Baillie Gifford Japan Trust PLC Regulatory News (BGFD)

Legal Entity Identifier: 54930037AGTKN765Y741

Over the year to 31 August 2019, The Baillie Gifford Japan Trust PLC's net asset value total return (after deducting borrowings at fair value) fell by 5.3% and the net asset value total return (after deducting borrowings at par value) fell by 5.2% compared to the 0.5% fall in the benchmark* TOPIX index total return (in sterling terms). In this period the Company's share price total return fell by 7.4%.

¾ A final dividend of 3.50p per ordinary share will be put to shareholders for approval at the AGM

¾ The largest contributor to performance this year was Rakuten, mainly an online retail and finance company.

¾ The two largest negative contributors to performance this year were Outsourcing and ZOZO (formerly named Start Today).

¾ Turnover was 11.5% during the year.

¾ Smartphone orientated computer games companies were a fertile area of opportunity during the year. We bought two new holdings in this area, Mixi and Gree.

* The benchmark index is the TOPIX total return (in sterling terms)

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

The Baillie Gifford Japan Trust PLC aims to achieve long term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth. At 31 August 2019, the Company had total assets of £859.7m (before deduction of bank loans of £127.6m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £202bn under management and advice as at 7 October 2019.

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

8 October 2019

For further information please contact:

Alex Blake - Client Liaison

The Baillie Gifford Japan Trust PLC

Tel: 0131 275 2859

Roland Cross, Director,

FourBroadgate Marketing

Tel: 0207 776 0512 or 07831 401309

This has been a more downbeat year than we have been used to for the Japan Trust with net asset value total return (after deducting borrowings at fair value) falling 5.3% compared to the 0.5% fall in the benchmark TOPIX index total return (in sterling terms). After exceptional strength in 2018 the share price total return fell back by 7.4% to 791.0p, while the Company's shares continued to trade at a premium to NAV during most of the year (after deducting borrowings at fair value) registering a 0.2% premium at 31 August 2019.

Short term reverses are part and parcel of investing and our emphasis remains on the long-term investment strategy of the Japan Trust as seen in our strong five and ten year records. The Company's NAV has risen 123% over five years and 326% over ten years compared to the index total return of 76% over five years and 126% over ten years. The share price has risen 125% over five years and 416% over ten years. In recent years the Managers have enjoyed an extremely successful stock selection track record, bolstered by additional benefits from gearing. During the year to 31 August 2019 this has not been the case, despite little change in stock selection, and the Manager still believes there remains significant potential for gains across our portfolio. As stock markets have been uneasy, gearing has also acted as a drag on performance rather than as a positive contributor. Further performance details are to be found in the Managers' Report.

Investment income continued to rise, this time by £2.6 million to £13.5m for the year, due in the main to the continuing increase in dividends from our Japanese investments. Expenses fell by £0.23 million in the period, due mostly to lower management fees (down £0.2 million) as the reduced fee level on the first £50 million of assets came into play on 1 January 2019 (down to 0.75% from 0.95%). Overall revenue return per share was 5.18p (2018 - 2.54p) while ongoing charges for the year reduced slightly to 0.70% (2018 - 0.73%).

Gearing

Gearing amounted to 11% of shareholders' funds at the start of the year and ended the year at 12%. Gross borrowings in Yen remained stable at ¥16.5 billion (2018 - ¥16.5 billion), while the sterling value of these loans in the balance sheet rose to £127.6 million by the year-end (2018 - £114.5 million). Given the ongoing low cost of yen loans, we continue to believe that borrowing to invest in Japanese equities is a sensible strategy.

Dividend

The Company's objective is, and has always been, to achieve long term capital growth and investors should not expect to receive consistent income. Last year our longstanding revenue reserve deficit was extinguished and, with revenue income currently outweighing expenditure, we will distribute revenue reserves in line with the requirements of the Companies Act.

On that basis, a final dividend of 3.50p per ordinary share will be put to shareholders for approval at the Annual General Meeting to be held on 5 December 2019 and, if approved, will be paid on 13 December 2019 to shareholders on the register at the close of business on 15 November 2019. A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the Company. The shares will go ex-dividend on 14 November 2019. For those shareholders electing to receive the DRIP the last date for receipt of election is 22 November 2019.

Share Capital

The Company did not exercise its share buy-back powers during the year; however, your Board believes it is important that the Company retains this power and so, at the Annual General Meeting, is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury for cash on a non-pre-emptive basis. Shares are issued/reissued only at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders. During the year to 31 August 2019, 1.965m shares were issued at a premium to net asset value raising proceeds of £15.6m, continuing the trend of recent years. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting and we would continue to issue shares only when at a premium to net asset value. This authority would expire at the conclusion of the Annual General Meeting in 2020.

Continuation Vote

Our shareholders have the right to vote annually on whether the Company should continue in business and will have the opportunity to do so again at the Annual General Meeting to be held on 5 December 2019. Last year, the Company again received support for its continuation. Your Directors still believe there are still attractive opportunities in selected, well-run Japanese companies benefiting the long-term favourable outlook for the Japan Trust. To that end, my fellow Directors and I intend, where possible, to vote our own shareholdings in favour of the resolution and hope that all shareholders will feel disposed to do likewise.

Board

Your Board is committed to high standards of corporate governance. In particular, it recognises the need for a balance of skills, experience, diversity and length of service amongst its Non-Executive Directors, all of which forms part of our succession planning discussions during Nomination Committee meetings. Given the above, and having overseen the changing of the guard from Sarah Whitley to Matthew Brett as Portfolio Manager, closely followed by appointments of two outstanding female Non Executive Directors, I am standing down as your Chairman at the AGM.

I have served on the Board since 2003, and been your Chairman for 5 years witnessing significant growth of the fund in that period and leave the Company in the excellent hands of both Matthew Brett as Manager and Keith Falconer as Chairman. Keith steps up from chairing the Audit Committee to be succeeded by Sharon Brown who, following a robust recruitment process earlier in the year, joined our Board on 3 October and will become Audit Chair after the AGM. We are delighted to welcome Sharon to the Board and I look forward to observing as a shareholder in the years ahead as she, Keith and the rest of your Board continue to provide excellent stewardship for Baillie Gifford Japan Trust.

Outlook

The Trust invests for the medium to longer term and on this basis our Managers have continued to find interesting companies operating in both domestic and export markets in which to invest. The Trust has enjoyed success with their 'bottom-up' approach to stock picking which has added significantly to the value of the portfolio and we, as a Board, believe there remain numerous opportunities for investment in Japanese companies able to capitalise on the changes within the wider economy. Although the Trust concentrates much more closely on micro than macro issues, it is worth reflecting on some of the latter given that Prime Minister Shinzo Abe has two years left in power as leader of the ruling Liberal Democratic Party making him Japan's longest serving Prime Minister. He remains pro-growth and pro-business, and is expected to bring a renewed focus on structural reform, entrepreneurship and industrial reorganisation while maintaining a high level of economic policy coordination. In October, the Government raised the sales tax from 8% to 10% which may impact consumer spending in the short term. However, the labour market continues to tighten thus stimulating labour market related innovation among companies in which the Trust has invested. Corporate governance remains an important pillar of the Government's economic programme and we see ongoing progress in this area. Your Trust continues to examine attitudes to corporate governance in the companies considered for investment.

A significant boost to the country's morale was felt in May when Crown Prince Naruhito acceded to the throne on the abdication of His Majesty Emperor Akihito, ushering in the new Reiwa era, meaning beauty and harmony. The onset of the new era is expected to encourage a fresh focus on innovation and revitalisation of the economy.

As was the case in my last report, there remain some political tensions in the region. The deterioration in US-China trade relations has increased US pressure on its trade relations with Japan, and a downturn in Japan-South Korea relations is straining US-Japan-South Korea cooperation over East Asian security issues. Ongoing missile testing by North Korea is adding to tensions. Despite these macro issues, we remain positive on the outlook for investments in the Baillie Gifford Japan Trust portfolio over the medium to longer term.

Nick AC Bannerman

Chairman

8 October 2019

For a definition of terms see Glossary of Terms and Alternative Performance Measures (APM), Note 11.

Past performance is not a guide to future performance.

Philosophy

We manage the Trust with three central philosophies. First, we believe in actual long-term growth investing. Second, Baillie Gifford is a partnership with a sole focus on asset management. Finally, we believe that the investment trust structure is an excellent vehicle for compounding wealth. Each of these points was discussed in more detail in the 2018 annual report.

Performance

Over the past year the NAV per share with borrowings deducted at fair value has decreased by 5.3% to 789.3p lagging the fall in the Company's benchmark of 0.5%. The journey was volatile with the NAV falling by 16.0% to 700.2p during the first half of the company's year, before rising 12.7% during the second half to 789.3p at the year-end. As we noted last year, following a year when performance was significantly ahead of the benchmark, Baillie Gifford believes that performance should be measured over longer periods. Over five years the NAV has outpaced the benchmark by 7.8% p.a. and over ten years by 9.4% p.a., demonstrating the benefit to shareholders of an active, long-term, growth-orientated approach to investing. Volatility and short-term setbacks are inevitable when pursuing this approach but this, in our view, should not distract from the significant value that can be created over the long-term.

The Company's total assets reduced slightly from £870.6m to £859.7m. The reduction was a combination of a negative return from the portfolio in Yen terms, exacerbated by gearing, which was partly offset by weakness in Sterling. As was the case last year, over five years each of the top ten contributors individually delivered more performance than the worst subtracted. Therefore, we continue to believe that it is important for us to focus on the upside potential of individual stocks and stay the course when we have found an idea where we have strong conviction.

The largest contributor to performance this year was Rakuten, mainly an online retail and finance company. It has made significant progress in its plans to launch a mobile phone network in Japan while other parts of the business continue to perform. Aside from this we had helpful contributions from Advantest, the chip-testing company, where demand and profits surged during the year; and Pan Pacific Holdings, the retailer formerly named Don Quijote, who made a significant acquisition to grow the size of the business.

On the other hand, the two largest negative contributors to performance this year were Outsourcing and ZOZO (formerly named Start Today). Both remain in the top ten positive contributors to performance over the past five years, so this year appears to be a reversal of the previous positive trend.

Outsourcing is a staffing business run by the entrepreneur Mr Doi, who owns a little over 12% of the company. It has grown its sales 7-fold and operating profits 13-fold over the past 5 years. Despite continuing to grow, the shares were weak due to the perception that tougher macro conditions might impact the business. We remain very happy to continue to back the founder and increased the company's shareholding this year.

ZOZO is an online fashion retailer run by the entrepreneur Mr Maezawa, who owns 36% of the company. It has experienced significant success over the past several years but recent attempts to innovate have been less successful. It also gave us cause for concern when the Board decided to approve an options package to Mr Maezawa that seemed excessive relative to the performance hurdles needed to achieve it. We reduced the holding during the year. Subsequently there has been a bid for majority control of the company by the Softbank controlled Yahoo Japan so we may end up continuing to own the business indirectly.

Portfolio positioning

As in last year's report, the portfolio is grouped into Secular Growth, Growth Stalwarts, Special Situations and Cyclical Growth reflecting our process. Secular Growth stocks remain the core of the portfolio, comprising a little over 55% at the year end. These businesses are those that we believe have the highest potential growth but where there is also the greatest uncertainty as they are often operating in rapidly evolving markets. Most of the internet businesses, factory automation businesses and emerging healthcare stocks sit within this grouping. Around 29% of the portfolio is in internet related businesses and a further 16% in automation related businesses. Both are areas that we believe will show significant growth for a long period of time and where we can find exceptional quality businesses.

Softbank, the strategic holding company, remains the single largest stock position. There are three parts to the investment case that mutually strengthen each other. First, excellent underlying assets. These include a large stake in Alibaba (China's largest e-commerce company) and many exciting investments in the Vision Fund including ARM (which designs chips for mobile phones) and significant stakes in ride-sharing businesses. Given the scale of the company's investments there will always be headlines about some individual holding having a problem but taken in the round we are in no doubt that Softbank has a high-quality portfolio. Second, if we compare the total value of the assets held by Softbank with the market capitalisation of the company a large discount exists, in our opinion more than 40%. Indeed, the stake in Alibaba alone is roughly equivalent to the market capitalisation of Softbank. Third, we think founder-entrepreneur Mr Son is a an extremely value-added manager and will continue to be so. Over a nearly forty-year period he has achieved a hugely successful investment record with the result that his holding in the company is worth $19bn alone.

Smartphone orientated computer games companies were a fertile area of opportunity during the year. We bought two new holdings, Mixi and Gree, and made significant additions to existing holding Colopl. Each of these businesses benefits from having the founder as a major shareholder and a good record of innovation in the past. Yet each has found the last few years challenging as they have not managed to generate hit games or new businesses to rival past successes. This has resulted in the shares seemingly taking little account of the future growth prospects for the businesses. Over the last year we have been regularly able to buy shares at such anomalous prices that fully two-thirds of the market capitalisation of the business has been covered by net cash on the balance sheet. Successful innovation and profit growth at any of these companies has the potential to drive a much more positive and appropriate perception in our view.

In total we bought 6 new holdings and sold 7. Turnover was 11.5% during the year. Given that we started the year with 70 holdings, by name we have retained 90% of last years' portfolio. This is entirely deliberate. As actual investors our starting point is that most of the portfolio value-added will come from the long-term holding of exceptional businesses. Charlie Munger, vice chairman of the well-known Berkshire Hathaway, noted in a lecture "when you analyse what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses." It also means that you as an investor in the shares of the Japan Trust can have a degree of conviction in the type of portfolio that you are buying into. It is highly unlikely that next year's portfolio is going to be radically different to this one.

Outlook

The outlook for the global and Japanese economies remains, as ever, uncertain. However, we believe that a selected portfolio of growing businesses retains the capability of growing shareholders wealth over time. When we consider the quality of the companies in your portfolio we look to the future with optimism and confidence.

Baillie Gifford

October 2019

For a definition of terms see Glossary of Terms and Alternative Performance Measures (APM), Note 11.

Past performance is not a guide to future performance.

Equity Portfolio by Growth Category

As at 31 August 2019

* A definition of the growth categories can be found in the Managers' Report.

Stock Level Attribution

Source: StatPro and relevant underlying index providers. Baillie Gifford Japan Trust relative to TOPIX total return, in sterling terms. See disclaimer at the end of this announcement.

Holding Period

As at 31 August 2019

List of Investments as at 31 August 2019

† Absolute and relative performance has been calculated on a total return basis over the period 1 September 2018 to 31 August 2019. For investments held for part of the year, the return is for the period they were held. Absolute performance is in sterling terms; relative performance is against TOPIX total return (in sterling terms).

* Figures relate to part period returns.

Source: Baillie Gifford/Statpro and relevant underlying index providers. See disclaimer at the end of this announcement.

Past performance is not a guide to future performance.

Income Statement

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

* See Glossary of Terms and Alternative Performance Measures (APM) at the end of this announcement.

For the year ended 31 August 2019

For the year ended 31 August 2018

* The capital reserve balance as at 31 August 2019 includes investment holding gains of £304,236,000 (2018 - £393,653,000)

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

# Alternative performance measure which is considered to be a known industry metric

‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Third Party Data Provider Disclaimer

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data.

No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.

Regulated Information Classification: Additional regulated information required to be disclosed under the laws of a Member State of the European Union.

- ends -