Prospect Japan Fund Ld Proposed Change in Investment Policy (0320Z)

TIDMPJF

RNS Number : 0320Z

Prospect Japan Fund Ld

31 January 2014

The Prospect Japan Fund Limited

Proposed change of investment policy and publication of circular

Introduction

The Prospect Japan Fund Limited (the "Company) announces that it has today published a Circular relating to approval by the Company's Shareholders of a proposed amendment to the Company's investment restrictions. A copy of the Circular will be submitted to the National Storage Mechanism and will shortly be available at: http://www.morningstar.co.uk/uk/NSM

The Chairman's Letter in respect of the Proposals, as contained in the Circular, is set out below and terms used and not defined in this announcement bear the meaning given to them in the Circular to be published today.

Chairman's Letter

"Dear Sir or Madam

NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Following the change in the investment environment in Japan since the Company's launch in 1994, and in light of the Manager's view of the country's investment outlook, the Board has concluded that the Company's investment remit should be expanded. The vast majority of listed Japanese companies are now completely debt-free, whilst many companies have net cash in excess of their market capitalisation or net book value of real estate over two times their market capitalisation. The Manager therefore believes an opportunity exists to realise value for Shareholders through taking larger positions in investee companies, with a view to engaging with/making changes to management or initiating corporate actions such as buybacks, asset sales or reconstructions. The Board is fully supportive of the Manager being permitted to take advantage of investment opportunities on a larger scale and with a focus on absolute return.

The Board therefore wishes to seek Shareholder approval for an amendment to the Company's investment restrictions.

It is proposed to amend the Company's investment restrictions by increasing the amount that the Company may invest or lend in securities of any one company or single issuer (other than obligations of the Japanese Government or its agencies or of the US Government or its agencies) from up to 10 per cent of its assets to up to 25 per cent.

In addition it is proposed to remove in their entirety the restrictions on:

(a) the amount the Company may invest in non-corporate investments or securities not listed or quoted on any recognised stock exchange, for which purpose securities quoted on any of the Japanese Stock Markets will be treated as securities quoted on a recognised stock exchange; and

(b) the Company investing where the investment would result in the Company holding more than 10 per cent of the issued share capital of that company or of any class of that company's share capital, unless that company constitutes a trading company (for the purposes of the relevant United Kingdom legislation) where the investment would result in the Company holding 50 per cent or more of the issued share capital of that company or of any class of that company's share capital.

It is also proposed to introduce a new restriction in relation to investment in other closed end investment funds listed on the Official List and formalise the Company's gearing policy. The Company may use gearing from time to time amounting to not more than 20 per cent. of the Company's net asset value. Although the Company does not have a borrowing facility at the present time, it has utilised modest levels of gearing in the past and the use of gearing within this limit in the future will be subject to prior approval of the Board.

Finally, since the Company's portfolio is not managed to a benchmark, it is proposed to state in the investment objective that performance is measured against the MSCI Japan Small Cap Index (Total Return) for comparison purposes only.

The Existing Investment Objective, Policy and Restrictions and the proposed New Investment Objective, Policy and Restrictions are set out in full below.

EXISTING INVESTMENT OBJECTIVE, POLICY AND RESTRICTIONS

Investment Objective

The Company's investment objective is to achieve long-term capital growth from a portfolio of securities primarily of smaller Japanese companies listed or traded on Japanese Stock Markets. The aim will be to achieve a long-term capital return on the Company's portfolio in excess of the return on the Tokyo Stock Exchange Section Index (TSE Second Index) and the Japan OTC Index (OTC Index) calculated in US Dollars. Dividend income will be a secondary consideration in making investment decisions.

Investment Policy

The Company's investment policy is that it will invest mainly in shares, but may also invest in equity related instruments such as convertible bonds or warrants issued by smaller Japanese companies and debt instruments.

The Company may invest not more than 10 per cent of the net asset value of the Company in unlisted securities which are not registered for trading on or quoted on any of the Japanese Stock Markets. It is the intention of the Directors that such investments should only be made where either a listing or an alternative form of realising the investment can be expected within a reasonable period of time. Within these parameters, the assets of the Company may be used to provide venture or start-up capital (but no investment will carry unlimited liability). The balance of the assets of the Company not invested in securities will normally be invested in short-term debt securities and money market instruments or placed on deposit.

The assets of the Company will be denominated principally in Japanese Yen. It is not the present intention of the Directors to hedge the currency exposure of the Company, but the Directors reserve the right to do so in the future if they consider this to be desirable.

It is intended that the principal investment objective and policies of the Company as set out above will remain in force until determined by the Directors and any material change in the policies will only be made with shareholder approval.

Investment Restrictions

It is the intention to observe the investment restrictions necessary to maintain a listing for the Company as an investment company on the London Stock Exchange and for the Company to be able to obtain certification as a distributing fund if subject to the applicable United Kingdom taxation legislation (and subject to other conditions of that legislation, see Taxation below). For these purposes and for other policy considerations, the Company will not:

(a) invest in securities carrying unlimited liability; or

(b) deal short in securities; or

   (c)   take legal or management control of investments in its portfolio; or

(d) invest in any commodities, land or interests in land; or

(e) invest or lend more than 10 per cent of its assets in securities of any one company or single issuer (other than obligations of the Japanese Government or its agencies or of the US Government or its agencies); or

(f) invest more than 10 per cent of its assets in non-corporate investments or securities not listed or quoted on any recognised stock exchange, for which purpose securities quoted on any of the Japanese Stock Markets will be treated as securities quoted on a recognised stock exchange; or

(g) invest in any company where the investment would result in the Company holding more than 10 per cent of the issued share capital of that company or of any class of that company's share capital, unless that company constitutes a trading company (for the purposes of the relevant United Kingdom legislation) in which case the Company may not make any investment that would result in its holding 50 per cent or more of the issued share capital of that company or of any class of that company's share capital; or

(h) invest in more than 5 per cent of its assets in units of unit trusts or shares or other forms of participation in managed open-ended investment vehicles; or

(i) commit its assets in the purchase of foreign exchange contracts or financial futures contracts or put or call options or in the purchase of securities on margin other than in connection with or for the purpose of hedging transactions effected on behalf of the Company.

NEW INVESTMENT OBJECTIVE, POLICY AND RESTRICTIONS

Investment Objective

The Company's investment objective is to achieve long-term capital growth from a portfolio of securities primarily of smaller Japanese companies listed or traded on Japanese Stock Markets. The aim will be to achieve a long-term capital return on the Company's portfolio and dividend income will be a secondary consideration in making investment decisions. Although the Company is not managed to a benchmark, it measures its performance against the MSCI Japan Small Cap Index (Total Return) for comparison purposes only.

Investment Policy

It is the intention of the Directors that investments in unlisted securities which are not registered for trading on or quoted on any of the Japanese Stock Markets should only be made where either a listing or an alternative form of realising the investment can be expected within a reasonable period of time. Within these parameters, the assets of the Company may be used to provide venture or start-up capital (but no investment will carry unlimited liability). The balance of the assets of the Company not invested in securities will normally be invested in short-term debt securities and money market instruments or placed on deposit.

Investment Restrictions

(a) invest in securities carrying unlimited liability; or

(b) deal short in securities; or

   (c)   take legal or management control of investments in its portfolio; or

(d) invest in any commodities, land or interests in land; or

(e) invest or lend more than 25 per cent of its assets at the time the investment is made in securities of any one company or single issuer (other than obligations of the Japanese Government or its agencies or of the US Government or its agencies); or

(f) invest more than 10 per cent of its assets at the time the investment is made in closed-end investment funds which are listed on the Official List maintained by the Financial Conduct Authority (except to the extent that those investment funds have stated investment policies to invest no more than 15 per cent of their total assets in other investment funds which are listed on the Official List) and the Company will not invest more than 15 per cent of its assets at the time the investment is made in such funds; or

(g) invest in more than 5 per cent of its assets at the time the investment is made in units of unit trusts or shares or other forms of participation in managed open-ended investment vehicles; or

(h) commit its assets in the purchase of foreign exchange contracts or financial futures contracts or put or call options or in the purchase of securities on margin other than in connection with or for the purpose of hedging transactions effected on behalf of the Company; or

(i) enter into borrowings in excess of 20 per cent. of net assets at the time the borrowings are drawn down.

A black line showing the changes to the Existing Investment Objective, Policy and Restrictions is set out in Appendix A, which forms part of this Circular.

RISKS ASSOCIATED WITH THE PROPOSALS

The effect of the proposed amendments to the Company's investment restrictions, if approved, will be to potentially increase the Company's risk profile in the followings ways:

   --     creating a more concentrated portfolio, with greater exposure to unquoted stocks; 
   --     increasing the likelihood of the Company holding illiquid positions; 
   --     reducing index correlation;

-- facing opposition from investee companies to shareholder activism and possibly adopting poison pill defences and/or dilutive share issues which could lead to the forced sale of the Company's holding;

-- greater costs incurred by the Company participating in corporate actions where assets are invested and an exit strategy is not successful and/or Shareholder value is not realised; and

   --     in general, the volatility of the Company's performance may be increased.

By contrast, in the view of the Manager, should the Proposals not be approved by Shareholders, the pool of available investments will be greatly reduced and the potential to realise value for Shareholders in accordance with the Existing Investment Objective of achieving long term value is likely to be significantly less.

Notwithstanding the risks identified above, in accordance with Listing Rule 15.2.8R, the Company will continue to ensure risk is diversified within its portfolio by monitoring the Manager's compliance with the exposure limits set out in the proposed new investment restrictions which notably include new limits in respect of investments in closed-end investment funds and the introduction of a formal gearing policy.

FREE FLOAT

The Company has recently become aware that it is currently in breach of Listing Rule 6.1.19R which states that at least 25 per cent. of a listed company's issued share capital must be held in public hands and that shares held by any person or persons in the same group or persons acting in concert who have an interest in 5 per cent. or more of the shares are not deemed to be in public hands.

In accordance with Listing Rule 9.2.16R, the Company has informed the Financial Conduct Authority ("FCA") that, given the size of the combined shareholdings of its top Shareholders, the Company is currently not able to comply with the shares in public hands requirement and it remains in consultation with the FCA regarding this issue.

The Board, in conjunction with its financial adviser and broker, Westhouse Securities Limited, is currently considering all possible and appropriate options for redressing the Company's current free float position. The Company intends to keep the FCA and its Shareholders regularly appraised of the issue. In the event that the Company is unable to rectify the breach of the free float requirement and therefore no longer satisfies its continuing obligations for listing, the FCA may unilaterally cancel the listing of the Company's Shares on the premium segment of the Official List and the admission to trading of the Company's Shares on the London Stock Exchange.

EXTRAORDINARY GENERAL MEETING

Under the Listing Rules the Company is required to seek the approval of Shareholders for any material change to its investment policy. Therefore an ordinary resolution to approve the changes to the Existing Investment Objective, Policy and Restrictions will be proposed at the EGM. The full text of the Resolution is set out in the notice of EGM at the end of this Circular.

All Shareholders are entitled to attend and vote at the EGM. In accordance with the Articles, all Shareholders present in person or by proxy shall upon a show of hands have one vote and upon a poll shall have one vote in respect of each Share held. In order to ensure that a quorum is present at the EGM, it is necessary for two or more Shareholders holding 5 per cent or more of the voting rights applicable to such meeting to be present in person or by proxy (or, if a corporation, by a representative).

RESOLUTION

You will find set out at the end of this Circular, a notice convening an EGM of the Company to be held at 10.00 a.m. on Wednesday 5 March 2014. The Resolution to be proposed at the EGM to amend the investment restrictions of the Company will be proposed as an ordinary resolution.

All persons holding Shares at 10.00 a.m. on Monday 3 March 2014, or if the EGM is adjourned, on the register of Shareholders of the Company 48 hours before the time of any adjourned EGM, shall be entitled to attend, speak and vote at the EGM and shall be entitled on a poll to one vote per Share held.

ACTION TO BE TAKEN

Appointment of proxy

Whether or not you intend to attend the EGM you should ensure that your Proxy Appointment is returned in hard copy form by post, by courier or by hand to the Company's registrars, Computershare Investor Services (Jersey) Limited, c/o The Pavilions, Bridgewater Road, Bristol BS99 6ZY by no later than 48 hours before the time for holding of the EGM. To be valid, the relevant Proxy Appointment should be completed in accordance with the instructions accompanying it and lodged with the Company's registrars by the relevant time.

Completion and return of the Proxy Appointment will not affect a Shareholder's right to attend, speak and vote at the EGM.

RECOMMENDATION

Your Board is of the opinion that the Proposals are in the best interests of the Company and its Shareholders as a whole and unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the EGM.

Yours faithfully

John Hawkins

Chairman"

 
Enquiries: 
Northern Trust International Fund Administration Services (Guernsey) 
 Limited 
 Franczeska King 
 +44 (0) 1481 745918 
 
 Westhouse Securities Limited 
 Alastair Moreton / Hannah Young / Darren Vickers 
 +44 (0) 20 7601 6118

This information is provided by RNS

The company news service from the London Stock Exchange

END

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