THE PROSPECT JAPAN FUND LIMITED
ANNUAL REPORT AND AUDITED FINANCIAL
STATEMENTS
The financial information set out in this announcement does not
constitute the Company's statutory accounts for the year ended
31 December, 2016. All figures are
based on the Audited Financial Statements for the year ended
31 December, 2016, approved by the
Board of Directors on 21 March,
2017.
CHAIRMAN’S REPORT
for the year ended 31 December,
2016
Your Company has had a disappointing year with a decline in
published NAV of 9.49% compared with MSCI Japan Small Cap Index’s
increase of 8.22%. Furthermore, the share price has fallen from
$1.05 to $0.89 with an increased
discount to published NAV of 27% (2015: 23%).
Following the change of investment policy approved by the
shareholders in 2014, the Manager has moved towards an even more
concentrated portfolio of investments than in 2015. There is now a
strong weighting towards regional banks, two of which make up
slightly more than 50% by value of the portfolio. As of now the
portfolio is comprised of less than 10 investments including the
investment in Prospect Co. This strategy together with direct
engagement with investee company management is expected to bring
rewards in due course.
As announced on 10 January, 2017,
the Independent Directors of the Company are in preliminary
discussions regarding a possible offer from Prospect, Co. Ltd
(“Prospect”), a Japanese company listed on the Tokyo Stock Exchange
and the parent company of the Company’s Manager and Investment
Advisor, for the entire issued and to be issued share capital of
the Company. The possible offer is under consideration, discussion
and evaluation by both parties is a securities exchange offer at a
ratio of 2.5 Ordinary Prospect Shares in exchange for each share
held in the Company. Further details of the possible offer and the
strategic rationale for the proposed combination are available on
the Company’s website: www.prospectjapan.com.
The Board will assess any offer in relation to the takeover of
the Company in light of our objectives, which are to maximise share
value, minimise or eliminate discount to NAV and improve the
liquidity of our shares.
John Hawkins
Chairman
21 March,
2017
INVESTMENT ADVISOR’S REPORT
For the year ended 31 December, 2016
Market Performance (%), US$ NAV
1 Year
3
Year
5
Year
Prospect Japan
Fund
(2.59)/(9.49)*
(3.88)
45.88
MSCI Japan Small Cap Index
8.22
24.79
64.67
The Prospect Japan Fund Limited
inception date is 20 December 1994.
The above performance of the Fund is net of fees and expenses and
includes reinvestment of dividends and capital gains. (Source:
Prospect Asset Management, Inc.) 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. The MSCI Developed Markets Small Cap Indices offer an
exhaustive representation of this size segment by targeting
companies that are in the Investable Market Index but not in the
Standard Index in a particular developed market. The indices
include Value and Growth style indices and industry indices based
on the Global Industry Classification Standard (GICS®). (Source:
Bloomberg)
*Refers to
performance based on published NAV. Further information can be
found in Note 17.
Investment Manager’s Summary
The Prospect Japan Fund Limited’s (the “Company”) published NAV
performance decreased 9.49% in 2016 (2015: increase 19.13%) (the
performance based on valuations produced in accordance with
International Financial Reporting Standards (“IFRS”) decreased by
2.59% see the “Results and Dividend” section of the Directors’
Report for further information), underperforming the MSCI Japan
Small Cap Index’s 8.22% total return. The broader Japanese market
performed weakly for much of the year with Japanese equity markets
experiencing the worst start to a year on record, with six
consecutive days of trading losses reversing most of the gains seen
in the year to 31 December 2015. The
Nikkei 225 index reached lows last seen in 2013 before rallying
with the weaker yen following US elections in November.
Global equities entered 2016 with a risk-off period, dragged
down by massive selling in China.
Key oil gauges dropped to 12-year lows amidst an ongoing supply
glut, and the cloud of the Chinese economic slowdown drove yen
strength. Toward the end of H1, global currency and equity markets
were shaken when the United
Kingdom referendum on European Union membership ended with
an unexpected victory for “Leave”. The unexpected outcome of the US
presidential election shook global politics and markets, with acute
effects on Japanese bond yields and currency momentum.
The yen weakened significantly following the US election results
on expectations of inflationary fiscal policy in the US leading to
a faster normalization of Fed policy. The yen saw the largest
monthly decline versus the dollar since 1995 following the
election, with the dollar reaching JPY
116.64 at year end. The equity market rallied with the
weaker yen, entering a bull market from June lows.
While the details of a Trump administration’s policy outlook
remain clouded, some of the key issues regarding the Japanese
economy include a potentially stronger dollar, US abandonment of
the Trans-Pacific Partnership (“TPP”) and closer attention paid to
the China-backed Regional
Comprehensive Economic Partnership (“RCEP”), a 16-nation initiative
of Asian nations that excludes North and South American countries,
much as TPP excluded China.
Domestically, markets were dominated by turbulent changes to the
monetary and fiscal policy dimensions of “Abenomics”. The Bank of
Japan (“BoJ”) surprised the market
by adopting a negative interest rate policy in late January.
“Quantitative & Qualitative Monetary Easing with a Negative
Interest Rate” aimed to mirror the multi-tier system in place at
the Swiss National Bank, in which the negative rate is applied to a
portion of a financial institution’s current account balance.
The reaction in the market was swift, with the yen gaining
strongly, bond yields falling to record levels, and shares of
financials falling precipitously.
Quantitative & Qualitative Monetary Easing (“QQE”) with a
Negative Interest Rate
| Tier |
Description |
Interest Rate
Applied |
| Basic Balance |
Existing balances with Bank of
Japan |
+0.1% |
| Macro Add-on Balance |
Required reserves and reserves
related to BoJ lending support programs |
0.0% |
| Policy-Rate Balance |
Reserves in excess of above
tiers |
-0.1% |
By September, faced with concerns regarding the limitations of
monetary easing with increasingly evident side effects on financial
sector profits and limited success in achieving its 2% inflation
target, the BoJ adopted a new “QQE with Yield Curve Control”
framework following a comprehensive policy assessment. The BoJ left
its controversial negative interest rate policy intact, while
shifting the target of policy to the yield curve, and away from
fixed increases to the monetary base. Other adjustments included
the elimination of the JPY 80
trillion annual increase in monetary base, allowing the BoJ
to be flexible in its purchases depending on needed adjustments to
the yield curve. The central bank’s stated intention is to buy JGBs
in line with the current pace, but eliminated the target for
average maturity on JGB purchases.
The BoJ also announced an “inflation-overshooting commitment”,
stating that extraordinary policy will continue until inflation is
stable above the 2% target. The ETF purchase target remained stable
at 5.7 trillion, though 2.7 trillion was allotted for ETFs that
track the broader TOPIX index.
On the fiscal side, Prime Minster Shinzo Abe again elected to
delay the scheduled increase in the consumption tax rate (from 8%
to 10%) until October 2019, helping
to secure a landslide victory in the summer upper house elections,
winning a two-thirds super majority for the ruling coalition. The
administration subsequently announced a JPY
28.1 trillion economic stimulus package, including
JPY 7.5 trillion in net new
spending.
The Company’s holdings, with strong weightings towards Banks
(53.9%) and Real Estate (5.3%), are direct beneficiaries of the
continued support for fiscal and monetary stimulus by the Abe
administration and BoJ, with real estate prices supported by the
expectation of stable near- to mid-term low government bond yields
via BoJ yield control operations.
The recovery in the Tokyo
office market continues, with Miki
Shoji reporting that the average office vacancy in Tokyo’s
Central Business District (CBD) has fallen 42 basis points
year-on-year in 2016. Average rents rose 4.79% year-on-year in
2016, improved from the 4.36% improvement in 2015, and 19.0% below
the 2008 highs.
During the year, the Company received shareholder approval of
the Exercise Agreement, which allowed for the purchase of 1,440
stock acquisition rights (“SARs”) for Prospect Co. (3528). These
cost JPY 288 million. As of 2016 year
end, the Company had converted 90 of these SARs into 9 million
shares, leaving the Company with 1,350 SARs at a cost of
JPY 270 million which is equal to an
additional 135 million shares.
OUTPERFORMANCE
The largest positive contributors to 2016 performance came from
holdings in Fukushima Bank (8562)
and Daiwa Motor Transportation (9082). Fukushima Bank, a regional bank in Fukushima
prefecture, fell sharply in February along with other financial
shares due to the implementation of the BoJ’s negative interest
rate policy, but rallied strongly over the following months after
technical adjustments by the BoJ that increased the proportion of
current account funds that will be considered part of the “macro
add-on balance” not subject to the negative policy rate, and into
year-end after introduction of the central bank’s yield control
policy framework. Fukushima Bank,
the third largest bank in the Fukushima prefecture, could benefit
from the ongoing consolidation trend in the sector.
The Company raised its holding in Fukushima Bank (8562) during the year from 4.4%
of assets to 23.7%. The bank is similar in size and valuation to
Daito Bank (8563), with no large
institutional shareholders and is seen as a potential beneficiary
of ongoing regional bank consolidation. Fukushima prefecture is
particularly attractive, considering the positive impact of
recovery efforts and victim compensation. Residential land price
increases led the nation in 2015, and employment growth has been
stronger than the national average. Fukushima prefecture
manufactured goods output growth strongly outpaced the national
rate over the last few years, nearly regaining the share of total
national output seen in 2010, despite a nearly 6% population
decline.
Strategic investments bore fruit during the year, with Daiwa
Motor Transportation (9082), a provider of taxi and chartered
limousine services, buying back 1.24 million shares from the
Company at the 15 June closing price of JPY
553 per share.
In March 2016, the Tokyo High
Court announced its decision on the appeal involving the Toho
(9602) tender offer bid of Toho Real Estate (8833). The High Court
ruled that the tender offer price amounted to fair value and has
therefore eliminated the award of JPY
100 per share decided by The Tokyo District Court. The Company summarily
submitted an appeal of the High court decision to the Supreme
Court, which accepted the request for appeal in June 2016.
In October 2016, the Niigata
District Court announced its decision to uphold the fairness of the
JPY 245 per share squeeze out price
of Yukiguni Maitake (1378), a manufacturer and seller of fresh
mushrooms and bean sprouts, by Bain Capital. The Company has
submitted an appeal to the District Court decision.
UNDERPERFORMANCE
Holdings resulting in outsized contribution to negative
performance during the period include Daito
Bank (8563) and Shaklee Global Group (8205). Daito Bank, a regional bank based in Fukushima
prefecture, underperformed during the year, after massive
outperformance of the overall bank sector in 2015. The bank fell
sharply in February along with other financial shares due to the
implementation of the BoJ’s negative interest rate policy and
subsequent downward pressure on loan interest and investment
revenue. Daito Bank, the second
largest bank in the Fukushima prefecture, could benefit from the
ongoing consolidation trend in the sector.
Shaklee Global Group, a seller of nutrition and personal care
products, fell during the year due to sluggish revenue and profits
from Asian operations and an adverse foreign exchange environment
for much of the year, that saw a strengthening Japanese yen erode
profitability from overseas sales that account for 85% of total
revenue. Company shares retreated sharply following the November US
election, despite the advantageous yen weakening, as US policy
towards China became uncertain.
China accounts for nearly 40% of
total sales
Principal Risks and Uncertainties
Japan remains vulnerable to
slowdown in the global economy and geopolitical turmoil,
particularly in major trading partners, as well as by volatile
swings in currency exchange rates and interest environment due to
domestic and overseas monetary policy.
While the Abe administration and BoJ remain poised to provide
additional stimulus as needed, inflation expectations remain muted,
and CPI turned negative with the largest monthly decline since 2013
recorded during the year. Although the delay of the consumption tax
increase is positive, the Abe administration’s successful rollout
of stimulus spending and regulatory reform remain necessary
catalysts for long-term economic growth. Fundamentals on the
corporate level remain strong, and while tangible effects of
corporate governance reforms, beyond an increased pace of share
buy-backs, are negligible, a widespread and ingrained refocusing on
investor return should be a long-term positive.
The Prospect Japan Fund Limited
Holdings
31 December
2016
| Symbol |
Security |
% of
Total Assets |
| 8562 |
FUKUSHIMA BANK
LTD/THE |
23.7 |
| 8563 |
DAITO BANK
LTD/THE |
23.5 |
| 3528 |
PROSPECT CO LTD |
11.3 |
| 9313 |
MARUHACHI WAREHOUSE CO
LTD |
8.6 |
| 8205 |
SHAKLEE GLOBAL GROUP
INC |
7.1 |
| 1921 |
TOMOE CORP |
3.2 |
The Prospect Japan Fund Limited Sector
Weighting
31 December
2016
| Banks |
50.5 |
| Real Estate |
11.3 |
|
Storage/Warehousing |
8.6 |
| Retail |
7.1 |
| Engineering &
Construction |
3.2 |
| REITs |
0.0 |
|
|
| Total** |
80.7 |
| No of Positions |
9 |
Prospect Asset Management, Inc.
21 March,
2017
PORTFOLIO OF INVESTMENTS
as at 31 December, 2016
|
Number of |
|
|
|
Fair
Value |
|
Percentage of |
|
Securities |
|
Investments |
|
in
U.S. Dollars |
|
Net
Asset Value |
|
|
Listed
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks |
|
|
|
|
|
20,225,000 |
|
The Daito Bank |
|
28,681,816 |
|
23.52 |
|
35,256,000 |
|
Fukushima Bank
Ltd |
|
28,914,409 |
|
23.72 |
|
230,000 |
|
Nagano Bank |
|
3,969,074 |
|
3.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,565,299 |
|
50.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and
Construction |
|
|
|
|
|
1,259,700 |
|
Tomoe Corp |
|
3,841,894 |
|
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,841,894 |
|
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate |
|
|
|
|
|
6,706,000 |
|
Prospect Co Ltd |
|
3,781,094 |
|
3.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,781,094 |
|
3.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
1,095,000 |
|
Shaklee Global Group
Inc |
|
8,681,047 |
|
7.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,681,047 |
|
7.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REITs |
|
|
|
|
|
7,898,895 |
|
Prospect Epicure
J-REIT Value Fund*# |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage/warehousing |
|
|
|
|
|
1,415,100 |
|
Maruhachi Warehouse Co
Ltd |
|
10,517,594 |
|
8.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,517,594 |
|
8.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total listed
investments |
|
88,386,928 |
|
72.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate |
|
|
|
|
|
1,350 |
|
Prospect
Co Ltd Stock Acquisition Rights* |
9,990,744 |
|
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,990,744 |
|
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unlisted
investments |
|
9,990,744 |
|
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments |
|
98,377,672 |
|
80.70 |
|
|
|
|
|
|
|
|
|
Net current
assets |
|
23,545,788 |
|
19.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS |
|
121,923,460 |
|
100.00 |
|
|
|
|
|
|
|
# Currently in liquidation.
* Prospect Co Ltd is classed as a related party as it is the
parent company of the Company’s manager, PAM(CI).
STRATEGIC REPORT
The Board has prepared this report on a voluntary basis
in accordance with the UK regulations governing the Directors’ duty
to prepare a strategic report.
Company Structure
The Company carries on business, and is registered, as a
Guernsey-based closed-ended
investment company. The Company is listed on the London Stock
Exchange.
Role and Composition of the Board
The Board is the Company’s governing body; it sets the Company’s
strategy and is collectively responsible to shareholders for its
long term success. The Board is responsible for appointing and
subsequently monitoring the activities of the Manager and other
service providers to ensure that the investment objectives of the
Company continue to be met. The Board also ensures that the Manager
adheres to the investment restrictions set by the Board and acts
within the parameters set by it in respect of any gearing. It also
identifies, monitors and manages the key risks facing the
Company.
The Board
The Board comprises three non-executive directors. All members
of the Board other than Rupert Evans
are independent of the Manager. None of the Directors has a
contract of service with the Company.
The Chairman of the Board is John
Hawkins. Biographies for Mr Hawkins and all other Directors
can be found in the General Information section. In considering the
independence of the Chairman, the Board has taken note of the
provisions of the AIC Code relating to independence and has
determined that Mr Hawkins is an Independent Director. As the
Chairman is an Independent Director, no appointment of a senior
Independent Director has been made. The Company has no employees
and therefore there is no requirement for a chief executive.
The Board meets on at least four occasions each year, at which
time the Directors review the investment management of the
Company’s assets and all other significant matters so as to ensure
that the Directors maintain overall control and supervision of the
Company’s affairs. The Board is responsible for the appointment and
monitoring of all service providers to the Company.
Dialogue with Shareholders
The Investment Advisor and the Financial Advisor and Broker
maintain a regular dialogue with institutional shareholders,
feedback from which is reported to the Board. In addition, Board
members and representatives of the Manager are available to answer
shareholders' questions at the Annual General Meeting. The Company
Secretary is available to deal with general shareholders' queries
at any time during the year.
Investment Management
The Company’s investment portfolio is managed by Prospect Asset
Management (Channel Islands)
Limited (“PAMCI”, or the “Manager”) whose parent company is
Prospect Co., Ltd (Kabushiki Kaisha Prospect (“KKP”), a Japanese
Company). The Manager implements the investment strategy, managing
the Company’s assets in line with appropriate restrictions placed
on it by the Board, including limits on the type and relative size
of holdings which may be held in the portfolio and on the use of
gearing, hedging, cash, derivatives and other financial
instruments. In the opinion of the Board, the continuing
appointment of the Manager on the terms agreed is in the best
interests of the Shareholders as a result of its performance and
results.
Please refer to Note 4 for details of the management agreement
between the Manager and the Company.
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 Strategy
The Board has delegated management of the Company’s portfolio to
the Investment Advisor. The Investment Advisor manages the
portfolio with the aim of helping the Company to achieve its
investment objective. Details of the Investment Advisor’s strategy,
and other factors that have affected performance during the year,
are set out in the Investment Advisor’s Report.
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.
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.
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.
Gearing
The Company may use gearing from time to time amounting to not
more than 20% 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.
Investment Philosophy and Process
The Company invests in companies with undervalued assets where
it believes it can be a catalyst for positive change. The Company
engages with management to enact this change for the benefit of all
shareholders. The Company believes the current government’s desire
to consolidate certain industries and to improve corporate
governance, offer support to this engaged shareholder strategy.
The Company’s research and execution expertise enables the
Company to identify and act upon the best opportunities.
Investment Restrictions and Spread of
Investment Risk
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 reporting fund if subject to
the applicable United Kingdom
taxation legislation (and subject to other conditions of that
legislation). 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 25% 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% 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% of their total
assets in other investment funds which are listed on the Official
List) and the Company will not invest more than 15% of its assets
at the time the investment is made in such funds; or
(g) invest in more than 5% 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% of net assets at the
time the borrowings are drawn down.
Performance
An outline of performance, market background, investment
activity and portfolio strategy during the year under review, as
well as outlook, is provided in the Investment Advisor’s
Report.
Key performance indicators
(“KPI’s”)
At each quarterly Board meeting, the Board considers a number of
performance measures to assess the Company’s success in achieving
its objectives. Below are the main KPI’s which have been identified
by the Board for determining the progress of the Company:
· Net asset value;
· Share price;
· Discount/premium of share price
to NAV; and
· Ongoing charges, which are set
out in the Directors’ Report.
A record of these measures is disclosed in the General
Information section.
Principal Risks and Uncertainties
The Board is responsible for the Company’s system of internal
controls and for reviewing its effectiveness. The Board is
satisfied that by using the Company’s risk matrix in establishing
the Company’s system of internal controls, while monitoring the
Company’s investment objective and policy, that the Board has
carried out a robust assessment of the principal risks and
uncertainties facing the Company. The principal risks and
uncertainties which have been identified and the steps which are
taken by the Board to mitigate them are as follows:
(i)
Investment objective and strategy
The Company’s strategy may not be successful in achieving its
investment objective if the Investment Advisor fails to comply with
the Company’s investment policy. The Board reviews reports from the
Investment Advisor at the quarterly Board Meetings, with a focus on
adherence to the investment policy. The Administrator is
responsible for ensuring that all transactions are in accordance
with the investment restrictions.
(ii)
Investment risk
To achieve the objective of delivering long-term
performance, the Company invests in Japanese growth as
well as cyclical companies with strong management teams that
possess a clear vision and focus on profitability and shareholders’
interests. The investment process is driven by proprietary
fundamental research identifying companies with below average
valuations and above average earnings growth and return on
equity.
The Company also invests in companies that have undervalued
assets where it identifies a realistic catalyst for positive
change. This represents an enhancement of the overall investment
process reflecting what the Manager believes are exciting new
opportunities in the Japanese equity market. The Manager believes
that these types of companies compliment the Company’s overall
stock picking expertise, enabling the Company to identify the best
opportunities for long term capital appreciation in Japan caused by ongoing consolidation.
Risk management is an integral part of the investment management
process. Core to the process is that risks taken are not incidental
but are fully understood and accounted for. In-depth proprietary
fundamental research provides the Manager with a deep understanding
of each stock in the Company’s portfolio and the associated risks.
The Board considers the risks facing the Company on an on-going
basis. All Board meetings are also attended by the Manager, either
in person or by telephone, where reports on portfolio performance
and strategy are provided.
Portfolio performance will be dependent on the performance of
Japanese equities and such stocks will be influenced by the general
health of the country.
(iii)
Financial risks
The financial risks, including market, credit and liquidity risk
faced by the Company are set out in Note 13 of the Financial
Statements. These risks and the controls in place to reduce the
risks are reviewed at the quarterly Board Meetings.
(iv)
Foreign exchange risk
The movement of exchange rates may have an unfavourable or
favourable impact on returns as the majority of the Company’s
assets are denominated in Yen, rather than US Dollar, the reporting
currency of the Company. Although not currently undertaken, the
Directors reserve the right to hedge the Company’s currency
exposure.
(v)
Ordinary shares
The market value of the shares in the Company may not reflect
the underlying Net Asset Value and may trade at a discount to it.
The Board actively monitors the discount of the Company and, where
appropriate, may implement share buybacks to help reduce the
discount and/or discount volatility.
(vi)
Borrowing
The Investment Policy restricts the Company from entering into
borrowings in excess of 20% of net assets at the time the
borrowings are drawn down. Whilst such borrowings may enhance the
return on the shares where the underlying Company performance is
positive, the opposite is also true and any borrowing will enhance
the negative performance of the Company.
(vii) Third
party service providers
The Company has no employees and the Board comprises three
non-executive directors. The Company is reliant on the Manager, the
Investment Advisor and the Secretary, Registrar and Administrator
to perform its executive function. The most significant of these
third party service providers is the Manager to whom the management
of the Company’s investments has been delegated. Failure by any of
these third party service providers to perform the services in
accordance with the terms of the relevant service contracts
represents a risk to the operations of the Company and the
performance of the Company.
Termination of the Investment Management Contract by the Manager
or loss of key staff by the Manager could materially affect the
ability of the Company to operate and detract from the performance
of the Company until a suitable replacement could be found.
The Board has segregated the duties of investment management,
accounting and custody. Each of the contracts with third party
service providers has been entered into after full and proper
consideration of the quality and cost of the services provided and
the control systems in place. The Board reviews the performance of
the Investment Advisor and the Manager on a regular basis.
The Directors seek to mitigate and manage these risks through
continual review, policy-setting and enforcement of contractual
obligations and will update the risk assessment matrix to reflect
any changes in the control environment. Further details on the
Company’s internal controls are given in the Directors’ Report.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code, published by the Financial Reporting Council in
September 2014 (the “Code”), the
Directors have assessed the prospects of the Company over the three
year period to 31 December, 2019. The
Company is required to put a discontinuation vote to shareholders
every three years, the next one occurring in 2017. On 10 January, 2017 the Company announced a possible
offer from Prospect, Co. Limited (“Prospect”) for the entire issued
and to be issued share capital of the Company. Currently, there is
no way of knowing the intentions of Prospect or if any proposal
would be accepted by the Shareholders. Therefore, assuming that the
discontinuation vote is not passed and there is no offer, the
Directors consider that three years is an appropriate period of
assessment of the viability of the Company for the purpose of
giving assurance to shareholders.
In its assessment of the viability of the Company, the Directors
have considered each of the Company’s principal risks and
uncertainties detailed in the Strategic Report and in particular
the impact of a significant fall in regional equity markets on the
value of the Company’s investment portfolio. The Directors consider
that a 30% fall in the value in the Company’s portfolio would be
significant but would have little impact on the Company’s ability
to continue in operation over the next three years. In reaching
this conclusion, the Directors considered the Company’s income and
expenditure projections, the fact that the Company has no gearing
and that the Company’s investments comprise readily realisable
securities which can be expected to be sold to meet funding
requirements if necessary, assuming market liquidity continues.
Based on the Company’s processes for monitoring operating costs
(cash burn vs. available resources), share price discount, the
Manager’s compliance with the investment objective, asset
allocation, the portfolio risk profile, counterparty exposure,
liquidity risk and financial controls, the Directors have 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 three year period to 31
December, 2019.
Future Developments
The future performance of the Company depends upon the success
of the Company’s investment strategy in the light of economic
factors and market developments. Further comments on the outlook
for the Company for the next twelve months are set out in both the
Chairman’s Statement and in the Investment Advisor’s Report.
John Hawkins
Chairman
Richard Battey
Director
21 March, 2017
DIRECTORS’ REPORT
The Directors present their Annual Report and the Audited
Financial Statements of The Prospect Japan Fund Limited (the
“Company”) for the year ended 31 December,
2016.
The Company's Business
The Company was registered under the laws of Guernsey on 18
November, 1994 as a Limited Company with a premium listing
on the London Stock Exchange. It is a close-ended investment
company established to achieve long-term capital growth from an
actively managed portfolio of securities primarily of smaller
Japanese companies listed or traded on Japanese Stock Markets. The
Company is a FATCA compliant organisation with FATCA entity
classification FFI and GIIN L0Q9R3.99999.SL.831.
Results and Dividend
The results for the year are set out in the Statement of
Comprehensive Income.
Whilst over the last three year period the Company’s return was
(3.88)% (2015: 35.64%) compared with 24.79% (2015: 46.38%) for the
MSCI Japan Small Cap Index, the last year’s performance based on
valuations produced in accordance with International Financial
Reporting Standards (“IFRS”) was (2.59)% (2015: (3.19)%) compared
with MSCI Japan Small Cap Index performance of 8.22% (2015: 15.74%)
((9.49)% (2015: 19.13%) based on published NAV). For further
details of the differences between published NAV and IFRS adjusted
NAV please see Note 17.
The Directors do not recommend the payment of a dividend for the
year (2015: Nil).
Performance
The Board considers that Prospect Asset Management (Channel Islands) Limited, the Manager to the
Company, is managing the Company's investments in a manner that is
most likely to achieve the objective of long term capital
appreciation for its shareholders.
Statement of Directors'
Responsibilities and Declarations
The Directors are responsible for preparing the Annual Report
and Financial Statements in accordance with applicable Guernsey Law
and International Financial Reporting Standards (“IFRS”) as adopted
by the European Union. The Directors are required to prepare
Financial Statements for each financial year which give a true and
fair view of the state of the affairs of the Company and of the
total return of the Company for that year and in accordance with
the applicable laws. The Directors are also responsible for
ensuring that the Company complies with the provisions of the
Listing Rules and the Disclosure Rules and Transparency Rules of
the UK Listing Authority. With regard to corporate governance the
Company is required to disclose how it has applied the principles
and complied with the provisions of the Corporate Governance code
applicable to the Company. In preparing those Financial Statements
the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable;
- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
- prepare the Financial Statements on a going concern basis
unless it is inappropriate to presume that the company will
continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position and performance of the Company and to enable
them to ensure that the Financial Statements have been properly
prepared in accordance with The Companies (Guernsey) Law and IFRS. They are also
responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of
fraud, error and non-compliance with law or regulations.
The Directors confirm that they have complied with the above
requirements in preparing the Financial Statements.
The Directors confirm that to the best of their knowledge
(a) The Annual Financial Statements have been prepared in
accordance with IFRS as adopted by the European Union and give a
true and fair view of the financial position and performance of the
Company as at and for the year ended 31
December, 2016.
(b) The Chairman’s, Investment Advisor’s, Strategic and
Directors’ Reports include a fair review of the development and
performance of the Company business and the position of the Company
together with a description of the principal risks and
uncertainties facing the
Company.
Directors' Statement
So far as each of the Directors is aware, there is no relevant
audit information of which the Company's auditor is unaware, and
each Director has taken all the steps he ought to have taken as a
Director to make himself aware of any relevant audit information
and to establish that the Company's auditor is aware of that
information. In the opinion of the Board, the Annual Report and
Financial Statements taken as a whole, are fair, balanced and
understandable and provide the information necessary to assess the
Company’s performance, business model and strategy.
Ongoing Charges
Ongoing charges are the recurring expenses incurred by the
Company excluding one-off expenses. Ongoing charges for the years
ended 31 December, 2016 and
31 December, 2015 have been prepared
in accordance with the AIC’s recommended methodology. The ongoing
charges for the year ended 31 December,
2016 was 2.09% (31 December, 2015: 2.20%). No
performance fees were charged during the year.
Corporate Governance
The Board is committed to high standards of corporate governance
and has implemented a framework for corporate governance which it
considers to be appropriate for an investment company in order to
comply with the principles of the UK Corporate Governance Code
(September 2014) (the “Code”) issued
by the Financial Reporting Council (“FRC”). The Company is also
required to comply with the Code of Corporate Governance (the “GFSC
Code”) issued by the Guernsey Financial Services Commission.
The FRC issued a revised Code in 2014, for reporting periods
beginning on or after 1 October,
2014. The AIC updated the AIC Code of Corporate Governance
(the “AIC Code”) (including the Guernsey edition) and its Guide to Corporate
Governance (the “AIC Guide”) to reflect the relevant changes to the
FRC document in February 2015. The
Board adopted the revised code during 2015.
The UK Listing Authority requires all UK premium listed
companies to disclose how they have complied with the provisions of
the UK Code. This Corporate Governance Statement, together with the
Going Concern Statement, Viability Statement and the Statement of
Directors’ Responsibilities set out in the Directors’ Report,
indicates how the Company has complied with the principles of good
governance of the UK Code and its requirements on Internal
Control.
The Company is a member of the Association of Investment
Companies (the “AIC”) and by complying with the AIC Code is deemed
to comply with both the UK Code and the GFSC Code.
The Board has considered the principles and recommendations of
the AIC Code, by reference to the guidance notes provided by the
AIC Guide, and consider that reporting against these will provide
appropriate information to shareholders. To ensure ongoing
compliance with these principles the Board reviews a report from
the Corporate Secretary at each quarterly meeting, identifying how
the Company is in compliance and identifying any changes that might
be necessary.
The AIC Code and the AIC Guide are available on the AIC’s
website, www.theaic.co.uk. The UK Code is available in the
Financial Reporting Council’s website, www.frc.org.uk.
Throughout the year ended 31 December,
2016, the Company has complied with the recommendations of
the AIC Code and thus the relevant provisions of the UK Code,
except as set out below.
The UK Code includes provisions relating to:
• the role of the Chief
Executive
• Executive Directors’
remuneration
• the need for an internal
audit function
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Company as it is an externally managed
investment company. The Company has therefore not reported further
in respect of these provisions. The Directors are all non-executive
and the Company does not have employees, hence no Chief Executive
is required for the Company. The Board is satisfied that any
relevant issues can be properly considered by the Board.
Details of compliance with the AIC Code are noted below and in
the succeeding sections. There have been no other instances of
non-compliance, other than those noted above.
Directors Attendance at Meetings
The number and attendance at the formal Board, Audit Committee
and Management Engagement Committee meetings during the year was as
follows;
|
Board Meetings |
Management Engagement Committee Meetings |
Audit Committee Meetings |
|
Held |
Attended |
Held |
Attended |
Held |
Attended |
| Rupert Evans |
4 |
4 |
N/A |
N/A |
N/A |
N/A |
| John Hawkins |
4 |
4 |
1 |
1 |
2 |
2 |
| Richard Battey |
4 |
4 |
1 |
1 |
2 |
2 |
Re-election
In accordance with the Company’s Articles of Association, all
newly appointed Directors stand for election by the shareholders at
the next Annual General Meeting (“AGM”) following their
appointment. The Directors retire by rotation and offer themselves
for re-election every three years. Directors who have served on the
Board for more than nine years are subject to annual re-election.
Mr Rupert Evans is considered a
non-independent Director due to being a Director of the Manager.
Non-independent Directors are subject to annual re-election. At the
AGM on 18 August, 2016, Rupert Evans and John
Hawkins retired as Directors, and being eligible,
Rupert Evans and John Hawkins offered themselves for re-election.
Rupert Evans and John Hawkins were re-elected as Directors of the
Company.
The Chairman has served on the Board for over nine years and
under the AIC Code may not be considered to be independent of the
Company. The Board however, takes the view that the length of
tenure does not necessarily determine the independence of the Board
and experience can add significantly to the Board’s strength. It
has therefore determined that in performing his role as Director,
the Chairman remains wholly independent.
Board Performance
The AIC Code requires external evaluation of Board performance
every three years. The last instance of which was in April 2016.
The Board, Audit Committee, Management Engagement Committee and
Nominations Committee undertake an evaluation of their own
performance and that of individual Directors on an annual basis. In
order to review their effectiveness, the Board and its Committees
carry out a process of formal self-appraisal. The Board and
Committees consider how they function as a whole and also review
the individual performance of its members. This process is
conducted by the respective Chairman reviewing each member’s
performance, contribution and commitment to the Company. Each Board
member provides proof of ongoing training and maintenance of
continuing professional development requirements.
The Board considers it has a breadth of experience relevant to
the Company, and the Directors believe that any changes to the
Board’s composition can be managed without undue disruption. An
induction programme has been prepared for any future Director
appointments.
Supply of Information
The quarterly board meetings are the principal source of regular
information for the Board enabling it to determine policy and to
monitor performance and compliance. The Manager attends each Board
meeting either in person or by telephone thus enabling the Board to
fully discuss and review the Company’s operation and performance.
Each Director has direct access to the Company Secretary, and may,
at the expense of the Company, seek independent professional advice
on any matter that concerns them in the furtherance of their
duties.
Committees of the Board
The Board has established Nomination, Audit and Management and
Engagement Committees and approved their Terms of Reference, copies
of which can be obtained from the Administrator.
Nomination Committee
The Board as a whole fulfils the function of a Nomination
Committee. Whilst the independent Directors take the lead in the
appointment of new Directors, any proposal for a new Director will
be discussed and approved by the entire Board during quarterly
Board meetings.
The Board has also given careful consideration to the
recommendations of the Davies Report on “Women on Boards”. As
recommended in the Davies Report, the Board has reviewed its
composition and believes that the current appointments provide an
appropriate range of skills, experience and diversity. The Board
will take into account the recommendations of the Davies Report as
part of its succession planning over future years.
Audit Committee
An audit committee has been appointed comprising the Independent
Directors. The Audit Committee operates within clearly defined
terms of reference which have been approved by the Board and
provides a forum through which the Company’s external Auditors
report to the Board. The Board is satisfied that the Audit
Committee contains members with sufficient recent and relevant
financial reporting experience.
The Audit Committee has considered the requirement for an annual
internal audit of the Company. On the basis that the Company is an
investment company with no employees, the Audit Committee believes
that an internal audit function is not necessary for the
Company.
The table above sets out the number of Audit Committee Meetings
held during the year ended 31 December, 2016 and the
number of such meetings attended by each Committee member.
The Audit Committee’s responsibilities and activities are
presented in the Audit Committee Report.
Management and Engagement
Committee
The Management and Engagement Committee comprises the
Independent Directors. The Management and Engagement Committee
operates within clearly defined terms of reference which have been
approved by the Board.
The purpose of this Committee is to review the performance of
the Investment Advisor, Manager and the third party service
providers to the Company. As the Board has evaluated their
performance during the course of their regular meetings and found
it satisfactory, the Board conclude that the continuing appointment
of the parties on the terms agreed would be in the best interests
of the Company’s shareholders as a whole. At the date of this
report the Board continues to be of the same opinion.
The table above sets out the number of Management Engagement
Meetings held during the year ended 31 December, 2016 and
the number of such meetings attended by each Committee member.
Directors’ Remuneration
The level of Directors’ fees is determined by the whole Board on
an annual basis and therefore a separate Remuneration Committee has
not been appointed. When considering the level of Directors’
remuneration the Board considers the industry standard and the
level of work that is undertaken.
During the year ended 31 December,
2016, the Directors were entitled to receive an annual fee
of £25,000 (2015: £25,000), the Chairman of the Audit Committee
£27,500 (2015: £27,500) and the Chairman of the Board £30,000
(2015: £30,000).
Going Concern
In accordance with the Company’s Articles, the Board is required
every three years to include in the business to be considered by
shareholders at the Annual General Meeting a Special Resolution
that the Company should be wound up. The last such resolution was
tabled at the eighteenth Annual General Meeting held in 2014. The
Shareholders voted against the resolution, and in favour of the
continuation of the Company. As announced on 10 January 2017 (the "Possible Offer
Announcement"), the independent directors of the Company are in
preliminary discussions regarding a possible offer from Prospect
Co., Ltd (“Prospect”) for the entire issued and to be issued share
capital of the Company. The possible offer is under consideration,
discussion and evaluation by both parties. The Possible Offer
Announcement does not amount to a firm intention to make an offer
under Rule 2.7 of The City Code on Takeovers and Mergers, and as
stated in the Possible Offer Announcement there can be no certainty
that an offer for the Company will ultimately be
made. If such a transaction: (i) was to be announced in
accordance with Rule 2.7 of The City Code on Takeovers and Mergers;
and (ii) was to be completed prior to the 2017 AGM, no AGM would be
held and no discontinuation vote would take
place. Whilst acknowledging the uncertainty of the
possible offer, and the upcoming vote for discontinuation, the fact
that neither the Board nor the Investment Advisor have received any
indication that the Shareholders are no longer in favour of the
investment policy and that the assets of the Company consist mainly
of securities that are readily realisable, leads the Directors to
believe that the discontinuation vote will not be passed and that
the Company has adequate financial resources to meet its
liabilities as they fall due for at least twelve months from the
date of this report, and that it is therefore appropriate for the
Financial Statements to be prepared on a going concern basis.
Factors regarding the going concern basis are also discussed in
Note 1 of the Financial Statements.”
Internal Control
The Board is ultimately responsible for establishing and
maintaining the Company’s system of internal financial and
operating control and for maintaining and reviewing its
effectiveness. The Company’s risk matrix continues to be the core
element of the Company’s risk management process in establishing
the Company’s system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which
initially identifies the risks facing the Company and then
collectively assesses the likelihood of each risk, the impact of
those risks and the strength of the controls operating over each
risk. The system of internal financial and operating control is
designed to manage rather than to eliminate the risk of failure to
achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and
loss.
These controls aim to ensure that assets of the Company are
safeguarded, proper accounting records are maintained and the
financial information for publication is reliable. The Board
confirms that there is an ongoing process for identifying,
evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up
to the date of approval of this Annual Report and Audited Financial
Statements and is reviewed by the Board and is in accordance with
the AIC Code and Internal Controls: Revised Guidance for Directors
on the Combined Code.
The AIC Code requires Directors to conduct at least annually a
review of the Company’s system of internal financial and operating
control, covering all controls, including financial, operational,
compliance and risk management. The Board has evaluated the systems
of internal controls of the Company. In particular, it has prepared
a process for identifying and evaluating the significant risks
affecting the Company and the policies by which these risks are
managed.
The Board has delegated the day to day responsibilities for the
management of the Company’s investment portfolio, the provision of
depositary services and administration, registrar and corporate
secretarial functions including the independent calculation of the
Company’s NAV and the production of the Annual Report and Financial
Statements which are independently audited.
Formal contractual agreements have been put in place between the
Company and providers of these services. Even though the Board has
delegated responsibility for these functions, it retains
accountability for these functions and is responsible for the
systems of internal control. At each quarterly Board meeting,
compliance reports are provided by the Administrator, Company
Secretary and Portfolio Manager. The Board also receives
confirmation from the Administrator of its accreditation under its
Service Organisation Controls 1 report.
The Company’s risk exposure and the effectiveness of its risk
management and internal control systems are reviewed by the Audit
Committee at its quarterly meetings and annually by the Board.
The Board believes that the Company has adequate and effective
systems in place to identify, mitigate and manage the risks to
which it is exposed.
Directors' and Other Interests
No Directors holding office at 31
December, 2016, or their associates, had any beneficial
interest in the Company's Shares (2015: None). There has been no
change in this position between the end of the year and the date of
this report.
Rupert Evans is a Director of the
Manager and a former partner in the firm of the Guernsey legal advisors, Mourant Ozannes.
John Hawkins and Richard Battey are Directors of a range of
funds.
Substantial Shareholdings
The following table shows the interests in the share capital of
the Company exceeding 5% of the issued share capital of which the
Company has been notified.
| TOP
HOLDINGS |
As at 31 December, 2016 |
As at 21 March, 2017 |
|
Number of shares |
Percentage of issued share capital |
Number of shares |
Percentage of issued share capital |
| Lazard Asset
Management |
22,041,625 |
23.87% |
23,324,778 |
25.26% |
| 1607 Capital
Partners |
19,863,439 |
21.51% |
18,122,488 |
19.62% |
| CG Asset
Management |
14,247,936 |
15.43% |
12,247,936 |
13.26% |
| Weiss Asset
Management |
2,870,506 |
3.11% |
8,920,506 |
9.66% |
There have been no other notifications of significant changes to
the substantial shareholdings at 21 March,
2017.
The percentage of ordinary shares shown above represents the
ownership of voting rights at the year end, before weighting for
votes in Directors.
It is the responsibility of the shareholders to notify the
Company of any change to their shareholdings when it reaches 5% of
shares in issue and any change which moves up or down through any
whole percentage figures above 5%.
Share buybacks
As approved at the AGM on 18 August,
2016, the Company may purchase, subject to various terms as
set out in the Articles, a maximum of 13,843,655 Ordinary Shares
under the Company’s discount control mechanism. During the year to
31 December, 2016, the Company
purchased 100,000 shares (2015: nil shares) as detailed in Note 9
of the Financial Statements.
Auditors
The Auditors, Ernst & Young LLP have indicated their
willingness to continue in office and offer themselves for
re-appointment at the forthcoming AGM.
John Hawkins
Chairman
Richard Battey
Director
21 March, 2016
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC
COMPANIES LISTED ON RECOGNISED STOCK EXCHANGES
for the year ended 31 December,
2016
The following summarises the Directors’ directorships in other
public companies
| Directorships |
Stock Exchange |
| Company Name |
|
|
|
| Richard Battey |
|
| AcenciA Debt Strategies Limited |
London |
| Juridica Investments Limited |
London |
| Princess Private Equity Holding
Limited |
London |
| Better Capital PCC Limited |
London |
| NB Global Floating Rate Income Fund
Limited |
London |
| Pershing Square Holdings
Limited |
Euronext |
|
|
| Rupert Evans |
|
| El Oro Limited |
Channel Islands |
| Oryx International Growth Fund
Limited |
London |
| The Red Fort Partnership
Limited |
Channel Islands |
| Stonehage Fleming Global Property
Fund PCC Limited |
Channel Islands |
| FF&P Ventures Funds PCC
Limited |
Channel Islands |
| Master Capital Fund Limited |
Irish |
|
|
| John Hawkins |
|
| Aberdeen Greater China Fund,
Inc |
New York |
| Aberdeen Emerging Markets Investment
Company Limited |
London |
AUDIT COMMITTEE REPORT
We present the Audit Committee (the “Committee”) Report for
2016, setting out the Committee’s structure and composition,
principal duties and key activities during the year. As in previous
years, the Committee has reviewed the Company's financial
reporting, the independence and effectiveness of the independent
auditor and the internal control and risk management systems of
service providers.
A member of the Committee will continue to be available at each
AGM to respond to any shareholder questions on the activities of
the Committee.
Role and responsibilities
The function of the Audit Committee is to ensure that the
Company maintains the highest standards of integrity of its
financial reporting and internal control.
The responsibilities of the Committee are:
· To review and make
recommendations on the appointment of the Company’s Auditors, the
scope of the audit, the audit fee, their independence and
objectivity and any questions of the resignation or dismissal of
the Auditors;
· To discuss with the Auditors the
nature and scope of the audit and to keep under review such scope
and its cost-effectiveness;
· To receive and review a Report
from the Company’s Auditors and to discuss any matters arising from
the audit and recommendations made by them;
· To review the Company’s
half-year and Annual Report and Financial Statements and any other
financial information published by the Company, in each case before
issue or publication, prior to submission to the Board, having
particular regard to:
• the accounting policies and whether
they continue to be appropriate for the business;
• any changes in accounting policies or
practices and whether they are appropriate for the business;
• any important areas where judgement must be
exercised e.g. valuation of unquoted investments;
• any significant adjustments arising from the
audit;
• the going concern assumption; and
• other legal, UK Listing Authority or
recognised investment exchange requirements.
· To advise the Board on whether
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.
· To ensure that the internal
control systems of the service providers are adequate. To receive
reports from the Company’s service providers covering internal
control systems, internal audit functions and procedures supported
either by SSAE 16, ISAE 3402 or AAF Reports. In light of the above,
to review the Company’s statement on internal controls prior to
endorsement by the Board;
· To monitor the Company’s
procedures for ensuring compliance with statutory, regulatory and
other financial reporting requirements i.e. the Guernsey Financial
Services Commission and the London Stock Exchange (which includes
the UK Listing Authority);
· To review significant
transactions outside the Company’s normal business (e.g. Company
share buy backs); and
· To consider any other topics
referred to it by the Board.
The Audit Committee’s full terms of reference can be obtained by
contacting the Administrator.
Membership
The members of the Committee are Richard
Battey (Chairman) and John
Hawkins. Full biographical details of each member can be
found in the General Information section. All members attended the
formal Audit Committee meetings held during the year. In addition a
number of ad hoc meetings were held with the Auditors to discuss
financial reporting matters.
Significant issues related to the
financial statements
The Committee’s review of the interim and annual financial
statements focused on the following areas:
· The Committee has concentrated
on the investment issues of existence and title in respect of the
Company’s portfolio holdings as a whole. 89.8% by value of the
investments are quoted investments and are held in a designated
account at the Custodian.
· The valuation of its unlisted
holdings which are dealt with in more detail below.
· Going Concern - In accordance
with the Company’s Articles, the Board is required every three
years to include in the business to be considered by shareholders
at the Annual General Meeting a Special Resolution that the Company
should be wound up. The last such resolution was tabled at the
eighteenth Annual General Meeting held in 2014. The Shareholders
voted against the resolution, and in favour of the continuation of
the Company. As announced on 10 January
2017 (the "Possible Offer Announcement"), the independent
directors of the Company are in preliminary discussions regarding a
possible offer from Prospect Co., Ltd (“Prospect”) for the entire
issued and to be issued share capital of the Company. The possible
offer is under consideration, discussion and evaluation by both
parties. The Possible Offer Announcement does not amount to a firm
intention to make an offer under Rule 2.7 of The City Code on
Takeovers and Mergers, and as stated in the Possible Offer
Announcement there can be no certainty that an offer for the
Company will ultimately be made. If such a transaction:
(i) was to be announced in accordance with Rule 2.7 of The City
Code on Takeovers and Mergers; and (ii) was to be completed prior
to the 2017 AGM, no AGM would be held and no discontinuation vote
would take place. Whilst acknowledging the uncertainty
of the possible offer, and the upcoming vote for discontinuation,
the fact that neither the Board nor the Investment Advisor have
received any indication that the Shareholders are no longer in
favour of the investment policy and that the assets of the Company
consist mainly of securities that are readily realisable, leads the
Directors to believe that the discontinuation vote will not be
passed and that the Company has adequate financial resources to
meet its liabilities as they fall due for at least twelve months
from the date of this report, and that it is therefore appropriate
for the Financial Statements to be prepared on a going concern
basis. Factors regarding the going concern basis are also discussed
in Note 1 of the Financial Statements.
Key activities and significant
risks
Going concern as described above.
The investment manager has built a concentrated portfolio of
small and medium sized enterprises and the Committee appreciates
that there are significant risks inherent in that investment policy
compared with a wider spread in larger quoted companies. There is
also a material exposure to regional banks at the year-end giving a
50.5% of NAV direct exposure (2015: 28.66%).
The Company holds one unlisted investment. Following advice from
the Investment Manager and per requirements under IFRS, the
Committee considers the valuation of this investment in detail. For
further details on the Investment policies and the valuation of
unlisted investments, please see Note 14 of the Financial
Statements.
The Manager and Administrator confirmed to the Committee that
they were not aware of any material misstatements including matters
relating to presentation. The Committee advised the Board that this
Annual Report and Financial Statements, taken as a whole, is fair,
balanced and understandable.
Following a review of the presentations and reports from the
Administrator and after consulting where necessary with the
external Auditor, the Committee is satisfied that the Financial
Statements appropriately address the critical judgements and key
estimates (both in respect to the amounts reported and the
disclosures). The Committee is also satisfied that the significant
assumptions used for determining the value of assets have been
appropriately scrutinised, challenged and are sufficiently robust.
Further details on the significant assumptions used for determining
the value of assets can be found in Note 14 of the Financial
Statements.
Risk Management
After consultation with the Manager and external Auditor, the
Audit Committee continues to consider the risks faced by the
Company and its service providers and the process for managing
them.
Risk management procedures for the Company, as set out in the
Company’s risk assessment matrix, were reviewed and approved by the
Audit Committee at each Quarterly Board Meeting.
The Committee reviews and examines externally prepared
assessments of the control environment in place at the Manager and
the Administrator, with the Manager and Administrator providing a
SOC1 report covering internal control systems and procedures
supported either by SSAE 16, ISAE 3402 or AAF Reports, on an annual
basis and a bi-annual basis respectively. No significant failings
or weaknesses were identified in these reports by the Committee.
There were no changes in risk management or internal control
systems during the year.
The Committee has considered the requirement for an annual
internal audit of the Company. On the basis that the Company is an
investment company with no employees, the Audit Committee believes
that an internal audit function is not necessary for the
Company.
External Audit
Independence, Objectivity and Fees
The independence and objectivity of the independent auditor is
regularly reviewed by the Audit Committee which also reviews the
terms under which the independent auditor is appointed to perform
non-audit services. The Audit Committee has established
pre-approval policies and procedures for the engagement of the
independent auditor to provide audit and non-audit services.
These are that the independent auditors may not provide a
service which:
· places them in a position to
audit their own work;
· creates a mutuality of
interest;
· results in the independent
auditor developing close relationships with service providers of
the Company;
· results in the independent
auditor functioning as a manager or employee of the Company; or
· puts the independent auditor in
the role of advocate of the Company.
The Audit Committee considered reports from the independent
auditor on their procedures to identify and mitigate any threats to
independence and concluded that the procedures were sufficient to
identify any threats to independence.
The following table summarises the remuneration paid to Ernst
& Young LLP for audit and non-audit services provided to the
Company during the years ended 31 December,
2016 and 31 December,
2015:
|
|
|
|
|
|
01.01.2016 |
|
01.01.2015 |
|
|
|
|
|
|
to
31.12.2016 |
|
to
31.12.2015 |
| Ernst
& Young LLP |
|
|
|
|
in GB
Pounds |
|
in GB
Pounds |
| Annual audit |
|
|
|
|
|
37,400 |
|
41,550 |
| Auditor's
interim review |
|
|
|
|
19,300 |
|
14,000 |
|
|
|
|
|
|
56,700 |
|
55,550 |
In line with the policies and procedures above, the Audit
Committee does not consider that the provision of these non-audit
services to be a threat to the objectivity and independence of the
independent auditor.
Ernst & Young LLP has been the Company’s independent auditor
since 28 June, 2001. The Audit
Committee has examined the scope and results of the external audit,
its cost effectiveness and the independence and objectivity of the
independent auditor, with particular regard to non-audit fees, and
considers Ernst & Young LLP, as independent auditor, to be
independent of the Company.
Performance and effectiveness
During the year, when considering the effectiveness of the
independent auditor, the Audit Committee has taken into account the
following factors:
· the audit plan presented to
them;
· the audit findings report
including variations from the original plan;
· changes in audit personnel;
· the independent auditor’s own
internal procedures to identify threats to independence; and
· feedback from both the Manager
and Administrator.
The Audit Committee reviewed the audit plan and the audit
findings report of the independent auditor and concluded that the
audit plan sufficiently identified audit risks and that the audit
findings report indicated that the audit risks were sufficiently
addressed and that there were no significant variations from the
audit plan.
Reappointment
Consequent to the review discussed above, the Audit Committee
has recommended to the Board that a resolution be put to the 2016
AGM for the reappointment of Ernst & Young LLP as independent
auditor. The Board has accepted this recommendation.
Fraud, Bribery and Corruption
The Audit Committee continues to monitor the fraud, bribery and
corruption policies of the Company. The Board receives a
confirmation from all service providers that there have been no
instances of fraud or bribery.
As the Company has no employees, the Committee does not consider
that a whistle-blowing policy is required. However, the Directors
have satisfied themselves that the Company’s service providers have
appropriate whistle-blowing policies and procedures and seek
regular confirmation from the service providers that nothing has
arisen under those policies and procedures which should be brought
to the attention of the Board.
Richard Battey
Chairman, Audit Committee
21 March, 2017
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF THE PROSPECT JAPAN FUND LIMITED
Our opinion on the financial statements
In our opinion:
- The Prospect Japan Fund
Limited’s (the “Company”) financial statements (the “financial
statements”) give a true and fair view of the state of the
Company’s affairs as at 31 December
2016 and of its loss for the year then ended;
- the financial statements have
been properly prepared in accordance with International Financial
Reporting Standards as adopted by the European Union
(“IFRSs”);
- the financial statements have
been prepared in accordance with the requirements of the Companies
(Guernsey) Law 2008.
What we have audited
The Prospect Japan Fund Limited’s financial statements
comprise:
|
- Statement of comprehensive income for the year ended
31 December 2016; |
|
- Statement of financial position as at 31 December
2016; |
|
- Statement of changes in equity for the year ended 31
December 2016; |
|
- Statement of cash flows for the year ended 31
December 2016; and |
|
- Related notes 1 to 18 to the financial
statements |
The financial reporting framework that has been applied in their
preparation is applicable law and IFRS.
Overview of our audit approach
| Risk of material misstatement |
-
Valuation of unquoted investments |
| Audit scope |
- We
performed an audit of the complete financial statements of the
Company for the year ended 31 December 2016. |
| Materiality |
-
Overall materiality of US$1.22 million which represents 1% of total
equity. |
Our assessment of risk of material misstatement
We identified the risk of material misstatement described below
as that which had the greatest effect on our overall audit
strategy, the allocation of resources in the audit and the
direction of the efforts of the audit team. In addressing this
risk, we have performed the procedures below which were designed in
the context of the financial statements as a whole and,
consequently, we do not express any opinion on this individual
area.
| Risk |
Our response to the
risk |
What we concluded to
the Audit Committee |
Valuation of unquoted investments (US$9,990,744 PY comparative
US$2,518,957)
Refer to the Audit Committee Report; Accounting policies in Note 1;
and Note 14 of the Financial Statements
Unquoted investments relates to the Company’s holding in Stock
Acquisition Rights (“SARs”) issued by Prospect Co. Ltd. The
Prospect Co. Ltd SARs were valued using the Black-Scholes-Merton
model.
The valuation is highly subjective with a high level of judgement
and estimation linked to the determination of the values with
limited market information available. Therefore there is a risk of
an inappropriate valuation model being applied, together with the
risk of inappropriate inputs to the model/calculation being
selected. |
- We
documented our understanding of the processes, policies and
methodologies used by management for valuing investments held by
the Company and performed walkthrough tests to confirm our
understanding of the systems and controls implemented.
- We
agreed the valuation per the financial statements to the model used
by management, agreed all inputs to the model to independent
sources and evaluating whether all key terms of the SARs had been
considered in the application of the model;
- We
engaged our internal valuation experts to
o assist us
to determine whether the methodologies used to value investments
were consistent with methods ordinarily applied by market
participants for these types of investments; and
o use their
knowledge of the market to assess and corroborate management's
market related judgements and valuation inputs (including risk free
interest rates, volatility rate, dividend yield, dilution impact
and restrictions on exercising the SARs) by reference to our
specialists’ knowledge of comparable transactions, and
independently compiled databases/indices.
|
During the audit
process, we discussed with the Audit Committee that there was
insufficient evidence to support the initial valuation estimate of
the SARs based on the fact that the model applied had not taken
into consideration the dilution impact of the future exercise of
the SARs. Management revised the model resulting in an adjustment
to the SARs valuation to the current carrying amount of US$10
million which we concluded was not materially misstated. |
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and
our allocation of performance materiality determine our audit scope
which enable us to form an opinion on the financial statements
under International Standards on Auditing (UK and Ireland).
Our application of materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
This is the magnitude of an omission or misstatement that,
individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial
statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined materiality for the Company to be US$1.22 million (2015: US$1.25 million), which is 1% (2015: 1%) of total
equity. This provided a basis for determining the nature, timing
and extent of risk assessment procedures, identifying and assessing
the risk of material misstatement and determining the nature,
timing and extent of further audit procedures.
It was considered inappropriate to determine materiality based
on Company profit before tax as the primary focus of the Company is
the overall performance of investments held which includes a
significant asset revaluation component. In addition, profit is not
a key metric reported upon by the Company, with the ability to make
dividend payments not limited by the profitability of the Company
in any particular period.
We believe that total equity provides us with an appropriate
basis for audit materiality as net asset value is a key published
performance measure and is a key metric used by management in
assessing and reporting on the overall performance of the
Company.
During the course of our audit, we reassessed initial
materiality and noted no factors leading us to amend materiality
levels from those originally determined at the audit planning
stage.
Performance materiality
This refers to the application of materiality at the individual
account or balance level. It is set at an amount to
reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our
assessment of the Company’s overall control environment, our
judgement was that performance materiality was 75% (2015: 75%) of
our planning materiality, namely US$914k (2015: US$940k). We have set performance materiality at
this percentage due to investment strategy remaining consistent
with our previous experience and limited identification of audit
findings in previous periods.
Reporting threshold
An amount below which identified misstatements are considered as
being clearly trivial.
We agreed with the Audit Committee that we would report to them
all uncorrected audit differences in excess of US$61k (2015: US$63k), which is set at 5% of planning
materiality, as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the directors; and the
overall presentation of the financial statements. In addition, we
read all the financial and non-financial information in the annual
report to identify material inconsistencies with the audited
financial statements and to identify any information that is
apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities
Statement set out on pages 14 and 15, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view. Our responsibility
is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors.
This report is made solely to the Company’s members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law 2008. Our audit work has been
undertaken so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report and
for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work,
for this report, or for the opinions we have formed.
Matters on which we are required to report by exception
| ISAs (UK and Ireland)
reporting |
We are
required to report to you if, in our opinion, financial and
non-financial information in the annual report is:
-
materially inconsistent with the information in the audited
financial statements; or
-
apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Company acquired in the
course of performing our audit; or
-
otherwise misleading.
In particular, we are required to report whether we have identified
any inconsistencies between our knowledge acquired in the course of
performing the audit and the directors’ statement that they
consider the annual report and accounts taken as a whole is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the entity’s performance, business model
and strategy; and whether the annual report appropriately addresses
those matters that we communicated to the audit committee that we
consider should have been disclosed. |
We have no exceptions
to report. |
| Companies (Guernsey)
Law 2008 reporting |
We are
required to report to you if, in our opinion:
-
proper accounting records have not been kept; or
- the
financial statements are not in agreement with the accounting
records; or
- we
have not received all the information and explanations we require
for our audit. |
We have no exceptions
to report. |
| Listing Rules review
requirements |
We are
required to review:
- The
directors’ statement in relation to going concern set out in the
Directors’ Report and longer-term viability, set out on in the
Strategic Report respectively; and
- the
part of the Corporate Governance Statement relating to the
Company’s compliance with the provisions of the UK Corporate
Governance Code specified for our review. |
We have no exceptions
to report. |
| ISAs (UK and Ireland)
reporting |
We are
required to give a statement as to whether we have anything
material to add or to draw attention to in relation to:
- the
directors’ confirmation in the annual report that they have carried
out a robust assessment of the principal risks facing the entity,
including those that would threaten its business model, future
performance, solvency or liquidity;
- the
disclosures in the annual report that describe those risks and
explain how they are being managed or mitigated;
- the
directors’ statement in the financial statements about whether they
considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any
material uncertainties to the entity’s ability to continue to do so
over a period of at least twelve months from the date of approval
of the financial statements; and
- the
directors’ explanation in the annual report as to how they have
assessed the prospects of the entity, over what period they have
done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation
that the entity will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions. |
We have nothing
material to add or to draw attention to other than as explained in
the “Emphasis of matter” paragraph above. |
Christopher James Matthews,
FCA
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
21 March 2017
Notes:
1. The
maintenance and integrity of the Company’s web site is the
responsibility of the Directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were
initially presented on the web site.
2. Legislation
in the Guernsey governing the
preparation and dissemination of group financial statements may
differ from legislation in other jurisdictions.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December,
2016
|
|
Revenue |
|
Capital |
|
Total |
|
Revenue |
|
Capital |
|
Total |
|
|
01.01.2016 to |
|
01.01.2016 to |
|
01.01.2016 to |
|
01.01.2015 to |
|
01.01.2015 to |
|
01.01.2015 to |
|
|
31.12.2016 |
|
31.12.2016 |
|
31.12.2016 |
|
31.12.2015 |
|
31.12.2015 |
|
31.12.2015 |
|
Notes |
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
2,067,155 |
|
- |
|
2,067,155 |
|
1,334,322 |
|
- |
|
1,334,322 |
|
Interest income |
- |
|
- |
|
- |
|
108,112 |
|
- |
|
108,112 |
|
Foreign exchange
movements |
- |
|
1,044,768 |
|
1,044,768 |
|
471,537 |
|
- |
|
471,537 |
|
Loss on financial
assets |
|
|
|
|
|
|
|
|
|
|
|
|
at fair value through
profit or loss |
- |
|
(828,874) |
|
(828,874) |
|
- |
|
(2,189,023) |
|
(2,189,023) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income |
2,067,155 |
|
215,894 |
|
2,283,049 |
|
1,913,971 |
|
(2,189,023) |
|
(275,052) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4 |
Management fee |
(1,856,441) |
|
- |
|
(1,856,441) |
|
(1,744,965) |
|
- |
|
(1,744,965) |
| 5 |
Other expenses |
(1,087,394) |
|
- |
|
(1,087,394) |
|
(1,128,764) |
|
- |
|
(1,128,764) |
|
Foreign exchange
movements |
(2,024,456) |
|
- |
|
(2,024,456) |
|
- |
|
(247,561) |
|
(247,561) |
|
Transaction costs |
- |
|
(260,045) |
|
(260,045) |
|
- |
|
(230,445) |
|
(230,445) |
|
Bank interest |
(13,951) |
|
- |
|
(13,951) |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses |
(4,982,242) |
|
(260,045) |
|
(5,242,287) |
|
(2,873,729) |
|
(478,006) |
|
(3,351,735) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
before tax |
(2,915,087) |
|
(44,151) |
|
(2,959,238) |
|
(959,758) |
|
(2,667,029) |
|
(3,626,787) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3 |
Withholding tax |
(316,585) |
|
- |
|
(316,585) |
|
(499,671) |
|
- |
|
(499,671) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
after tax |
(3,231,672) |
|
(44,151) |
|
(3,275,823) |
|
(1,459,429) |
|
(2,667,029) |
|
(4,126,458) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year |
(3,231,672) |
|
(44,151) |
|
(3,275,823) |
|
(1,459,429) |
|
(2,667,029) |
|
(4,126,458) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2 |
Loss per Ordinary
Share - |
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted
(in cents) |
(3.50) |
|
(0.05) |
|
(3.55) |
|
(1.58) |
|
(2.88) |
|
(4.46) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The “Total” column of this statement represents the Company’s
Statement of Comprehensive Income, prepared in accordance with
IFRS. The supplementary ‘Revenue’ and ‘Capital’ columns are both
prepared under guidance published by the Association of Investment
Companies. There was no comprehensive income other than the loss
for the year.
All items in the above statement derive from continuing
operations.
The notes form an integral part of the Financial Statements.
STATEMENT OF FINANCIAL POSITION
as at 31 December, 2016
|
|
|
31.12.2016 |
|
31.12.2015 |
|
Notes |
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
Non-current
assets |
|
|
|
|
| 6 |
Financial assets at
fair value through profit or loss |
|
98,377,672 |
|
106,417,543 |
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
| 7 |
Receivables |
|
1,189,423 |
|
399,051 |
|
Cash and cash
equivalents |
|
22,688,931 |
|
19,009,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
assets |
|
23,878,354 |
|
19,408,589 |
|
Current
liabilities |
|
|
|
|
| 8 |
Payables |
|
332,566 |
|
529,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current
assets |
|
23,545,788 |
|
18,879,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets |
|
121,923,460 |
|
125,296,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
| 9 |
Stated capital |
|
92,352 |
|
92,452 |
| 9 |
Redemption
reserve |
|
85,435,381 |
|
85,533,077 |
| 9 |
Capital redemption
reserve |
|
323,157 |
|
323,057 |
|
Other reserves |
|
36,072,570 |
|
39,348,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity |
|
121,923,460 |
|
125,296,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares in
issue |
|
92,352,602 |
|
92,452,602 |
|
|
|
|
|
|
|
|
|
|
|
|
| 2 |
Net Asset Value per
Ordinary Share (in cents) |
|
132.02 |
|
135.53 |
|
|
|
|
|
|
The Financial Statements were approved by the Board of Directors
on 21 March, 2017 and signed on its
behalf by:
John Hawkins
Richard Battey
Chairman
Director
The notes form an integral part of the Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December,
2016
|
|
Share |
|
Capital |
|
|
|
|
|
Capital |
|
Capital |
|
Capital Reserve/ |
|
|
|
|
|
Capital |
|
Redemption |
|
Redemption |
|
Revenue |
|
Reserve/ |
|
Reserve/ |
|
Exchange |
|
|
|
|
|
Account |
|
Reserve |
|
Reserve |
|
Reserve |
|
Realised |
|
Unrealised |
|
Differences |
|
Total |
|
|
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In
U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
| Balances
at 1 January, 2016 |
92,452 |
|
323,057 |
|
85,533,077 |
|
(16,365,019) |
|
67,395,805 |
|
(6,825,610) |
|
(4,856,783) |
|
125,296,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income/(expense) for the
year |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss)/gain
for the year after tax |
- |
|
- |
|
- |
|
(3,231,672) |
|
(2,480,866) |
|
1,391,947 |
|
1,044,768 |
|
(3,275,823) |
|
| Capital
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Repurchase
of shares |
(100) |
|
100 |
|
(97,696) |
|
- |
|
- |
|
- |
|
- |
|
(97,696) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances
at 31 December, 2016 |
92,352 |
|
323,157 |
|
85,435,381 |
|
(19,596,691) |
|
64,914,939 |
|
(5,433,663) |
|
(3,812,015) |
|
121,923,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share |
|
Capital |
|
|
|
|
|
Capital |
|
Capital |
|
Capital Reserve/ |
|
|
|
|
|
Capital |
|
Redemption |
|
Redemption |
|
Revenue |
|
Reserve/ |
|
Reserve/ |
|
Exchange |
|
|
|
|
|
Account |
|
Reserve |
|
Reserve |
|
Reserve |
|
Realised |
|
Unrealised |
|
Differences |
|
Total |
|
|
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
In U.S. Dollars |
|
| Balances
at 1 January, 2015 |
92,452 |
|
323,057 |
|
85,533,077 |
|
(14,905,590) |
|
53,873,130 |
|
9,116,533 |
|
(4,609,222) |
|
129,423,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
comprehensive income/(expense) for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/gain for the year after tax |
- |
|
- |
|
- |
|
(1,459,429) |
|
13,522,675 |
|
(15,942,143) |
|
(247,561) |
|
(4,126,458) |
| Capital
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Repurchase
of shares |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances
at 31 December, 2015 |
92,452 |
|
323,057 |
|
85,533,077 |
|
(16,365,019) |
|
67,395,805 |
|
(6,825,610) |
|
(4,856,783) |
|
125,296,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The notes form an integral part of the Financial Statements.
STATEMENT OF CASH FLOWS
for the year ended 31 December,
2016
|
|
|
01.01.2016 to |
|
01.01.2015 to |
|
|
|
31.12.2016 |
|
31.12.2015 |
|
Notes |
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
Cash flows from
operating activities |
|
|
|
|
| 10 |
Net cash outflow from
operating activities |
|
(5,347,772) |
|
(2,998,658) |
|
Interest received |
|
- |
|
108,112 |
|
Interest paid |
|
(13,951) |
|
- |
|
Dividends
received |
|
2,098,471 |
|
1,334,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow from
operating activities |
|
(3,263,252) |
|
(1,556,224) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
|
Purchase of
investments |
|
(68,253,522) |
|
(70,769,961) |
|
|
|
|
|
|
|
Sale of
investments |
|
74,249,095 |
|
86,178,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash inflow from
investing activities |
|
5,995,573 |
|
15,408,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash inflow
before financing activities |
|
2,732,321 |
|
13,852,463 |
|
|
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
|
|
|
|
|
|
| 9 |
Repurchase of
shares |
|
(97,696) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow from
financing activities |
|
(97,696) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
and cash equivalents |
|
2,634,625 |
|
13,852,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
net cash flow to |
|
|
|
|
|
movement in net
funds |
|
|
|
|
|
|
|
|
|
|
|
Net cash inflow |
|
2,634,625 |
|
13,852,463 |
|
|
|
|
|
|
|
Effects of foreign
exchange rate changes |
|
1,044,768 |
|
(247,561) |
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of the year |
|
19,009,538 |
|
5,404,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of the year |
|
22,688,931 |
|
19,009,538 |
|
|
|
|
|
|
The notes form an integral part of the Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December,
2016
Note 1 Principal
Accounting Policies
The following accounting policies have been applied consistently
in dealing with items which are considered to be material in
relation to the Company's Financial Statements:
Basis of preparation
The Financial Statements are prepared in accordance with
International Financial Reporting Standards (“IFRS”) adopted by the
European Union, which comprise standards and interpretations
approved by the International Accounting Standards Board (IASB) and
are in compliance with The Companies (Guernsey) Law, 2008. The Financial Statements
have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of financial assets
at fair value through profit or loss.
Presentation of information
Where presentational guidance set out in the Statement of
Recommended Practice (“SORP”) for Investment Companies issued by
the Association of Investment Companies (“AIC”) in November 2014 is consistent with the requirements
of IFRS, the Directors have sought to prepare the Financial
Statements on a basis compliant with the SORP. Supplementary
information which analyses the Statement of Comprehensive Income
between items of a revenue and capital nature has been presented
within the Statement of Comprehensive Income.
Standards, amendments and
interpretations effective during the year with relevance to the
Company
The following amendments were applicable for the first time this
year but had no impact on the financial position or performance of
the Company.
- IFRS 10 (Amendments) – Consolidated Financial Statements
(effective 1 January, 2016)
- IFRS 12 (Amendments) – Disclosure of Interests in Other
Entities (effective 1 January,
2016)
- IAS 1 (Amendments) – Disclosure Initiative (effective
1 January, 2016)
- IAS 7 (Amendments) – Statement of Cash Flows (effective
1 January, 2016)
- IAS 27 (Amendments) – Separate Financial Statements (effective
1 January, 2016)
- IAS 28 (Amendments) – Investments in Associates and Joint
Ventures (effective 1 January,
2016)
Investment Entities, Applying the Consolidation Exception
Narrow-scope amendments to IFRS 10, IFRS 12 and IAS 28 introduce
clarifications to the requirements when accounting for
investment entities. The amendments also provide relief in
particular circumstances, which will reduce the costs of applying
the Standards.
Standards, amendments and
interpretations issued but not yet effective with relevance to the
Company
- IFRS 9 Financial Instruments – (effective 1 January, 2018)
- IAS 34 – Interim Financial Reporting (Disclosure of
information elsewhere in the interim accounts) (Annual improvements
process)
IFRS 9, Financial Instruments
In July 2014, the IASB issued the
final version of IFRS 9 Financial Instruments which reflects all
phases of the financial instruments project and replaces IAS 39
Financial Instruments: Recognition and Measurement and all previous
versions of IFRS 9. The standard introduces new requirements for
classification and measurement, impairment, and hedge accounting.
IFRS 9 is effective for annual periods beginning on or after
1 January 2018, with early
application permitted. Retrospective application is required, but
comparative information is not compulsory. Early application of
previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if
the date of initial application is before 1
February, 2015. The adoption of IFRS 9 will not have an
effect on the classification and measurement of the Company’s
financial assets, or financial liabilities.
The Company’s financial instruments consist of equity
instruments and derivatives. Due to the cash flow characteristics
of such financial instruments, on application of IFRS 9, they will
continue to be classified as fair value through the profit or
loss.
There are no other standards, amendments or interpretations that
are not yet effective that would be expected to have a material
impact on the Company.
The Board anticipate that the adoption of these standards and
interpretations in a future period, once they are effective, will
not have a material impact on the Financial Statements of the
Company.
Assessment as investment entity
Entities that meet the definition of an investment entity within
IFRS 10 are required to measure their subsidiaries, at fair value
through profit or loss rather than consolidate them. The criteria
which define an investment entity are, as follows:
- An entity that obtains funds
from one or more investors for the purpose of providing those
investors with investment services;
- An entity that commits to its
investors that its business purpose is to invest funds solely for
returns from capital appreciation, investment income or both;
and
- An entity that measures and
evaluates the performance of substantially all of its investments
on a fair value basis.
The Company meets the criteria as follows:
The Company provides investment management services and has a
number of investors who pool their funds to gain access to these
services and investment opportunities that they might not have had
access to individually. The Company, being listed on the London
Stock Exchange, obtains funding from a diverse group of external
shareholders. The Company’s objective is consistent with that of an
investment entity. The Company has the intention to realise the
constituents of each of its investment classes.
The Company measures and evaluates the performance of
substantially all of its investments on a fair value basis. The
fair value method is used to represent the Company’s performance in
its communication to the market. In addition, the Company reports
fair value information internally to Directors, who use fair value
as a significant measurement attribute to evaluate the performance
of its investments and to make investment decisions for mature
investments.
The Board has also concluded that the Company meets the
additional characteristics of an investment entity, in that it has
more than one investment; the investments are predominantly in the
form of equities and similar securities; it has more than one
investor and its investors are not related parties.
Significant accounting judgements and
estimates
The preparation of the Financial Statements in conformity with
IFRS requires management to make judgements, estimates and
assumptions that affect the application of policies and the
reported amounts of assets and liabilities, income and expense and
disclosure of contingent assets. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making the judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from those
estimates.
Going concern
In accordance with the Company’s Articles, the Board is required
every three years to include in the business to be considered by
shareholders at the Annual General Meeting a Special Resolution
that the Company should be wound up. The last such resolution was
tabled at the eighteenth Annual General Meeting held in 2014. The
Shareholders voted against the resolution, and in favour of the
continuation of the Company. As announced on 10 January 2017 (the "Possible Offer
Announcement"), the independent directors of the Company are in
preliminary discussions regarding a possible offer from Prospect
Co., Ltd (“Prospect”) for the entire issued and to be issued share
capital of the Company. The possible offer is under consideration,
discussion and evaluation by both parties. The Possible Offer
Announcement does not amount to a firm intention to make an offer
under Rule 2.7 of The City Code on Takeovers and Mergers, and as
stated in the Possible Offer Announcement there can be no certainty
that an offer for the Company will ultimately be
made. If such a transaction: (i) was to be announced in
accordance with Rule 2.7 of The City Code on Takeovers and Mergers;
and (ii) was to be completed prior to the 2017 AGM, no AGM would be
held and no discontinuation vote would take
place. Whilst acknowledging the uncertainty of the
possible offer, and the upcoming vote for discontinuation, the fact
that neither the Board nor the Investment Advisor have received any
indication that the Shareholders are no longer in favour of the
investment policy and that the assets of the Company consist mainly
of securities that are readily realisable, leads the Directors to
believe that the discontinuation vote will not be passed and that
the Company has adequate financial resources to meet its
liabilities as they fall due for at least twelve months from the
date of this report, and that it is therefore appropriate for the
Financial Statements to be prepared on a going concern basis.
Factors regarding the going concern basis are also discussed in
Note 1 of the Financial Statements.
Share Capital
The Company holds a discontinuation vote every three years,
however as there is only one class of share in issue they continue
to be presented as equity in accordance with IAS 32 – “Financial
Instruments: Disclosure and presentation”.
Fair value of securities not quoted
in an active market
In the process of applying the Company’s accounting policies,
management has made the following judgements, which have the most
significant effect on the amounts recognised in the financial
statements:
The Company carries its investments at fair value, with changes
in value being recognised in the Statement of Comprehensive Income.
In cases of unlisted investments where prices of investments are
not quoted in an active market, estimates are based on available
traded prices, comparisons with the valuations of comparable
instruments or by using valuation techniques, such as the Black
Scholes model.
The Investment Manager exercises judgement on the valuation of
unlisted investments. Further details on the valuation techniques
applied to level 3 investments can be found in Note 14 of the
Financial Statements.
Financial instruments
Financial assets and financial liabilities are recognised in the
Company's Statement of Financial Position when the Company becomes
a party to the contractual provisions of the instrument. Financial
assets and liabilities, other than those shown at fair value
through profit or loss, are measured at amortised cost using the
effective interest rate method.
Derivatives
The Stock Acquisition Rights are treated as a derivative and as
such are recognised at fair value on the date on which they are
entered into and subsequently re-measured at their fair value. Fair
value is determined by utilising appropriate valuation techniques,
namely the Black-Scholes-Merton model. The gain or loss on
re-measurement to fair value is recognised immediately through
profit or loss in the Statement of Comprehensive Income within net
gain/loss on financial assets at fair value through profit or loss
in the period in which they arise.
Financial assets at fair value through
profit or loss (“investments”)
All “regular way” purchases and sales of investments are
recognised on the trade date, that is the date on which the Company
commits to purchase or sell the investment). "Regular way"
purchases or sales are purchases or sales of financial assets that
require delivery of assets within the time frame generally
established by regulation or convention in the market place.
All of the Company's investments are recorded at fair value
through profit or loss at the time of acquisition. Investments are
initially recognised at fair value, normally being the cost
incurred in their acquisition. Any transaction costs are expensed
in the Statement of Comprehensive Income. After initial
recognition, investments are measured at fair value. Gains and
losses arising from changes in fair value are presented in the
Statement of Comprehensive Income in the period in which they
arise.
Investments are designated at fair value through profit or loss
at inception because they are managed and their performance
evaluated on a fair value basis and information thereon is
evaluated by the management of the Company on a fair value
basis.
Other financial instruments
For other financial instruments, including other receivables and
other payables, the carrying amounts as shown in the Statement of
Financial Position approximate to fair values due to the short term
nature of these financial instruments.
Fair value
The Company’s investments consist of equity and equity-related
investments in smaller companies in Japan and unlisted stock acquisition right and
corporate bonds.
Listed investments held at the statement of financial position
date are valued at bid prices quoted on the principal stock
exchange on which the investments are traded. Gains and losses
arising from changes in fair value are presented in the Statement
of Comprehensive Income in the period in which they arise.
Unlisted investments are valued at the Directors' estimate of
their fair value in accordance with the requirements of IFRS 13
'Fair Value Measurement’. The Directors’ estimates are based on
available price data, comparisons with the valuations of comparable
corporate bonds or by using appropriate valuation techniques, such
as the Black Scholes Merton model.
Derecognition of financial
instruments
A financial asset is derecognised when the Company has
transferred substantially all the risks and rewards of the asset,
or has neither transferred nor retained substantially all the risks
and rewards of the asset, but has transferred control of the
asset.
A financial liability is derecognised when the obligation under the
liability is discharged or cancelled.
Income
Income arising on the investments is recognised when the right
to receive it has been met and is recorded gross of withholding
tax. Bank interest is accounted for on an accruals basis.
Expenses
Expenses are accounted for on an accruals basis. Expenses
incurred on the acquisition of investments at fair value through
profit or loss are charged to the Statement of Comprehensive Income
in capital. All other expenses are charged to the Statement of
Comprehensive Income in revenue.
Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand
deposits and highly liquid investments readily convertible to known
amounts of cash and subject to insignificant risk of change in
value. Cash and cash equivalents at the year end constituted demand
deposits.
Capital reserves
Gains and losses recorded on the realisation of investments and
realised exchange differences of a capital nature are transferred
to the realised capital reserve. Unrealised gains and losses
recorded on the revaluation of investments held at a period end and
unrealised exchange differences of a capital nature are transferred
to the unrealised capital reserve.
Foreign currencies
(i) Functional and presentation
currency
The Company’s shares are denominated in United States dollars and accordingly the
Board have determined that the Company’s functional and
presentation currency is United
States dollars, despite the fact that the investments are in
Japanese yen.
(ii) Foreign currency transactions
Monetary assets and liabilities and investments at fair value
through profit or loss are translated into United States dollars at the rate of exchange
ruling at the Statement of Financial Position date. Investment
transactions and income and expenditure items are translated at the
rate of exchange ruling at the date of the transactions. Gains and
losses on foreign exchange are included in the Statement of
Comprehensive Income.
Note 2 Loss per Ordinary Share -
Basic and Diluted and Net Asset Value per Ordinary Share - Basic
and Diluted
The loss per Ordinary Share - Basic and Diluted has been
calculated based on the weighted average number of Ordinary Shares
of 92,392,220 and a net loss of US$3,275,823 (2015: 92,452,602 Ordinary Shares
and a net loss of US$4,126,458).
There were no dilutive elements to shares issued or repurchased
during the year.
The Net Asset Value per Ordinary Share - Basic and Diluted has
been calculated based on the number of shares in existence at the
year end date of 92,352,602 (2015: 92,452,602) and shareholders'
funds attributable to equity interests of US$121,923,460 (2015: US$125,296,979).
Note 3 Taxation
The Company has been granted Exempt Status under the terms of
The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in
Guernsey. Its liability is an
annual fee of £1,200 (2015: £1,200).
The amount disclosed as withholding tax in the Statement of
Comprehensive Income relates solely to withholding tax suffered at
source, on income in the investing country, Japan.
Note 4 Management
Fees
The management fee is payable to the Manager, Prospect Asset
Management (Channel Islands)
(“PAM(CI)”), monthly in arrears at a rate of 1.5% per annum of the
Net Asset Value, which is calculated as of the last business day of
each month. Total management fees for the year amounted to
US$1,856,441 (2015: US$1,744,965) of which US$140,667 (2015: US$155,954) is due and payable at the year end.
The Management Agreement dated 1 December,
1994 remains in force until determined by the Company or by
the Manager giving the other party not less than three months'
notice in writing, subject to additional provisions included in the
agreement regarding a breach by either party.
Note 5 Other
Expenses
|
|
|
|
|
|
|
|
|
01.01.2016 to |
|
01.01.2015 to |
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
Administration and secretarial fees* |
|
|
|
|
|
|
309,407 |
|
290,827 |
|
Custodian's fees and charges** |
|
|
|
|
|
|
135,310 |
|
105,482 |
| General
expenses |
|
|
|
|
|
|
|
252,593 |
|
548,964 |
| Directors'
remuneration |
|
|
|
|
|
|
110,529 |
|
116,723 |
| Legal fees |
|
|
|
|
|
|
|
|
218,639 |
|
- |
| Auditors' fees |
|
|
|
|
|
|
|
|
39,392 |
|
46,133 |
| Non-audit fees |
|
|
|
|
|
|
|
|
21,524 |
|
20,635 |
| Bank interest |
|
|
|
|
|
|
|
|
13,951 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,101,345 |
|
1,128,764 |
|
|
|
|
|
|
|
|
|
|
|
|
*The administration and secretarial fees are payable to Northern
Trust International Fund Administration Services (Guernsey) Limited monthly in arrears at a rate
of 0.25% of the Net Asset Value of the Company as at the last
business day of the month. Total administration and secretarial
fees for the year amounted to US$309,407 (2015: US$290,827) of which US$23,445 (2015: US$25,992) is due and payable at the year
end.
** The custodian's fees and charges are payable to Northern
Trust (Guernsey) Limited monthly
in arrears at a rate of 0.08% of the value of the portfolio of the
Company as at the last business day of the month. Total custodian's
fees and charges for the year amounted to US$135,310 (2015: US$105,482) of which US$9,307 (2015: US$10,384) is due and payable at the year
end.
Note 6 Financial
Assets at Fair Value through Profit or Loss
|
|
|
|
|
|
|
|
|
01.01.2016 to |
|
01.01.2015 to |
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
| Opening
book cost |
|
|
|
|
|
|
113,243,153 |
|
114,885,517 |
| Purchases
at cost |
|
|
|
|
|
|
|
68,014,094 |
|
109,096,236 |
| Proceeds
on sale |
|
|
|
|
|
|
|
(75,225,091) |
|
(124,491,720) |
| Realised
(loss)/gain on sale |
|
|
|
|
|
|
(2,220,821) |
|
13,753,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Closing
book cost |
|
|
|
|
|
|
103,811,335 |
|
113,243,153 |
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealised
loss |
|
|
|
|
|
|
|
(5,433,663) |
|
(6,825,610) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value |
|
|
|
|
|
|
|
|
98,377,672 |
|
106,417,543 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
Receivables
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
|
|
In U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts
due from brokers |
|
|
|
|
|
|
977,551 |
|
151,847 |
| Dividends
receivable |
|
|
|
|
|
|
192,689 |
|
224,005 |
| Other
receivables |
|
|
|
|
|
|
|
19,183 |
|
23,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,189,423 |
|
399,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Payables
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts
due to brokers |
|
|
|
|
|
|
42,943 |
|
172,618 |
| Other creditors |
|
|
|
|
|
|
|
|
289,623 |
|
356,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,566 |
|
529,153 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 9 Share Capital, Redemption
Reserve & Capital Redemption Reserve
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
| Number
of shares |
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
150,000,000 |
|
|
Ordinary
Shares of US$0.001 each |
|
150,000 |
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000,000 |
|
|
"C"
Ordinary Shares of US$0.01 each |
600,000 |
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
As approved at the AGM on 18 August,
2016, the Company may purchase a maximum of 13,843,655
Ordinary Shares, equivalent to 14.99% of the issued share capital
of the Company as at the date of the AGM.
On 23 May, 2016, 100,000 shares
were repurchased at a price of US$0.975. The Redemption Reserve was utilised to
cancel these shares.
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
Redemption |
|
Redemption |
|
Ordinary Shares |
|
|
|
|
|
|
Share
Capital |
|
Reserve |
|
Reserve |
|
Number of shares |
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
92,452,602 |
|
Balance at
1 January, 2016 |
|
92,452 |
|
85,533,077 |
|
323,057 |
|
|
Shares
repurchased and |
|
|
|
|
|
|
|
|
(100,000) |
|
cancelled
during the year |
|
(100) |
|
(97,696) |
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,352,602 |
|
Balance at
31 December, 2016 |
92,352 |
|
85,435,381 |
|
323,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
Redemption |
|
Redemption |
| Ordinary
Shares |
|
|
|
|
|
|
Share
Capital |
|
Reserve |
|
Reserve |
| Number
of shares |
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
92,452,602 |
|
Balance at
1 January, 2015 |
|
92,452 |
|
85,533,077 |
|
323,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,452,602 |
|
Balance at
31 December, 2015 |
92,452 |
|
85,533,077 |
|
323,057 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Reserves
The Redemption Reserve account is a distributable reserve
account which can be used for, among other things, the payment of
dividends, if any. The Directors do not recommend the payment of a
dividend for the year.
The Capital Redemption Reserve is used to cancel the shares of
the Company when they are redeemed or there is a share buyback.
Ordinary Shares carry the right to vote at general meetings of
the Company and to receive dividends and, in a winding-up will
participate in any surplus assets remaining after settlement of any
outstanding liabilities of the Company.
Note 10 Reconciliation of Deficit on Ordinary
Activities to Net Cash Outflow from Operating Activities
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
| Revenue
loss on ordinary activities for the year |
|
|
(3,231,672) |
|
(1,459,429) |
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
| Interest
received |
|
|
|
|
|
|
- |
|
(108,112) |
| Interest paid |
|
|
|
|
|
|
|
|
13,951 |
|
- |
| Dividends
received |
|
|
|
|
|
|
(2,067,155) |
|
(1,334,322) |
|
Decrease/(increase) in other receivables |
|
|
|
|
4,016 |
|
(103,925) |
|
(Decrease)/increase in other creditors |
|
|
|
|
|
|
(66,912) |
|
7,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash
outflow from operating activities |
|
|
|
|
(5,347,772) |
|
(2,998,658) |
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Analysis of Financial Assets and Liabilities
by Measurement Basis
|
|
|
|
|
|
|
|
Investments |
|
Net
current |
|
|
|
|
|
|
|
|
|
|
at
fair value |
|
assets |
|
Total |
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
| As at 31
December, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value through profit or loss |
|
98,377,672 |
|
- |
|
98,377,672 |
| Cash and
cash equivalents |
|
|
|
|
|
|
- |
|
22,688,931 |
|
22,688,931 |
| Receivables |
|
|
|
|
|
|
|
- |
|
1,189,423 |
|
1,189,423 |
|
|
|
|
|
|
|
|
98,377,672 |
|
23,878,354 |
|
122,256,026 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
| Payables |
|
|
|
|
|
|
|
- |
|
332,566 |
|
332,566 |
|
|
|
|
|
|
|
|
- |
|
332,566 |
|
332,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
Net
current |
|
|
|
|
|
|
|
|
|
|
at
fair value |
|
assets |
|
Total |
|
|
|
|
|
|
|
|
In
U.S. Dollars |
|
In
U.S. Dollars |
|
In
U.S. Dollars |
| As at 31
December, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value through profit or loss |
|
106,417,543 |
|
- |
|
106,417,543 |
| Cash and
cash equivalents |
|
|
|
|
|
|
- |
|
19,009,538 |
|
19,009,538 |
| Receivables |
|
|
|
|
|
|
|
- |
|
399,051 |
|
399,051 |
|
|
|
|
|
|
|
|
106,417,543 |
|
19,408,589 |
|
125,826,132 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
| Payables |
|
|
|
|
|
|
|
- |
|
529,153 |
|
529,153 |
|
|
|
|
|
|
|
|
- |
|
529,153 |
|
529,153 |
Note 12 Related Party
Transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions.
The Directors are responsible for the determination of the
investment policy of the Company and have overall responsibility
for the Company's activities. The Company’s investment portfolio is
managed by PAM(CI) (the “Manager”) whose parent company is Prospect
Co., Ltd (Kabushiki Kaisha Prospect (“KKP”), a Japanese
Company).
Mr Rupert Evans is a Director of
the Manager.
Directors’ fees are disclosed in Note 5. The basic fee payable
to Directors in 2016 is £25,000 (US$30,890) (2015: £25,000 (US$36,848)), the Chairman of the Audit Committee
£27,500 (US$33,979) (2015: £27,500
(US$40,532)) and the Chairman of the
Board £30,000 (US$37,068) (2015:
£30,000 (US$44,217)) per annum. At
31 December, 2016, US$25,484 (2015: US$30,399) of the fee remained payable.
No Directors holding office at 31
December, 2016, or their associates, had any beneficial
interest in the Company's shares. There have been no changes in
these interests between the end of the period and up to the date of
this report.
Mr. Curtis Freeze is a Director
of PAM(CI), the Manager of The Prospect Japan Fund Limited, and is
the President of Prospect Co. Ltd., the owner of PAMI, the
Investment Advisor to The Prospect Japan Fund Limited and PAM(CI),
the Manager of The Prospect Japan Fund Limited.
Management fees are disclosed in Note 4. Fees due to the
Investment Advisor are paid by PAM(CI) from these management
fees.
The Company holds both Equity shares and SARs in Prospect Co.
Ltd. The value of the SARs is disclosed in Note 14 under Unlisted
investments.
Note 13 Financial Risk
Management Objectives and Policies
Financial instruments
In accordance with its investment objectives and policies, the
Company holds financial instruments which at any one time may
comprise the following:
* securities held in accordance with the
investment objectives and policies
* cash and short-term debtors and creditors
arising directly from operations
* borrowing used to finance investment
activity
* derivative transactions including investment
in warrants and forward currency contracts
* options or futures for hedging purposes
The financial instruments held by the Company principally
comprise equities listed on the stock market in Japan. The specific risks arising from the
Company's exposure to these instruments, and the Manager/Investment
Advisor's policies for managing these risks, which have been
applied throughout the year, are summarised below.
Market price risk
The Company's investment portfolio - particularly its equity
investments - is exposed to market price fluctuations, which are
monitored by the Manager/Investment Advisor in pursuance of the
investment objectives and policies.
Exceptional risks associated with investment in Japanese smaller
companies may include:
a) greater price volatility, substantially
less liquidity and significantly smaller market capitalisation,
and
b) more substantial government intervention in the
economy, including restrictions on investing in companies or in
industries deemed sensitive to relevant national interests.
Market price sensitivity analysis
The sensitivity of the Company to market price risk can be
approximated by measuring the impact that a movement in the MSCI
Japan Small Cap Index would have on the percentage of funds
invested. The MSCI Developed Markets Small Cap Indices offer an
exhaustive representation of the size segment by targeting
companies that are in the Investable Market Index but not in the
Standard Index in a particular developed market. The indices
include Value and Growth style indices and industry indices based
on the Global Industry Classification Standard. The MSCI Japan
Small Cap Index provides an indicator of the effect of market price
risk on the Company's portfolio since its characteristics with
respect to average market capitalisation more closely resemble the
investment strategy pursued by the Company. However, the Company's
investments do not reflect the full array of companies on the
index. At 31 December, 2016, using a
beta of 0.646 (2015: 0.485), a 1% positive/negative movement in the
index would produce a positive/negative movement in the investments
of the Company of US$635,520 (2015:
US$516,125) for equity related
securities. This relationship between the movement in the value of
the assets of the Company and the Index is of a linear nature.
A 1% increase/decrease in the value of the SARs would impact the
NAV by US$99,907 (2015: US$23,914).
Foreign currency risk
The Company principally invests in securities denominated in
Japanese yen rather than United
States dollars, the functional currency of the Company.
Therefore, the Statement of Financial Position may be affected by
movements in the exchange rates of such currencies against
the United States dollar. The
Manager/Investment Advisor has the power to manage exposure to
currency movements by using forward currency contracts. The Company
was not party to any such instruments at the statement of financial
position date in either the current or prior year.
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.
The treatment of currency transactions other than in
United States dollars is set out
in Note 1 to the Financial Statements under "Foreign
Currencies".
The Company's currency exposure is as follows:
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
|
Investments |
|
|
|
|
|
|
|
|
| Japanese
Yen (¥11,515,598,396; 2015:¥12,815,864,703) |
|
98,377,672 |
|
106,417,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,377,672 |
|
106,417,543 |
|
|
|
|
|
|
|
|
|
|
| Other
(Liabilities)/Assets |
|
|
|
|
|
|
|
| US
Dollars |
|
|
|
|
|
(190,156) |
|
(188,836) |
| Sterling
(£40,818; 2015:£74,287) |
|
|
|
(50,170) |
|
(110,095) |
| Japanese
Yen (¥2,784,283,574; 2015:¥2,309,650,737) |
|
23,786,114 |
|
19,178,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,545,788 |
|
18,879,436 |
|
|
|
|
|
|
|
|
|
|
The below details the Company's sensitivity to a 10%
(31 December, 2015: 10%) change in
foreign exchange rates against the US dollar.
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
| Impact on
Statement of Comprehensive Income and Equity in response to a |
|
|
|
|
| - 10%
increase in the US dollar against other currencies |
|
|
|
(12,250,087) |
|
(12,548,581) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - 10%
decrease in the US dollar against other currencies |
|
|
|
12,250,087 |
|
12,548,581 |
Interest rate risk
Interest receivable on bank deposits or payable on bank
overdraft positions will be affected by fluctuations in interest
rates, however the value of the underlying cash positions will not
be affected.
The direct effect of movements in interest rates are not
material on cash and cash equivalents as the Company predominantly
keeps its surplus cash in Japanese Yen on which it does not earn
interest.
If the risk-free rate of return increased/decreased by 0.5%, the
impact on the net asset value and the profit and loss for the year
would be an increase /decrease/ of US$113,445 (2015: US$95,686 with a 0.5% increase/decrease).
Short term debtors and creditors
Trade and other receivables and creditors do not carry interest
and are short term in nature. They are stated at nominal value as
reduced by appropriate allowances for irrecoverable amounts in the
case of receivables.
Liquidity risk
Liquidity risk is the risk that the Company may encounter in
realising assets or otherwise raising funds to meet financial
commitments.
The Company invests primarily in listed securities. The tables
below analyse liquidity of the Company's securities based on
trading volumes in the period after the statement of financial
position date and maturity of other financial assets and
liabilities. Although market values are low in comparison to the
Company’s shareholding for some securities, there is sufficient
volume to demonstrate an active market.
The Investment Manager considers expected cash flows from
financial assets based on traded volumes in assessing and managing
liquidity risk, in particular its cash resources and trade
receivables. Cash flows from trade and other receivables are all
contractually due within twelve months. Liquidity risk is not
deemed to be significant.
As at 31 December, 2016
|
Up to
1 week |
|
1
week to 1 month |
|
1-6
months |
|
6-12
months |
|
Greater than 12 months |
|
Total |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial
assets |
|
|
|
|
|
|
|
|
|
|
|
| Financial assets at
fair |
|
|
|
|
|
|
|
|
|
|
|
| value through profit
or loss |
10,838,996 |
|
22,519,263 |
|
40,356,666 |
|
4,523,359 |
|
20,139,388 |
|
98,377,672 |
| Dividends
receivable |
- |
|
- |
|
192,689 |
|
- |
|
- |
|
192,689 |
| Other receivables |
- |
|
- |
|
19,183 |
|
- |
|
- |
|
19,183 |
| Cash and cash
equivalents |
22,688,931 |
|
- |
|
- |
|
- |
|
- |
|
22,688,931 |
| Securities sold
receivable |
977,551 |
|
- |
|
- |
|
- |
|
- |
|
977,551 |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial
liabilities |
|
|
|
|
|
|
|
|
|
|
|
| Amounts due to
brokers |
(42,943) |
|
- |
|
- |
|
- |
|
- |
|
(42,943) |
| Other creditors |
- |
|
(231,225) |
|
(58,398) |
|
- |
|
- |
|
(289,623) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
34,462,535 |
|
22,288,038 |
|
40,510,140 |
|
4,523,359 |
|
20,139,388 |
|
121,923,460 |
As at 31
December, 2015
|
Up to
1 week |
|
1
week to 1 month |
|
1-6
months |
|
6-12
months |
|
Greater than 12 months |
|
Total |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial
assets |
|
|
|
|
|
|
|
|
|
|
|
| Financial assets at
fair |
|
|
|
|
|
|
|
|
|
|
|
| value through profit
or loss |
16,158,458 |
|
33,525,242 |
|
47,088,648 |
|
4,841,226 |
|
4,803,969 |
|
106,417,543 |
| Dividends
receivable |
- |
|
- |
|
224,005 |
|
- |
|
- |
|
224,005 |
| Other receivables |
- |
|
- |
|
23,199 |
|
- |
|
- |
|
23,199 |
| Cash and cash
equivalents |
19,009,538 |
|
- |
|
- |
|
- |
|
- |
|
19,009,538 |
| Securities sold
receivable |
151,847 |
|
- |
|
- |
|
- |
|
- |
|
151,847 |
|
|
|
|
|
|
|
|
|
|
|
- |
| Financial
liabilities |
|
|
|
|
|
|
|
|
|
|
- |
| Amounts due to
brokers |
(172,618) |
|
- |
|
- |
|
- |
|
- |
|
(172,618) |
| Other creditors |
- |
|
(299,113) |
|
(57,422) |
|
- |
|
- |
|
(356,535) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
35,147,225 |
|
33,226,129 |
|
47,278,430 |
|
4,841,226 |
|
4,803,969 |
|
125,296,979 |
Credit risk
Credit risk is the risk
that an issuer or counterparty will be unable or unwilling to meet
a commitment that it has entered into with the Company. The
Company's principal sources of credit risk arise on amounts due
from brokers for settlement of outstanding investment transactions,
dividends and interest receivable, corporate bonds and cash and
cash equivalents.
The Company utilises 8 executing brokers setting allocation
targets for each broker so as to not to place excessive
concentration in any one counterparty.
The Investment Advisor performs a quarterly review of executing
brokers as part of its “Best Execution” analysis, which is part of
the advisor’s compliance program. The investment team reviews the
quality of broker research, execution and service, and sets targets
for each broker based on the brokers’ overall performance.
Currently all cash is placed with Northern Trust (Guernsey) Limited (“NTGL”). NTGL is also
custodian of the majority of the Company's investments. NTGL is a
wholly owned subsidiary of The Northern Trust Corporation (“TNTC”).
TNTC is publicly traded and a constituent of the S&P 500. TNTC
has a credit rating of A+.
All transactions in listed securities are settled/paid upon
delivery using approved brokers. The risk of default is considered
minimal, as delivery of securities sold is only made once the
broker has received payment. Payment is made on a purchase once the
securities have been received by the broker. The trade will fail if
either party fails to meet their obligation.
When purchasing unlisted securities including over-the-counter
bonds, the Investment Advisor prepares an evaluation on the company
issuing these securities and monitors and reviews the Company's
quality and performance over time. These unlisted investments are
issued by the companies themselves and by their nature are either
not rated or have a higher credit rating.
It is the opinion of the Board of Directors that the carrying
amounts of these financial assets, excluding equities, represent
the maximum credit risk exposure as at the statement of financial
position date.
The Company’s maximum credit exposure is limited to the carrying
amount of unlisted investment and financial assets recognised as at
the statement of financial position date including bank balances,
Level 3 investments, illiquid investments and other receivables
with a possible risk of no recovery:
| Maximum
Credit Risk Exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
| Unlisted
investments |
|
|
|
|
9,990,744 |
|
2,518,957 |
| Cash and
cash equivalents |
|
|
|
|
22,688,931 |
|
19,009,538 |
| Receivables |
|
|
|
|
|
1,189,423 |
|
399,051 |
|
|
|
|
|
|
33,869,098 |
|
21,927,546 |
Capital management
The Company is a close-ended investment company, and thus has a
fixed capital. The Company's capital is represented by Ordinary
Shares and each share carries one vote. Each share has an
entitlement to dividends if declared.
As approved at the AGM on 18 August,
2016, the Company may purchase a maximum of 13,843,655
Ordinary Shares, equivalent to 14.99% of the issued share capital
of the Company as at the date of the AGM provided that;
•
the minimum price to be paid (exclusive of expenses) is
US$0.001;
•
the maximum price to be paid (exclusive of expenses) is 105% of the
average mid-market valuation for five days preceding the purchase;
and
•
if the shares are trading on the London Stock Exchange, at a
discount to the lower of the undiluted or diluted Net Asset
Value;
The Company purchased 100,000 shares at a price of US$0.975 per share on the 23 May 2016. Refer to Note 9.
The Board also considers from time to time whether it may be
appropriate to raise new capital by a further issue of shares. The
raising of new capital would however be dependent on there being
genuine market demand.
The Company is not subject to externally imposed capital
requirements.
Note 14 Fair Value
Financial assets at fair value through profit or loss are
carried at fair value. The valuation techniques for valuing
unlisted investments are described below. Other assets and
liabilities are carried at cost which approximates fair value.
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
(i) in the principal market for the asset or liability,
or
(ii) in the absence of a principal market, in the most advantageous
market for the asset or liability
The principal or the most advantageous market must be accessible
by the Company.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
The Company uses valuation techniques that are appropriate in
the circumstances and for which sufficient data is available to
measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
All financial instruments for which fair value is recognised or
disclosed are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 — Quoted market prices (unadjusted) in an active market
for identical assets or liabilities
Level 2 — Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable
Level 3 — Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable
For financial instruments that are recognised at fair value on a
recurring basis, the Company determines whether transfers have
occurred between levels in the hierarchy by re-assessing
categorisation, based on the lowest level input that is significant
to the fair value measurement as a whole, at the end of each
reporting period.
The following table analyses within the fair value hierarchy the
Company’s financial assets and liabilities (by class) measured at
fair value for the year ended 31 December,
2016.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
| Assets |
|
|
|
|
|
|
|
|
|
| Financial
assets at fair value |
|
|
|
|
|
|
|
|
through profit or loss: |
|
|
|
|
|
|
|
|
| -Equity
Securities |
|
88,386,928 |
|
- |
|
- |
|
88,386,928 |
|
-Derivative Instruments |
- |
|
- |
|
9,990,744 |
|
9,990,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
as at 31 December, 2016 |
88,386,928 |
|
- |
|
9,990,744 |
|
98,377,672 |
The following table presents the movement in level 3 instruments
for the year ended 31 December, 2016
by class of Financial Instrument.
|
|
|
|
|
Debt |
|
Derivative |
|
|
|
|
|
|
|
Securities |
|
Securities |
|
Total |
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
| Opening
balance |
|
|
|
127,526 |
|
2,391,431 |
|
2,518,957 |
| Purchases |
|
|
|
|
- |
|
- |
|
- |
| Sales |
|
|
|
|
(127,526) |
|
(294,005) |
|
(421,531) |
| Realised
gains during the year |
|
|
127,526 |
|
145,802 |
|
273,328 |
| Unrealised
gain during the year |
|
|
(127,526) |
|
7,747,516 |
|
7,619,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Closing
balance |
|
|
|
- |
|
9,990,744 |
|
9,990,744 |
|
|
|
|
|
|
|
|
|
|
| Net
unrealised gain for the year included in the Statement of
Comprehensive Income |
|
- |
|
7,747,516 |
|
7,747,516 |
There were no transfers between levels for the year ended
31 December, 2016.
The following table analyses, within the fair value hierarchy,
the Company’s financial assets and liabilities (by class) measured
at fair value for the year ended 31
December, 2015 as required by IFRS 7.
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
| Assets |
|
|
|
|
|
|
|
|
|
| Financial
assets at fair value |
|
|
|
|
|
|
|
|
through profit and loss: |
|
|
|
|
|
|
|
|
| -Equity
Securities |
|
103,898,586 |
|
- |
|
- |
|
103,898,586 |
|
-Derivative Instruments |
- |
|
- |
|
2,391,431 |
|
2,391,431 |
| -Debt
Securities |
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
- |
|
- |
|
127,526 |
|
127,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
assets as at 31 December, 2015 |
103,898,586 |
|
- |
|
2,518,957 |
|
106,417,543 |
The following table presents the movement in level 3 instruments
for the year ended 31 December, 2015
by class of Financial Instrument.
|
|
|
|
|
Debt |
|
Derivative |
|
|
|
|
|
|
|
Securities |
|
Securities |
|
Total |
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
|
In US
Dollars |
| Opening
balance |
|
|
|
56,008,526 |
|
- |
|
56,008,526 |
| Purchases |
|
|
|
|
18,641,413 |
|
2,371,249 |
|
21,012,662 |
| Sales |
|
|
|
|
(52,378,965) |
|
- |
|
(52,378,965) |
| Realised
gains during the year |
|
|
3,131,464 |
|
- |
|
3,131,464 |
| Unrealised
losses during the year |
|
(25,274,912) |
|
20,182 |
|
(25,254,730) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Closing
balance |
|
|
|
127,526 |
|
2,391,431 |
|
2,518,957 |
|
|
|
|
|
|
|
|
|
|
| Net
unrealised gain for the year included in the Statement of
Comprehensive Income |
|
127,526 |
|
20,182 |
|
147,708 |
There were no transfers between levels for the year ended
31 December, 2015.
Valuation techniques
Listed investments
Securities valued based on quoted market prices, in an active
market for identical assets without any adjustments, are included
within Level 1 of the hierarchy and are valued at bid price.
Unlisted investments
The Company invests in debt securities which are not quoted in
an active market. Transactions in such investments do not occur on
a regular basis. These positions are valued at their fair value in
accordance with IFRS 13.
Level 3 valuations are monitored closely by the Investment
Advisor who reports to the Board of Directors on a quarterly basis.
Valuations are based on the most appropriate method for each level
3 investment as at 31 December, 2016
as discussed below.
As at 31 December, 2016, the
Company holds stock acquisition rights (“SARs”) in Prospect Co.
Ltd. In accordance with IFRS 13, the Directors have undertaken
their responsibility to approximate a fair value of this level 3
investment by way of utilising the Black-Scholes-Merton model. The
model uses observable, non-observable and contractual inputs. The
observable inputs are the underlying price of Prospect Co. Ltd
(31 December, 2016: ¥66.5,
31 December, 2015: ¥51.5) and the
risk free rate (31 December, 2016:
0.00%, 31 December, 2015: 0.00%). The
significant unobservable inputs are the dividend yield, which is
based on historic dividend payments (31 December, 2016:1.95%,
31 December, 2015: 1.95%) and the
volatility rate used (31 December,
2016: 21.73%, 31 December,
2015: 15.7%), which was the implied rate of volatility
having removed the peaks created by the increase in dividend
announced on 6 December, 2016 and
adjusted for the potential restriction on the exercise of the SAR’s
following the announcement of a possible offer made by Prospect,
Co. Ltd.
The effects of movements of the significant unobservable inputs
used in the fair value measurement of the unlisted investment
categorised within Level 3 of the fair value hierarchy as at
31 December 2016 are shown below:
|
|
|
|
Effect on Fair Value |
|
Unobservable input |
|
Sensitivity used |
|
In U.S. Dollars |
|
|
|
|
|
|
|
| Dividend
yield |
|
+0.05%/-0.05% |
|
(25,883) |
|
32,353 |
|
|
|
|
|
|
|
|
Volatility |
|
+5%/-5% |
|
1,294,138 |
|
(1,171,195) |
The contractual inputs are the shares received for each right
exercised (100,000), the exercise date (21
December, 2015) the remaining exercise period (1 January 2016 to 20
December, 2020), the strike price of the SAR (¥54) and the
number of SARs remaining (1,350). Using this model with the implied
rate has resulted in an uplift of US$7,684,136 (31 December,
2015: US$490,243) from the
year end valuation of the SARs.
Note 15 Segmental Reporting
The Board is responsible for reviewing the Company’s entire
portfolio and considers the business to have a single operating
segment. The Board’s asset allocation decisions are based on a
single, integrated investment strategy, and the Company’s
performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of Japanese
investments. The total fair value of the financial instruments held
by the Company and the equivalent percentages of the total value of
the Company, are reported in the Portfolio Statement.
Revenue earned is reported separately on the face of the
Statement of Comprehensive Income as investment income being
dividend income received from equities, and interest income being
interest earned from convertible and corporate bonds.
Note 16 Contingent Asset
The Company declined to tender its shares for Toho Real Estate,
as the Company believed the true value to be considerably higher
than that stated in the tender offer, and entered into an
arbitration process. The Company has been involved in court
proceedings with Toho Real Estate arising from the tender offer. In
March 2015 the Company received
notice from the court presiding over its petition that it had ruled
in its favour. The court awarded the Company an aggregate amount of
¥121,600,000 (US$1.01 million).
Although an improvement, this was still significantly discounted to
the fair value of Toho Real Estate and as such, on 8 April, 2015 the Company filed an appeal against
the ruling. On 30 March, 2016, the
Company announced that the Tokyo High Court had ruled that the
tender offer price for Toho Real Estate amounted to fair value and
eliminated a previous award of ¥121,600,000 to the Company. The
Company has filed an appeal to this ruling which has been accepted
to be heard by the Supreme Court of Japan.
With regard to Yukiguni Maitake, the Company feels that a tender
offer was unfair and feels that the shares were artificially
depressed due to poor management, which resulted in an accounting
violation around the payment of dividends. The holding bank sold
into the TOB and realised the collateral at what the Company
believes to be an unfair price. Alix Partners Asia LLC and Nera
Economic Consulting have been engaged to provide valuations. In
October 2016 the Company received
notice from the court presiding over its petition that it had ruled
the tender offer price for Yukiguni Maitake amounted to fair value.
The company filed an appeal, which is currently being reviewed by
the Tokyo High Court. Although at this point it would be difficult
to put a per share value on it, the Company believes a premium
closer to 40% vs. the 18.7% paid would be in line with the
market.
Note 17 Reconciliation of Published
Valuation to Audited Financial Statements Prepared under IFRS
|
|
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
|
|
|
|
|
|
|
|
|
| Net
assets per Financial Statements |
|
|
|
|
121,923,460 |
|
125,296,979 |
|
|
|
|
|
|
|
|
|
| Writeback
of prior year uplift on Toho Real Estate (Note 16) |
|
|
|
- |
|
1,009,715 |
|
Adjustment in value of financial assets at fair value through
profit and loss: |
|
|
|
| Prospect
Co Ltd Stock Acquisition Rights (Note 14) |
|
|
|
(7,684,136) |
|
- |
|
|
|
|
|
|
|
|
|
| Net
assets per published valuation |
|
|
|
|
114,239,324 |
|
126,306,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NAV per
share per Financial Statements (in cents) |
|
|
|
132.02 |
|
135.53 |
| NAV per
share per published valuation (in cents) |
|
|
|
123.70 |
|
136.62 |
Note 18 Subsequent Events
These Annual Report and Financial Statements were approved for
issuance by the Board on 21 March,
2017. Subsequent events have been evaluated until this
date.
On 10 January, 2017, the Company
announced that it was in preliminary discussions with Prospect, Co.
Ltd (“Prospect”) in respect of a possible offer by Prospect for the
entire issued and to be issued share capital of the Company.
Prospect was required on 7 February,
2017, to either announce a firm intention to make an offer
for the Company or announce that it does not intend to make an
offer.
At the request of the Independent Directors of the Company, the
Panel on Takeovers & Mergers (the "Panel") has consented to an
extension of the relevant deadline, until 5:00 p.m. on 4 April,
2017 to enable the parties to conclude their ongoing
discussions. By this time Prospect must either announce a firm
intention to make an offer for the Company or announce that it does
not intend to make an offer, in which case the announcement will be
treated as a statement. This new deadline can be extended with the
consent of the Panel.
GENERAL INFORMATION
General
The Company is a close-ended investment company incorporated in
Guernsey in November, 1994 and was
launched in December, 1994 with an initial asset value of
US$70 million. There are 92,352,602
Ordinary Shares in issue as at 31 December,
2016. The Company's Ordinary Shares are listed on the Main
Market of the London Stock Exchange.
The Ordinary Shares of the Company have not been registered
under the United States Securities Act of 1933 or the United States
Investment Companies Act of 1940. Accordingly, none of the Ordinary
Shares may be offered or sold directly or indirectly in
the United States or to any
United States persons (as defined
in Regulation ‘S’ under the 1933 Act) other than in accordance with
certain exemptions. Investment in the Company is suitable only for
sophisticated investors and should be regarded as long-term. Past
performance is no indication of future results.
The Company is a FATCA compliant organisation with FATCA entity
classification FFI and GIIN L0Q9R3.99999.SL.831.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") APMs are included in the financial statements
which require further clarification. An APM is defined as a
financial measure of historical or future financial performance,
financial position, or cash flows, other than a financial measure
defined or specified in the applicable financial reporting
framework.
NAV to market price discount
The Net Asset Value (“NAV”) per share is the value of all the
investment company’s assets, less any liabilities it has, divided
by the number of shares. However, because the Company’s Ordinary
Shares are traded on the London Stock Exchange's Main Market, the
share price may be higher or lower than the NAV. The difference is
known as a discount or premium. The Company’s discount is
calculated by expressing the difference between the period end
dollar equivalent share price and the period end NAV per share as a
percentage of the NAV per share.
Market Performance
Market Performance measures how the NAV per share has performed
over a period of time compared to the MSCI Japan Small Cap Index.
The Company quotes NAV per share performance as a percentage change
from the start of the period, one-year and also three-year and
five-year periods. The MSCI Japan Small Cap Index is designed to
measure the performance of the small cap segment of the Japanese
market. It has 901 constituents and represents
14% of the free float-adjusted market capitalization of the
Japan equity universe. It is also
quoted as a percentage change from the start of the period,
one-year and also three-year and five-year periods.
Investment Objective
The Company's investment objective is detailed in the Strategic
Report.
Investment Restrictions
The Company’s investment restrictions are detailed in the
Strategic Report.
NAV and Information
The prices of Ordinary Shares and the latest NAV are published
daily in the Financial Times. The price of the Ordinary Shares
appears within the section of the London Share Service entitled
"Investment Companies".
Life of the Company
From inception the Directors have believed that Shareholders
should be able to review the progress of the Company so that a
decision can be taken as to whether Shareholders should have an
opportunity of realising the Company's underlying investments.
Accordingly, at the eighteenth Annual General Meeting of the
Company held on 27 August, 2014, the Board included in
the business to be considered by Shareholders a special resolution
that the Company should be wound up. The resolution was not passed.
The board will include a similar resolution in the business to be
considered at every third Annual General Meeting held. The next
such resolution will be tabled at the Annual General Meeting to be
held in 2017.
|
Financial Highlights |
|
|
|
|
31.12.2016 |
|
31.12.2015 |
|
|
|
|
|
|
In US
Dollars |
|
In US
Dollars |
| Total Net Assets |
|
|
|
|
|
121,923,460 |
|
125,296,979 |
| IFRS NAV per
share |
|
|
|
|
|
132.02 |
|
135.53 |
| Share Price |
|
|
|
|
|
89.75 |
|
105.50 |
| Discount to NAV |
|
|
|
|
|
32.02% |
|
22.16% |
Directors
Brief biographical details of the Directors are as follows:
Rupert Evans, age 78, is a
Guernsey advocate and former
partner in the firm of the Guernsey legal advisors, Mourant Ozannes. He
is now a consultant to Mourant Ozannes. He is a non-executive
director of the Manager and of a number of investment companies. Mr
Evans is resident in Guernsey. Mr
Evans was appointed to the Board on 18
November, 1994.
John Hawkins, age 74, is a Fellow
of the Institute of Chartered Accountants in England and Wales. He was formerly Executive Vice
President and a member of the Corporate Office of The Bank of
Bermuda Limited, with whom he spent many years in Asia. He retired from the Bank of Bermuda in 2001 after 25 years with the Group.
He is a director of a range of funds which include hedge funds and
equity funds investing in Japan
and Asia. Mr Hawkins was appointed
to the Board on 4 April, 2004. Mr
Hawkins is resident in the UK.
Richard Battey, age 65, is a
qualified chartered accountant. He is a non-executive director of a
number of investment companies and funds. Mr Battey joined the
Schroder Group in December 1977 and
was a director of Schroders (C.I.) Limited from April, 1994 to
December, 2004, where he served as Finance Director and Chief
Operating Officer, and was a director of Schroder Group Guernsey
companies before retiring from his last Schroder directorship in
December, 2008. Mr Richard Battey
was appointed as Chairman of the Audit Committee on
10 February, 2010. Mr Battey is resident in Guernsey.
Taxation Status
The Company has obtained exemption from Guernsey Income Tax
under The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. There is no capital
gains tax in Guernsey.