Fidelity Japan Trust Regulatory News (FJV)

Fidelity Japan Trust Plc - Annual Financial Report

PR Newswire

London, April 7

FIDELITY JAPAN TRUST PLC 

AnnualReportfor the yearended 31 December 2019

Financial Highlights:

The Company recorded a net asset value (“NAV”) total return of +36.6% for the year ended 31 December 2019, more than double its Reference Index which returned +14.6%%, and the share price total return was +39.4%.

During the reporting year, the Board undertook more active management of the discount contributing to a narrowing of the discount to NAV from a high of 13.8% to 6.6%. Against this backdrop, the Board has amended its discount policy to maintain the discount in single figures in normal market conditions.

The Board has approved an increase in gearing to 25% to assist the Portfolio Manager in maximising the opportunity to purchase high quality companies at depressed prices as a result of current market conditions caused by the pandemic.

Contacts

For further information, please contact: Natalia de Sousa Company Secretary, FIL Investments International 01737 837846

CHAIRMAN’S STATEMENT

PERFORMANCE REVIEWI am delighted to report that the Company had an excellent year in 2019, doing more than recouping the setback suffered in 2018.

Over the 12 months to 31 December 2019, the Company’s NAV per share increased by 36.6% (in sterling terms) whilst the share price rose by 39.4%, more than double the Reference Index, which returned 14.6%. Moreover, the Company topped the AIC Japan peer group, not only outperforming all the other trusts over the review period, but also over three and five years.

Holdings in mid to large cap growth stocks were the primary source of the Company’s strong outperformance. In particular, positions in electronic component makers and semiconductor related stocks such as Murata Manufacturing that were built up through the first half of the year were among the standout contributors to returns. Holdings in domestic oriented services companies that continued to increase their earnings were also strong performers, as were high quality medical technology names such as Olympus and Sysmex. At a sector level, the Company’s underweight exposure to laggard defensive sectors and financials further supported relative returns.

Since the end of the reporting year, the share price continued to perform favourably for a brief period, before being caught up in the global market turmoil sparked by the rapid spread of the Coronavirus (COVID-19) outside China. From 1 January 2020 to 31 March 2020, the NAV of the Company had declined by 22.5% and the share price by 25.1% compared with a fall in the TOPIX Total Return Index of 11.2%.

Whilst this is a significant setback, your Portfolio Manager had avoided various sectors on fundamental grounds which have proved to be the most badly impacted during this period of market volatility. Moreover, the extreme market disruption has provided him with opportunities to invest in quality companies at very depressed prices. This augurs well for the future. 

The investment trust structure is particularly robust at times of crisis compared with open ended funds, many of which have had to sell underlying investments to meet large redemptions. Your Portfolio Manager has not been under any such pressure. Moreover, it must be remembered that he takes a long term view and, as noted above, his record over both three and five years has been particularly good. 

DISCOUNT MANAGEMENT, SHARE REPURCHASES AND TREASURY SHARESDuring the reporting year, the Board decided that more active management of the discount was warranted, given the performance of the Company. As a result, 1,929,105 ordinary shares were repurchased for holding in Treasury (representing 1.4% of the issued share capital), leading to a narrowing of the discount from a high of 13.8% to 6.6% as at 31 December 2019. Since the year end, the discount traded in the range of 4.5% to 8.7% up until 21 February 2020. Thereafter, there has been an unprecedented level of turmoil in the world’s financial markets and the Company’s discount has been extremely volatile in reaction to such market conditions.

Against this backdrop, the Board has decided to adopt a formal discount control policy whereby it will seek to maintain the discount in single digits in normal market conditions and will, subject to market conditions, repurchase shares with the objective of stabilising the share price discount within a single digit range.

At the forthcoming Annual General Meeting (“AGM”), the Board is seeking to renew the annual authority to repurchase up to 14.99% of the Company’s shares, to be either cancelled or held in Treasury, as it has done each year previously.

SHAREHOLDER MOVEMENTSIt is pleasing to note the trend of shareholder activity in recent years as demonstrated in the table below. Given the performance of the Company both in the short and medium term, we have seen increased activity by wealth managers, investment platforms and retail investors in accumulating the Company’s shares since 2016. This has led to a rise in the holdings of these investors from 25% to 46% in the Company’s shares, whilst institutional shareholdings have declined from 75% to 54%.

ONGOING CHARGESThe ongoing charge for the reporting year was 0.83% which was lower than the previous year’s figure of 1.06% as the new variable management fee arrangement was in place for the full year. This compared with the unweighted AIC Japan Peer Group average of 0.94%.

ALLOCATION OF FEESThe Board has elected under the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Trust Companies, to charge 80% of base management fees and finance costs to capital and 20% to revenue, reflecting the Company’s focus on capital growth to generate returns.

This took effect from 1 January 2020. The practice, for the years up to and including the 2019 financial year, had been to charge these costs in their entirety to revenue. The change is a matter for judgement and the result of the Board reviewing its policy on the allocation of fees. It should be noted that while the new allocation of costs may lead to surpluses on the Revenue Reserve which, over time, should gradually reduce the deficit on the Revenue Reserve, the future payment of dividends was not a major consideration in adopting the change.

GEARINGThe Company continues to gear the portfolio through the use of long contracts for difference (“CFDs”). Total portfolio exposure at the end of the year was £295.4m, equating to gearing of 17.0% compared with 15.2% at the end of 2018. Further information can be found in the Strategic Report. As at 31 March 2020, gearing was 19.7%.

The Board continues to be of the view that using CFDs provides more flexibility at a much lower cost than traditional bank debt, despite the low level of interest rates.

SUCCESSION PLANNING AND BOARD CHANGESThree of the current Directors have been in post for nine or more years and to avoid losing valuable corporate history, market knowledge and specific skillsets simultaneously, the Board has put a clearly defined succession plan in place.

Sir Laurence Magnus, having served on the Board for over nine years as a Director and as Chairman of the Audit Committee, will step down from the Board at the conclusion of the AGM on 19 May 2020. I would like to take this opportunity to thank him on behalf of the Board and all of the Company’s stakeholders for all that he has accomplished and for his unfailing dedication and attention to detail. He takes with him our very best wishes for the future.

David Graham will take over as Chairman of the Audit Committee from Sir Laurence Magnus on 19 May 2020.

It is my intention to retire at the conclusion of the Company’s AGM next year, by which time I will have served ten years as a Director and nine years as Chairman.

The Nomination Committee of the Board met during the year and it was determined that due to the length of his tenure, Philip Kay should stand down as Senior Independent Director and that Sarah MacAulay should replace him with effect from 10 October 2019. Mr Kay has been invited to remain on the Board for a period of time as a non-independent non-executive Director because of the valuable contribution he continues to bring to the collective skills of the Board. Philip Kay will step down from the Board at the AGM in 2022, having served 18 years by that time.

All Directors, with the exception of Sir Laurence Magnus, are subject to annual re-election at the AGM on 19 May 2020. Biographical details of the full Board are included in the Annual Report to assist shareholders when considering their voting at the AGM.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)Recent years have seen growing concern about global warming and increasing efforts to counter its effects. Businesses for their part are under pressure to ensure that their activities are environmentally sustainable, as well as demonstrating social responsibility and good corporate governance. Ultimately, ESG cannot be boiled down to a tick-box exercise, however, I am pleased to say that Morningstar rates the Company as ‘above average’ in its sustainability scoring.

In his report, Nicholas Price outlines Fidelity’s approach to this important subject and what this means for the Company’s investment portfolio.

ANNUAL GENERAL MEETING – TUESDAY 19 MAY 2020In response to the wide spread of the Coronavirus (COVID-19), the Stay at Home Measures were passed into law in England and Wales on 26 March 2020, with immediate effect. These measures dictate that gatherings of more than two people are not permitted.

However, the legal requirement to hold an AGM remains in force and we are therefore obliged to convene the meeting at 10.00 am on 19 May 2020 at Flat 2, Fidelity International, Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent, TN11 9DZ. 

As the attendance of more than two people at an AGM (other than where this is essential for work purposes) is not permitted under the Stay at Home Measures, not to mention unsafe for the attendees, the Chairman will exercise his statutory powers to exclude other attendees. This means that any of those whose presence is not 'essential for work purposes' will be excluded, once two people (including the Chairman of the meeting) are present. The other member has already been contacted and has confirmed his attendance in person. Therefore, anyone who ignores the Stay at Home Measures and attempts to join the meeting will not be admitted.

With this in mind, this year’s AGM will run with a substantially reduced programme. The meeting will be restricted to the formal business of the meeting as set out in the Annual Report and voting on the resolutions therein. On this occasion, the Portfolio Manager will not attend the meeting. His presentation will be pre-recorded and made available on the website www.fidelityinvestmenttrusts.com as soon as practicable. Hard copies of the presentation will also be made available by post on request to the Secretary, contact details for which can be found in the Annual Report.

It is not the Board’s intention to exclude or discount the views of the Company’s shareholders, but at the moment, the health of all investors, workforce and officers must be paramount. We urge all shareholders to make use of the proxy form provided. If you hold shares through the Fidelity Platform or a nominee (and not directly in your own name) please contact the company with which you hold your shares to determine alternative options (if available) for lodging your voting instructions.

We encourage all investors who have any questions or comments to contact the Secretary so that she can relay your comments to the Board, and we will respond in due course. The Secretary’s contact details can be found in the Annual Report.

We thank you for your cooperation and sincerely hope to resume the meeting’s usual format in future.

OUTLOOKWhile global growth expectations had improved around the turn of the year, partly as a result of the ‘phase one’ trade agreement between the US and China, all expectations of 2020 being a better year for global trade and growth have been dashed by the rapid spread of the Coronavirus (COVID-19) around the world.

Global supply chains have been badly disrupted by the measures taken to combat the virus, first in China but subsequently worldwide. The pandemic is now also expected to impart a significant demand shock to the global economy. The combination of this supply and demand shock is likely to result in recession, despite both further monetary easing by Central Banks and fiscal expansion by a number of Governments. There is thus, no clear view as to when a recovery may ensue.

In Japan, following the negative impact of the Consumption Tax rise in the fourth quarter of the 2019 calendar year, the economy probably contracted again in the first quarter of 2020. This would effectively mean that the country has been in recession from the start of the year. Whether the Government’s fiscal expansion and continued monetary easing by the Bank of Japan will be sufficient to offset the impact of the Coronavirus (COVID-19) on domestic growth remains to be seen, but with a negative global backdrop the portents are not positive. In addition, the cancellation of the Olympic Games in July has removed another prop to growth on which the Government was relying.

The Japanese equity market was not looking over-valued early in the year but collapsed in February/March, along with financial markets globally. Whilst continued buying by the Bank of Japan might provide some support, corporate earnings will be severely impacted by a domestic and global recession.

However, there are undoubtedly opportunities for your Portfolio Manager to purchase high quality companies at depressed prices, and to this end the Board approved an increase in the gearing level to 25%. In current circumstances, a conservative approach and extremely careful stock selection are warranted until the end of the pandemic can be confirmed. Nevertheless, it is worth stressing that your Portfolio Manager has a long track record of generating alpha from his stock selection, finding companies with strong balance sheets, sound management and good growth prospects, and this is the approach that he will maintain.

DAVID ROBINSChairman7 April 2020

PORTFOLIO MANAGER’S REVIEW

Nicholas Price was appointed as Portfolio Manager of Fidelity Japan Trust PLC on 1 September 2015. He joined Fidelity Investments Japan in 1993 as a research analyst. He became a portfolio manager in 1999 and has since been managing a number of Japanese equity portfolios on behalf of both Japanese and international clients.

QUESTIONWhat type of market environment have we seen this year?

ANSWERThe Japanese equity market made solid gains in 2019, though most of the upside came towards the end of the year, when progress in US-China trade talks buoyed hopes of a recovery in the global economy and earnings cycle. Sector returns displayed a clear tilt towards technology and other global cyclical segments that were expected to drive a recovery in earnings. Semiconductors, medical equipment and analytical instruments were among the standout performers in 2019. Conversely, the weakest performers included power utilities, transportation and financials. In terms of style, large and small cap growth stocks were the clear winners of the year, whereas large cap value names were conspicuous laggards.

QUESTIONWhat have been the key contributors to performance? And detractors?

ANSWERStrong stock selection in technology related and services sectors was a key driver of the Company’s significant outperformance over the review period. As the inventory cycle of electronic components and devices bottomed out, holdings in globally competitive companies well positioned to capture the structural growth of automotive semiconductors and the advent of fifth generation (5G) mobile phone technology performed strongly. Murata Manufacturing (a global leader in capacitors and communication modules), Tokyo Electron (a leading player in semiconductor production equipment) and Screen Holdings (a specialist in manufacturing and cleaning systems for semiconductors and flat panel displays) were among the standout contributors to performance. The medical technology (medtech) sector was also a source of strong returns for the Company. Positions in Olympus (a leading maker of endoscopes globally) and Sysmex (a market leader in clinical testing equipment) supported performance.

Conversely, individual holdings that weighed on returns included power tool maker Makita, educational portal site operator ItoKuro and chemicals company NOF. The underweight position in the pharmaceuticals sector, which outperformed the broader market in the closing months of 2019 on merger and acquisition (M&A) related newsflow, also constrained relative performance.

QUESTIONWhat are some of the changes that you have seen in Japan at the micro level?

ANSWERJapan is making clear strides in terms of corporate governance, where it was once a laggard, and is now moving towards global norms. The introduction of growth oriented governance reforms such as the Stewardship Code (2014) and the Corporate Governance Code (2015) are instrumental in driving this change. We are seeing a gradual shift in corporate mindsets, with management now paying far more attention to profitability targets such as return on equity (ROE), as well as increasing shareholder returns to record highs.

Yet, despite the significant increase in shareholder returns in recent years, Japanese companies remain overcapitalised. More than half of the listed companies in the TOPIX Total Return Index have a net cash position compared with much lower levels in the US and Europe.

In addition to a significant increase in buybacks, we are seeing a pick-up in tender offer activity in Japan. The need for companies to reorganise their business portfolios and adhere to governance reforms has led to an increased focus on the dissolution of parent/subsidiary listings. This has prompted management to reconsider their subsidiary listings. We are seeing concrete developments on this front, with the value of tender offers in 2019 reaching the highest level in more than ten years. For example, we saw Sony divest its stake in Olympus and industrial conglomerate Toshiba announce the conversion of three listed units into wholly owned subsidiaries.

QUESTIONThere is a lot of press comment about ESG in connection with investing. What is your approach as the Portfolio Manager?

ANSWERAt Fidelity, ESG factors are considered and integrated into our research analysis. As the Portfolio Manager, I analyse the effects of these factors when making bottom-up investment decisions, and whether they have the potential to affect the long term value of an investment. By working closely with our team in Japan, we are able to identify laggard companies that are implementing real change and moving up the ESG scale. When the efforts of these companies are recognised by the market, there is a good chance for them to be revalued.

Recent examples of shareholder engagement in relation to ESG include:

Olympus Corporation; amid further progress in the company’s corporate restructuring plan, which is partly driven by the involvement of an activist shareholder, Fidelity’s engagement team met with senior management to see if the projected rate of additional restructuring activity is achievable or not. We provided the company with a “value creation diagnosis report” and encouraged it to improve the company’s cash management. Olympus Corporation agreed with us that there is room to improve its cash management processes and that it remains committed to achieving the aggressive targets disclosed in its restructuring plan.

Fidelity’s engagement team continued to engage with Shimadzu Corporation and exchanged views regarding its corporate governance and sustainability strategy. We explained our concerns over the company’s policy on management remuneration, as well as cross-shareholdings. As for its sustainability strategy, the company accepted our opinion that it would be beneficial to demonstrate how much it can contribute to resolving social challenges by referring to concrete targets of the UN’s Sustainable Development Goals.

Fidelity’s engagement team also met with NOF Corporation and discussed its low ESG score and possible improvement plan. We pointed out that although it has succeeded in providing greater added value to products over the past ten years, the improvement has not reflected sufficiently on the share price because of some issues relating to the company’s low ESG score. NOF Corporation admitted that the low score is mostly due to its current disclosure policy on chemical safety and carbon emissions as well as a historic reluctance by senior management to engage with investors directly. The company has committed to making serious efforts to deal with these issues. We believe our views were conveyed successfully, which should result in visible progress, through better disclosure and through further discussions with senior management.

The portfolio has a significantly lower carbon footprint versus the overall market, which is largely a reflection of the bias towards mid/small cap growth stocks in low-emission industries such as business to business (B2B) and business to consumer (B2C) online services.

QUESTIONTalking about governance, do you think there is a governance premium in Japan?

ANSWEROn the contrary, I believe that there is a governance discount in Japan, which can be detected and exploited more readily by being on the ground. By working closely with our sustainable investing team in Japan, we are able to identify laggard companies that are implementing real change and moving up the governance scale.

QUESTIONWhat about increased activist engagement in Japan?

ANSWERThe introduction of the Corporate Governance Code means that companies have to listen to shareholders, who in turn have to be more engaged in order to unlock value. Now we are seeing a mix of domestic and overseas activists behind a rising number of campaigns directed at cash or asset rich companies. We are also seeing more activity among private equity firms in Japan as resistance has waned and companies are more willing to divest assets.

QUESTIONWere there any significant changes to your strategy in 2019?

ANSWERThe underlying investment approach that guides the Company remains consistent and continues to be driven by stock specific factors, with a preference for companies with attractive business models that can exceed earnings expectations over the medium term. My aim is to generate outperformance from holdings in companies with consistent growth within the mid/small cap space and to identify signs of positive change over the mid to long term.

Areas where I see potential investment opportunities in the coming year include:

· Sustainable growth companies that can increase earnings as the global economy stabilises.

· High quality services and technology related companies geared to structural growth trends, such as medtech, automation and 5G.

· Under researched companies with new and interesting business models, and unlisted opportunities.

QUESTIONWere there any significant changes to the portfolio during the reporting year and what impact has the Coronavirus (COVID-19) had more recently?

ANSWERA notable change that occurred in 2019 was the increase in the Company’s allocation to the diverse electrical appliances sector. Trade frictions coincided with a downturn in the technology cycle, and we saw, for example, semiconductor stocks falling by c.50% relative to their market peak in late 2018. In this environment, market dynamics combined with overly negative sentiment, created opportunities to buy companies at trough valuations. Notable examples include Tokyo Electron and Screen Holdings, both of which were strong contributors to the performance of the Company in 2019.

The spread of Coronavirus (COVID-19) will have a significant effect on end consumer demand in the near term. Having said that, the impact on smartphone demand is likely to be limited due to the seasonal consumption skew towards the second half of the year and the holiday season. Automotive demand will suffer in the short term, but pent-up replacement demand and Government initiatives should support a recovery. Corporate spending is likely to be more stable, especially relating to networking and data processing. Over the longer term, an acceleration towards online purchases, entertainment and changing working styles will drive higher demand for the semiconductor industry.

QUESTIONWhat opportunities have you been seeing in the pre-IPO space?

ANSWERWe typically see around 100 initial public offerings (IPOs) per year in Japan, predominantly on the TSE Mothers’ Index and other start-up markets. Being on the ground means that we see a lot of the new ideas and business models that are coming to market first-hand. What we have also seen in recent years is that the number of sell-side analysts covering IPOs has consistently declined, which creates opportunities for bottom-up managers like me, who are willing to do the leg work and identify the most attractive investment cases.

We continue to look for early stage ideas, particularly among fast growing services and internet-based companies, as well as innovative medtech names. At the end of the review period, the Company held two unlisted securities. Firstly, Coconala which offers an online consumer to consumer (C2C) platform where users can buy and sell knowledge, skills and experience from those who are willing to teach these activities for a fee. Secondly, Innophys, a Tokyo University based venture harnessing the power of robotics to develop innovative solutions to elderly care and physical rehabilitation.

QUESTIONWhat are your current thoughts on gearing? And how has your use of gearing changed over the period under review?

ANSWERThe level of gearing employed remained fairly consistent over the review period and averaged close to 16%. I reduced the exposure to machinery stocks as the risk/reward balance deteriorated and took profits in strong performers among services companies. On the other hand, the period of market weakness that culminated in a near term bottom in August created opportunities to increase holdings in high conviction technology related names.

More recently, the Board has approved an increase in the level of gearing to a limit of 25%, which will enable me to capitalise on excessive price action to add or increase positions in attractive growth stocks that I believe will contribute to future returns for the Company.

QUESTIONWhat is your outlook for the months ahead and what changes have you made to the Portfolio as a result of recent market turmoil?

ANSWERI have been reducing at least some of the high performing stocks, so-called consistent growers, where the relative valuations remain elevated and there will likely be at least two quarters of tough earnings. When aggregate demand goes close to zero, even the market share gainers cannot gain a share of zero.

I am watching balance sheet leverage and covenants for the few leveraged companies in my portfolios. If they can make it through, some high leverage names could double in value.

At the same time, I am actively looking for domestic and/or China related companies that are getting closer to Lehman style valuations. It currently seems that Japan and China will get out of this crisis earlier than the rest of the world. Some of the candidates include retailers, rail operators and leisure companies that have been really punished. I feel much more confident that the downturn is discounted when I see Price-to-Book-Ratios that are getting close to Lehman levels (small caps, in particular, got there very fast).

Overall, I am maintaining the technology bias in the portfolio, focusing on names with strong balance sheets, reasonable valuations and a secular rather than cyclical basis. I think that there is a good chance that they will lead us out of this, as their demand is likely delayed rather than foregone. 

Lessons learnt from Lehman and the 2008 Credit Crisis

Turning ultra-defensive when the market has already fallen by c.30% and many stocks have halved, is probably not going to be rewarded on a 12-month basis.

Bear markets often create new turning points and market leadership. The likely coming fiscal stimulus may throw up new leadership and new winners from discarded losers, so I am recommending that Fidelity’s analysts revisit underperforming stocks as well as the old long term winners in their coverage. What if the US and/or China implement another auto scrappage subsidy? After the 2011 Japan earthquake, tolls were cut to zero on the motorways to encourage domestic tourism. Things will change quickly when there is some stimulus at the micro level, and when this happens the market will look through the current negativity in those areas.

Finally, it is out of the ruins of this last bull market from which the seeds of the new one will grow. It is our job to find the new winners when everyone else is standing shell shocked. While the market is busy focusing on the daily infection charts, if we keep on going out and visiting/calling a lot of companies and casting the net wider, we will find the new winners.

NICHOLAS PRICEPortfolio Manager7 April 2020

STRATEGIC REPORT

PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENTAs required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks that the Company faces. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the following as the principal risks and uncertainties faced by the Company. There have been no changes to these since the prior year except for the addition of “Key Person risk”, “Pandemic risk” and the categorisation of “Cybercrime risk” as a principal risk.

Other risks facing the Company include:

TAX AND REGULATORY RISKSThere is a risk to the Company of not complying with tax and regulatory requirements. A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status resulting in the Company being subject to tax on capital gains.

The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.

OPERATIONAL RISKSThe Company relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and the compliance of regulatory and legal requirements. The Registrar, Custodian and Depositary are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers’ own internal controls reports are received by the Board on an annual basis and any concerns are investigated. Risks associated with these services are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company.

CONTINUATION VOTEA continuation vote takes place every three years. There is a risk that shareholders do not vote in favour of continuation of the Company during periods when performance of the Company’s NAV and share price is poor. At the Company’s AGM held on 21 May 2019, 99.88% of shareholders voted in favour of the continuation of the Company. The next continuation vote will take place at the AGM in 2022.

VIABILITY STATEMENTIn accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long term capital growth. The Board considers that three years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment of the viability of the Company, the Board has taken account of the Company’s current position, the principal risks that it faces and their potential impact on its future development and prospects, and the Company’s objective and strategy. The Company’s working capital is strong because the portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary and the operating costs and income are modest in comparison to the Company’s total assets. Furthermore, Japanese equities have a long term future and the Manager has a strong track record for delivering positive returns over the long term in this sector. The Directors, therefore, confirm that they have 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 of assessment. This confirmation also takes into account the Board’s assessment of the risks arising from the Coronavirus (COVID-19) as set out in the Pandemic risk above.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement below.

PROMOTING THE SUCCESS OF THE COMPANYUnder Section 172(1) of the Companies Act, the Directors have a duty to promote the success of the Company for the benefit of its shareholders. This includes having regard (amongst other matters) fostering relationships with the Company’s stakeholders and maintaining a reputation for high standards of business conduct.

The Board, with the Portfolio Manager, sets an overall investment strategy and reviews this on an ongoing basis. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, including in relation to the maximum size of individual holdings, the use of derivatives, and the level of gearing. These limits and guidelines are regularly monitored.

It is one of the Board’s long term intentions that the share price should trade at a level close to the underlying net asset value of the shares. In order to achieve this, the Board has implemented an active discount policy in order to reduce discount volatility and will execute share repurchases (in normal market conditions) in order to keep the discount in single figures.

The Board is mindful that investors expect their assets to be managed for a competitive fee. The Board negotiated a variable management fee with Fidelity in 2018. The Board believes that this fee arrangement fairly rewards the Manager for any outperformance against the Reference Index while remaining competitive against fees charged by the Company’s peer group. Fees for the reporting year were £1,226,000 (2018: £1,843,000). Further information about the variable fee arrangement can be found in the Directors’ Report.

It is important that shareholders have access to both the Portfolio Manager and the Board. The Portfolio Manager meets with major shareholders, stock market analysts, journalists and other commentators during the year. In the run up to the Continuation Vote in May 2019 the Chairman, through the Broker, met with several shareholders without representatives of Fidelity present. These meetings were instrumental in shaping the Board’s views around the active discount policy mentioned above.

As long term investors, we look to the future – the Portfolio Manager in constructing the portfolio and the Board in governing the Company. The performance of the Company and its reputation for transparency and good governance are paramount to its long term success for the benefit of all its stakeholders.

GOING CONCERN STATEMENTThe Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt the going concern basis for at least twelve months from the date of this Annual Report. This conclusion also takes into account the Board’s assessment of the risks arising from the Coronavirus (COVID-19) as set out in the Pandemic risk above. The prospects of the Company over a period longer than twelve months can be found in the Viability Statement.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial period. Under that law they have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice, including FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the reporting period.

In preparing these Financial Statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

· prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Corporate Governance Statement and a Directors’ Remuneration Report that comply with that law and those regulations.

The Directors have delegated to the Manager the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelityinvestmenttrusts.com. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their own jurisdictions.

The Directors confirm that to the best of their knowledge:

· The Financial Statements, prepared in accordance with FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

· The Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces.

The Directors consider that 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.

Approved by the Board on 7 April 2020 and signed on its behalf by:

DAVID ROBINSChairman

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2019

The Company does not have any other comprehensive income. Accordingly, the net return/(loss) on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes in the Annual Report form an integral part of these Financial Statements.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2019

The Notes form an integral part of these Financial Statements.

BALANCE SHEET AS AT 31 DECEMBER 2019 COMPANY NUMBER 2885584

The Financial Statements were approved by the Board of Directors on 7 April 2020 and were signed on its behalf by:

DAVID ROBINSChairman

The Notes in the Annual Report form an integral part of the Company’s Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

1 PRINCIPAL ACTIVITYFidelity Japan Trust PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2885584, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 ACCOUNTING POLICIESThe Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”), in November 2014 and updated in February 2018 with consequential amendments. The Company is exempt from presenting a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investments are highly liquid and are carried at market value.

a) Basis of accountingThe Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments. The Company’s Going Concern Statement in the Directors’ Report takes account of all events and conditions up to the date of approval of these Financial Statements, as further disclosed in Note 19.

b) Significant accounting estimates and judgementsThe Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The judgements required in order to determine the appropriate valuation methodology of level 3 financial instruments have a risk of causing an adjustment to the carrying amounts of assets. These judgements include making assessments of the possible valuations in the event of a listing or other marketability related risks.

c) Segmental reportingThe Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income StatementIn order to reflect better the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) IncomeIncome from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

f) Investment management fees and other expensesInvestment management fees and other expenses are accounted for on an accruals basis. The base investment management fee and other expenses are charged in full to revenue. The variable investment management fee is charged/credited to capital, as it is based on the performance of the net asset value per share relative to the Reference Index.

g) Functional currency and foreign exchangeThe functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

h) Finance costsFinance costs comprise interest on bank overdrafts and interest paid on long CFDs, which are accounted for on an accruals basis. Finance costs are charged in full to the revenue column of the Income Statement.

i) TaxationThe taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

j) InvestmentsThe Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

· Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed.

· Unlisted investments are investments are not quoted or frequently traded, and are stated at the Directors best estimate of fair value. The Manager’s Fair Value Committee, which is independent of the portfolio management team, provide a recommendation of fair values to the Directors based on recognised valuation techniques that take account of the cost of the investment, recent arm’s length transactions in the same or similar investments and financial performance of the investment since purchase.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within gains/(losses) on investments in the capital column of the Income Statement and has disclosed these costs in Note 9 below.

k) Derivative instrumentsWhen appropriate, permitted transactions in derivative instruments are used. Some of the Company’s portfolio exposure to Japanese equities is achieved by investment in long CFDs. Long CFDs are classified as other financial instruments and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

· Long CFDs are valued at the difference between the strike price and the value of the underlying shares in the contract.

l) DebtorsDebtors include securities sold for future settlement, accrued income and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not, they are presented as non-current assets. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

m) Cash collateral held with brokersThese are amounts held in segregated accounts as collateral on behalf of brokers and are subject to an insignificant risk of changes in value.

n) Other creditorsOther creditors include securities purchased for future settlement and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

o) Other reserveThe full cost of ordinary shares repurchased and held in Treasury is charged to the other reserve.

p) Capital reserveThe following are accounted for in the capital reserve:

· Gains and losses on the disposal of investments and derivative instruments;

· Changes in the fair value of investments and derivative instruments held at the year end;

· Foreign exchange gains and losses of a capital nature;

· Dividends receivable which are capital in nature;

· Variable investment management fees; and

· Other expenses which are capital in nature.

As a result of technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, the determination of realised profits and losses in the context of distributions under the Companies Act 2006, changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of investments listed on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash, with the exception of the level 3 investments which had unrealised foreign exchange losses of £180,000 (2018: £nil). See Note 16 for further details on the level 3 investments.

3 INCOME

No special dividends have been recognised in capital during the reporting year (2018: nil). 

4 INVESTMENT MANAGEMENT FEES 

* For the calculation of the variable management fee element above, the Company’s NAV return has been compared to the Reference Index return for the period from 1 July 2018 to 31 December 2019. This has resulted in an underperformance of the NAV and therefore a credit to the company of £329,000.

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

From the 1 July 2018, the Company adopted a new fee arrangement which reduced the base management fee from 0.85% of gross assets to 0.70% of net assets. In addition, with effect from 1 October 2018, there is a +/- 0.20% variation based on performance relative to the Reference Index. Fees are payable monthly in arrears and are calculated on a daily basis.

Further details of the terms of the Management Agreement are given in the Directors’ Report.

5 OTHER EXPENSES

1 Details of the breakdown of Directors’ fees are provided in the Directors’ Remuneration Report.

6 FINANCE COSTS 

7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES

b) Factors affecting the taxation charge for the yearThe taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 19.00% (2018: 19.00%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:

1 The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxationA deferred taxation asset of £4,698,000 (2018: £4,424,000), in respect of excess expenses of £27,638,000 (2018: £26,025,000) has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

8 RETURN/(LOSS) PER ORDINARY SHARE

The returns/(losses) per ordinary share are based on respectively; the net revenue return on ordinary activities after taxation for the year of £397,000 (2018: net revenue loss £97,000); the net capital return on ordinary activities after taxation for the year of £67,482,000 (2018: net capital loss of £34,159,000) and the net total return on ordinary activities after taxation for the year of £67,879,000 (2018: net total loss of £34,256,000); and on 134,354,398 ordinary shares (2018: 135,439,468), being the weighted average number of ordinary shares held outside of Treasury during the year.

9 INVESTMENTS

Investment transaction costsTransaction costs incurred in the acquisition and disposal of investments, which are included in the gains on sales of investments above, were as follows:

The portfolio turnover rate for the year was 68.7% (2018: 63.7%).

10 DERIVATIVE INSTRUMENTS

Derivative instruments recognised on the Balance Sheet 

11 DEBTORS 

12 OTHER CREDITORS 

13 SHARE CAPITAL

* Ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

The Company repurchased 1,929,105 ordinary shares (2018: 470,500 shares) and held them in Treasury. The £2,918,000 (2018: £741,000) cost of repurchase was charged to the other reserve.

14 RESERVESThe share premium account represents the amount by which the proceeds from the issue of ordinary shares, on the exercise of rights attached to subscription shares, exceeded the nominal value of those ordinary shares. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital redemption reserve maintains the equity share capital of the Company and represents the nominal value of shares repurchased and cancelled. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The other reserve was created in 1999 when the share premium account at that time was cancelled. It can be used to fund share repurchases.

The capital reserve represents realised gains and losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives held and other income and costs recognised in the capital column of the Income Statement. It can be used to fund share repurchases and it is distributable by way of dividend. See Note 2(p) above for further details.

The revenue reserve represents the retained revenue losses recognised in the revenue column of the Income Statement. It could be distributed by way of dividend if it were not in deficit.

15 NET ASSET VALUE PER ORDINARY SHAREThe net asset value per ordinary share is based on net assets of £252,491,000 (2018: £187,530,000) and on 133,207,090 (2018: 135,136,195) ordinary shares, being the number of ordinary shares of 25 pence each held outside of Treasury at the year end. It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

16 FINANCIAL INSTRUMENTSManagement of RiskThe Company’s investment activities in pursuit of its objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, performance, economic, geopolitical and natural disasters, key person, discount control, gearing, currency, cybercrime and pandemic risks. Other risks identified are tax and regulatory and operational risks, including those relating to third party service providers covering investment management, marketing and business development, company secretarial, fund administration and operations and support functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown in the Strategic Report.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

· Equity shares held in accordance with the Company’s investment objective and policies;

· Derivative instruments which comprise CFDs; and

· Cash, liquid resources and short term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

MARKET PRICE RISKInterest rate riskThe Company finances its operations through its share capital and reserves. In addition, the Company has a geared exposure to Japanese equities through the use of long CFDs which incur funding costs and can provide collateral in yen. The level of gearing is reviewed by the Board and the Portfolio Manager. The Company is exposed to a financial risk arising as a result of increases in yen interest rates associated with the funding of the long CFDs.

Interest rate risk exposureThe values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

Foreign currency riskThe Company’s net return/(loss) on ordinary activities after taxation for the year and its net assets may be affected by foreign exchange movements because the Company has income and assets which are denominated in yen whereas the Company’s functional currency is UK sterling. The Company may also be subject to short term exposure from exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs. The Company does not hedge the sterling value of investments or other net assets priced in yen by the use of derivative instruments.

Three significant areas have been identified where foreign currency risk may impact the Company:

· Movements in exchange rates affecting the value of investments and long CFDs;

· Movements in exchange rates affecting short term timing differences; and

· Movements in exchange rates affecting income received.

Currency exposure of financial assetsThe currency exposure profile of the Company’s financial assets is shown below:

1 Excludes other debtors and prepayments of £73,000 which are denominated in UK sterling.

1 Debtors include cash collateral held with brokers and exclude other debtors and prepayments of £86,000 which are denominated in UK sterling.

Currency exposure of financial liabilitiesThe currency exposure profile of the Company’s financial liabilities is shown below:

Other price riskOther price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets at least quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively managing and monitoring the existing portfolio, selected in accordance with the overall asset allocation parameters described above, and seeks to ensure that individual stocks also meet an acceptable risk/reward profile.

Liquidity riskLiquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short term flexibility, if required, is achieved by the use of a bank overdraft.

Liquidity risk exposureAt 31 December 2019, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £1,075,000 (2018: £6,529,000), bank overdraft of £nil (2018: £1,718,000) and other creditors of £676,000 (2018: £1,353,000).

Counterparty riskThe long CFDs in which the Company invests are not traded on an exchange but instead are traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Manager employs, the Manager will seek to minimise such risk by only entering into transactions with counterparties which it believes to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk, by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

Cash collateralFor derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2019, £1,578,000 (2018: £nil) was held by UBS AG in cash denominated in Japanese yen in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company’s net unrealised profits on derivative positions. At 31 December 2019, no collateral amounts were held by the Company on behalf of the broker, UBS AG, (2018: UBS AG £7,611,000 in cash denominated in Japanese yen) as the Company had no net unrealised loss positions.

Credit riskFinancial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions, long CFD contracts and cash at bank.

Derivative instruments riskThe risks and risk management processes which result from the use of long CFDs are included within the risk categories disclosed above. Long CFDs are used by the Manager to gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial outflow of capital. The risk and performance contribution of long CFDs held in the Company’s portfolio is overseen by the Manager’s experienced, specialist derivative instruments team that uses portfolio risk assessment and construction tools to manage risk and investment performance.

RISK SENSITIVITY ANALYSISInterest rate risk sensitivity analysisBased on the financial instruments held and interest rates at 31 December 2019, an increase of 0.25% in interest rates throughout the year, with all other variables held constant, would have decreased the return on ordinary activities after taxation for the year and decreased the net assets of the Company by £108,000 (2018: increased the net loss and decreased the net assets by £75,000). A decrease of 0.25% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysisBased on the financial instruments held and currency exchange rates at 31 December 2019, a 10% strengthening of the sterling exchange rate against the yen, with all other variables held constant, would have decreased the Company’s net return on ordinary activities after taxation for the year and decreased the Company’s net assets by £26,999,000 (2018: increased the net loss and decreased the net assets by £20,357,000). A 10% weakening of the sterling exchange rate against the yen would have increased the Company’s net return on ordinary activities after taxation for the year and increased the Company’s net assets by £32,999,000 (2018: decreased the net loss and increased the net assets by £24,881,000).

Other price risk – exposure to investments risk sensitivity analysisBased on the investments held and share prices at 31 December 2019, an increase of 10% in share prices, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £24,910,000 (2018: decreased the net loss and increased the net assets by £18,599,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Other price risk – exposure to derivative instruments risk sensitivity analysisBased on the long CFDs held and share prices at 31 December 2019, an increase of 10% in the share prices underlying the long CFDs, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £4,626,000 (2018: decreased the net loss and increased the net assets by £3,002,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Fair Value of Financial Assets and LiabilitiesFinancial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Notes 2 (j) and (k) above, investments and derivative instruments are shown at fair value. In the case of cash and cash equivalents, book value approximates to fair value due to the short maturity of the instruments.

Fair Value HierarchyThe Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Notes 2 (j) and (k). The table below sets out the Company’s fair value hierarchy:

1 Raksul was transferred out of level 3 in 2018 when the Company was listed.

CoconalaCoconala operates a website to buy and sell knowledge, skills and experience from users who are willing to teach in Japan and is an unlisted company. The valuation on 31 December 2019 is based on the cost of the investment when it was purchased in July 2019. As at 31 December 2019, its fair value was £2,774,000.

InnophysInnophys develops elderly-care and welfare equipment designed to be used as an exoskeleton for physical support in Japan and is an unlisted company. The valuation on 31 December 2019 is based on the cost of the investment when it was purchased in December 2019. As at 31 December 2019, its fair value was £902,000.

17 CAPITAL RESOURCES AND GEARINGThe Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital and reserves, as disclosed in the Balance Sheet, and its gearing which is achieved through the use of long CFDs. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its objective, both of which are detailed in the Strategic Report. The principal risks and their management are disclosed in the Strategic Report and in Note 16 above.

The Company’s gearing at the end of the year is shown below:

1 Gearing is the amount by which the Portfolio Exposure exceeds Shareholders’ Funds expressed as a percentage of the Shareholders’ Funds.

18 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIESFIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”), the Investment Manager. Both companies are Fidelity group companies. Details of the fee arrangements are given in the Directors’ Report and in Note 4. During the year, fees for portfolio management services of £1,226,000 (2018: £1,843,000) and secretarial and administration fees of £50,000 (2018: £47,000) were payable to FII. At the Balance Sheet date, fees for portfolio management services of £160,000 (2018: £84,000) and secretarial and administration fees of £13,000 (2018: £12,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £101,000 (2018: £100,000). At the Balance Sheet date, £11,000 (2018: £17,000) for marketing services was accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Directors’ fees and taxable expenses relating to reasonable travel expenses paid to the Directors are given in the Directors’ Remuneration Report. In addition to the fees and taxable expenses disclosed in the Directors’ Remuneration Report, £15,000 (2018: £14,000) of Employers’ National Insurance Contributions was also paid by the Company. As at 31 December 2019, Directors’ fees of £14,000 were accrued and payable.

19. POST BALANCE SHEET EVENTThe Board has considered the risks arising from the Coronavirus (COVID-19) pandemic as part of its process to approve the Company’s Financial Statements and the Going Concern Statement in the Directors’ Report on page 24, concluding that the impact of the Coronavirus (COVID-19) on the Company’s business performance and operations is a non-adjusting post balance sheet event. The Board has taken into account the recent share price volatility and further information is provided in the Chairman’s Statement, the Portfolio Manager’s Review and in the Principal Risks above. As at 6 April 2020, the Company’s published net asset value per ordinary share was 143.43p and the latest share price was 126.50p.

ALTERNATIVE PERFORMANCE MEASURES

TOTAL RETURNTotal return is considered to be an alternative performance measure (as defined in the Glossary of Terms of the Annual Report).

The tables below provide information relating to the NAVs and share prices of the Company and the total returns for the years ended 31 December 2019 and 31 December 2018.

ONGOING CHARGESOngoing charges are considered to be an alternative performance measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and other expenses expressed as a percentage of the average net asset values throughout the year.

GEARINGGearing is considered to be an alternative performance measure. See note 17 for details of the Company’s gearing.

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 December 2019 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2018 and 2019 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2018 is derived from the statutory accounts for 2018 which have been delivered to the Registrar of Companies. The 2019 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to shareholders in April 2020 and additional copies will be available from the registered office of the Company and on the Company's website:

www.fidelityinvestmenttrusts.com where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

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

ENDS