of seven new holdings and sold five, maintaining the low turnover that characterises our long-term approach to investing.  Since the Interim report, we took new holdings in Unicharm (nappies and sanitary products), BASE (e-commerce software) and TKP (serviced offices and conference rooms).  Although these companies have many differences, they each share the feature of significant inside ownership.  Unicharm's Takahara family own approximately 30% of the shares and are involved in the management of the business, while BASE's founder Mr Tsuroaka owns approximately 15% and TKP's founder Mr Kawano owns over 50%.  We have long believed that significant ownership by management helps to align their interests with outside shareholders and is one of the most effective means of ensuring that shareholder interests are high up the priority list.  Meanwhile, we sold the holdings in JAFCO (venture capital) and Zozo (e-commerce).  Consistent with the above comment on inside ownership, one of the long-term concerns with Zozo was the stepping down of Mr Maezawa, the founder, from the management of the company and his subsequent share sales which we believe are likely to reduce the entrepreneurialism of the company in the long-run.

Net gearing levels rose during the year and your Company ended the year with 10% net gearing, reflecting two factors.  First, the development of effective vaccines brought forward the likely date at which the novel coronavirus ultimately becomes one of many endemic viruses and gave a level of certainty that the worst of the problems would end.  Second, we found ourselves with more buying than selling ideas which always encourages us to invest the cash that we keep on hand.   

Outlook

It is sometimes easier to make long-term predictions than shorter ones.  It seems highly likely to us that the novel coronavirus pandemic will fade into being another of the many endemic virus outbreaks that affect humanity.  Similarly, it seems highly likely that the current waves of economic disruption that have flowed from it will ebb away over time.  However, we do not feel that we can say anything insightful on the detail of the journey to these outcomes.  

Similarly, in terms of the Trust itself: we continue to believe in the power of a diversified mix of quality growth companies to deliver a good return to shareholders over the long-term.  However, we can give no assurances on how the journey will go in the short-term.  What we can continue to do is to strive for ongoing improvement in the portfolio of your Company with a view to benefitting from the good business prospects of selected Japanese companies.

Baillie Gifford

13 October 2021

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.