THE PROSPECT JAPAN FUND LIMITED
THE PROSPECT JAPAN FUND LIMITED
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the year ended 31 December, 2016. All figures
are based on the Audited Financial Statements for the year ended
31 December, 2016, approved by the Board of Directors on 21 March, 2017.
CHAIRMAN'S REPORT
for the year ended 31 December, 2016
Your Company has had a disappointing year with a decline in published NAV of
9.49% compared with MSCI Japan Small Cap Index's increase of 8.22%.
Furthermore, the share price has fallen from $1.05 to $0.89 with an increased
discount to published NAV of 27% (2015: 23%).
Following the change of investment policy approved by the shareholders in 2014,
the Manager has moved towards an even more concentrated portfolio of
investments than in 2015. There is now a strong weighting towards regional
banks, two of which make up slightly more than 50% by value of the portfolio.
As of now the portfolio is comprised of less than 10 investments including the
investment in Prospect Co. This strategy together with direct engagement with
investee company management is expected to bring rewards in due course.
As announced on 10 January, 2017, the Independent Directors of the Company are
in preliminary discussions regarding a possible offer from Prospect, Co. Ltd
("Prospect"), a Japanese company listed on the Tokyo Stock Exchange and the
parent company of the Company's Manager and Investment Advisor, for the entire
issued and to be issued share capital of the Company. The possible offer is
under consideration, discussion and evaluation by both parties is a securities
exchange offer at a ratio of 2.5 Ordinary Prospect Shares in exchange for each
share held in the Company. Further details of the possible offer and the
strategic rationale for the proposed combination are available on the Company's
website: www.prospectjapan.com.
The Board will assess any offer in relation to the takeover of the Company in
light of our objectives, which are to maximise share value, minimise or
eliminate discount to NAV and improve the liquidity of our shares.
John Hawkins
Chairman
21 March, 2017
INVESTMENT ADVISOR'S REPORT
For the year ended 31 December, 2016
Market Performance (%), US$ NAV
1
Year 3
Year 5 Year
Prospect Japan Fund (2.59)/(9.49)*
(3.88) 45.88
MSCI Japan Small Cap Index 8.22
24.79 64.67
The Prospect Japan Fund Limited inception date is 20 December 1994. The above
performance of the Fund is net of fees and expenses and includes reinvestment
of dividends and capital gains. (Source: Prospect Asset Management, Inc.)
Although the Company is not managed to a benchmark, it measures its performance
against the MSCI Japan Small Cap Index (Total Return) for comparison purposes
only. The MSCI Developed Markets Small Cap Indices offer an exhaustive
representation of this size segment by targeting companies that are in the
Investable Market Index but not in the Standard Index in a particular developed
market. The indices include Value and Growth style indices and industry indices
based on the Global Industry Classification Standard (GICS®). (Source:
Bloomberg)
*Refers to performance based on published NAV. Further information can be found
in Note 17.
Investment Manager's Summary
The Prospect Japan Fund Limited's (the "Company") published NAV performance
decreased 9.49% in 2016 (2015: increase 19.13%) (the performance based on
valuations produced in accordance with International Financial Reporting
Standards ("IFRS") decreased by 2.59% see the "Results and Dividend" section of
the Directors' Report for further information), underperforming the MSCI Japan
Small Cap Index's 8.22% total return. The broader Japanese market performed
weakly for much of the year with Japanese equity markets experiencing the worst
start to a year on record, with six consecutive days of trading losses
reversing most of the gains seen in the year to 31 December 2015. The Nikkei
225 index reached lows last seen in 2013 before rallying with the weaker yen
following US elections in November.
Global equities entered 2016 with a risk-off period, dragged down by massive
selling in China. Key oil gauges dropped to 12-year lows amidst an ongoing
supply glut, and the cloud of the Chinese economic slowdown drove yen strength.
Toward the end of H1, global currency and equity markets were shaken when the
United Kingdom referendum on European Union membership ended with an unexpected
victory for "Leave". The unexpected outcome of the US presidential election
shook global politics and markets, with acute effects on Japanese bond yields
and currency momentum.
The yen weakened significantly following the US election results on
expectations of inflationary fiscal policy in the US leading to a faster
normalization of Fed policy. The yen saw the largest monthly decline versus the
dollar since 1995 following the election, with the dollar reaching JPY 116.64
at year end. The equity market rallied with the weaker yen, entering a bull
market from June lows.
While the details of a Trump administration's policy outlook remain clouded,
some of the key issues regarding the Japanese economy include a potentially
stronger dollar, US abandonment of the Trans-Pacific Partnership ("TPP") and
closer attention paid to the China-backed Regional Comprehensive Economic
Partnership ("RCEP"), a 16-nation initiative of Asian nations that excludes
North and South American countries, much as TPP excluded China.
Domestically, markets were dominated by turbulent changes to the monetary and
fiscal policy dimensions of "Abenomics". The Bank of Japan ("BoJ") surprised
the market by adopting a negative interest rate policy in late January.
"Quantitative & Qualitative Monetary Easing with a Negative Interest Rate"
aimed to mirror the multi-tier system in place at the Swiss National Bank, in
which the negative rate is applied to a portion of a financial institution's
current account balance.
The reaction in the market was swift, with the yen gaining strongly, bond
yields falling to record levels, and shares of financials falling
precipitously.
Quantitative & Qualitative Monetary Easing ("QQE") with a Negative Interest
Rate
Tier Description Interest Rate Applied
Basic Balance Existing balances with +0.1%
Bank of Japan
Macro Add-on Balance Required reserves and 0.0%
reserves related to BoJ
lending support programs
Policy-Rate Balance Reserves in excess of -0.1%
above tiers
By September, faced with concerns regarding the limitations of monetary easing
with increasingly evident side effects on financial sector profits and limited
success in achieving its 2% inflation target, the BoJ adopted a new "QQE with
Yield Curve Control" framework following a comprehensive policy assessment. The
BoJ left its controversial negative interest rate policy intact, while shifting
the target of policy to the yield curve, and away from fixed increases to the
monetary base. Other adjustments included the elimination of the JPY 80
trillion annual increase in monetary base, allowing the BoJ to be flexible in
its purchases depending on needed adjustments to the yield curve. The central
bank's stated intention is to buy JGBs in line with the current pace, but
eliminated the target for average maturity on JGB purchases.
The BoJ also announced an "inflation-overshooting commitment", stating that
extraordinary policy will continue until inflation is stable above the 2%
target. The ETF purchase target remained stable at 5.7 trillion, though 2.7
trillion was allotted for ETFs that track the broader TOPIX index.
On the fiscal side, Prime Minster Shinzo Abe again elected to delay the
scheduled increase in the consumption tax rate (from 8% to 10%) until October
2019, helping to secure a landslide victory in the summer upper house
elections, winning a two-thirds super majority for the ruling coalition. The
administration subsequently announced a JPY 28.1 trillion economic stimulus
package, including JPY 7.5 trillion in net new spending.
The Company's holdings, with strong weightings towards Banks (53.9%) and Real
Estate (5.3%), are direct beneficiaries of the continued support for fiscal and
monetary stimulus by the Abe administration and BoJ, with real estate prices
supported by the expectation of stable near- to mid-term low government bond
yields via BoJ yield control operations.
The recovery in the Tokyo office market continues, with Miki Shoji reporting
that the average office vacancy in Tokyo's Central Business District (CBD) has
fallen 42 basis points year-on-year in 2016. Average rents rose 4.79%
year-on-year in 2016, improved from the 4.36% improvement in 2015, and 19.0%
below the 2008 highs.
During the year, the Company received shareholder approval of the Exercise
Agreement, which allowed for the purchase of 1,440 stock acquisition rights
("SARs") for Prospect Co. (3528). These cost JPY 288 million. As of 2016 year
end, the Company had converted 90 of these SARs into 9 million shares, leaving
the Company with 1,350 SARs at a cost of JPY 270 million which is equal to an
additional 135 million shares.
OUTPERFORMANCE
The largest positive contributors to 2016 performance came from holdings in
Fukushima Bank (8562) and Daiwa Motor Transportation (9082). Fukushima Bank, a
regional bank in Fukushima prefecture, fell sharply in February along with
other financial shares due to the implementation of the BoJ's negative interest
rate policy, but rallied strongly over the following months after technical
adjustments by the BoJ that increased the proportion of current account funds
that will be considered part of the "macro add-on balance" not subject to the
negative policy rate, and into year-end after introduction of the central
bank's yield control policy framework. Fukushima Bank, the third largest bank
in the Fukushima prefecture, could benefit from the ongoing consolidation trend
in the sector.
The Company raised its holding in Fukushima Bank (8562) during the year from
4.4% of assets to 23.7%. The bank is similar in size and valuation to Daito
Bank (8563), with no large institutional shareholders and is seen as a
potential beneficiary of ongoing regional bank consolidation. Fukushima
prefecture is particularly attractive, considering the positive impact of
recovery efforts and victim compensation. Residential land price increases led
the nation in 2015, and employment growth has been stronger than the national
average. Fukushima prefecture manufactured goods output growth strongly
outpaced the national rate over the last few years, nearly regaining the share
of total national output seen in 2010, despite a nearly 6% population decline.
Strategic investments bore fruit during the year, with Daiwa Motor
Transportation (9082), a provider of taxi and chartered limousine services,
buying back 1.24 million shares from the Company at the 15 June closing price
of JPY 553 per share.
In March 2016, the Tokyo High Court announced its decision on the appeal
involving the Toho (9602) tender offer bid of Toho Real Estate (8833). The High
Court ruled that the tender offer price amounted to fair value and has
therefore eliminated the award of JPY 100 per share decided by The Tokyo
District Court. The Company summarily submitted an appeal of the High court
decision to the Supreme Court, which accepted the request for appeal in June
2016.
In October 2016, the Niigata District Court announced its decision to uphold
the fairness of the JPY 245 per share squeeze out price of Yukiguni Maitake
(1378), a manufacturer and seller of fresh mushrooms and bean sprouts, by Bain
Capital. The Company has submitted an appeal to the District Court decision.
UNDERPERFORMANCE
Holdings resulting in outsized contribution to negative performance during the
period include Daito Bank (8563) and Shaklee Global Group (8205). Daito Bank, a
regional bank based in Fukushima prefecture, underperformed during the year,
after massive outperformance of the overall bank sector in 2015. The bank fell
sharply in February along with other financial shares due to the implementation
of the BoJ's negative interest rate policy and subsequent downward pressure on
loan interest and investment revenue. Daito Bank, the second largest bank in
the Fukushima prefecture, could benefit from the ongoing consolidation trend in
the sector.
Shaklee Global Group, a seller of nutrition and personal care products, fell
during the year due to sluggish revenue and profits from Asian operations and
an adverse foreign exchange environment for much of the year, that saw a
strengthening Japanese yen erode profitability from overseas sales that account
for 85% of total revenue. Company shares retreated sharply following the
November US election, despite the advantageous yen weakening, as US policy
towards China became uncertain. China accounts for nearly 40% of total sales
Principal Risks and Uncertainties
Japan remains vulnerable to slowdown in the global economy and geopolitical
turmoil, particularly in major trading partners, as well as by volatile swings
in currency exchange rates and interest environment due to domestic and
overseas monetary policy.
While the Abe administration and BoJ remain poised to provide additional
stimulus as needed, inflation expectations remain muted, and CPI turned
negative with the largest monthly decline since 2013 recorded during the year.
Although the delay of the consumption tax increase is positive, the Abe
administration's successful rollout of stimulus spending and regulatory reform
remain necessary catalysts for long-term economic growth. Fundamentals on the
corporate level remain strong, and while tangible effects of corporate
governance reforms, beyond an increased pace of share buy-backs, are
negligible, a widespread and ingrained refocusing on investor return should be
a long-term positive.
The Prospect Japan Fund Limited Holdings
31 December 2016
Symbol Security % of Total Assets
8562 FUKUSHIMA BANK LTD/THE 23.7
8563 DAITO BANK LTD/THE 23.5
3528 PROSPECT CO LTD 11.3
9313 MARUHACHI WAREHOUSE CO LTD 8.6
8205 SHAKLEE GLOBAL GROUP INC 7.1
1921 TOMOE CORP 3.2
The Prospect Japan Fund Limited Sector Weighting
31 December 2016
Banks 50.5
Real Estate 11.3
Storage/Warehousing 8.6
Retail 7.1
Engineering & 3.2
Construction
REITs 0.0
Total** 80.7
No of Positions 9
Prospect Asset Management, Inc.
21 March, 2017
PORTFOLIO OF INVESTMENTS
as at 31 December, 2016
Number of Fair Value Percentage of
Securities Investments in U.S. Net Asset
Dollars Value
Listed investments
Banks
20,225,000 The Daito Bank 28,681,816 23.52
35,256,000 Fukushima Bank Ltd 28,914,409 23.72
230,000 Nagano Bank 3,969,074 3.26
61,565,299 50.50
Engineering and Construction
1,259,700 Tomoe Corp 3,841,894 3.15
3,841,894 3.15
Real Estate
6,706,000 Prospect Co Ltd 3,781,094 3.10
3,781,094 3.10
Retail
1,095,000 Shaklee Global Group Inc 8,681,047 7.12
8,681,047 7.12
REITs
7,898,895 Prospect Epicure J-REIT Value - -
Fund*#
- -
Storage/warehousing
1,415,100 Maruhachi Warehouse Co Ltd 10,517,594 8.63
10,517,594 8.63
Total listed investments 88,386,928 72.50
Real Estate
1,350 Prospect Co Ltd Stock Acquisition 9,990,744 8.20
Rights*
9,990,744 8.20
Total unlisted investments 9,990,744 8.20
Total investments 98,377,672 80.70
Net current assets 23,545,788 19.30
NET ASSETS 121,923,460 100.00
# Currently in liquidation.
* Prospect Co Ltd is classed as a related party as it is the parent company of
the Company's manager, PAM(CI).
STRATEGIC REPORT
The Board has prepared this report on a voluntary basis in accordance with the
UK regulations governing the Directors' duty to prepare a strategic report.
Company Structure
The Company carries on business, and is registered, as a Guernsey-based
closed-ended investment company. The Company is listed on the London Stock
Exchange.
Role and Composition of the Board
The Board is the Company's governing body; it sets the Company's strategy and
is collectively responsible to shareholders for its long term success. The
Board is responsible for appointing and subsequently monitoring the activities
of the Manager and other service providers to ensure that the investment
objectives of the Company continue to be met. The Board also ensures that the
Manager adheres to the investment restrictions set by the Board and acts within
the parameters set by it in respect of any gearing. It also identifies,
monitors and manages the key risks facing the Company.
The Board
The Board comprises three non-executive directors. All members of the Board
other than Rupert Evans are independent of the Manager. None of the Directors
has a contract of service with the Company.
The Chairman of the Board is John Hawkins. Biographies for Mr Hawkins and all
other Directors can be found in the General Information section. In considering
the independence of the Chairman, the Board has taken note of the provisions of
the AIC Code relating to independence and has determined that Mr Hawkins is an
Independent Director. As the Chairman is an Independent Director, no
appointment of a senior Independent Director has been made. The Company has no
employees and therefore there is no requirement for a chief executive.
The Board meets on at least four occasions each year, at which time the
Directors review the investment management of the Company's assets and all
other significant matters so as to ensure that the Directors maintain overall
control and supervision of the Company's affairs. The Board is responsible for
the appointment and monitoring of all service providers to the Company.
Dialogue with Shareholders
The Investment Advisor and the Financial Advisor and Broker maintain a regular
dialogue with institutional shareholders, feedback from which is reported to
the Board. In addition, Board members and representatives of the Manager are
available to answer shareholders' questions at the Annual General Meeting. The
Company Secretary is available to deal with general shareholders' queries at
any time during the year.
Investment Management
The Company's investment portfolio is managed by Prospect Asset Management
(Channel Islands) Limited ("PAMCI", or the "Manager") whose parent company is
Prospect Co., Ltd (Kabushiki Kaisha Prospect ("KKP"), a Japanese Company). The
Manager implements the investment strategy, managing the Company's assets in
line with appropriate restrictions placed on it by the Board, including limits
on the type and relative size of holdings which may be held in the portfolio
and on the use of gearing, hedging, cash, derivatives and other financial
instruments. In the opinion of the Board, the continuing appointment of the
Manager on the terms agreed is in the best interests of the Shareholders as a
result of its performance and results.
Please refer to Note 4 for details of the management agreement between the
Manager and the Company.
Investment Objective
The Company's investment objective is to achieve long-term capital growth from
a portfolio of securities primarily of smaller Japanese companies listed or
traded on Japanese Stock Markets. The aim will be to achieve a long-term
capital return on the Company's portfolio and dividend income will be a
secondary consideration in making investment decisions. Although the Company is
not managed to a benchmark, it measures its performance against the MSCI Japan
Small Cap Index (Total Return) for comparison purposes only.
Investment Strategy
The Board has delegated management of the Company's portfolio to the Investment
Advisor. The Investment Advisor manages the portfolio with the aim of helping
the Company to achieve its investment objective. Details of the Investment
Advisor's strategy, and other factors that have affected performance during the
year, are set out in the Investment Advisor's Report.
Investment Policy
The Company's investment policy is that it will invest mainly in shares, but
may also invest in equity related instruments such as convertible bonds or
warrants issued by smaller Japanese companies and debt instruments.
It is the intention of the Directors that investments in unlisted securities
which are not registered for trading on or quoted on any of the Japanese Stock
Markets should only be made where either a listing or an alternative form of
realising the investment can be expected within a reasonable period of time.
Within these parameters, the assets of the Company may be used to provide
venture or start-up capital (but no investment will carry unlimited liability).
The balance of the assets of the Company not invested in securities will
normally be invested in short-term debt securities and money market instruments
or placed on deposit.
The assets of the Company will be denominated principally in Japanese yen. It
is not the present intention of the Directors to hedge the currency exposure of
the Company, but the Directors reserve the right to do so in the future if they
consider this to be desirable.
It is intended that the principal investment objective and policies of the
Company as set out above will remain in force until determined by the Directors
and any material change in the policies will only be made with shareholder
approval.
Gearing
The Company may use gearing from time to time amounting to not more than 20% of
the Company's net asset value. Although the Company does not have a borrowing
facility at the present time, it has utilised modest levels of gearing in the
past and the use of gearing within this limit in the future will be subject to
prior approval of the Board.
Investment Philosophy and Process
The Company invests in companies with undervalued assets where it believes it
can be a catalyst for positive change. The Company engages with management to
enact this change for the benefit of all shareholders. The Company believes the
current government's desire to consolidate certain industries and to improve
corporate governance, offer support to this engaged shareholder strategy.
The Company's research and execution expertise enables the Company to identify
and act upon the best opportunities.
Investment Restrictions and Spread of Investment Risk
It is the intention to observe the investment restrictions necessary to
maintain a listing for the Company as an investment company on the London Stock
Exchange and for the Company to be able to obtain certification as a reporting
fund if subject to the applicable United Kingdom taxation legislation (and
subject to other conditions of that legislation). For these purposes and for
other policy considerations, the Company will not:
(a) invest in securities carrying unlimited liability; or
(b) deal short in securities; or
(c) take legal or management control of investments in its portfolio; or
(d) invest in any commodities, land or interests in land; or
(e) invest or lend more than 25% of its assets at the time the investment is
made in securities of any one company or single issuer (other than obligations
of the Japanese Government or its agencies or of the US Government or its
agencies); or
(f) invest more than 10% of its assets at the time the investment is made in
closed-end investment funds which are listed on the Official List maintained by
the Financial Conduct Authority (except to the extent that those investment
funds have stated investment policies to invest no more than 15% of their total
assets in other investment funds which are listed on the Official List) and the
Company will not invest more than 15% of its assets at the time the investment
is made in such funds; or
(g) invest in more than 5% of its assets at the time the investment is made in
units of unit trusts or shares or other forms of participation in managed
open-ended investment vehicles; or
(h) commit its assets in the purchase of foreign exchange contracts or
financial futures contracts or put or call options or in the purchase of
securities on margin other than in connection with or for the purpose of
hedging transactions effected on behalf of the Company; or
(i) enter into borrowings in excess of 20% of net assets at the time the
borrowings are drawn down.
Performance
An outline of performance, market background, investment activity and portfolio
strategy during the year under review, as well as outlook, is provided in the
Investment Advisor's Report.
Key performance indicators ("KPI's")
At each quarterly Board meeting, the Board considers a number of performance
measures to assess the Company's success in achieving its objectives. Below are
the main KPI's which have been identified by the Board for determining the
progress of the Company:
· Net asset value;
· Share price;
· Discount/premium of share price to NAV; and
· Ongoing charges, which are set out in the Directors' Report.
A record of these measures is disclosed in the General Information section.
Principal Risks and Uncertainties
The Board is responsible for the Company's system of internal controls and for
reviewing its effectiveness. The Board is satisfied that by using the Company's
risk matrix in establishing the Company's system of internal controls, while
monitoring the Company's investment objective and policy, that the Board has
carried out a robust assessment of the principal risks and uncertainties facing
the Company. The principal risks and uncertainties which have been identified
and the steps which are taken by the Board to mitigate them are as follows:
(i) Investment objective and strategy
The Company's strategy may not be successful in achieving its investment
objective if the Investment Advisor fails to comply with the Company's
investment policy. The Board reviews reports from the Investment Advisor at the
quarterly Board Meetings, with a focus on adherence to the investment policy.
The Administrator is responsible for ensuring that all transactions are in
accordance with the investment restrictions.
(ii) Investment risk
To achieve the objective of delivering long-term performance, the
Company invests in Japanese growth as well as cyclical companies with strong
management teams that possess a clear vision and focus on profitability and
shareholders' interests. The investment process is driven by proprietary
fundamental research identifying companies with below average valuations and
above average earnings growth and return on equity.
The Company also invests in companies that have undervalued assets where it
identifies a realistic catalyst for positive change. This represents an
enhancement of the overall investment process reflecting what the Manager
believes are exciting new opportunities in the Japanese equity market. The
Manager believes that these types of companies compliment the Company's overall
stock picking expertise, enabling the Company to identify the best
opportunities for long term capital appreciation in Japan caused by ongoing
consolidation.
Risk management is an integral part of the investment management process. Core
to the process is that risks taken are not incidental but are fully understood
and accounted for. In-depth proprietary fundamental research provides the
Manager with a deep understanding of each stock in the Company's portfolio and
the associated risks. The Board considers the risks facing the Company on an
on-going basis. All Board meetings are also attended by the Manager, either in
person or by telephone, where reports on portfolio performance and strategy are
provided.
Portfolio performance will be dependent on the performance of Japanese equities
and such stocks will be influenced by the general health of the country.
(iii) Financial risks
The financial risks, including market, credit and liquidity risk faced by the
Company are set out in Note 13 of the Financial Statements. These risks and the
controls in place to reduce the risks are reviewed at the quarterly Board
Meetings.
(iv) Foreign exchange risk
The movement of exchange rates may have an unfavourable or favourable impact on
returns as the majority of the Company's assets are denominated in Yen, rather
than US Dollar, the reporting currency of the Company. Although not currently
undertaken, the Directors reserve the right to hedge the Company's currency
exposure.
(v) Ordinary shares
The market value of the shares in the Company may not reflect the underlying
Net Asset Value and may trade at a discount to it. The Board actively monitors
the discount of the Company and, where appropriate, may implement share
buybacks to help reduce the discount and/or discount volatility.
(vi) Borrowing
The Investment Policy restricts the Company from entering into borrowings in
excess of 20% of net assets at the time the borrowings are drawn down. Whilst
such borrowings may enhance the return on the shares where the underlying
Company performance is positive, the opposite is also true and any borrowing
will enhance the negative performance of the Company.
(vii) Third party service providers
The Company has no employees and the Board comprises three non-executive
directors. The Company is reliant on the Manager, the Investment Advisor and
the Secretary, Registrar and Administrator to perform its executive function.
The most significant of these third party service providers is the Manager to
whom the management of the Company's investments has been delegated. Failure by
any of these third party service providers to perform the services in
accordance with the terms of the relevant service contracts represents a risk
to the operations of the Company and the performance of the Company.
Termination of the Investment Management Contract by the Manager or loss of key
staff by the Manager could materially affect the ability of the Company to
operate and detract from the performance of the Company until a suitable
replacement could be found.
The Board has segregated the duties of investment management, accounting and
custody. Each of the contracts with third party service providers has been
entered into after full and proper consideration of the quality and cost of the
services provided and the control systems in place. The Board reviews the
performance of the Investment Advisor and the Manager on a regular basis.
The Directors seek to mitigate and manage these risks through continual review,
policy-setting and enforcement of contractual obligations and will update the
risk assessment matrix to reflect any changes in the control environment.
Further details on the Company's internal controls are given in the Directors'
Report.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code,
published by the Financial Reporting Council in September 2014 (the "Code"),
the Directors have assessed the prospects of the Company over the three year
period to 31 December, 2019. The Company is required to put a discontinuation
vote to shareholders every three years, the next one occurring in 2017. On 10
January, 2017 the Company announced a possible offer from Prospect, Co. Limited
("Prospect") for the entire issued and to be issued share capital of the
Company. Currently, there is no way of knowing the intentions of Prospect or if
any proposal would be accepted by the Shareholders. Therefore, assuming that
the discontinuation vote is not passed and there is no offer, the Directors
consider that three years is an appropriate period of assessment of the
viability of the Company for the purpose of giving assurance to shareholders.
In its assessment of the viability of the Company, the Directors have
considered each of the Company's principal risks and uncertainties detailed in
the Strategic Report and in particular the impact of a significant fall in
regional equity markets on the value of the Company's investment portfolio. The
Directors consider that a 30% fall in the value in the Company's portfolio
would be significant but would have little impact on the Company's ability to
continue in operation over the next three years. In reaching this conclusion,
the Directors considered the Company's income and expenditure projections, the
fact that the Company has no gearing and that the Company's investments
comprise readily realisable securities which can be expected to be sold to meet
funding requirements if necessary, assuming market liquidity continues.
Based on the Company's processes for monitoring operating costs (cash burn vs.
available resources), share price discount, the Manager's compliance with the
investment objective, asset allocation, the portfolio risk profile,
counterparty exposure, liquidity risk and financial controls, the Directors
have concluded that there is a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall due over
the three year period to 31 December, 2019.
Future Developments
The future performance of the Company depends upon the success of the Company's
investment strategy in the light of economic factors and market developments.
Further comments on the outlook for the Company for the next twelve months are
set out in both the Chairman's Statement and in the Investment Advisor's
Report.
John Hawkins
Chairman
Richard Battey
Director
21 March, 2017
DIRECTORS' REPORT
The Directors present their Annual Report and the Audited Financial Statements
of The Prospect Japan Fund Limited (the "Company") for the year ended 31
December, 2016.
The Company's Business
The Company was registered under the laws of Guernsey on 18 November, 1994 as a
Limited Company with a premium listing on the London Stock Exchange. It is a
close-ended investment company established to achieve long-term capital growth
from an actively managed portfolio of securities primarily of smaller Japanese
companies listed or traded on Japanese Stock Markets. The Company is a FATCA
compliant organisation with FATCA entity classification FFI and GIIN
L0Q9R3.99999.SL.831.
Results and Dividend
The results for the year are set out in the Statement of Comprehensive Income.
Whilst over the last three year period the Company's return was (3.88)% (2015:
35.64%) compared with 24.79% (2015: 46.38%) for the MSCI Japan Small Cap Index,
the last year's performance based on valuations produced in accordance with
International Financial Reporting Standards ("IFRS") was (2.59)% (2015: (3.19)
%) compared with MSCI Japan Small Cap Index performance of 8.22% (2015: 15.74%)
((9.49)% (2015: 19.13%) based on published NAV). For further details of the
differences between published NAV and IFRS adjusted NAV please see Note 17.
The Directors do not recommend the payment of a dividend for the year (2015:
Nil).
Performance
The Board considers that Prospect Asset Management (Channel Islands) Limited,
the Manager to the Company, is managing the Company's investments in a manner
that is most likely to achieve the objective of long term capital appreciation
for its shareholders.
Statement of Directors' Responsibilities and Declarations
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable Guernsey Law and International
Financial Reporting Standards ("IFRS") as adopted by the European Union. The
Directors are required to prepare Financial Statements for each financial year
which give a true and fair view of the state of the affairs of the Company and
of the total return of the Company for that year and in accordance with the
applicable laws. The Directors are also responsible for ensuring that the
Company complies with the provisions of the Listing Rules and the Disclosure
Rules and Transparency Rules of the UK Listing Authority. With regard to
corporate governance the Company is required to disclose how it has applied the
principles and complied with the provisions of the Corporate Governance code
applicable to the Company. In preparing those Financial Statements the
Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable;
- state whether applicable accounting standards have been followed, subject to
any material departures disclosed and explained in the Financial Statements;
and
- prepare the Financial Statements on a going concern basis unless it is
inappropriate to presume that the company will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position and
performance of the Company and to enable them to ensure that the Financial
Statements have been properly prepared in accordance with The Companies
(Guernsey) Law and IFRS. They are also responsible for safeguarding the assets
of the Company and hence for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with law or regulations.
The Directors confirm that they have complied with the above requirements in
preparing the Financial Statements.
The Directors confirm that to the best of their knowledge
(a) The Annual Financial Statements have been prepared in accordance with IFRS
as adopted by the European Union and give a true and fair view of the financial
position and performance of the Company as at and for the year ended 31
December, 2016.
(b) The Chairman's, Investment Advisor's, Strategic and Directors' Reports
include a fair review of the development and performance of the Company
business and the position of the Company together with a description of the
principal risks and uncertainties facing the Company.
Directors' Statement
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps he ought to have taken as a Director to make himself aware
of any relevant audit information and to establish that the Company's auditor
is aware of that information. In the opinion of the Board, the Annual Report
and Financial Statements taken as a whole, are fair, balanced and
understandable and provide the information necessary to assess the Company's
performance, business model and strategy.
Ongoing Charges
Ongoing charges are the recurring expenses incurred by the Company excluding
one-off expenses. Ongoing charges for the years ended 31 December, 2016 and 31
December, 2015 have been prepared in accordance with the AIC's recommended
methodology. The ongoing charges for the year ended 31 December, 2016 was 2.09%
(31 December, 2015: 2.20%). No performance fees were charged during the year.
Corporate Governance
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Corporate Governance Code (September 2014) (the "Code") issued by the
Financial Reporting Council ("FRC"). The Company is also required to comply
with the Code of Corporate Governance (the "GFSC Code") issued by the Guernsey
Financial Services Commission.
The FRC issued a revised Code in 2014, for reporting periods beginning on or
after 1 October, 2014. The AIC updated the AIC Code of Corporate Governance
(the "AIC Code") (including the Guernsey edition) and its Guide to Corporate
Governance (the "AIC Guide") to reflect the relevant changes to the FRC
document in February 2015. The Board adopted the revised code during 2015.
The UK Listing Authority requires all UK premium listed companies to disclose
how they have complied with the provisions of the UK Code. This Corporate
Governance Statement, together with the Going Concern Statement, Viability
Statement and the Statement of Directors' Responsibilities set out in the
Directors' Report, indicates how the Company has complied with the principles
of good governance of the UK Code and its requirements on Internal Control.
The Company is a member of the Association of Investment Companies (the "AIC")
and by complying with the AIC Code is deemed to comply with both the UK Code
and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide appropriate information to shareholders.
To ensure ongoing compliance with these principles the Board reviews a report
from the Corporate Secretary at each quarterly meeting, identifying how the
Company is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the Financial Reporting Council's
website, www.frc.org.uk.
Throughout the year ended 31 December, 2016, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
• the role of the Chief Executive
• Executive Directors' remuneration
• the need for an internal audit function
For the reasons set out in the AIC Guide, and as explained in the UK Code, the
Board considers these provisions are not relevant to the position of the
Company as it is an externally managed investment company. The Company has
therefore not reported further in respect of these provisions. The Directors
are all non-executive and the Company does not have employees, hence no Chief
Executive is required for the Company. The Board is satisfied that any relevant
issues can be properly considered by the Board.
Details of compliance with the AIC Code are noted below and in the succeeding
sections. There have been no other instances of non-compliance, other than
those noted above.
Directors Attendance at Meetings
The number and attendance at the formal Board, Audit Committee and Management
Engagement Committee meetings during the year was as follows;
Board Meetings Management Engagement Audit Committee
Committee Meetings Meetings
Held Attended Held Attended Held Attended
Rupert Evans 4 4 N/A N/A N/A N/A
John Hawkins 4 4 1 1 2 2
Richard Battey 4 4 1 1 2 2
Re-election
In accordance with the Company's Articles of Association, all newly appointed
Directors stand for election by the shareholders at the next Annual General
Meeting ("AGM") following their appointment. The Directors retire by rotation
and offer themselves for re-election every three years. Directors who have
served on the Board for more than nine years are subject to annual re-election.
Mr Rupert Evans is considered a non-independent Director due to being a
Director of the Manager. Non-independent Directors are subject to annual
re-election. At the AGM on 18 August, 2016, Rupert Evans and John Hawkins
retired as Directors, and being eligible, Rupert Evans and John Hawkins offered
themselves for re-election. Rupert Evans and John Hawkins were re-elected as
Directors of the Company.
The Chairman has served on the Board for over nine years and under the AIC Code
may not be considered to be independent of the Company. The Board however,
takes the view that the length of tenure does not necessarily determine the
independence of the Board and experience can add significantly to the Board's
strength. It has therefore determined that in performing his role as Director,
the Chairman remains wholly independent.
Board Performance
The AIC Code requires external evaluation of Board performance every three
years. The last instance of which was in April 2016.
The Board, Audit Committee, Management Engagement Committee and Nominations
Committee undertake an evaluation of their own performance and that of
individual Directors on an annual basis. In order to review their
effectiveness, the Board and its Committees carry out a process of formal
self-appraisal. The Board and Committees consider how they function as a whole
and also review the individual performance of its members. This process is
conducted by the respective Chairman reviewing each member's performance,
contribution and commitment to the Company. Each Board member provides proof of
ongoing training and maintenance of continuing professional development
requirements.
The Board considers it has a breadth of experience relevant to the Company, and
the Directors believe that any changes to the Board's composition can be
managed without undue disruption. An induction programme has been prepared for
any future Director appointments.
Supply of Information
The quarterly board meetings are the principal source of regular information
for the Board enabling it to determine policy and to monitor performance and
compliance. The Manager attends each Board meeting either in person or by
telephone thus enabling the Board to fully discuss and review the Company's
operation and performance. Each Director has direct access to the Company
Secretary, and may, at the expense of the Company, seek independent
professional advice on any matter that concerns them in the furtherance of
their duties.
Committees of the Board
The Board has established Nomination, Audit and Management and Engagement
Committees and approved their Terms of Reference, copies of which can be
obtained from the Administrator.
Nomination Committee
The Board as a whole fulfils the function of a Nomination Committee. Whilst the
independent Directors take the lead in the appointment of new Directors, any
proposal for a new Director will be discussed and approved by the entire Board
during quarterly Board meetings.
The Board has also given careful consideration to the recommendations of the
Davies Report on "Women on Boards". As recommended in the Davies Report, the
Board has reviewed its composition and believes that the current appointments
provide an appropriate range of skills, experience and diversity. The Board
will take into account the recommendations of the Davies Report as part of its
succession planning over future years.
Audit Committee
An audit committee has been appointed comprising the Independent Directors. The
Audit Committee operates within clearly defined terms of reference which have
been approved by the Board and provides a forum through which the Company's
external Auditors report to the Board. The Board is satisfied that the Audit
Committee contains members with sufficient recent and relevant financial
reporting experience.
The Audit Committee has considered the requirement for an annual internal audit
of the Company. On the basis that the Company is an investment company with no
employees, the Audit Committee believes that an internal audit function is not
necessary for the Company.
The table above sets out the number of Audit Committee Meetings held during the
year ended 31 December, 2016 and the number of such meetings attended by each
Committee member.
The Audit Committee's responsibilities and activities are presented in the
Audit Committee Report.
Management and Engagement Committee
The Management and Engagement Committee comprises the Independent Directors.
The Management and Engagement Committee operates within clearly defined terms
of reference which have been approved by the Board.
The purpose of this Committee is to review the performance of the Investment
Advisor, Manager and the third party service providers to the Company. As the
Board has evaluated their performance during the course of their regular
meetings and found it satisfactory, the Board conclude that the continuing
appointment of the parties on the terms agreed would be in the best interests
of the Company's shareholders as a whole. At the date of this report the Board
continues to be of the same opinion.
The table above sets out the number of Management Engagement Meetings held
during the year ended 31 December, 2016 and the number of such meetings
attended by each Committee member.
Directors' Remuneration
The level of Directors' fees is determined by the whole Board on an annual
basis and therefore a separate Remuneration Committee has not been appointed.
When considering the level of Directors' remuneration the Board considers the
industry standard and the level of work that is undertaken.
During the year ended 31 December, 2016, the Directors were entitled to receive
an annual fee of £25,000 (2015: £25,000), the Chairman of the Audit Committee £
27,500 (2015: £27,500) and the Chairman of the Board £30,000 (2015: £30,000).
Going Concern
In accordance with the Company's Articles, the Board is required every three
years to include in the business to be considered by shareholders at the Annual
General Meeting a Special Resolution that the Company should be wound up. The
last such resolution was tabled at the eighteenth Annual General Meeting held
in 2014. The Shareholders voted against the resolution, and in favour of the
continuation of the Company. As announced on 10 January 2017 (the "Possible
Offer Announcement"), the independent directors of the Company are in
preliminary discussions regarding a possible offer from Prospect Co., Ltd
("Prospect") for the entire issued and to be issued share capital of the
Company. The possible offer is under consideration, discussion and evaluation
by both parties. The Possible Offer Announcement does not amount to a firm
intention to make an offer under Rule 2.7 of The City Code on Takeovers and
Mergers, and as stated in the Possible Offer Announcement there can be no
certainty that an offer for the Company will ultimately be made. If such a
transaction: (i) was to be announced in accordance with Rule 2.7 of The City
Code on Takeovers and Mergers; and (ii) was to be completed prior to the 2017
AGM, no AGM would be held and no discontinuation vote would take place. Whilst
acknowledging the uncertainty of the possible offer, and the upcoming vote for
discontinuation, the fact that neither the Board nor the Investment Advisor
have received any indication that the Shareholders are no longer in favour of
the investment policy and that the assets of the Company consist mainly of
securities that are readily realisable, leads the Directors to believe that the
discontinuation vote will not be passed and that the Company has adequate
financial resources to meet its liabilities as they fall due for at least
twelve months from the date of this report, and that it is therefore
appropriate for the Financial Statements to be prepared on a going concern
basis. Factors regarding the going concern basis are also discussed in Note 1
of the Financial Statements."
Internal Control
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix
continues to be the core element of the Company's risk management process in
establishing the Company's system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board which initially
identifies the risks facing the Company and then collectively assesses the
likelihood of each risk, the impact of those risks and the strength of the
controls operating over each risk. The system of internal financial and
operating control is designed to manage rather than to eliminate the risk of
failure to achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Financial Statements and is reviewed
by the Board and is in accordance with the AIC Code and Internal Controls:
Revised Guidance for Directors on the Combined Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary and Portfolio Manager. The Board also receives confirmation from the
Administrator of its accreditation under its Service Organisation Controls 1
report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
meetings and annually by the Board.
The Board believes that the Company has adequate and effective systems in place
to identify, mitigate and manage the risks to which it is exposed.
Directors' and Other Interests
No Directors holding office at 31 December, 2016, or their associates, had any
beneficial interest in the Company's Shares (2015: None). There has been no
change in this position between the end of the year and the date of this
report.
Rupert Evans is a Director of the Manager and a former partner in the firm of
the Guernsey legal advisors, Mourant Ozannes. John Hawkins and Richard Battey
are Directors of a range of funds.
Substantial Shareholdings
The following table shows the interests in the share capital of the Company
exceeding 5% of the issued share capital of which the Company has been
notified.
TOP HOLDINGS As at 31 December, 2016 As at 21 March, 2017
Number of Percentage of Number of Percentage of
shares issued share shares issued share
capital capital
Lazard Asset Management 22,041,625 23.87% 23,324,778 25.26%
1607 Capital Partners 19,863,439 21.51% 18,122,488 19.62%
CG Asset Management 14,247,936 15.43% 12,247,936 13.26%
Weiss Asset Management 2,870,506 3.11% 8,920,506 9.66%
There have been no other notifications of significant changes to the
substantial shareholdings at 21 March, 2017.
The percentage of ordinary shares shown above represents the ownership of
voting rights at the year end, before weighting for votes in Directors.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 5% of shares in issue and any
change which moves up or down through any whole percentage figures above 5%.
Share buybacks
As approved at the AGM on 18 August, 2016, the Company may purchase, subject to
various terms as set out in the Articles, a maximum of 13,843,655 Ordinary
Shares under the Company's discount control mechanism. During the year to 31
December, 2016, the Company purchased 100,000 shares (2015: nil shares) as
detailed in Note 9 of the Financial Statements.
Auditors
The Auditors, Ernst & Young LLP have indicated their willingness to continue in
office and offer themselves for re-appointment at the forthcoming AGM.
John Hawkins
Chairman
Richard Battey
Director
21 March, 2016
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON RECOGNISED STOCK
EXCHANGES
for the year ended 31 December, 2016
The following summarises the Directors' directorships in other public companies
Directorships Stock Exchange
Company Name
Richard Battey
AcenciA Debt Strategies Limited London
Juridica Investments Limited London
Princess Private Equity Holding Limited London
Better Capital PCC Limited London
NB Global Floating Rate Income Fund Limited London
Pershing Square Holdings Limited Euronext
Rupert Evans
El Oro Limited Channel Islands
Oryx International Growth Fund Limited London
The Red Fort Partnership Limited Channel Islands
Stonehage Fleming Global Property Fund PCC Channel Islands
Limited
FF&P Ventures Funds PCC Limited Channel Islands
Master Capital Fund Limited Irish
John Hawkins
Aberdeen Greater China Fund, Inc New York
Aberdeen Emerging Markets Investment London
Company Limited
AUDIT COMMITTEE REPORT
We present the Audit Committee (the "Committee") Report for 2016, setting out
the Committee's structure and composition, principal duties and key activities
during the year. As in previous years, the Committee has reviewed the Company's
financial reporting, the independence and effectiveness of the independent
auditor and the internal control and risk management systems of service
providers.
A member of the Committee will continue to be available at each AGM to respond
to any shareholder questions on the activities of the Committee.
Role and responsibilities
The function of the Audit Committee is to ensure that the Company maintains the
highest standards of integrity of its financial reporting and internal control.
The responsibilities of the Committee are:
· To review and make recommendations on the appointment of the Company's
Auditors, the scope of the audit, the audit fee, their independence and
objectivity and any questions of the resignation or dismissal of the Auditors;
· To discuss with the Auditors the nature and scope of the audit and to
keep under review such scope and its cost-effectiveness;
· To receive and review a Report from the Company's Auditors and to
discuss any matters arising from the audit and recommendations made by them;
· To review the Company's half-year and Annual Report and Financial
Statements and any other financial information published by the Company, in
each case before issue or publication, prior to submission to the Board, having
particular regard to:
• the accounting policies and whether they continue to be appropriate for
the business;
• any changes in accounting policies or practices and whether they are
appropriate for the business;
• any important areas where judgement must be exercised e.g. valuation of
unquoted investments;
• any significant adjustments arising from the audit;
• the going concern assumption; and
• other legal, UK Listing Authority or recognised investment exchange
requirements.
· To advise the Board on whether the Annual Report and Financial
Statements, taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's performance,
business model and strategy.
· To ensure that the internal control systems of the service providers are
adequate. To receive reports from the Company's service providers covering
internal control systems, internal audit functions and procedures supported
either by SSAE 16, ISAE 3402 or AAF Reports. In light of the above, to review
the Company's statement on internal controls prior to endorsement by the Board;
· To monitor the Company's procedures for ensuring compliance with
statutory, regulatory and other financial reporting requirements i.e. the
Guernsey Financial Services Commission and the London Stock Exchange (which
includes the UK Listing Authority);
· To review significant transactions outside the Company's normal business
(e.g. Company share buy backs); and
· To consider any other topics referred to it by the Board.
The Audit Committee's full terms of reference can be obtained by contacting the
Administrator.
Membership
The members of the Committee are Richard Battey (Chairman) and John Hawkins.
Full biographical details of each member can be found in the General
Information section. All members attended the formal Audit Committee meetings
held during the year. In addition a number of ad hoc meetings were held with
the Auditors to discuss financial reporting matters.
Significant issues related to the financial statements
The Committee's review of the interim and annual financial statements focused
on the following areas:
· The Committee has concentrated on the investment issues of existence and
title in respect of the Company's portfolio holdings as a whole. 89.8% by value
of the investments are quoted investments and are held in a designated account
at the Custodian.
· The valuation of its unlisted holdings which are dealt with in more
detail below.
· Going Concern - In accordance with the Company's Articles, the Board is
required every three years to include in the business to be considered by
shareholders at the Annual General Meeting a Special Resolution that the
Company should be wound up. The last such resolution was tabled at the
eighteenth Annual General Meeting held in 2014. The Shareholders voted against
the resolution, and in favour of the continuation of the Company. As announced
on 10 January 2017 (the "Possible Offer Announcement"), the independent
directors of the Company are in preliminary discussions regarding a possible
offer from Prospect Co., Ltd ("Prospect") for the entire issued and to be
issued share capital of the Company. The possible offer is under consideration,
discussion and evaluation by both parties. The Possible Offer Announcement does
not amount to a firm intention to make an offer under Rule 2.7 of The City Code
on Takeovers and Mergers, and as stated in the Possible Offer Announcement
there can be no certainty that an offer for the Company will ultimately be
made. If such a transaction: (i) was to be announced in accordance with Rule
2.7 of The City Code on Takeovers and Mergers; and (ii) was to be completed
prior to the 2017 AGM, no AGM would be held and no discontinuation vote would
take place. Whilst acknowledging the uncertainty of the possible offer, and
the upcoming vote for discontinuation, the fact that neither the Board nor the
Investment Advisor have received any indication that the Shareholders are no
longer in favour of the investment policy and that the assets of the Company
consist mainly of securities that are readily realisable, leads the Directors
to believe that the discontinuation vote will not be passed and that the
Company has adequate financial resources to meet its liabilities as they fall
due for at least twelve months from the date of this report, and that it is
therefore appropriate for the Financial Statements to be prepared on a going
concern basis. Factors regarding the going concern basis are also discussed in
Note 1 of the Financial Statements.
Key activities and significant risks
Going concern as described above.
The investment manager has built a concentrated portfolio of small and medium
sized enterprises and the Committee appreciates that there are significant
risks inherent in that investment policy compared with a wider spread in larger
quoted companies. There is also a material exposure to regional banks at the
year-end giving a 50.5% of NAV direct exposure (2015: 28.66%).
The Company holds one unlisted investment. Following advice from the Investment
Manager and per requirements under IFRS, the Committee considers the valuation
of this investment in detail. For further details on the Investment policies
and the valuation of unlisted investments, please see Note 14 of the Financial
Statements.
The Manager and Administrator confirmed to the Committee that they were not
aware of any material misstatements including matters relating to presentation.
The Committee advised the Board that this Annual Report and Financial
Statements, taken as a whole, is fair, balanced and understandable.
Following a review of the presentations and reports from the Administrator and
after consulting where necessary with the external Auditor, the Committee is
satisfied that the Financial Statements appropriately address the critical
judgements and key estimates (both in respect to the amounts reported and the
disclosures). The Committee is also satisfied that the significant assumptions
used for determining the value of assets have been appropriately scrutinised,
challenged and are sufficiently robust. Further details on the significant
assumptions used for determining the value of assets can be found in Note 14 of
the Financial Statements.
Risk Management
After consultation with the Manager and external Auditor, the Audit Committee
continues to consider the risks faced by the Company and its service providers
and the process for managing them.
Risk management procedures for the Company, as set out in the Company's risk
assessment matrix, were reviewed and approved by the Audit Committee at each
Quarterly Board Meeting.
The Committee reviews and examines externally prepared assessments of the
control environment in place at the Manager and the Administrator, with the
Manager and Administrator providing a SOC1 report covering internal control
systems and procedures supported either by SSAE 16, ISAE 3402 or AAF Reports,
on an annual basis and a bi-annual basis respectively. No significant failings
or weaknesses were identified in these reports by the Committee. There were no
changes in risk management or internal control systems during the year.
The Committee has considered the requirement for an annual internal audit of
the Company. On the basis that the Company is an investment company with no
employees, the Audit Committee believes that an internal audit function is not
necessary for the Company.
External Audit
Independence, Objectivity and Fees
The independence and objectivity of the independent auditor is regularly
reviewed by the Audit Committee which also reviews the terms under which the
independent auditor is appointed to perform non-audit services. The Audit
Committee has established pre-approval policies and procedures for the
engagement of the independent auditor to provide audit and non-audit services.
These are that the independent auditors may not provide a service which:
· places them in a position to audit their own work;
· creates a mutuality of interest;
· results in the independent auditor developing close relationships with
service providers of the Company;
· results in the independent auditor functioning as a manager or employee
of the Company; or
· puts the independent auditor in the role of advocate of the Company.
The Audit Committee considered reports from the independent auditor on their
procedures to identify and mitigate any threats to independence and concluded
that the procedures were sufficient to identify any threats to independence.
The following table summarises the remuneration paid to Ernst & Young LLP for
audit and non-audit services provided to the Company during the years ended 31
December, 2016 and 31 December, 2015:
01.01.2016 01.01.2015
to to
31.12.2016 31.12.2015
Ernst & Young LLP in GB Pounds in GB Pounds
Annual audit 37,400 41,550
Auditor's interim review 19,300 14,000
56,700 55,550
In line with the policies and procedures above, the Audit Committee does not
consider that the provision of these non-audit services to be a threat to the
objectivity and independence of the independent auditor.
Ernst & Young LLP has been the Company's independent auditor since 28 June,
2001. The Audit Committee has examined the scope and results of the external
audit, its cost effectiveness and the independence and objectivity of the
independent auditor, with particular regard to non-audit fees, and considers
Ernst & Young LLP, as independent auditor, to be independent of the Company.
Performance and effectiveness
During the year, when considering the effectiveness of the independent auditor,
the Audit Committee has taken into account the following factors:
· the audit plan presented to them;
· the audit findings report including variations from the original plan;
· changes in audit personnel;
· the independent auditor's own internal procedures to identify threats to
independence; and
· feedback from both the Manager and Administrator.
The Audit Committee reviewed the audit plan and the audit findings report of
the independent auditor and concluded that the audit plan sufficiently
identified audit risks and that the audit findings report indicated that the
audit risks were sufficiently addressed and that there were no significant
variations from the audit plan.
Reappointment
Consequent to the review discussed above, the Audit Committee has recommended
to the Board that a resolution be put to the 2016 AGM for the reappointment of
Ernst & Young LLP as independent auditor. The Board has accepted this
recommendation.
Fraud, Bribery and Corruption
The Audit Committee continues to monitor the fraud, bribery and corruption
policies of the Company. The Board receives a confirmation from all service
providers that there have been no instances of fraud or bribery.
As the Company has no employees, the Committee does not consider that a
whistle-blowing policy is required. However, the Directors have satisfied
themselves that the Company's service providers have appropriate
whistle-blowing policies and procedures and seek regular confirmation from the
service providers that nothing has arisen under those policies and procedures
which should be brought to the attention of the Board.
Richard Battey
Chairman, Audit Committee
21 March, 2017
INDEPENDENT AUDITOR'S REPORT
TO THE MEMBERS OF THE PROSPECT JAPAN FUND LIMITED
Our opinion on the financial statements
In our opinion:
* The Prospect Japan Fund Limited's (the "Company") financial
statements (the "financial statements") give a true and fair view of the
state of the Company's affairs as at 31 December 2016 and of its loss for
the year then ended;
* the financial statements have been properly prepared in accordance
with International Financial Reporting Standards as adopted by the European
Union ("IFRSs");
* the financial statements have been prepared in accordance with the
requirements of the Companies (Guernsey) Law 2008.
What we have audited
The Prospect Japan Fund Limited's financial statements comprise:
- Statement of comprehensive income for the year ended 31 December
2016;
- Statement of financial position as at 31 December 2016;
- Statement of changes in equity for the year ended 31 December
2016;
- Statement of cash flows for the year ended 31 December 2016; and
- Related notes 1 to 18 to the financial statements
The financial reporting framework that has been applied in their preparation is
applicable law and IFRS.
Overview of our audit approach
Risk of - Valuation of unquoted investments
material
misstatement
Audit scope - We performed an audit of the complete financial
statements of the Company for the year ended 31 December 2016.
Materiality - Overall materiality of US$1.22 million which
represents 1% of total equity.
Our assessment of risk of material misstatement
We identified the risk of material misstatement described below as that which
had the greatest effect on our overall audit strategy, the allocation of
resources in the audit and the direction of the efforts of the audit team. In
addressing this risk, we have performed the procedures below which were
designed in the context of the financial statements as a whole and,
consequently, we do not express any opinion on this individual area.
Risk Our response to the risk What we concluded to the
Audit Committee
Valuation of unquoted - We documented During the audit process,
investments our understanding of the we discussed with the
(US$9,990,744 PY processes, policies and Audit Committee that
comparative methodologies used by there was insufficient
US$2,518,957) management for valuing evidence to support the
Refer to the Audit investments held by the initial valuation
Committee Report; Company and performed estimate of the SARs
Accounting policies in walkthrough tests to based on the fact that
Note 1; and Note 14 of confirm our understanding the model applied had not
the Financial Statements of the systems and taken into consideration
Unquoted investments controls implemented. the dilution impact of
relates to the Company's - We agreed the the future exercise of
holding in Stock valuation per the the SARs. Management
Acquisition Rights financial statements to revised the model
("SARs") issued by the model used by resulting in an
Prospect Co. Ltd. The management, agreed all adjustment to the SARs
Prospect Co. Ltd SARs inputs to the model to valuation to the current
were valued using the independent sources and carrying amount of US$10
Black-Scholes-Merton evaluating whether all million which we
model. key terms of the SARs had concluded was not
The valuation is highly been considered in the materially misstated.
subjective with a high application of the model;
level of judgement and - We engaged
estimation linked to the our internal valuation
determination of the experts to
values with limited o assist us to
market information determine whether the
available. Therefore methodologies used to
there is a risk of an value investments were
inappropriate valuation consistent with methods
model being applied, ordinarily applied by
together with the risk market participants for
of inappropriate inputs these types of
to the model/calculation investments; and
being selected. o use their
knowledge of the market
to assess and corroborate
management's market
related judgements and
valuation inputs
(including risk free
interest rates,
volatility rate, dividend
yield, dilution impact
and restrictions on
exercising the SARs) by
reference to our
specialists' knowledge of
comparable transactions,
and independently
compiled databases/
indices.
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope which enable us to form an
opinion on the financial statements under International Standards on Auditing
(UK and Ireland).
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
This is the magnitude of an omission or misstatement that, individually or in
the aggregate, could reasonably be expected to influence the economic decisions
of the users of the financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the Company to be US$1.22 million (2015: US$1.25
million), which is 1% (2015: 1%) of total equity. This provided a basis for
determining the nature, timing and extent of risk assessment procedures,
identifying and assessing the risk of material misstatement and determining the
nature, timing and extent of further audit procedures.
It was considered inappropriate to determine materiality based on Company
profit before tax as the primary focus of the Company is the overall
performance of investments held which includes a significant asset revaluation
component. In addition, profit is not a key metric reported upon by the
Company, with the ability to make dividend payments not limited by the
profitability of the Company in any particular period.
We believe that total equity provides us with an appropriate basis for audit
materiality as net asset value is a key published performance measure and is a
key metric used by management in assessing and reporting on the overall
performance of the Company.
During the course of our audit, we reassessed initial materiality and noted no
factors leading us to amend materiality levels from those originally determined
at the audit planning stage.
Performance materiality
This refers to the application of materiality at the individual account or
balance level. It is set at an amount to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality.
On the basis of our risk assessments, together with our assessment of the
Company's overall control environment, our judgement was that performance
materiality was 75% (2015: 75%) of our planning materiality, namely US$914k
(2015: US$940k). We have set performance materiality at this percentage due to
investment strategy remaining consistent with our previous experience and
limited identification of audit findings in previous periods.
Reporting threshold
An amount below which identified misstatements are considered as being clearly
trivial.
We agreed with the Audit Committee that we would report to them all uncorrected
audit differences in excess of US$61k (2015: US$63k), which is set at 5% of
planning materiality, as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the
financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are
appropriate to the Company's circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial
statements. In addition, we read all the financial and non-financial
information in the annual report to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the knowledge
acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications
for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors' Responsibilities Statement set out on
pages 14 and 15, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair
view. Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board's Ethical Standards for Auditors.
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law 2008. Our audit work has been
undertaken so that we might state to the Company's members those matters we are
required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Matters on which we are required to report by exception
ISAs (UK and We are required to report to you if, in our We have no
Ireland) reporting opinion, financial and non-financial exceptions
information in the annual report is: to report.
- materially inconsistent with the
information in the audited financial
statements; or
- apparently materially incorrect
based on, or materially inconsistent with, our
knowledge of the Company acquired in the
course of performing our audit; or
- otherwise misleading.
In particular, we are required to report
whether we have identified any inconsistencies
between our knowledge acquired in the course
of performing the audit and the directors'
statement that they consider the annual report
and accounts taken as a whole is fair,
balanced and understandable and provides the
information necessary for shareholders to
assess the entity's performance, business
model and strategy; and whether the annual
report appropriately addresses those matters
that we communicated to the audit committee
that we consider should have been disclosed.
Companies We are required to report to you if, in our We have no
(Guernsey) Law 2008 opinion: exceptions
reporting - proper accounting records have not to report.
been kept; or
- the financial statements are not
in agreement with the accounting records; or
- we have not received all the
information and explanations we require for
our audit.
Listing Rules We are required to review: We have no
review requirements - The directors' statement in exceptions
relation to going concern set out in the to report.
Directors' Report and longer-term viability,
set out on in the Strategic Report
respectively; and
- the part of the Corporate
Governance Statement relating to the Company's
compliance with the provisions of the UK
Corporate Governance Code specified for our
review.
ISAs (UK and We are required to give a statement as to We have
Ireland) reporting whether we have anything material to add or to nothing
draw attention to in relation to: material
- the directors' confirmation in the to add or
annual report that they have carried out a to draw
robust assessment of the principal risks attention
facing the entity, including those that would to other
threaten its business model, future than as
performance, solvency or liquidity; explained
- the disclosures in the annual in the
report that describe those risks and explain "Emphasis
how they are being managed or mitigated; of matter"
- the directors' statement in the paragraph
financial statements about whether they above.
considered it appropriate to adopt the going
concern basis of accounting in preparing them,
and their identification of any material
uncertainties to the entity's ability to
continue to do so over a period of at least
twelve months from the date of approval of the
financial statements; and
- the directors' explanation in the
annual report as to how they have assessed the
prospects of the entity, over what period they
have done so and why they consider that period
to be appropriate, and their statement as to
whether they have a reasonable expectation
that the entity will be able to continue in
operation and meet its liabilities as they
fall due over the period of their assessment,
including any related disclosures drawing
attention to any necessary qualifications or
assumptions.
Christopher James Matthews, FCA
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
21 March 2017
Notes:
1. The maintenance and integrity of the Company's web site is the
responsibility of the Directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the financial
statements since they were initially presented on the web site.
2. Legislation in the Guernsey governing the preparation and
dissemination of group financial statements may differ from legislation in
other jurisdictions.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December, 2016
Revenue Capital Total Revenue Capital Total
01.01.2016 01.01.2016 01.01.2016 01.01.2015 01.01.2015 01.01.2015
to to to to to to
31.12.2016 31.12.2016 31.12.2016 31.12.2015 31.12.2015 31.12.2015
Notes In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars
Investment income 2,067,155 - 2,067,155 1,334,322 - 1,334,322
Interest income - - - 108,112 - 108,112
Foreign exchange - 1,044,768 1,044,768 471,537 - 471,537
movements
Loss on financial
assets
at fair value through - (828,874) (828,874) - (2,189,023) (2,189,023)
profit or loss
Total income 2,067,155 215,894 2,283,049 1,913,971 (2,189,023) (275,052)
4 Management fee (1,856,441) - (1,856,441) (1,744,965) - (1,744,965)
5 Other expenses (1,087,394) - (1,087,394) (1,128,764) - (1,128,764)
Foreign exchange (2,024,456) - (2,024,456) - (247,561) (247,561)
movements
Transaction costs - (260,045) (260,045) - (230,445) (230,445)
Bank interest (13,951) - (13,951) - - -
Total expenses (4,982,242) (260,045) (5,242,287) (2,873,729) (478,006) (3,351,735)
Loss for the year (2,915,087) (44,151) (2,959,238) (959,758) (2,667,029) (3,626,787)
before tax
3 Withholding tax (316,585) - (316,585) (499,671) - (499,671)
Loss for the year after (3,231,672) (44,151) (3,275,823) (1,459,429) (2,667,029) (4,126,458)
tax
Loss for the year (3,231,672) (44,151) (3,275,823) (1,459,429) (2,667,029) (4,126,458)
2 Loss per Ordinary Share
-
Basic & Diluted (in (3.50) (0.05) (3.55) (1.58) (2.88) (4.46)
cents)
The "Total" column of this statement represents the Company's Statement of
Comprehensive Income, prepared in accordance with IFRS. The supplementary
'Revenue' and 'Capital' columns are both prepared under guidance published by
the Association of Investment Companies. There was no comprehensive income
other than the loss for the year.
All items in the above statement derive from continuing operations.
The notes form an integral part of the Financial Statements.
STATEMENT OF FINANCIAL POSITION
as at 31 December, 2016
31.12.2016 31.12.2015
Notes In U.S. In U.S.
Dollars Dollars
Non-current assets
6 Financial assets at fair value through profit 98,377,672 106,417,543
or loss
Current assets
7 Receivables 1,189,423 399,051
Cash and cash equivalents 22,688,931 19,009,538
Total current assets 23,878,354 19,408,589
Current liabilities
8 Payables 332,566 529,153
Net current assets 23,545,788 18,879,436
Net assets 121,923,460 125,296,979
Equity
9 Stated capital 92,352 92,452
9 Redemption reserve 85,435,381 85,533,077
9 Capital redemption reserve 323,157 323,057
Other reserves 36,072,570 39,348,393
Total equity 121,923,460 125,296,979
Ordinary Shares in issue 92,352,602 92,452,602
2 Net Asset Value per Ordinary Share (in cents) 132.02 135.53
The Financial Statements were approved by the Board of Directors on 21 March,
2017 and signed on its behalf by:
John Hawkins
Richard Battey
Chairman
Director
The notes form an integral part of the Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December, 2016
Share Capital Capital Capital Capital
Reserve/
Capital Redemption Redemption Revenue Reserve/ Reserve/ Exchange
Account Reserve Reserve Reserve Realised Unrealised Differences Total
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars
Balances at 92,452 323,057 85,533,077 (16,365,019) 67,395,805 (6,825,610) (4,856,783) 125,296,979
1 January,
2016
Total comprehensive income/(expense)
for the year
(Loss)/gain - - - (3,231,672) (2,480,866) 1,391,947 1,044,768 (3,275,823)
for the year
after tax
Capital
activities
Repurchase (100) 100 (97,696) - - - - (97,696)
of shares
Balances at 92,352 323,157 85,435,381 (19,596,691) 64,914,939 (5,433,663) (3,812,015) 121,923,460
31 December,
2016
Share Capital Capital Capital Capital
Reserve/
Capital Redemption Redemption Revenue Reserve/ Reserve/ Exchange
Account Reserve Reserve Reserve Realised Unrealised Differences Total
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars
Balances at 92,452 323,057 85,533,077 (14,905,590) 53,873,130 9,116,533 (4,609,222) 129,423,437
1 January,
2015
Total comprehensive income/(expense)
for the year
(Loss)/gain for - - - (1,459,429) 13,522,675 (15,942,143) (247,561) (4,126,458)
the year after
tax
Capital
activities
Repurchase of - - - - - - - -
shares
Balances at 92,452 323,057 85,533,077 (16,365,019) 67,395,805 (6,825,610) (4,856,783) 125,296,979
31 December,
2015
The notes form an integral part of the Financial Statements.
STATEMENT OF CASH FLOWS
for the year ended 31 December, 2016
01.01.2016 01.01.2015
to to
31.12.2016 31.12.2015
Notes In U.S. In U.S.
Dollars Dollars
Cash flows from operating activities
10 Net cash outflow from operating (5,347,772) (2,998,658)
activities
Interest received - 108,112
Interest paid (13,951) -
Dividends received 2,098,471 1,334,322
Net cash outflow from operating (3,263,252) (1,556,224)
activities
Cash flows from investing activities
Purchase of investments (68,253,522) (70,769,961)
Sale of investments 74,249,095 86,178,648
Net cash inflow from investing 5,995,573 15,408,687
activities
Net cash inflow before financing 2,732,321 13,852,463
activities
Cash flows from financing activities
9 Repurchase of shares (97,696) -
Net cash outflow from financing (97,696) -
activities
Increase in cash and cash equivalents 2,634,625 13,852,463
Reconciliation of net cash flow to
movement in net funds
Net cash inflow 2,634,625 13,852,463
Effects of foreign exchange rate changes 1,044,768 (247,561)
Cash and cash equivalents at beginning 19,009,538 5,404,636
of the year
Cash and cash equivalents at end of the 22,688,931 19,009,538
year
The notes form an integral part of the Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December, 2016
Note 1 Principal Accounting Policies
The following accounting policies have been applied consistently in dealing
with items which are considered to be material in relation to the Company's
Financial Statements:
Basis of preparation
The Financial Statements are prepared in accordance with International
Financial Reporting Standards ("IFRS") adopted by the European Union, which
comprise standards and interpretations approved by the International Accounting
Standards Board (IASB) and are in compliance with The Companies (Guernsey) Law,
2008. The Financial Statements have been prepared on a going concern basis
under the historical cost convention, as modified by the revaluation of
financial assets at fair value through profit or loss.
Presentation of information
Where presentational guidance set out in the Statement of Recommended Practice
("SORP") for Investment Companies issued by the Association of Investment
Companies ("AIC") in November 2014 is consistent with the requirements of IFRS,
the Directors have sought to prepare the Financial Statements on a basis
compliant with the SORP. Supplementary information which analyses the Statement
of Comprehensive Income between items of a revenue and capital nature has been
presented within the Statement of Comprehensive Income.
Standards, amendments and interpretations effective during the year with
relevance to the Company
The following amendments were applicable for the first time this year but had
no impact on the financial position or performance of the Company.
- IFRS 10 (Amendments) - Consolidated Financial Statements (effective 1
January, 2016)
- IFRS 12 (Amendments) - Disclosure of Interests in Other Entities (effective 1
January, 2016)
- IAS 1 (Amendments) - Disclosure Initiative (effective 1 January, 2016)
- IAS 7 (Amendments) - Statement of Cash Flows (effective 1 January, 2016)
- IAS 27 (Amendments) - Separate Financial Statements (effective 1 January,
2016)
- IAS 28 (Amendments) - Investments in Associates and Joint Ventures (effective
1 January, 2016)
Investment Entities, Applying the Consolidation Exception
Narrow-scope amendments to IFRS 10, IFRS 12 and IAS 28 introduce clarifications
to the requirements when accounting for investment entities. The amendments
also provide relief in particular circumstances, which will reduce the costs of
applying the Standards.
Standards, amendments and interpretations issued but not yet effective with
relevance to the Company
- IFRS 9 Financial Instruments - (effective 1 January, 2018)
- IAS 34 - Interim Financial Reporting (Disclosure of information elsewhere in
the interim accounts) (Annual improvements process)
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments
which reflects all phases of the financial instruments project and replaces IAS
39 Financial Instruments: Recognition and Measurement and all previous versions
of IFRS 9. The standard introduces new requirements for classification and
measurement, impairment, and hedge accounting. IFRS 9 is effective for annual
periods beginning on or after 1 January 2018, with early application permitted.
Retrospective application is required, but comparative information is not
compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and
2013) is permitted if the date of initial application is before 1 February,
2015. The adoption of IFRS 9 will not have an effect on the classification and
measurement of the Company's financial assets, or financial liabilities.
The Company's financial instruments consist of equity instruments and
derivatives. Due to the cash flow characteristics of such financial
instruments, on application of IFRS 9, they will continue to be classified as
fair value through the profit or loss.
There are no other standards, amendments or interpretations that are not yet
effective that would be expected to have a material impact on the Company.
The Board anticipate that the adoption of these standards and interpretations
in a future period, once they are effective, will not have a material impact on
the Financial Statements of the Company.
Assessment as investment entity
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries, at fair value through profit or loss
rather than consolidate them. The criteria which define an investment entity
are, as follows:
- An entity that obtains funds from one or more investors for the purpose
of providing those investors with investment services;
- An entity that commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income or
both; and
- An entity that measures and evaluates the performance of substantially
all of its investments on a fair value basis.
The Company meets the criteria as follows:
The Company provides investment management services and has a number of
investors who pool their funds to gain access to these services and investment
opportunities that they might not have had access to individually. The Company,
being listed on the London Stock Exchange, obtains funding from a diverse group
of external shareholders. The Company's objective is consistent with that of an
investment entity. The Company has the intention to realise the constituents of
each of its investment classes.
The Company measures and evaluates the performance of substantially all of its
investments on a fair value basis. The fair value method is used to represent
the Company's performance in its communication to the market. In addition, the
Company reports fair value information internally to Directors, who use fair
value as a significant measurement attribute to evaluate the performance of its
investments and to make investment decisions for mature investments.
The Board has also concluded that the Company meets the additional
characteristics of an investment entity, in that it has more than one
investment; the investments are predominantly in the form of equities and
similar securities; it has more than one investor and its investors are not
related parties.
Significant accounting judgements and estimates
The preparation of the Financial Statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expense and disclosure of contingent assets. The estimates and
associated assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from those estimates.
Going concern
In accordance with the Company's Articles, the Board is required every three
years to include in the business to be considered by shareholders at the Annual
General Meeting a Special Resolution that the Company should be wound up. The
last such resolution was tabled at the eighteenth Annual General Meeting held
in 2014. The Shareholders voted against the resolution, and in favour of the
continuation of the Company. As announced on 10 January 2017 (the "Possible
Offer Announcement"), the independent directors of the Company are in
preliminary discussions regarding a possible offer from Prospect Co., Ltd
("Prospect") for the entire issued and to be issued share capital of the
Company. The possible offer is under consideration, discussion and evaluation
by both parties. The Possible Offer Announcement does not amount to a firm
intention to make an offer under Rule 2.7 of The City Code on Takeovers and
Mergers, and as stated in the Possible Offer Announcement there can be no
certainty that an offer for the Company will ultimately be made. If such a
transaction: (i) was to be announced in accordance with Rule 2.7 of The City
Code on Takeovers and Mergers; and (ii) was to be completed prior to the 2017
AGM, no AGM would be held and no discontinuation vote would take place. Whilst
acknowledging the uncertainty of the possible offer, and the upcoming vote for
discontinuation, the fact that neither the Board nor the Investment Advisor
have received any indication that the Shareholders are no longer in favour of
the investment policy and that the assets of the Company consist mainly of
securities that are readily realisable, leads the Directors to believe that the
discontinuation vote will not be passed and that the Company has adequate
financial resources to meet its liabilities as they fall due for at least
twelve months from the date of this report, and that it is therefore
appropriate for the Financial Statements to be prepared on a going concern
basis. Factors regarding the going concern basis are also discussed in Note 1
of the Financial Statements.
Share Capital
The Company holds a discontinuation vote every three years, however as there is
only one class of share in issue they continue to be presented as equity in
accordance with IAS 32 - "Financial Instruments: Disclosure and presentation".
Fair value of securities not quoted in an active market
In the process of applying the Company's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the financial statements:
The Company carries its investments at fair value, with changes in value being
recognised in the Statement of Comprehensive Income. In cases of unlisted
investments where prices of investments are not quoted in an active market,
estimates are based on available traded prices, comparisons with the valuations
of comparable instruments or by using valuation techniques, such as the Black
Scholes model.
The Investment Manager exercises judgement on the valuation of unlisted
investments. Further details on the valuation techniques applied to level 3
investments can be found in Note 14 of the Financial Statements.
Financial instruments
Financial assets and financial liabilities are recognised in the Company's
Statement of Financial Position when the Company becomes a party to the
contractual provisions of the instrument. Financial assets and liabilities,
other than those shown at fair value through profit or loss, are measured at
amortised cost using the effective interest rate method.
Derivatives
The Stock Acquisition Rights are treated as a derivative and as such are
recognised at fair value on the date on which they are entered into and
subsequently re-measured at their fair value. Fair value is determined by
utilising appropriate valuation techniques, namely the Black-Scholes-Merton
model. The gain or loss on re-measurement to fair value is recognised
immediately through profit or loss in the Statement of Comprehensive Income
within net gain/loss on financial assets at fair value through profit or loss
in the period in which they arise.
Financial assets at fair value through profit or loss ("investments")
All "regular way" purchases and sales of investments are recognised on the
trade date, that is the date on which the Company commits to purchase or sell
the investment). "Regular way" purchases or sales are purchases or sales of
financial assets that require delivery of assets within the time frame
generally established by regulation or convention in the market place.
All of the Company's investments are recorded at fair value through profit or
loss at the time of acquisition. Investments are initially recognised at fair
value, normally being the cost incurred in their acquisition. Any transaction
costs are expensed in the Statement of Comprehensive Income. After initial
recognition, investments are measured at fair value. Gains and losses arising
from changes in fair value are presented in the Statement of Comprehensive
Income in the period in which they arise.
Investments are designated at fair value through profit or loss at inception
because they are managed and their performance evaluated on a fair value basis
and information thereon is evaluated by the management of the Company on a fair
value basis.
Other financial instruments
For other financial instruments, including other receivables and other
payables, the carrying amounts as shown in the Statement of Financial Position
approximate to fair values due to the short term nature of these financial
instruments.
Fair value
The Company's investments consist of equity and equity-related investments in
smaller companies in Japan and unlisted stock acquisition right and corporate
bonds.
Listed investments held at the statement of financial position date are valued
at bid prices quoted on the principal stock exchange on which the investments
are traded. Gains and losses arising from changes in fair value are presented
in the Statement of Comprehensive Income in the period in which they arise.
Unlisted investments are valued at the Directors' estimate of their fair value
in accordance with the requirements of IFRS 13 'Fair Value Measurement'. The
Directors' estimates are based on available price data, comparisons with the
valuations of comparable corporate bonds or by using appropriate valuation
techniques, such as the Black Scholes Merton model.
Derecognition of financial instruments
A financial asset is derecognised when the Company has transferred
substantially all the risks and rewards of the asset, or has neither
transferred nor retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.
A financial liability is derecognised when the obligation under
the liability is discharged or cancelled.
Income
Income arising on the investments is recognised when the right to receive it
has been met and is recorded gross of withholding tax. Bank interest is
accounted for on an accruals basis.
Expenses
Expenses are accounted for on an accruals basis. Expenses incurred on the
acquisition of investments at fair value through profit or loss are charged to
the Statement of Comprehensive Income in capital. All other expenses are
charged to the Statement of Comprehensive Income in revenue.
Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and
highly liquid investments readily convertible to known amounts of cash and
subject to insignificant risk of change in value. Cash and cash equivalents at
the year end constituted demand deposits.
Capital reserves
Gains and losses recorded on the realisation of investments and realised
exchange differences of a capital nature are transferred to the realised
capital reserve. Unrealised gains and losses recorded on the revaluation of
investments held at a period end and unrealised exchange differences of a
capital nature are transferred to the unrealised capital reserve.
Foreign currencies
(i) Functional and presentation currency
The Company's shares are denominated in United States dollars and accordingly
the Board have determined that the Company's functional and presentation
currency is United States dollars, despite the fact that the investments are in
Japanese yen.
(ii) Foreign currency transactions
Monetary assets and liabilities and investments at fair value through profit or
loss are translated into United States dollars at the rate of exchange ruling
at the Statement of Financial Position date. Investment transactions and income
and expenditure items are translated at the rate of exchange ruling at the date
of the transactions. Gains and losses on foreign exchange are included in the
Statement of Comprehensive Income.
Note 2 Loss per Ordinary Share - Basic and Diluted and Net Asset Value per
Ordinary Share - Basic and Diluted
The loss per Ordinary Share - Basic and Diluted has been calculated based on
the weighted average number of Ordinary Shares of 92,392,220 and a net loss of
US$3,275,823 (2015: 92,452,602 Ordinary Shares and a net loss of US$4,126,458).
There were no dilutive elements to shares issued or repurchased during the
year.
The Net Asset Value per Ordinary Share - Basic and Diluted has been calculated
based on the number of shares in existence at the year end date of 92,352,602
(2015: 92,452,602) and shareholders' funds attributable to equity interests of
US$121,923,460 (2015: US$125,296,979).
Note 3 Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability is an annual fee of £1,200 (2015: £1,200).
The amount disclosed as withholding tax in the Statement of Comprehensive
Income relates solely to withholding tax suffered at source, on income in the
investing country, Japan.
Note 4 Management Fees
The management fee is payable to the Manager, Prospect Asset Management
(Channel Islands) ("PAM(CI)"), monthly in arrears at a rate of 1.5% per annum
of the Net Asset Value, which is calculated as of the last business day of each
month. Total management fees for the year amounted to US$1,856,441 (2015:
US$1,744,965) of which US$140,667 (2015: US$155,954) is due and payable at the
year end. The Management Agreement dated 1 December, 1994 remains in force
until determined by the Company or by the Manager giving the other party not
less than three months' notice in writing, subject to additional provisions
included in the agreement regarding a breach by either party.
Note 5 Other Expenses
01.01.2016 01.01.2015
to to
31.12.2016 31.12.2015
In U.S. In U.S.
Dollars Dollars
Administration and 309,407 290,827
secretarial fees*
Custodian's fees and charges* 135,310 105,482
*
General 252,593 548,964
expenses
Directors' remuneration 110,529 116,723
Legal fees 218,639 -
Auditors' 39,392 46,133
fees
Non-audit 21,524 20,635
fees
Bank 13,951 -
interest
1,101,345 1,128,764
*The administration and secretarial fees are payable to Northern Trust
International Fund Administration Services (Guernsey) Limited monthly in
arrears at a rate of 0.25% of the Net Asset Value of the Company as at the last
business day of the month. Total administration and secretarial fees for the
year amounted to US$309,407 (2015: US$290,827) of which US$23,445 (2015:
US$25,992) is due and payable at the year end.
** The custodian's fees and charges are payable to Northern Trust (Guernsey)
Limited monthly in arrears at a rate of 0.08% of the value of the portfolio of
the Company as at the last business day of the month. Total custodian's fees
and charges for the year amounted to US$135,310 (2015: US$105,482) of which
US$9,307 (2015: US$10,384) is due and payable at the year end.
Note 6 Financial Assets at Fair Value through Profit or Loss
01.01.2016 01.01.2015 to
to
31.12.2016 31.12.2015
In U.S. In U.S.
Dollars Dollars
Opening book cost 113,243,153 114,885,517
Purchases at 68,014,094 109,096,236
cost
Proceeds on (75,225,091) (124,491,720)
sale
Realised (loss)/gain on sale (2,220,821) 13,753,120
Closing book cost 103,811,335 113,243,153
Unrealised loss (5,433,663) (6,825,610)
Fair value 98,377,672 106,417,543
Note 7 Receivables
31.12.2016 31.12.2015
In U.S. In U.S.
Dollars Dollars
Amounts due from brokers 977,551 151,847
Dividends receivable 192,689 224,005
Other 19,183 23,199
receivables
1,189,423 399,051
Note 8 Payables
31.12.2016 31.12.2015
In U.S. In U.S.
Dollars Dollars
Amounts due to brokers 42,943 172,618
Other 289,623 356,535
creditors
332,566 529,153
Note 9 Share Capital, Redemption Reserve & Capital Redemption Reserve
31.12.2016 31.12.2015
Number of shares In U.S. In U.S.
Dollars Dollars
150,000,000 Ordinary Shares of US$0.001 150,000 150,000
each
60,000,000 "C" Ordinary Shares of US$0.01 600,000 600,000
each
As approved at the AGM on 18 August, 2016, the Company may purchase a maximum
of 13,843,655 Ordinary Shares, equivalent to 14.99% of the issued share capital
of the Company as at the date of the AGM.
On 23 May, 2016, 100,000 shares were repurchased at a price of US$0.975. The
Redemption Reserve was utilised to cancel these shares.
Capital
Redemption Redemption
Ordinary Shares Share Reserve Reserve
Capital
Number of In U.S. In U.S. In U.S.
shares Dollars Dollars Dollars
92,452,602 Balance at 1 January, 92,452 85,533,077 323,057
2016
Shares repurchased
and
(100,000) cancelled during the (100) (97,696) 100
year
92,352,602 Balance at 31 December, 92,352 85,435,381 323,157
2016
Capital
Redemption Redemption
Ordinary Shares Share Reserve Reserve
Capital
Number of shares In U.S. In U.S. In U.S.
Dollars Dollars Dollars
92,452,602 Balance at 1 January, 92,452 85,533,077 323,057
2015
92,452,602 Balance at 31 December, 92,452 85,533,077 323,057
2015
Other Reserves
The Redemption Reserve account is a distributable reserve account which can be
used for, among other things, the payment of dividends, if any. The Directors
do not recommend the payment of a dividend for the year.
The Capital Redemption Reserve is used to cancel the shares of the Company when
they are redeemed or there is a share buyback.
Ordinary Shares carry the right to vote at general meetings of the Company and
to receive dividends and, in a winding-up will participate in any surplus
assets remaining after settlement of any outstanding liabilities of the
Company.
Note 10 Reconciliation of Deficit on Ordinary Activities to Net Cash Outflow
from Operating Activities
31.12.2016 31.12.2015
In U.S. In U.S.
Dollars Dollars
Revenue loss on ordinary activities for the (3,231,672) (1,459,429)
year
Adjusted
for:
Interest received - (108,112)
Interest 13,951 -
paid
Dividends received (2,067,155) (1,334,322)
Decrease/(increase) in other 4,016 (103,925)
receivables
(Decrease)/increase in other (66,912) 7,130
creditors
Net cash outflow from operating (5,347,772) (2,998,658)
activities
Note 11 Analysis of Financial Assets and Liabilities by Measurement Basis
Investments Net
current
at fair assets Total
value
In U.S. In U.S. In U.S.
Dollars Dollars Dollars
As at 31 December,
2016
Financial assets
Investments at fair value through 98,377,672 - 98,377,672
profit or loss
Cash and cash - 22,688,931 22,688,931
equivalents
Receivables - 1,189,423 1,189,423
98,377,672 23,878,354 122,256,026
Financial liabilities
Payables - 332,566 332,566
- 332,566 332,566
Investments Net
current
at fair assets Total
value
In U.S. In U.S. In U.S.
Dollars Dollars Dollars
As at 31 December,
2015
Financial assets
Investments at fair value through 106,417,543 - 106,417,543
profit or loss
Cash and cash - 19,009,538 19,009,538
equivalents
Receivables - 399,051 399,051
106,417,543 19,408,589 125,826,132
Financial liabilities
Payables - 529,153 529,153
- 529,153 529,153
Note 12 Related Party Transactions
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the other party in
making financial or operational decisions.
The Directors are responsible for the determination of the investment policy of
the Company and have overall responsibility for the Company's activities. The
Company's investment portfolio is managed by PAM(CI) (the "Manager") whose
parent company is Prospect Co., Ltd (Kabushiki Kaisha Prospect ("KKP"), a
Japanese Company).
Mr Rupert Evans is a Director of the Manager.
Directors' fees are disclosed in Note 5. The basic fee payable to Directors in
2016 is £25,000 (US$30,890) (2015: £25,000 (US$36,848)), the Chairman of the
Audit Committee £27,500 (US$33,979) (2015: £27,500 (US$40,532)) and the
Chairman of the Board £30,000 (US$37,068) (2015: £30,000 (US$44,217)) per
annum. At 31 December, 2016, US$25,484 (2015: US$30,399) of the fee remained
payable.
No Directors holding office at 31 December, 2016, or their associates, had any
beneficial interest in the Company's shares. There have been no changes in
these interests between the end of the period and up to the date of this
report.
Mr. Curtis Freeze is a Director of PAM(CI), the Manager of The Prospect Japan
Fund Limited, and is the President of Prospect Co. Ltd., the owner of PAMI, the
Investment Advisor to The Prospect Japan Fund Limited and PAM(CI), the Manager
of The Prospect Japan Fund Limited.
Management fees are disclosed in Note 4. Fees due to the Investment Advisor are
paid by PAM(CI) from these management fees.
The Company holds both Equity shares and SARs in Prospect Co. Ltd. The value of
the SARs is disclosed in Note 14 under Unlisted investments.
Note 13 Financial Risk Management Objectives and Policies
Financial instruments
In accordance with its investment objectives and policies, the Company holds
financial instruments which at any one time may comprise the following:
* securities held in accordance with the investment objectives and policies
* cash and short-term debtors and creditors arising directly from operations
* borrowing used to finance investment activity
* derivative transactions including investment in warrants and forward
currency contracts
* options or futures for hedging purposes
The financial instruments held by the Company principally comprise equities
listed on the stock market in Japan. The specific risks arising from the
Company's exposure to these instruments, and the Manager/Investment Advisor's
policies for managing these risks, which have been applied throughout the year,
are summarised below.
Market price risk
The Company's investment portfolio - particularly its equity investments - is
exposed to market price fluctuations, which are monitored by the Manager/
Investment Advisor in pursuance of the investment objectives and policies.
Exceptional risks associated with investment in Japanese
smaller companies may include:
a) greater price volatility, substantially less liquidity and significantly
smaller market capitalisation, and
b) more substantial government intervention in the economy,
including restrictions on investing in companies or in industries deemed
sensitive to relevant national interests.
Market price sensitivity analysis
The sensitivity of the Company to market price risk can be approximated by
measuring the impact that a movement in the MSCI Japan Small Cap Index would
have on the percentage of funds invested. The MSCI Developed Markets Small Cap
Indices offer an exhaustive representation of the size segment by targeting
companies that are in the Investable Market Index but not in the Standard Index
in a particular developed market. The indices include Value and Growth style
indices and industry indices based on the Global Industry Classification
Standard. The MSCI Japan Small Cap Index provides an indicator of the effect of
market price risk on the Company's portfolio since its characteristics with
respect to average market capitalisation more closely resemble the investment
strategy pursued by the Company. However, the Company's investments do not
reflect the full array of companies on the index. At 31 December, 2016, using a
beta of 0.646 (2015: 0.485), a 1% positive/negative movement in the index would
produce a positive/negative movement in the investments of the Company of
US$635,520 (2015: US$516,125) for equity related securities. This relationship
between the movement in the value of the assets of the Company and the Index is
of a linear nature.
A 1% increase/decrease in the value of the SARs would impact the NAV by
US$99,907 (2015: US$23,914).
Foreign currency risk
The Company principally invests in securities denominated in Japanese yen
rather than United States dollars, the functional currency of the Company.
Therefore, the Statement of Financial Position may be affected by movements in
the exchange rates of such currencies against the United States dollar. The
Manager/Investment Advisor has the power to manage exposure to currency
movements by using forward currency contracts. The Company was not party to any
such instruments at the statement of financial position date in either the
current or prior year.
It is not the present intention of the Directors to hedge the currency exposure
of the Company, but the Directors reserve the right to do so in the future if
they consider this to be desirable.
The treatment of currency transactions other than in United States dollars is
set out in Note 1 to the Financial Statements under "Foreign Currencies".
The Company's currency exposure is as follows:
31.12.2016 31.12.2015
In US In US
Dollars Dollars
Investments
Japanese Yen (¥11,515,598,396; 2015:¥12,815,864,703) 98,377,672 106,417,543
98,377,672 106,417,543
Other (Liabilities)/
Assets
US Dollars (190,156) (188,836)
Sterling (£40,818; 2015:£74,287) (50,170) (110,095)
Japanese Yen (¥2,784,283,574; 2015:¥2,309,650,737) 23,786,114 19,178,367
23,545,788 18,879,436
The below details the Company's sensitivity to a 10% (31 December, 2015: 10%)
change in foreign exchange rates against the US dollar.
31.12.2016 31.12.2015
In US In US
Dollars Dollars
Impact on Statement of Comprehensive Income and Equity
in response to a
- 10% increase in the US dollar against (12,250,087) (12,548,581)
other currencies
- 10% decrease in the US dollar against 12,250,087 12,548,581
other currencies
Interest rate risk
Interest receivable on bank deposits or payable on bank overdraft positions
will be affected by fluctuations in interest rates, however the value of the
underlying cash positions will not be affected.
The direct effect of movements in interest rates are not material on cash and
cash equivalents as the Company predominantly keeps its surplus cash in
Japanese Yen on which it does not earn interest.
If the risk-free rate of return increased/decreased by 0.5%, the impact on the
net asset value and the profit and loss for the year would be an increase /
decrease/ of US$113,445 (2015: US$95,686 with a 0.5% increase/decrease).
Short term debtors and creditors
Trade and other receivables and creditors do not carry interest and are short
term in nature. They are stated at nominal value as reduced by appropriate
allowances for irrecoverable amounts in the case of receivables.
Liquidity risk
Liquidity risk is the risk that the Company may encounter in realising assets
or otherwise raising funds to meet financial commitments.
The Company invests primarily in listed securities. The tables below analyse
liquidity of the Company's securities based on trading volumes in the period
after the statement of financial position date and maturity of other financial
assets and liabilities. Although market values are low in comparison to the
Company's shareholding for some securities, there is sufficient volume to
demonstrate an active market.
The Investment Manager considers expected cash flows from financial assets
based on traded volumes in assessing and managing liquidity risk, in particular
its cash resources and trade receivables. Cash flows from trade and other
receivables are all contractually due within twelve months. Liquidity risk is
not deemed to be significant.
As at 31 December, 2016
Up to 1 1 week to 1 1-6 months 6-12 Greater Total
week month months than 12
months
In US In US Dollars In US In US In US In US
Dollars Dollars Dollars Dollars Dollars
Financial assets
Financial assets at
fair
value through profit 10,838,996 22,519,263 40,356,666 4,523,359 20,139,388 98,377,672
or loss
Dividends receivable - - 192,689 - - 192,689
Other receivables - - 19,183 - - 19,183
Cash and cash 22,688,931 - - - - 22,688,931
equivalents
Securities sold 977,551 - - - - 977,551
receivable
Financial
liabilities
Amounts due to (42,943) - - - - (42,943)
brokers
Other creditors - (231,225) (58,398) - - (289,623)
Total 34,462,535 22,288,038 40,510,140 4,523,359 20,139,388 121,923,460
As at 31 December, 2015
Up to 1 1 week to 1 1-6 months 6-12 Greater Total
week month months than 12
months
In US In US Dollars In US In US In US In US
Dollars Dollars Dollars Dollars Dollars
Financial assets
Financial assets at
fair
value through profit 16,158,458 33,525,242 47,088,648 4,841,226 4,803,969 106,417,543
or loss
Dividends receivable - - 224,005 - - 224,005
Other receivables - - 23,199 - - 23,199
Cash and cash 19,009,538 - - - - 19,009,538
equivalents
Securities sold 151,847 - - - - 151,847
receivable
-
Financial -
liabilities
Amounts due to (172,618) - - - - (172,618)
brokers
Other creditors - (299,113) (57,422) - - (356,535)
Total 35,147,225 33,226,129 47,278,430 4,841,226 4,803,969 125,296,979
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company. The
Company's principal sources of credit risk arise on amounts due from brokers
for settlement of outstanding investment transactions, dividends and interest
receivable, corporate bonds and cash and cash equivalents.
The Company utilises 8 executing brokers setting allocation targets for each
broker so as to not to place excessive concentration in any one counterparty.
The Investment Advisor performs a quarterly review of executing brokers as part
of its "Best Execution" analysis, which is part of the advisor's compliance
program. The investment team reviews the quality of broker research, execution
and service, and sets targets for each broker based on the brokers' overall
performance.
Currently all cash is placed with Northern Trust (Guernsey) Limited ("NTGL").
NTGL is also custodian of the majority of the Company's investments. NTGL is a
wholly owned subsidiary of The Northern Trust Corporation ("TNTC"). TNTC is
publicly traded and a constituent of the S&P 500. TNTC has a credit rating of
A+.
All transactions in listed securities are settled/paid upon delivery using
approved brokers. The risk of default is considered minimal, as delivery of
securities sold is only made once the broker has received payment. Payment is
made on a purchase once the securities have been received by the broker. The
trade will fail if either party fails to meet their obligation.
When purchasing unlisted securities including over-the-counter bonds, the
Investment Advisor prepares an evaluation on the company issuing these
securities and monitors and reviews the Company's quality and performance over
time. These unlisted investments are issued by the companies themselves and by
their nature are either not rated or have a higher credit rating.
It is the opinion of the Board of Directors that the carrying amounts of these
financial assets, excluding equities, represent the maximum credit risk
exposure as at the statement of financial position date.
The Company's maximum credit exposure is limited to the carrying amount of
unlisted investment and financial assets recognised as at the statement of
financial position date including bank balances, Level 3 investments, illiquid
investments and other receivables with a possible risk of no recovery:
Maximum Credit Risk Exposure
31.12.2016 31.12.2015
In US In US
Dollars Dollars
Unlisted investments 9,990,744 2,518,957
Cash and cash equivalents 22,688,931 19,009,538
Receivables 1,189,423 399,051
33,869,098 21,927,546
Capital management
The Company is a close-ended investment company, and thus has a fixed capital.
The Company's capital is represented by Ordinary Shares and each share carries
one vote. Each share has an entitlement to dividends if declared.
As approved at the AGM on 18 August, 2016, the Company may purchase a maximum
of 13,843,655 Ordinary Shares, equivalent to 14.99% of the issued share capital
of the Company as at the date of the AGM provided that;
• the minimum price to be paid (exclusive of expenses) is
US$0.001;
• the maximum price to be paid (exclusive of expenses) is 105% of
the average mid-market valuation for five days preceding the purchase; and
• if the shares are trading on the London Stock Exchange, at a
discount to the lower of the undiluted or diluted Net Asset Value;
The Company purchased 100,000 shares at a price of US$0.975 per share on the 23
May 2016. Refer to Note 9.
The Board also considers from time to time whether it may be appropriate to
raise new capital by a further issue of shares. The raising of new capital
would however be dependent on there being genuine market demand.
The Company is not subject to externally imposed capital requirements.
Note 14 Fair Value
Financial assets at fair value through profit or loss are carried at fair
value. The valuation techniques for valuing unlisted investments are described
below. Other assets and liabilities are carried at cost which approximates fair
value.
IFRS 13 requires the Company to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making the
measurements.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The fair value measurement is based on the presumption
that the transaction to sell the asset or transfer the liability takes place
either:
(i) in the principal market for the asset or liability, or
(ii) in the absence of a principal market, in the most
advantageous market for the asset or liability
The principal or the most advantageous market must be accessible by the
Company.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
The Company uses valuation techniques that are appropriate in the circumstances
and for which sufficient data is available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs.
All financial instruments for which fair value is recognised or disclosed are
categorised within the fair value hierarchy, described as follows, based on the
lowest level input that is significant to the fair value measurement as a
whole:
Level 1 - Quoted market prices (unadjusted) in an active market for identical
assets or liabilities
Level 2 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable
Level 3 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable
For financial instruments that are recognised at fair value on a recurring
basis, the Company determines whether transfers have occurred between levels in
the hierarchy by re-assessing categorisation, based on the lowest level input
that is significant to the fair value measurement as a whole, at the end of
each reporting period.
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value for the year
ended 31 December, 2016.
Level 1 Level 2 Level 3 Total
In US In US In US In US
Dollars Dollars Dollars Dollars
Assets
Financial assets at fair
value
through profit or
loss:
-Equity Securities 88,386,928 - - 88,386,928
-Derivative Instruments - - 9,990,744 9,990,744
Total as at 31 December, 88,386,928 - 9,990,744 98,377,672
2016
The following table presents the movement in level 3 instruments for the year
ended 31 December, 2016 by class of Financial Instrument.
Debt Derivative
Securities Securities Total
In US In US In US
Dollars Dollars Dollars
Opening balance 127,526 2,391,431 2,518,957
Purchases - - -
Sales (127,526) (294,005) (421,531)
Realised gains during the 127,526 145,802 273,328
year
Unrealised gain during (127,526) 7,747,516 7,619,990
the year
Closing balance - 9,990,744 9,990,744
Net unrealised gain for the year - 7,747,516 7,747,516
included in the Statement of
Comprehensive Income
There were no transfers between levels for the year ended 31 December, 2016.
The following table analyses, within the fair value hierarchy, the Company's
financial assets and liabilities (by class) measured at fair value for the year
ended 31 December, 2015 as required by IFRS 7.
Level 1 Level 2 Level 3 Total
In US In US In US In US
Dollars Dollars Dollars Dollars
Assets
Financial assets at fair
value
through profit
and loss:
-Equity Securities 103,898,586 - - 103,898,586
-Derivative Instruments - - 2,391,431 2,391,431
-Debt Securities
Corporate bonds - - 127,526 127,526
Total assets as at 31 103,898,586 - 2,518,957 106,417,543
December, 2015
The following table presents the movement in level 3 instruments for the year
ended 31 December, 2015 by class of Financial Instrument.
Debt Derivative
Securities Securities Total
In US In US In US
Dollars Dollars Dollars
Opening balance 56,008,526 - 56,008,526
Purchases 18,641,413 2,371,249 21,012,662
Sales (52,378,965) - (52,378,965)
Realised gains during the 3,131,464 - 3,131,464
year
Unrealised losses during the year (25,274,912) 20,182 (25,254,730)
Closing balance 127,526 2,391,431 2,518,957
Net unrealised gain for the year 127,526 20,182 147,708
included in the Statement of
Comprehensive Income
There were no transfers between levels for the year ended 31 December, 2015.
Valuation techniques
Listed investments
Securities valued based on quoted market prices, in an active market for
identical assets without any adjustments, are included within Level 1 of the
hierarchy and are valued at bid price.
Unlisted investments
The Company invests in debt securities which are not quoted in an active
market. Transactions in such investments do not occur on a regular basis. These
positions are valued at their fair value in accordance with IFRS 13.
Level 3 valuations are monitored closely by the Investment Advisor who reports
to the Board of Directors on a quarterly basis. Valuations are based on the
most appropriate method for each level 3 investment as at 31 December, 2016 as
discussed below.
As at 31 December, 2016, the Company holds stock acquisition rights ("SARs") in
Prospect Co. Ltd. In accordance with IFRS 13, the Directors have undertaken
their responsibility to approximate a fair value of this level 3 investment by
way of utilising the Black-Scholes-Merton model. The model uses observable,
non-observable and contractual inputs. The observable inputs are the underlying
price of Prospect Co. Ltd (31 December, 2016: ¥66.5, 31 December, 2015: ¥51.5)
and the risk free rate (31 December, 2016: 0.00%, 31 December, 2015: 0.00%).
The significant unobservable inputs are the dividend yield, which is based on
historic dividend payments (31 December, 2016:1.95%, 31 December, 2015: 1.95%)
and the volatility rate used (31 December, 2016: 21.73%, 31 December, 2015:
15.7%), which was the implied rate of volatility having removed the peaks
created by the increase in dividend announced on 6 December, 2016 and adjusted
for the potential restriction on the exercise of the SAR's following the
announcement of a possible offer made by Prospect, Co. Ltd.
The effects of movements of the significant unobservable inputs used in the
fair value measurement of the unlisted investment categorised within Level 3 of
the fair value hierarchy as at 31 December 2016 are shown below:
Effect on Fair Value
Unobservable Sensitivity In U.S. Dollars
input used
Dividend yield +0.05%/-0.05% (25,883) 32,353
Volatility +5%/-5% 1,294,138 (1,171,195)
The contractual inputs are the shares received for each right exercised
(100,000), the exercise date (21 December, 2015) the remaining exercise period
(1 January 2016 to 20 December, 2020), the strike price of the SAR (¥54) and
the number of SARs remaining (1,350). Using this model with the implied rate
has resulted in an uplift of US$7,684,136 (31 December, 2015: US$490,243) from
the year end valuation of the SARs.
Note 15 Segmental Reporting
The Board is responsible for reviewing the Company's
entire portfolio and considers the business to have a single operating segment.
The Board's asset allocation decisions are based on a single, integrated
investment strategy, and the Company's performance is evaluated on an overall
basis.
The Company invests in a diversified portfolio of
Japanese investments. The total fair value of the financial instruments held by
the Company and the equivalent percentages of the total value of the Company,
are reported in the Portfolio Statement.
Revenue earned is reported separately on the face of the Statement of
Comprehensive Income as investment income being dividend income received from
equities, and interest income being interest earned from convertible and
corporate bonds.
Note 16 Contingent Asset
The Company declined to tender its shares for Toho Real Estate, as the Company
believed the true value to be considerably higher than that stated in the
tender offer, and entered into an arbitration process. The Company has been
involved in court proceedings with Toho Real Estate arising from the tender
offer. In March 2015 the Company received notice from the court presiding over
its petition that it had ruled in its favour. The court awarded the Company an
aggregate amount of ¥121,600,000 (US$1.01 million). Although an improvement,
this was still significantly discounted to the fair value of Toho Real Estate
and as such, on 8 April, 2015 the Company filed an appeal against the ruling.
On 30 March, 2016, the Company announced that the Tokyo High Court had ruled
that the tender offer price for Toho Real Estate amounted to fair value and
eliminated a previous award of ¥121,600,000 to the Company. The Company has
filed an appeal to this ruling which has been accepted to be heard by the
Supreme Court of Japan.
With regard to Yukiguni Maitake, the Company feels that a tender offer was
unfair and feels that the shares were artificially depressed due to poor
management, which resulted in an accounting violation around the payment of
dividends. The holding bank sold into the TOB and realised the collateral at
what the Company believes to be an unfair price. Alix Partners Asia LLC and
Nera Economic Consulting have been engaged to provide valuations. In October
2016 the Company received notice from the court presiding over its petition
that it had ruled the tender offer price for Yukiguni Maitake amounted to fair
value. The company filed an appeal, which is currently being reviewed by the
Tokyo High Court. Although at this point it would be difficult to put a per
share value on it, the Company believes a premium closer to 40% vs. the 18.7%
paid would be in line with the market.
Note 17 Reconciliation of Published Valuation to Audited Financial Statements
Prepared under IFRS
31.12.2016 31.12.2015
In US In US
Dollars Dollars
Net assets per Financial Statements 121,923,460 125,296,979
Writeback of prior year uplift on Toho Real - 1,009,715
Estate (Note 16)
Adjustment in value of financial assets at fair value
through profit and loss:
Prospect Co Ltd Stock Acquisition Rights (7,684,136) -
(Note 14)
Net assets per published valuation 114,239,324 126,306,694
NAV per share per Financial Statements (in 132.02 135.53
cents)
NAV per share per published valuation (in 123.70 136.62
cents)
Note 18 Subsequent Events
These Annual Report and Financial Statements were approved for issuance by the
Board on 21 March, 2017. Subsequent events have been evaluated until this date.
On 10 January, 2017, the Company announced that it was in preliminary
discussions with Prospect, Co. Ltd ("Prospect") in respect of a possible offer
by Prospect for the entire issued and to be issued share capital of the
Company.
Prospect was required on 7 February, 2017, to either announce a firm intention
to make an offer for the Company or announce that it does not intend to make an
offer.
At the request of the Independent Directors of the Company, the Panel on
Takeovers & Mergers (the "Panel") has consented to an extension of the relevant
deadline, until 5:00 p.m. on 4 April, 2017 to enable the parties to conclude
their ongoing discussions. By this time Prospect must either announce a firm
intention to make an offer for the Company or announce that it does not intend
to make an offer, in which case the announcement will be treated as a
statement. This new deadline can be extended with the consent of the Panel.
GENERAL INFORMATION
General
The Company is a close-ended investment company incorporated in Guernsey in
November, 1994 and was launched in December, 1994 with an initial asset value
of US$70 million. There are 92,352,602 Ordinary Shares in issue as at 31
December, 2016. The Company's Ordinary Shares are listed on the Main Market of
the London Stock Exchange.
The Ordinary Shares of the Company have not been registered under the United
States Securities Act of 1933 or the United States Investment Companies Act of
1940. Accordingly, none of the Ordinary Shares may be offered or sold directly
or indirectly in the United States or to any United States persons (as defined
in Regulation 'S' under the 1933 Act) other than in accordance with certain
exemptions. Investment in the Company is suitable only for sophisticated
investors and should be regarded as long-term. Past performance is no
indication of future results.
The Company is a FATCA compliant organisation with FATCA entity classification
FFI and GIIN L0Q9R3.99999.SL.831.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs")
APMs are included in the financial statements which require further
clarification. An APM is defined as a financial measure of historical or future
financial performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial reporting
framework.
NAV to market price discount
The Net Asset Value ("NAV") per share is the value of all the investment
company's assets, less any liabilities it has, divided by the number of shares.
However, because the Company's Ordinary Shares are traded on the London Stock
Exchange's Main Market, the share price may be higher or lower than the NAV.
The difference is known as a discount or premium. The Company's discount is
calculated by expressing the difference between the period end dollar
equivalent share price and the period end NAV per share as a percentage of the
NAV per share.
Market Performance
Market Performance measures how the NAV per share has performed over a period
of time compared to the MSCI Japan Small Cap Index. The Company quotes NAV per
share performance as a percentage change from the start of the period, one-year
and also three-year and five-year periods. The MSCI Japan Small Cap Index is
designed to measure the performance of the small cap segment of the Japanese
market. It has 901 constituents and represents
14% of the free float-adjusted market capitalization of the Japan equity
universe. It is also quoted as a percentage change from the start of the
period, one-year and also three-year and five-year periods.
Investment Objective
The Company's investment objective is detailed in the Strategic Report.
Investment Restrictions
The Company's investment restrictions are detailed in the Strategic Report.
NAV and Information
The prices of Ordinary Shares and the latest NAV are published daily in the
Financial Times. The price of the Ordinary Shares appears within the section of
the London Share Service entitled "Investment Companies".
Life of the Company
From inception the Directors have believed that Shareholders should be able to
review the progress of the Company so that a decision can be taken as to
whether Shareholders should have an opportunity of realising the Company's
underlying investments. Accordingly, at the eighteenth Annual General Meeting
of the Company held on 27 August, 2014, the Board included in the business to
be considered by Shareholders a special resolution that the Company should be
wound up. The resolution was not passed. The board will include a similar
resolution in the business to be considered at every third Annual General
Meeting held. The next such resolution will be tabled at the Annual General
Meeting to be held in 2017.
Financial Highlights 31.12.2016 31.12.2015
In US In US
Dollars Dollars
Total Net Assets 121,923,460 125,296,979
IFRS NAV per share 132.02 135.53
Share Price 89.75 105.50
Discount to NAV 32.02% 22.16%
Directors
Brief biographical details of the Directors are as follows:
Rupert Evans, age 78, is a Guernsey advocate and former partner in the firm of
the Guernsey legal advisors, Mourant Ozannes. He is now a consultant to Mourant
Ozannes. He is a non-executive director of the Manager and of a number of
investment companies. Mr Evans is resident in Guernsey. Mr Evans was appointed
to the Board on 18 November, 1994.
John Hawkins, age 74, is a Fellow of the Institute of Chartered Accountants in
England and Wales. He was formerly Executive Vice President and a member of the
Corporate Office of The Bank of Bermuda Limited, with whom he spent many years
in Asia. He retired from the Bank of Bermuda in 2001 after 25 years with the
Group. He is a director of a range of funds which include hedge funds and
equity funds investing in Japan and Asia. Mr Hawkins was appointed to the Board
on 4 April, 2004. Mr Hawkins is resident in the UK.
Richard Battey, age 65, is a qualified chartered accountant. He is a
non-executive director of a number of investment companies and funds. Mr Battey
joined the Schroder Group in December 1977 and was a director of Schroders
(C.I.) Limited from April, 1994 to December, 2004, where he served as Finance
Director and Chief Operating Officer, and was a director of Schroder Group
Guernsey companies before retiring from his last Schroder directorship in
December, 2008. Mr Richard Battey was appointed as Chairman of the Audit
Committee on 10 February, 2010. Mr Battey is resident in Guernsey.
Taxation Status
The Company has obtained exemption from Guernsey Income Tax under The Income
Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. There is no capital gains tax
in Guernsey.
Prospect Japan Fund : Annual Financial Report
March 22, 2017 at 07:01 am
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