Perpetual Japanese Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 January 2008
KEY FACTS
Investment Objective
Perpetual Japanese Investment Trust plc's objective is to achieve long-term
capital growth by investing in a diversified portfolio of quoted Japanese
securities.
Share Capital
As at 31 January 2008, the Company's share capital consisted of 92,165,333
ordinary shares of 10p each.
Performance Statistics
AT 31 AT 31
JANUARY JULY %
2008 2007 CHANGE
Total net assets (�'000) 51,224 51,767 -1.1
Net asset value per ordinary
share 55.6p 56.2p -1.1
Mid-market price per ordinary
share 51.75p 50.75p +2.0
Discount per ordinary share 6.9% 9.7%
FTSE World Japan Index (in
Sterling) 102.7 113.0 -9.1
Tokyo TOPIX Index (in
Sterling) 6.4 7.1 -9.9
Tokyo TOPIX Index (in Yen) 1,346.3 1,706.2 -21.1
Actual Gearing 101 104
Asset Gearing 101 104
INTERIM MANAGEMENT REPORT
Financial Markets and Performance
The six month period under review saw a fall in the Japanese
stockmarket of 9.9% expressed in sterling (Tokyo TOPIX Index). The net asset
value (`NAV') of the Company's portfolio decreased by only 1.1%.
Worries over the implications of the sub prime housing problem in
the US and the risk of slower global growth presented a challenging investment
background. The Manager's caution proved to be beneficial. The defensive
nature of the portfolio helped preserve capital in what was a very weak
market. The Company's NAV performance was ranked first over three and six
months as well as one and three years as at 31 January 2008 against its peer
group. (Source: Cazenove Investment Companies Research)
While the Japanese economy remains vulnerable to global growth
concerns, being as dependent as it is on its export sector, stockmarket falls
are leading to opportunities. The Board is pleased to see the Manager
investing in some of Japan's best `blue chip' companies on valuations he feels
are reasonable. These are the type of companies best able to cope with
difficult economic conditions while offering good growth opportunities over
the medium term.
Growth in the Japanese economy continued to be driven by exports
with Asian and particularly Chinese markets providing especially attractive
opportunities. Meanwhile the contribution from domestic industries remained
poor. Large exporting companies can take advantage of growth anywhere in the
world, but companies that do the bulk of their business in Japan are finding
life a lot more difficult. A falling population and the lack of wage growth
means it is hard to generate top line growth. In addition higher raw material
prices are pushing up input costs, squeezing margins. Japan has few natural
resources and so the pain of higher commodity prices is felt more keenly.
Slowing loan growth at Japanese banks is an indication that few growth
opportunities are currently available in the domestic market.
Effective domestic economic policy seems to be lacking. In
September Prime Minister Abe resigned following defeat in the Upper House
election. He has been replaced by Mr Fukuda. This change is unlikely to have
much impact. Japan's high level of indebtedness leaves little room for fiscal
stimulus. Where the politicians have acted it has been to the detriment of the
economy. For example, following a scandal involving the falsification of
safety standard certification of new buildings a new, stricter approval
process was put in place. This has lengthened the time required to get
building approval and led to a severe fall in housing starts. Monetary policy
is left to the Bank of Japan and they have given no indication that they
intend to cut rates; if anything, they seem to be looking for the next
opportunity to raise them.
The period under review saw a sharp rise of the yen against the
dollar and against sterling. While this is beneficial for a sterling-based
investor in the short term, it does threaten the competitiveness of Japan's
exporters. This is especially worrying for a country so dependent on exports
as Japan. As the sub prime problem unfolded and worsened in the US the
Japanese stockmarket was dragged downwards. While the direct exposure of
Japanese banks appears to be limited, investors were concerned about the
knock-on effects to the US and global economies. Cyclical stocks such as
shipping companies, machinery manufacturers and steel groups were among the
worst performers. More defensive sectors such as telecommunications,
pharmaceuticals, railways and electric utilities performed relatively well.
It is often said that significant value, often in the form of idle
cash, is locked away in Japanese balance sheets. It follows that if this was
unlocked, then investors could expect to see large returns. In many cases this
is true. There are companies whose balance sheets are heavy with cash earning
very little on deposit. Other companies have large land assets which are idle
or generating returns far below their potential. The emergence of activist
investors in Japan has had some success in improving dividends or forcing
share buybacks but we are yet to see a significant, successful hostile bid for
a company. A recent court case which pitted the activist investor Steel
Partners against the asset rich company Bull-Dog Sauce ended with defeat for
the investor as Bull-Dog Sauce were allowed to issue warrants convertible to
stock to their shareholders on a selective basis. This put an end to the deal
and also put an end, in the short term, to the dream of a wave of balance
sheet restructuring and large payouts for investors.
Portfolio Review and Strategy
Your portfolio was defensively positioned throughout the period
under review. A focus on surety of earnings and cheap valuation was
beneficial. The types of companies that performed well were railways,
pharmaceutical companies, telecommunications and electric utilities. As these
stocks held up relatively well they reached valuations, in some cases, in
excess of the market average. In line with our valuation-focussed investment
approach we have been selling, selectively, some of the more expensive,
defensive positions. Most notable here are the railway companies, East Japan
Railway and West Japan Railway. Although they have not been sold in entirety,
their weightings have been significantly reduced. Proceeds from these sales
have been reinvested in some of Japan's best blue chip exporters. Concerns
over global and especially US growth along with worries over the stronger yen
have pushed these stocks down to valuation levels we find attractive. An
example here is Honda, to which we have added. Honda is now trading on little
over break-up value with a dividend yield significantly higher, and a price
earnings ratio significantly lower than the market average. We have further
increased the weighting in the automobile sector by taking a position in
Toyota and adding to Nissan. Japanese car companies have been exposed to the
full force of global competition for decades and have proven themselves to be
very well run. As long as the yen strengthens in a gradual manner they will be
able to cut costs enough to maintain their competitiveness. As their
production bases grow around the world there is less impact of currency
movements. We have also taken a position in Tokyo Electron. This is another of
Japan's leading exporters. It makes semiconductor production equipment and
parts used in the fabrication of LCD panels. Following a period of poor orders
from semiconductor makers the stock has fallen sharply and is trading at
valuation levels not seen since 1992. The semiconductor industry is highly
cyclical and we expect orders to pick up in the second half of 2008.
With 2008 likely to be a tough year we look forward to buying more
of Japan's best companies at depressed valuations.
Outlook
Just as many investors became too bullish in 2005 many are becoming
too bearish now. Structural change at the corporate level in Japan continues,
but the pace is and will remain gradual. Companies are making better use of
assets and are returning more to shareholders. However, cyclical risks remain.
Japan remains dependent on other economies, notably Asia, for growth. If
China's attempts to cool growth go too far, or the impact from a slowing US
spreads, then Japanese profits will suffer.
On a more positive note we are happy to be reducing some of our
defensive companies following good performance and reinvesting in some of
Japan's best global companies on cheap valuations. In what is likely to be a
difficult year, we anticipate that the portfolio will continue to produce a
good relative performance against the market and our peer group.
VAT on Management Fees
As reported in the press, HM Revenue & Customs have accepted the European Court of
Justice ruling in a test case to the effect that investment trusts should not be
charged VAT on management fees. For other investment trust companies, this will
result in significant reclaims of VAT. However, this is not the case for your
Company as it invests in non-EU securities and has thus recovered all of the VAT
which it has suffered.
Christopher Mitchinson
Chairman
25 March 2008
Related Parties
Invesco Asset Management Limited (`IAML'), a wholly owned
subsidiary of Invesco Limited, acts as Manager and Company Secretary to the
Company. Details of IAML's services and fees arrangements are given in the
latest Annual Report and Accounts, which is available on the Company's
website.
Principal Risks and Uncertainties
The principal risks and uncertainties that could affect the Company's business
can be divided into the following areas:
- Market Movements and Portfolio Performance; and
- Regulatory and Tax Related.
A detailed explanation of these principal risks and uncertainties can be found
on page 14 of the latest Annual Report and Accounts, which is available on the
Company's website.
In the view of the Board, these principal risks and uncertainties are equally
as applicable to the remaining six months of the financial year as they were
to the six months under review.
DIRECTOR'S RESPONSIBILITY STATEMENT
In respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and UK Accounting
Standards.
The Directors confirm that to the best of their knowledge:
- the condensed set of financial statements contained within the half-yearly
financial report have been prepared in accordance with the Accounting
Standards Board's Statement "Half-Yearly Financial Report";
- the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8 of the FSA's Disclosure and Transparency
Rules; and
- the interim management report includes a fair review of the information
required on related party transactions.
Signed on behalf of the Board of Directors.
Christopher Mitchinson
Chairman
25 March 2008
LIST OF INVESTMENTS IN ORDER OF VALUATION AT 31 JANUARY 2008
Ordinary shares
VALUATION %OF
COMPANY PRINCIPAL ACTIVITY �'000 PORTFOLIO
Takeda Pharmaceutical
Pharmaceuticals 2,969 5.8
Nissan Motor Transport Equipment 2,815 5.5
Honda Motor Transport Equipment 2,615 5.1
Astellas Pharmaceutical
Pharmaceuticals 2,436 4.7
Oji Paper Pulp and Paper 2,398 4.6
Tokyo Gas Electric Power & Gas
Utilities 2,393 4.6
NTT Docomo Communication 2,214 4.3
Chubu Electrical Electric Power & Gas
Power Utilities 2,149 4.2
Lawson Retail Trade 2,062 4.0
Nippon Telegraph Communication
& Telephone 1,992 3.9
Nippon Paper Pulp and Paper 1,938 3.8
West Japan Land Transportation
Railway 1,814 3.4
Sumitomo Rubber Rubber Products 1,547 3.0
Kansai Electrical Power & Gas
Electrical Power Utilities 1,465 2.8
Tokyo Electrical Electrical Power & Gas
Power Utilities 1,422 2.7
Tohuku Electric Electrical Power & Gas
Power Utilities 1,400 2.7
Tokyo Electron Electrical Appliances 1,375 2.7
East Japan Land Transportation
Railway 1,331 2.6
Canon Electrical Appliances 1,311 2.5
Kao Chemicals 1,230 2.4
Japan Real Real Estate
Estate 1,222 2.4
Aeon Retail trade 1,200 2.3
TDK Electrical Appliances 1,132 2.2
Hirose Electric Electrical Appliances 1,127 2.2
Zeon Chemicals 1,070 2.1
Nippon Real Estate
Commercial 1,069 2.1
Japan Retail Real Estate
Fund 1,060 2.0
JS Metal Products 1,008 2.0
Nitto Denko Chemicals 955 1.9
THK Machinery 727 1.4
Showa Denko Chemicals 542 1.1
Nippon Building Real Estate
Fund 507 1.0
Ricoh Electrical Appliances 425 0.8
Nomura Real Real Estate
Estate Office
Fund 406 0.7
Tokyo Ohka Kogyo Chemicals 268 0.5
Total Investments (35) 51,594 100.0
CONDENSED INCOME STATEMENT
Six Months to Six Months to
31 January 31 January Year to 31
2008 2007 July 2007
Revenue Capital Total Revenue Capital Total Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000
(Losses)/gains
on investments
at fair value
through
profit or loss -- (696) ( 696) -- 1,971 1,971 (4,274)
Exchange
(losses)/gains -- (2) (2) -- 5 5 (3)
Unfranked
Investment
income -
dividends 540 -- 540 442 -- 442 912
Deposit
interest 7 -- 7 11 -- 11 11
Investment
management fee (208) -- (208) (228) -- (228) (443)
Other expenses (136) (1) (137) (103) -- (103) (191)
Net return
before
finance costs
and taxation 203 (699) (496) 122 1,976 2,098 (3,988)
Investment
payable
and similar
charges (9) -- (9) (11) -- (11) (36)
Return on
ordinary
activities
before
taxation 194 (699) (505) 111 1,976 2,087 (4,024)
Tax on
ordinary
activities (38) -- (38) (36) -- (36) (66)
Return on
Ordinary
activities
after
tax for the
financial
period 156 (699) (543) 75 1,976 2,051 (4,090)
Return per
Ordinary share
- note 4 0.2p (0.8)p (0.6)p 0.1p 2.1p 2.2p (4.4)p
The total column of this statement represents the Company's profit
and loss account, prepared in accordance with UK Accounting Standards. The
supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies. All items in the above
statements derive from continuing operations and the company has no other
gains or losses and therefore no statement of recognised gains and losses is
presented. No operations were acquired or discontinued in the period.
CONDENSED BALANCE SHEET
At At At
31 January 31 July 31 January
2008 2007 2007
�'000 �'000 �'000
Non-current assets
Investments held at fair value
through profit or loss 51,594 53,650 58,277
Current assets
Amounts due from brokers 637 -- 1,238
VAT recoverable 10 22 24
Prepayments and accrued income 47 57 35
694 79 1,297
Creditors: amounts falling due
within one year
Amounts due to brokers (384) -- (740)
Bank overdraft (416) (1,788) (646)
Unrealised loss on forward
currency transactions (2) -- (5)
Accruals and deferred income (262) (174) (275)
(1,064) (1,962) (1,666)
Net current liabilities (370) (1,883) (369)
Total assets less current liabilities 51,224 51,767 57,908
Capital and reserves
Called up share capital 9,217 9,217 9,217
Share premium account 5,927 5,927 5,927
Other reserves
Capital redemption reserve 28,025 28,025 28,025
Special reserve 16,915 16,915 16,915
Capital reserve -- realised (1,783) (2,035) (878)
Capital reserve -- unrealised (5,932) (4,981) 119
Revenue reserve (1,145) (1,301) (1,417)
Total Shareholders' funds 51,224 51,767 57,908
Net asset value per
ordinary share - note 5 55.6p 56.2p 62.8p
CONDENSED CASH FLOW STATEMENT
Six months to Year to Six months to
31 January 31 July 31 January
2008 2007 2007
�'000 �'000 �'000
Total return before finance costs and
taxation (496) (3,988) 2,098
Losses/(gains) on investments 696 4,274 (1,971)
Exchange losses/(gains) 2 3 (5)
Decrease in debtors 22 26 44
Increase/(decrease) in creditors 100 (1) 111
Overseas tax on unfranked investment
income (38) (66) (38)
Cash inflow from operating activities 286 248 239
Servicing of finance (19) (26) (11)
Capital expenditure and financial
investment
Purchase of investments (14,868) (38,394) (23,466)
Sale of investments 15,973 36,977 23,169
Net cash inflow/(outflow) before
management of liquid resources and
financing 1,372 (1,195) (69)
Exchange difference - (5) 11
Movement in net debt in the period 1,372 (1,200) (58)
Net debt at beginning of the period (1,788) (588) (588)
Net debt at end of the period (416) (1,788) (646)
Analysis of changes in net debt
Brought forward:
Cash -- 914 914
Bank overdraft (1,788) (1,502) (1,502)
Net debt brought forward (1,788) (588) (588)
Movements in the period:
Cash inflow/(outflow) from bank 1,372 (1,195) (69)
Exchange movement - (5) 11
Net debt at end of period (416) (1,788) (646)
CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Share Capital Capital Capital
Share Premium Redemption Special Reserve Reserve- Revenue
Capital Account Reserve Reserve Realised Unrealised Reserve Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000 �'000
For the six
months ended
31 January 2007
At 1 August
2006 9,217 5,927 28,025 16,915 (2,590) (145) (1,492) 55,857
Return from the
Income
Statement for
the period -- -- -- -- 1,712 264 75 2,051
At 31 January
2007 9,217 5,927 28,025 16,915 (878) 119 (1,417) 57,908
For the year
ended
31 July 2007
At 1 August
2006 9,217 5,927 28,025 16,915 (2,590) (145) (1,492) 55,857
Return from the
Income
Statement for
the year -- -- -- -- 555 (4,836) 191 (4,090)
At 31 July 2007 9,217 5,927 28,025 16,915 (2,035) (4,981) (1,301) 51,767
For the six
months ended
31 January 2008
At 1 August
2007 9,217 5,927 28,025 16,915 (2,035) (4,981) (1,301) 51,767
Return from the
Income
Statement for
the year -- -- -- -- 252 (951) 156 (543)
At 31 January
2008 9,217 5,927 28,025 16,915 (1,783) (5,932) (1,145) 51,224
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements have been using the same accounting
policies as those adopted in the annual report and accounts for 31 July 2007,
which have been prepared under the historical cost convention and are
consistent with applicable UK Accounting Standards and with the Statement of
Recommended Practice: `Financial Statements of Investment Trust Companies'.
2. Management Fees and Finance Costs
Investment management fees and interest payable on borrowings are allocated
wholly to capital.
3. Tax
The tax effect of expenditure is allocated between capital and revenue on the
same basis as the particular item to which it relates, using the Company's
effective rate of tax for the accounting period.
4. Basis of Returns
Six months Six months
to to Year to
31 January 31 January 31 July
2008 2007 2007
Returns after tax:
Revenue � 156,000 75,000 191,000
Capital � (699,000) 1,976,000 (4,281,000)
Total � (543,000) 2,051,000 (4,090,000)
Weighted average number of ordinary
shares in issue during the period 92,165,333 92,165,333 92,165,333
5. Net Asset Value per Ordinary Share
Six months Six months
to to Year to
31 January 31 January 31 July
2008 2007 2007
Shareholders' funds � 51,224,000 57,908,000 51,767,000
Ordinary shares in issue at period
end 92,165,333 92,165,333 92,165,333
6. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for approval as an investment trust
company set out in section 842 of the Income and Corporation Taxes Act 1988.
7. The financial information contained in this half-yearly report which has
not been reviewed or audited, does not constitute statutory accounts as
defined in section 240 of the Companies Act 1985. The financial information
for the half years ended 31 January 2008 and 31 January 2007 have not been
audited. The figures and financial information for the year ended 31 July 2007
are extracted and abridged from the latest published accounts and do not
constitute the statutory accounts for that year. Those accounts have been
delivered to the Registrar of Companies and included the Report of the
Independent Auditors, which was unqualified and did not include a statement
under either section 237(2) or 237(3) of the Companies Act 1985.
By order of the Board
Invesco Asset Management Limited
Company Secretary
25 March 2008
A copy of the half-yearly financial report will be available shortly from
Invesco Perpetual on the following website:
www.invescoperpetual.co.uk/investmenttrusts
END
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