BGS Baillie Gifford Shin Nippon Plc

HEADLINE ALTERATION

The headline for Baillie Gifford announcement released on 25/03/2024 at 7:00am under RNS No 0291I should read Final Results Baillie Gifford Shin Nippon PLC

RNS Announcement

Baillie Gifford Shin Nippon PLC (BGS)

Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83

Results for the year to 31 January 2024

Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws and regulations.

The following is the results announcement for the year to 31 January 2024 which was approved by the Board on 22 March 2024.

Over the year to 31 January 2024, the Company's net asset value per share^† declined by 14.9% and its share price by 20.5%. The comparative index* appreciated by 6.3%.

In sterling terms over five years, the Company's comparative index* was up 24.1% while the net asset value per share^† was down by 6.8% and the share price was down 26.3%.

¾  Portfolio performance has remained weak since the decline in impact of Covid-19 as large-cap value stocks have been very much in favour compared to high growth small cap stocks. Most of the portfolio's poor performers over the past year were companies with meaningful exposure to China. There was wide sectoral dispersion among the portfolio's top performing stocks.

¾  The Board is committing to a one-off performance-triggered tender offer for up to 15% of the Company's issued share capital if the Company's NAV per share total return underperforms the MSCI Japan Small Cap Index total return (in sterling terms) over the three years to 31 January 2027, given the period of poor performance.

¾  Portfolio turnover for the financial year was 12.1%, with seven positions exited and five new positions initiated. There are currently four private companies in the portfolio accounting for 3.7% of total assets.

¾  The Company's share price ended the period at a 14.6% discount to the NAV per share. 4,395,000 shares were bought back in the reporting period and are currently held in treasury.

¾  The persistent share price weakness of most holdings across the portfolio, together with their strong operational performance has meant that the portfolio as a whole has been de-rated significantly and, relative to the comparative index, although valued at a small premium it should deliver much faster sales growth.

¾  As the focus on fundamentals takes a firm hold, portfolio performance should recover. The Board and Managers remain of the view that exceptional long term returns are likely to be generated by young, disruptive, fast-growing and entrepreneurial smaller businesses in Japan.

¾  Revenue return per share was 0.94p (2023 1.11p). Having been in deficit for a number of years, the Company's revenue reserve has moved to a surplus. The Board is recommending a final dividend of 0.80p per share, being broadly the minimum required to maintain investment trust status. The proposed final dividend will be put before shareholders as part of the Company's Annual General Meeting ('AGM') business in May.

^†           After deducting borrowings at fair value. For a definition of terms see Glossary of terms and Alternative Performance Measures at the end of this announcement.

*           The Company's comparative index is the MSCI Japan Small Cap Index (total return and in sterling terms). See disclaimer at the end of this announcement.

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

Shin Nippon aims to achieve long term capital growth through investment principally in small Japanese companies which are believed to have above average prospects for growth. At 31 January 2024 the Company had total assets of £544.3 million (before deduction of bank loans of £86.5 million).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with approximately £227 billion under management and advice as at 20 March 2024.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. The Company is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority. Investment in investment trusts should be regarded as long term. You can find up to date performance information about Shin Nippon at shinnippon.co.uk.

25 March 2024

For further information please contact:

Anzelm Cydzik, Baillie Gifford & Co                                     

Tel: 0131 275 2000                                                                

Jonathan Atkins, Director, Four Communications

Tel: 0203 920 0555 or 07872 495396

Chair's statement

In this, my first year as Chair of the Company, I had hoped to report an improvement in performance by the end of it. However, this has not materialised. Over the year to 31 January 2024, the Company's net asset value ('NAV') per share* declined by 14.9% and its share price by 20.5%. The comparative index (MSCI Japan Small Cap Index, total return in sterling terms) appreciated by 6.3%.

As highlighted in last year's report, your Board has determined that performance should be measured principally over rolling five-year periods to reflect the Managers' time horizon for investment. Over the five years to 31 January 2024, the Company's NAV per share declined by 6.8% and its share price declined by 26.3%. The Company's comparative index return appreciated by 24.1%. Much of the underperformance has occurred over the past three years when the Company's NAV per share fell 36.2% against a 7.6% rise in the comparative index.

We remain resolute in our belief that the companies we hold are very well-placed to generate extremely attractive returns to investors over the long term. Although the Company has faced the challenges of growth investing being out of favour, we support the Managers in their core ethos of investing in dynamic entrepreneurial small cap businesses in Japan. Despite the recent underperformance, over the ten years to 31 January 2024 the NAV compound annual return was 9.1% compared to 8.5% for the comparative index. More detail on ten year performance can be viewed on page 31 of the Annual Report and Financial Statements.

The Board has of course rigorously challenged the portfolio manager at each Board meeting on the reasons for the portfolio's  underperformance. These can be summarised as:

• growth stocks being out of favour, with high growth Japanese small cap stocks indiscriminately sold, particularly by domestic Japanese investors, in favour of value stocks;

• the portfolio has had historically longstanding structural underweights in the energy, industrials, financials and materials sectors, all of which have done exceptionally well over the past couple of years. In aggregate, these sectors account for just over 40% of the comparative index and being underweight has impacted relative performance; and finally

• rising interest rates and geopolitical risks have tilted investors towards stocks perceived to be 'safe'. These tend to be highly cyclical (global industrials, shippers), interest rate sensitive (financials), invested in real assets (trading companies, miners) and extremely low valuation (often less than 0.5 times price-to-book). These characteristics are not favoured by the portfolio manager.

The Manager's report below goes into significantly more detail on the main drivers of portfolio performance during the period.

As at 31 January 2024, the Company's shares stood at a 14.6% discount^†, having averaged 11.4% over the year, from 8.6% as at 31 January 2023. As part of the process of becoming the Company's Chair, I and my fellow Director Abigail Rotheroe undertook some shareholder meetings to canvass views on a number of matters. The Company's use of share buybacks featured strongly in the feedback we received. Over the year, the Company has bought back 4,395,000 shares to be held in treasury, equivalent to 1.4% of the Company's issued share capital at the start of the period, split over 62 separate buyback transactions. Since then, the buybacks have accelerated, and a further 3,375,000 shares have been purchased. The Board remains committed to utilising the buyback authority appropriately.

The poor investment performance has, not surprisingly, led to selling by the same investors that the Board wishes to attract and retain on the share register. The 'retail' weighting on the register (holding shares on investment platforms) has declined from 78.9% to 68.7% over the year. It is the Board's hope that this trend reverses once performance improves. To this end, the Board has agreed to an increased annual marketing budget of £100,000. The Company is part of a Baillie Gifford marketing programme which includes all the investment trusts managed by them. The cost is borne in partnership by the Company and the Manager, with the Manager matching the Company's marketing contribution and providing the resource to manage and run the programme. This marketing programme is a key method of shareholder communication and, in our opinion, represents good value for money for our shareholders.

Tender offer

As I have said, the Board maintains a keen interest in the performance of the portfolio and the resultant impact this has on the level of the Company's share price discount or premium to the underlying NAV per share. Whilst cognisant of the drivers of performance and remaining supportive of the portfolio manager, the Board has concluded that, given the period of poor performance, it would be in the best interests of the Company to commit to a one-off performance-triggered tender offer for up to 15% of the Company's issued share capital (excluding any shares held in treasury). This tender offer would be triggered if the Company's NAV total return per share, measuring debt at fair value, underperformed the total return of the MSCI Japan Small Cap Index (in sterling terms) over the three years to 31 January 2027. The tender would be at a price equal to a 2% discount to the cum income NAV per share (calculating debt at fair value) less costs.

If the tender offer is triggered, it is expected to be implemented around the time of the Company's 2027 Annual General Meeting ('AGM') and subject to shareholder approval at that time.

Borrowings

The Company's gearing^† increased over the course of the year from 15.0% to 18.1% whilst gross gearing increased from 16.1% to 18.9% following the drawing of a new secured ¥2,000 million three-year revolving credit facility from ING Bank N.V. The ¥7,000 million fixed rate facility matured on 27 November 2023 and was refinanced with a three-year ¥7,000 million revolving credit facility from ING Bank N.V. As at 31 January 2024, the Company had total borrowings of ¥16.1 billion (£86.5 million) at an average blended interest rate of 1.7%. The Board agreed to increase the level of borrowing during the year and is committed to the strategic use of borrowing at attractive rates to invest in exciting opportunities, enhancing shareholder returns over the long term.

During the year the yen weakened against sterling by 14.0%. The Company undertook no currency hedging during the year and has no plans to do so.

Revenue return and ongoing charges

Revenue return per share was 0.94p compared to 1.11p the prior year. Having been in deficit for a number of years, the Company's revenue reserve has moved to a surplus, principally due to increased dividend payments from the portfolio's underlying holdings and a drop in the NAV of the Company resulting in reduced investment management fees. The Board is recommending a final dividend of 0.80p per share, being broadly the minimum required to maintain investment trust status. The proposed final dividend will be put before shareholders as part of the Company's AGM business in May. I should add that, as the Company's focus is on capital growth, shareholders should not rely on their investment in the Company to provide a regular and stable source of income.

The Company's ongoing charges^† were 0.72% compared to 0.74% last year, due largely to the decline in the Company's expenses from £3.8 million to £3.5 million. A reconciliation of this can be found at the end of this announcement.

Share issuance, buybacks and treasury

As part of this year's AGM business, approval is again being sought to renew the Company's share issuance, buyback and treasury share authorities. Share issuance, either of new shares or from treasury, on a non pre-emptive basis, would only be undertaken at a premium to the Company's NAV per share and therefore be NAV accretive for existing shareholders. The Board is of the view that being able to increase the size of the Company, when conditions permit, helps to improve liquidity, reduces costs per share and potentially increases the appeal of the Company to a wider range of shareholders. The buyback facility is being sought to enable the Company to keep buying back shares if the discount to NAV is substantial in absolute terms or in relation to its peers, should that continue to be deemed desirable. Any such activity would enhance the NAV attributable to existing shareholders.

TCFD and Consumer Duty

As Manager to the Company, Baillie Gifford is now required to produce a product-level TCFD (Task Force on Climate-Related Financial Disclosures) report outlining the portfolio's climate-related risks and opportunities. The report, which is based on backward looking historic data, is to be produced annually. The report on our Company can be found at shinnippon.co.uk.

A further new regulatory requirement introduced by the FCA is that of 'Consumer Duty'. The Duty raises the standard of care that FCA regulated firms, such as Baillie Gifford, are expected to provide to retail consumers and includes a number of obligations that need to be met. One of these obligations is to undertake an Assessment of Value on their products, including investment trusts. This assessment is similar, though not identical, to the annual evaluation of the Managers conducted by the Board of performance and quality of service, costs and shareholder interest. This year's assessment has concluded that the Company is expected to provide value for a reasonably foreseeable period, meaning that distributors, such as trading platforms, will be able to undertake their assessments and continue to make the Company's shares available to current and potential shareholders.

Annual General Meeting

This year's AGM will take place in London rather than in Edinburgh. The Company is trialling this approach following a decline in the number of shareholders attending the Company's AGM in Edinburgh. The AGM is an important opportunity for engagement and enables shareholders to meet and question in-person those managing their assets as well as us the Directors, charged with acting in your best interests. The AGM will take place on Thursday 23 May 2024 at The Cavendish London, 81 Jermyn Street, St James's, London SW1Y 6JF, commencing at 11.00 and I look forward to seeing as many of you there as possible.

In recent years, a UK governance service provider has decided to recommend to the Company's shareholders that they oppose AGM resolutions relating to receiving the Company's Annual Report. The reason given is that, because Baillie Gifford & Co Ltd undertakes the Company's administration and company secretarial duties whilst also being the Manager, the interests of shareholders are considered to be in conflict with Baillie Gifford as Manager due to the impact of management fees. My fellow Directors and I strongly refute this claim. There is no evidence of this compromising the standards of governance or reporting the Company receives, nor of it creating conflicts which compromise the efficacy or independence of your Board. What is more, the Company Secretary has a fiduciary duty to the Company to act in good faith in the interests of the Company and to avoid conflicts of interest. Each year the Board reviews and evaluates the administration and company secretarial services provided by Baillie Gifford & Co Ltd to the Company. This year, as in previous years, the Board has been pleased with the service provided and sees no benefit in engaging another party to undertake these services.

In addition, the same provider recommends voting against the resolution to authorise share repurchases, because the Company has not made a separate public statement addressing a number of points (which are largely already disclosed in the Company's Annual Report) or has not quantified or attributed their impact on the discount of the Company's shares versus the NAV per share. The suggestion is that the supply and demand for investment trust shares is materially impacted by these points and that they can somehow be quantified and failing to do so means the buyback authority should be opposed.

Both these recommendations are an outlier among such service providers and are not unique to this Company. They appear to be that particular provider's view on best practice, despite being out of line with Financial Reporting Council guidelines as well as with the AIC Code of Corporate Governance.

Outlook

The past couple of years have been very challenging for high growth investing and some of the headwinds (heightened macroeconomic and geopolitical concerns) over this period persist. However, there are some encouraging signs. Inflation in the US is showing signs of cooling which has led to expectations of an end to the current cycle of interest rate increases. Japanese corporate earnings and profits remain resilient, with several companies guiding higher. Contrary to popular belief, the weak yen has accounted for surprisingly little of this profit growth; rather it has been due to a combination of price hikes, stringent cost control and aggressive marketing.

Your portfolio manager is seeing strong results being reported by holdings across sectors and valuations are attractive. Nearly 60% of the portfolio now trades on a price-to-sales ratio of 2x or less, which is generally considered as a no or low growth multiple. The Managers' report below goes into further detail on the portfolio and the outlook for Japanese smaller companies.

The Board and Managers are confident that the current portfolio can generate superior growth relative to the comparative index. Considering the current low valuation and a mid teens discount, we think the Company should be top of mind for investors looking for Japanese equity exposure.

Jamie Skinner

22 March 2024

Past performance is not a guide to future performance.

*  After deducting borrowings at fair value. For a definition of terms see Glossary of terms and Alternative Performance Measures at the end of this announcement.

† Alternative Performance Measure - see Glossary of terms and Alternative Performance Measures at the end of this announcement.

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

Managers' report

It is extremely disappointing to report another year of weak portfolio performance. For shareholders, of which I am one, this will undoubtedly be disappointing, frustrating and possibly puzzling, especially when the Japanese large cap-oriented indices, TOPIX and Nikkei 225, are near their all-time highs recorded at the peak of Japan's asset bubble of the late 1980s. There are specific factors, which we discuss below, for this performance gap between large and small caps.

The strong performance of the Japanese market over the past year has been driven largely by so-called value stocks. These are mostly large cap stocks from traditional resource intensive sectors with cash rich balance sheets and large cross-shareholdings. The Tokyo Stock Exchange has issued directives, including the threat of delisting, aimed at forcing such companies to improve their financial performance. This has led many companies, especially those trading below book value, to increase their dividend significantly, conduct large buybacks and sell down their cross-shareholdings. Such companies have attracted considerable investor interest and feature prominently among the best performing stocks. This has hurt our relative performance as we do not invest in such companies given our philosophy of investing in high growth small caps.

Despite moderation in inflation, especially in the US, the major central banks across the developed world are yet to cut interest rates. There is a possibility that interest rates may remain higher for longer and some market participants seem to have taken this view. The inevitable consequence of this has been continued selling of high growth stocks, including those in Japan. This is due to the perception that they all require access to third-party funding at increased rates of interest, slowing their progress to profitability. In Japan, the Central Bank's favoured measure of inflation (which excludes fresh food and fuel) remains above its target level. This has stoked speculation of a potential rate rise in Japan after years of negative interest rates and has led to considerable buying of banks and other interest rate sensitive stocks.

For the first time in decades, we are witnessing significant levels of corporate action in Japan. Activist investors and private equity groups, both domestic and from overseas, are taking large stakes in underperforming Japanese companies and agitating for change. This, along with the pressure being applied on such companies by the Tokyo Stock Exchange, is resulting in a major change in corporate behaviour. This includes, but is not limited to, changes in dividend policy, share buybacks and the sale of unproductive or loss-making assets. While this is very positive for the overall health of corporate Japan, this unfortunately has also resulted in a significant flight of shareholder capital from young, disruptive and fast-growing companies into traditional, old economy businesses. Data from the Tokyo Stock Exchange shows that Japan's domestic individual cash investors, traditionally among the largest buyers of small caps, have been net sellers over the past year.

Given these developments, it is unsurprising that Japanese small caps as an asset class remain completely out of favour, in particular the pool of growth names in which we invest. However, it is precisely for these reasons that we remain cautiously optimistic about the future. At a fundamental level, the majority of the Company's holdings are continuing to deliver strong sales and profit growth. Some of our portfolio companies like business-to-business online food ordering system provider Infomart, housing renovation specialist Katitas, and semiconductor valves manufacturer Kitz have also been raising prices which should support structurally higher margins in the long run.

The persistent share price weakness of most holdings across the portfolio, together with their strong operational performance, has meant that the portfolio as a whole has been de-rated significantly. On an EV (enterprise value)/EBIT (earnings before interest and taxes) basis, the portfolio currently trades at 13.3 times versus 12.5 times for our comparative index. However, for the portfolio as a whole, the one year forward sales growth rate is estimated to be 9.3% compared to 2.3%. This means we have a portfolio that, relative to the comparative index, is valued at a small premium but should deliver much faster sales growth. We believe this to be a very encouraging starting point for future portfolio outperformance.

Performance

For the year ending 31 January 2024, the Company's net asset value ('NAV') decreased by 14.9% compared to an increase of 6.3% in the MSCI Japan Small Cap Index (all figures total return and in sterling terms, NAV with borrowings at fair value). Performance has remained weak since the decline in impact of Covid-19 as large cap value stocks have been very much in favour compared to high growth small cap stocks. Consequently, the Company's NAV now lags the comparative index over three and five years, falling 36.2% and 6.8% versus gains of 7.6% and 24.1% respectively for the comparative index over these periods.

Over the past year, there was wide sectoral dispersion among the portfolio's top performing stocks. The top contributor to relative performance was Megachips, the largest supplier of custom-made chips for Nintendo's gaming consoles. The company has benefited from the success of Nintendo's Switch console and is using the profits generated from this business to expand into new areas where it is already making strong progress. Recent holding SWCC, was another strong performer. It makes electrical wires and cables for power companies and was first purchased for the portfolio in May 2023. Since then, the share price has risen by nearly 80%. It is run by its first ever female president in its nearly 90-year history. Under her leadership, it is transforming itself from a manufacturer of commodity products to a high value-added component supplier. It has expanded its opportunity set by capturing demand in renewables and electric vehicles. Margins have been on an improving trend, and it appears that there is considerable upside remaining in the shares. Online shoe retailer Jade Group (previously named Locondo) was another strong performer. It is forecast to grow profits at nearly 80% in the current fiscal year and yet trades at very low multiple of profits. It has secured a leading market share in Japan and is continuing to expand rapidly. Management has also been buying back shares regularly which is quite unusual for what is an immature small cap company.

Longstanding holding Bengo4.com also performed well. Growth of its online legal business has accelerated following the introduction of a range of artificial intelligence enabled services which have been well received by the legal community. Its digital contracts business, CloudSign, is also making rapid progress and has already achieved a dominant share of the public sector market. Elsewhere, enterprise software provider oRo generated stronger than expected sales and profit growth. Its cloud-based project management and cost accounting software attracted increased interest among small and medium enterprises. Its good operational performance was rewarded by the market, resulting in a strong share price. Japan's largest drugstore chain, MatsukiyoCocokara, was also among the portfolio's top performers. It is benefiting from a revival in inbound tourism and the integration with Cocokara Fine, a smaller peer acquired three years ago, continues to progress well, resulting in significant synergies.

Most of the portfolio's poor performers over the past year were companies with meaningful exposure to China. They suffered from a sharp fall in demand as a weak Chinese economy forced corporate and individual consumers to rein in spending. Premium motorcycle helmet manufacturer Shoei was among the largest negative contributors to performance. Along with weak consumer demand, it is also facing regulatory change in China which has forced it to modify the specification of its helmets to comply with the new rules. This has resulted in additional costs which have squeezed its profit margins in the short term. Sensor manufacturer Optex is also suffering from weak demand in China. Factory automation is its key end market, and the Chinese factory automation sector continues to remain sluggish following a period of inventory correction. It was a similar story for automatic lathe manufacturer Tsugami which experienced a sharp fall in orders from its Chinese customers who are taking a cautious stance towards forward-looking investments.

Second-hand home renovation specialist Katitas was another holding that performed poorly. It was embroiled in a tax dispute with a regional tax agency that resulted in the company taking a one-off hit to profits as it was forced to pay a fine. This incident was taken negatively by the market. We believe this was an isolated incident. Fundamentally, Katitas remains a strong business, with a solid competitive edge and very attractive growth prospects. Litalico, which provides education and welfare for disabled adults and children, also performed poorly. Its shares have halved over the past two years despite sales growing at over 20% per annum and profits at over 30% per annum over this period. Management is investing aggressively in rolling out learning centres nationwide and this has held back further margin expansion in the short term, and which was taken by the market as a disappointment. In contrast, we see this as positioning the company for future growth.

As alluded to earlier, there has been a significant uptick in corporate activity in Japan, driven by activist investors and private equity groups. Although this is centred mostly around old economy large cap companies, we are seeing some of this activity spill over to small caps. Within the Company's portfolio we have had two stocks, outdoor camping equipment manufacturer Snow Peak and staffing company Outsourcing, that have both announced a management buy-out supported by Bain, one of the largest private equity groups globally. This has been done at an average premium of around 50%. Another portfolio holding, Wealthnavi, announced a capital and business alliance with MUFG Bank, part of the MUFG Group which is one of the world's largest financial conglomerates by assets. Wealthnavi is Japan's largest robo-advisory firm for wealth management and as part of this deal, MUFG is taking a 16% stake in Wealthnavi. By leveraging MUFG's considerable resources and vast customer base, we believe Wealthnavi can potentially transform its growth opportunity.

Portfolio

The Company's active share remains high at 95.4%, implying only a 4.6% overlap with the comparative index. This is consistent with our investment approach of seeking out and investing in under researched, dynamic and high growth smaller businesses in Japan, and being agnostic of the index constituents and their weights. Portfolio turnover for the year was 12.1% which is in line with our investment horizon of five to ten years. Gearing is 18.1% which is consistent with our philosophy of maintaining structural gearing which is based on not taking a view on the market but focusing solely on the attractions of individual companies to enhance long-term capital growth.

Over the course of the year, we purchased five new holdings. As noted earlier, the market dynamics around high growth small cap stocks in Japan have changed. Our approach towards idea generation has therefore adapted too, but without compromising on our high growth investment philosophy and style. As avowed growth investors, we do not chase value stocks or stocks with poor long-term growth prospects just because they are currently in vogue. Instead, we try hard to identify stocks with different drivers of growth, including in sectors to which we have traditionally not had much exposure.

SWCC is a classic example of this. This is a company that operates in a terribly unattractive sector but one where management has successfully reoriented the business to growth areas. Even within its core market of supplying cables and wires to electric utilities, SWCC has developed new high value added and high margin products that make its clients' operations more efficient. This has resulted in steady margin improvement. Management has also managed to pivot the business to newer growth areas like renewables and electric vehicles. Another new purchase was Vector, Japan's largest public relations agency. Vector is using its dominant position in public relations to disrupt the online and offline advertising market in Japan. This is another example of a growth stock from a sector not normally associated with producing high growth businesses.

We also took holdings in Oisix and Appier Group, more typical high growth companies that we have a bias towards. Oisix is Japan's leading online meal kit provider that is continuing to grow its sales and profits despite the overall market being sluggish following a Covid-19 induced boom. It is achieving this by expanding its product range, building a sophisticated storage and delivery system and offering compelling pricing for its customers. Appier is an artificial intelligence software company founded by a Taiwanese couple but headquartered in Tokyo. It has developed a suite of software tools that allow its clients to track and analyse consumer behaviour and improve consumer acquisition and retention. Its software is proving to be extremely popular, and it already has a growing business outside of Japan, resulting in ongoing rapid growth in sales and profits.

As part of our process, we closely monitor the investment case and performance for every single stock held in the portfolio. Where there is a divergence, we have taken decisive action in either reducing our position or selling the stock outright. The latter has usually been the case where we lose conviction in the investment thesis. Overall, we sold seven stocks over the Company's fiscal year.

Baby bottle manufacturer Pigeon, a long-term portfolio holding, was one such stock. It had a large and highly profitable business in China but has been struggling of late in this market due to intensifying competition. Having given management time to respond to this challenge, we were disappointed by its apparent lack of ambition and therefore lost conviction in its ability to respond to competition. Tsubaki Nakashima was another stock that was sold. It makes steel and ceramic balls that are used in ball bearings. It is one of only three companies globally that make this product. It has struggled to recover post Covid-19 and demand has stayed muted for longer than we had anticipated. It also had a weak balance sheet with a lot of debt. Cognisant of the current macro environment, we took the view that the financial burden would prove too much for the company and there was a material risk of a large equity issuance to shore up the balance sheet and massively dilute shareholders in the process. We also sold artificial intelligence consultant Brainpad where we were left disappointed with the inability of management to scale the business and grow more aggressively, despite a very favourable operating environment.

Outlook

We acknowledge the frustration that shareholders have had to endure as a result of the Company's underperformance for the third year running. While it may seem like an uphill task to turn performance around given the headwinds discussed earlier in this report, it might be worth remembering that we have been here before. Small caps can be extremely volatile at the best of times and in the current environment they remain very much out of favour. However, we believe that the stocks that are driving the current market rally in Japan have a time-bound investment appeal. As their attraction in terms of improving shareholder returns plays out, there is little else to get excited about in terms of their fundamentals. It is at this point, we think, that investor interest will refocus on the prospects for dynamic small cap growth companies in Japan.

Already, based on recent quarterly results, we have observed tentative signs of such a move. Portfolio holdings that have reported strong results have seen a sharp and sustained upward move in their share price. As the focus on fundamentals takes a firm hold, we should start seeing a strong recovery in the performance of the portfolio. In the meantime, we intend to remain focused on factors that are within our control. This means staying patient, disciplined and staying true to the Company's core ethos of focusing on, identifying and investing in dynamic, entrepreneurial high growth smaller businesses in Japan.

Baillie Gifford & Co

22 March 2024

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

For a definition of terms see Glossary of terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

Baillie Gifford - valuing private companies

We hold our private company investments at an estimation of 'fair value', i.e. the price that would be paid in an open-market transaction. Valuations are adjusted both during regular valuation cycles and on an ad hoc basis in response to 'trigger events'. Our valuation process ensures that private companies are valued in both a fair and timely manner.

The valuation process is overseen by a valuations group at Baillie Gifford, which takes advice from an independent third party (S&P Global). The valuations group is independent from the investment team, as well as Baillie Gifford's Private Companies Specialist team, with all voting members being from different operational areas of the firm, and the investment managers only receive final valuation notifications once they have been applied.

We revalue the private holdings on a three-month rolling cycle, with one-third of the holdings reassessed each month. During stable market conditions, and assuming all else is equal, each investment would be valued four times in a twelve month period. For Shin Nippon, and our other investment trusts, the prices are also reviewed twice per year by the respective boards and are subject to the scrutiny of external auditors in the annual audit process.

Beyond the regular cycle, the valuations team also monitors the portfolio for certain 'trigger events'. These may include changes in fundamentals, a takeover approach, an intention to carry out an Initial Public Offering ('IPO'), company news which is identified by the valuation team or by the investment team, or meaningful changes to the valuation of comparable public companies. Any ad hoc change to the fair valuation of any holding is implemented swiftly and reflected in the next published net asset value. There is no delay.

The valuations team also monitors relevant market indices on a weekly basis and updates valuations in a manner consistent with our external valuer's (S&P Global) most recent valuation report where appropriate.

Continued market volatility has meant that valuations continue to be reviewed much more frequently, in some instances resulting in valuation movements. The data below quantifies the revaluations carried out during the year to 31 January 2024, however does not reflect the ongoing monitoring of the private company investment portfolio.

In the year to 31 January 2024, we have seen a number of the investments in the portfolio raise additional capital at flat and increased valuations, with private investments now seeking public market listings in the near term. The average movement in company valuations and share prices for those are shown below.

*Data reflecting period 1 February 2023 - 31 January 2024 to align with the Company's reporting period end.

Review of investments

A review of the Company's ten largest investments together with a list of the new acquisitions in the year.

Top ten

GMO Financial Gate

GMO Financial Gate is a leading offline digital payments provider. Offline digital payments involve a credit or debit card and take place at physical stores or internet of things enabled terminals like vending and ticketing machines. This is a large market in Japan using mainly outdated technology. GMO is attempting to modernise this sector with its new technology and is growing rapidly as it gains increasing traction with merchants.
Megachips

Megachips is a fabless semiconductor chip design company. The company is a significant supplier of chips for Nintendo's gaming consoles and has been enjoying strong growth thanks to the ongoing success of Nintendo's latest console, Switch. It also has a fast growing US-listed subsidiary called SiTime that is emerging as a global leader in advanced and energy efficient timing devices for electronic devices.
Litalico

Litalico provides training and employment assistance for disabled people, and educational and training services for children with developmental difficulties. It targets the roughly five million adults and children in Japan who suffer from cognitive and mental disabilities. The Japanese government has put in place policies to improve access and employment opportunities for disabled people. This should benefit Litalico which is the largest national service provider.
Cosmos Pharmaceuticals

Cosmos is a leading Japanese discount drugstore with a compelling everyday-low-price model that is hard to replicate. The company is growing rapidly through aggressive store rollouts and is gaining market share on a consistent basis from slow-moving traditional incumbents. The founder owns and manages the company, creating strong alignment between management and minority shareholders.
Toyo Tanso

Toyo Tanso makes specialty carbon products used mainly in renewable energy related systems and semiconductor manufacturing. Both these end markets are growing strongly. The company has a leading global market share in its products and is in pole position to benefit from the growth in its end markets. This is a family run business where the founding family has a significant stake, thereby ensuring strong alignment with minority shareholders.
Lifenet Insurance

Lifenet is a fast-growing online life insurer. It offers a limited range of easy to understand life insurance products sold predominantly through its own website. Its direct- to-consumer model enables it to price competitively, resulting in a potentially enduring competitive edge. Incumbents are large, slow moving and traditional insurers which lack technological prowess and employ a labour intensive sales model. This is allowing Lifenet to gain market share on a consistent basis.
Sho-Bond

Sho-Bond specialises in reinforcing concrete structures like bridges, highways, and tunnels with its proprietary resin. The demand background has been improving due to the need to repair and replace Japan's ageing infrastructure. The competitive environment has become more favourable for Sho-Bond as it operates a fabless model whereas competitors are more labour intensive and are suffering from cost escalations due to labour shortages in Japan.
Horiba

Horiba makes analysers and measuring devices for automobiles, semiconductors and in healthcare. It has high global market shares in its products and a good long-term financial record. Tightening emissions standards, the rapid growth of electric vehicles and strong demand for semiconductors across a range of applications are all resulting in strong and sustained demand for Horiba's products.
GA Technologies

GA Technologies provides online B2B ('business-to-business') services for the real estate sector. It has developed a suite of artificial intelligence based software applications that allows clients to manage numerous tasks like remote viewing, rental property management, end-to-end processing of mortgages and automated generation of building floor plans, to name a few. It is run by its ambitious and young founder who owns a large stake, thereby ensuring strong alignment with minority shareholders.
Anest Iwata

Anest Iwata makes oil-free air compressors, vacuum pump equipment and paint application systems. Its compressors and paint application systems are environmentally friendly, which is a key feature. Tightening environmental regulations are driving demand for its products and this should result in a steady expansion of sales and profits longer term.

New buys

Appier Group

Founded in 2012, Appier products use AI to help clients acquire data on and understand customer behaviour and automate a range of related business processes. There are significant opportunities for it to add new clients and cross-sell its products to existing clients. A major competitive advantage is that the company's clients achieve fantastic returns from Appier's products, which in turn improve over time. Furthermore, pricing is closely aligned with clients' success. After multiple engagements with the company, we have been impressed by the ambition of the founders and the management team, the effectiveness of the products and the company's operational performance.
Cellsource

Cellsource provides contract processing services to medical institutions in Japan. It processes blood samples received from patients and extracts specific proteins which it then converts into powdered form using its patented technology. This is then injected back into the patient to stimulate growth. Currently, Cellsource is focused on treating patients with osteoarthritis, but its products have potential applications across a range of other chronic diseases, meaning that the addressable market is potentially very large. It is managed by its two co-founders who between them have significant stake in the company thereby ensuring strong alignment with minority shareholders.
Oisix

Oisix provides high-quality meal kits and organic food through online ordering. Both areas have been growing from a low base in Japan and appear to have a long growth runway ahead. Oisix has strong relationships with organic farmers and has been investing in distribution efficiency, which will depress short-term profits but deepen its long-term competitive edge. The business is run by its founder who owns a sizeable part of the business thereby ensuring strong alignment with minority shareholders.
SWCC

SWCC Showa is an electric wire/cable manufacturer. Its traditional business relates to the manufacture and supply of low and high voltage cables for private and public electric power utilities. It is in the process of moving away from its low growth and low margin legacy business, of supplying cables, to becoming a component supplier. It has developed a set of unique, lightweight and high margin connector components, branded as SICONEX, that are driving strong profit growth. The market continues to rate the company as an undifferentiated supplier of commoditised products, ignoring the radical changes occurring within the business, and as such the shares remain very lowly rated.
Vector

Vector is one of Japan's largest PR companies. It is run by a dynamic and entrepreneurial founder who retains a large stake in the company. The PR industry in Japan is relatively small but has been growing at a steady rate over the past decade. Vector is disrupting Japan's traditional advertising market by using its expertise in PR to offer a bundled package of services. This will allow clients to deal with just one counterparty, instead of many, for all their PR and advertising needs.

*For a definition of terms see Glossary of terms and Alternative Performance Measures at the end of this announcement.

Baillie Gifford's stewardship principles

Baillie Gifford's overarching ethos is that we are 'Actual' investors. That means we seek to invest for the long term. Our role as an engaged owner is core to our mission to be effective stewards for our clients. As an active manager, we invest in companies at different stages of their evolution across many industries and geographies, and focus on their unique circumstances and opportunities. Our approach favours a small number of simple principles rather than overly prescriptive policies. This helps shape our interactions with holdings and ensures our investment teams have the freedom and retain the responsibility to act in clients' best interests.

Long-term value creation

We believe that companies that are run for the long term are more likely to be better investments over our clients' time horizons. We encourage our holdings to be ambitious, focusing on long-term value creation and capital deployment for growth. We know events will not always run according to plan. In these instances we expect management to act deliberately and to provide appropriate transparency. We think helping management to resist short-term demands from shareholders often protects returns. We regard it as our responsibility to encourage holdings away from destructive financial engineering towards activities that create genuine value over the long run. Our value will often be in supporting management when others don't.

Alignment in vision and practice

Alignment is at the heart of our stewardship approach. We seek the fair and equitable treatment of all shareholders alongside the interests of management. While assessing alignment with management often comes down to intangible factors and an understanding built over time, we look for clear evidence of alignment in everything from capital allocation decisions in moments of stress to the details of executive remuneration plans and committed share ownership. We expect companies to deepen alignment with us, rather than weaken it, where the opportunity presents itself.

Governance fit for purpose

Corporate governance is a combination of structures and behaviours; a careful balance between systems, processes and people. Good governance is the essential foundation for long-term company success. We firmly believe that there is no single governance model that delivers the best long-term outcomes. We therefore strive to push back against one-dimensional global governance principles in favour of a deep understanding of each company we invest in. We look, very simply, for structures, people and processes which we think can maximise the likelihood of long-term success. We expect to trust the boards and management teams of the companies we select, but demand accountability if that trust is broken.

Sustainable business practices

A company's ability to grow and generate value for our clients relies on a network of interdependencies between the company and the economy, society and environment in which it operates. We expect holdings to consider how their actions impact and rely on these relationships. We believe long-term success depends on maintaining a social licence to operate and look for holdings to work within the spirit and not just the letter of the laws and regulations that govern them. Material factors should be addressed at the board level as appropriate.

Environmental, social and governance engagement

By engaging with companies, we seek to build constructive relationships with them, to better inform our investment activities and, where necessary, effect change within our holdings, ultimately with the goal of achieving better returns for our shareholders. The issues we consider in our assessment of ESG factors are varied but may include governance arrangements, human rights, labour rights, diversity and inclusion,

climate change, nature and biodiversity, respect for legal and regulatory guidelines and consideration of stakeholder perspectives. The examples below demonstrate our approach to proxy voting and stewardship through constructive, ongoing engagement.

M3 - navigating trade-offs in digitalising healthcare

M3 is a Japanese company involved in multiple areas of digitalising healthcare. The company's core business is a medical platform for physicians, providing them with all the information they need to make the best decisions for their patients.

Objective: During a meeting with the CEO, Itaru Tanimura, we discussed how M3 manages the trade-offs between the needs of pharmaceutical companies, physicians, and patients.

Discussion: During the meeting, Tanimura san was forthright about the need for patients to come first in order for M3's business model to be sustainable. He emphasised that the company must navigate the practicalities of working with pharmaceutical companies and only pursue business activities where the balance of return to risk is attractive.

Tanimura san provided examples of where M3 facilitated the success of superior treatments. However, he emphasised that the company's core business, a medical platform for physicians, must be a neutral marketplace. He acknowledged that successfully managing these evolving issues will be critical to M3's future success.

Outcome: The meeting with Itaru Tanimura provided valuable insight into the thinking of one of Japan's most exciting entrepreneurs. Tanimura san appreciated the discussion and suggested establishing some form of internal stakeholder review board to ensure these ideas are robustly discussed. This would help M3 navigate the trade-offs between the needs of pharmaceutical companies, physicians and patients, and ensure that the company's core business remains a neutral marketplace that provides doctors with all the information they need to make the best decisions for their patients. Successfully managing these evolving issues will be critical to M3's future success and its clients' returns.

Nihon M&A Center - lessons learned and building culture

Nihon M&A Center is Japan's leading M&A advisory firm, with a focus on smaller companies.

Objective: We met with Suguru Miyake, the President of Nihon M&A, to discuss the company's response to the accounting and marketing challenges it faced in late 2021. The focus was on understanding the steps taken, in the time that had elapsed since the incident, to remediation following the premature recording of deals in order to meet revenue targets.

Discussion: In our discussion Miyake san emphasised his direct involvement with measures to improve compliance and transparency, and to revitalise the company's culture. This effort led to changes in the consultant team, with some members leaving, either by encouragement or voluntarily. This paved the way for a renewed growth trajectory in consultant numbers, which saw an over 8 year-on-year increase.
The company's morale has seemingly since improved, as evidenced by a recent staff survey. Employees now see more opportunities, thanks to focused talent development initiatives. Miyake san also discussed maintaining a balance between entrepreneurship and compliance, stating they can coexist without conflict, aligning with the employees' aspirations for growth.
The company had also taken steps to improve 'group unity', an area identified as needing enhancement. This included dividing all employees into small groups for teaching sessions and face-to-face meetings with the President to improve company culture. These initiatives, coupled with feedback from 50 meetings, have reportedly improved morale. Despite a second wave of departures mid-year, following bonus pay-outs, the remaining employees are described as more cohesive, with an increase in productivity and a recovery in deal activity.

Outcome: Our meeting with Miyake san provided valuable insights into Nihon M&A's response to its recent challenges and that he had made a concerted effort to identify and rectify root causes. We learned more about the company's focused efforts on remediation, culture enhancement and employee engagement, and how they have laid a foundation for recovery and future growth.

Descente - developing a resilient portfolio of brands

Descente manufactures and sells sportswear. It has a portfolio of 14 brands across a range of price points, including the likes of ski apparel brand Descente, Le Coq Sportif, Umbro, and Srixon.

Objective: During a meeting with corporate planning officer, Tomoko Kitazawa, we discussed how Descente is considering the impacts of climate change on its portfolio of brands.

Discussion: Skiing may become increasingly difficult in some places like the Alps and there may also be increasing challenges to growing market share in a sport that will likely decline should global temperatures rise. Management is keenly aware that the long term risk is significant. Reassuringly, this is a topic of live discussion and management is actively considering how it can introduce new products to hedge against possible obsolescence.

Outcome: The meeting provided us comfort in the short term that the matter is under ongoing consideration and provided useful context to monitor how Descente will continue to evolve its portfolio in response.

Proxy voting - 'active ownership' in action

Harmonic Drive

Reason: We abstained on the election of the chair of the board in order to escalate our voting approach due to the ongoing practice of granting bonuses to non-executive directors. We have been opposing the resolution to grant bonuses to directors since 2014 and have fed back concerns to the company. We believe granting performance-based pay to non-executives could impact their ability to think independently and view it as a potential conflict of interest. The company continues to grant performance based pay to outsiders and did not address our concerns and we therefore escalated our response.

DaikyoNishikawa

Reason: We opposed the election of one internal statutory auditor due to ongoing concerns with the low level of independence on the statutory auditor board. In 2022 we opposed the election of an affiliated external statutory auditor as we viewed the statutory auditor board as being only 33% independent when we believe it should be at least 50% independent to provide effective objective oversight of the audit process. We communicated our concerns to the company however as these concerns were not addressed, and the statutory auditor board remains only 33% independent, at the 2023 Annual General Meeting we continued to oppose non-independent members of the statutory auditor board. Again, we communicated our concerns to the company and encouraged increasing levels of independence.

Yonex

Reason: We opposed a resolution relating to retirement bonuses due to the lack of disclosure of the director receiving the bonus and the exact amounts to be paid. We opposed the same resolution at the 2019, 2021 and 2022 Annual General Meetings. While the company is not required to disclose this information we do not feel we have sufficient information to make a judgement on whether the retirement bonus is appropriate or not.

*For a definition of terms see Glossary of terms and Alternative Performance Measures at the end of this announcement.

List of investments as at 31 January 2024

† Absolute performance (in sterling terms) has been calculated on a total return basis over the period 1 February 2023 to 31 January 2024.

Source: Baillie Gifford/Revolution and relevant underlying index data providers. See disclaimer at the end of this document.
* Figure relate to part period returns where the investment has been purchased in the period.

u  Private company (unlisted) investment.

#  See Glossary of terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

Income statement

For the year ended 31 January

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

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

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

The accompanying notes below are an integral part of the Financial Statements.

Balance sheet

As at 31 January

* See Glossary of terms and Alternative Performance Measures at the end of this announcement.

The accompanying notes below are an integral part of the Financial Statements.

Statement of changes in equity

For the year ended 31 January 2024

For the year ended 31 January 2023

* The capital reserve balance as at 31 January 2024 includes investment holding losses of £23,847,000 (2023 - gains of £60,696,000).
The accompanying notes below are an integral part of the Financial Statements.

Cash flow statement

For the year ended 31 January

* Cash and cash equivalents represent cash at bank and deposits repayable on demand.

The accompanying notes below are an integral part of the Financial Statements.

Notes to the Financial Statements

1.   The Financial Statements for the year to 31 January 2024 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out in the Annual Report and Financial Statements for the year ended 31 January 2024.

2.   Currency gains

3.   Investment management fee

Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting have been further sub-delegated to Baillie Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited.

The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than six months' notice. Compensation fees would only be payable in respect of the notice period if termination were to occur sooner. The annual management fee for the year to 31 January 2024 was 0.75% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remainder. The fees are calculated and paid on a quarterly basis.

4.   The Company paid interest of £23,000 (2023 - £37,000) in respect of yen deposits held by the custodian bank.

5.   Ordinary dividends

We set out below the total dividends proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. There is a revenue surplus at 31 January 2024 of £2,602,000 which is available for distribution by way of a dividend payment (2023 - a revenue deficit of £342,000).

If approved, the recommended final dividend on the ordinary shares will be paid on 30 May 2024 to shareholders on the register at the close of business on 19 April 2024. The ex-dividend date is 18 April 2024.

6.  Net return per ordinary share

The returns per ordinary share set out above are based on the net revenue gain of £2,944,000 (2023 - gain of £3,490,000) and net capital loss of £84,855,000 (2023 - net capital loss of £10,535,000) and on 312,785,827 ordinary shares (2023 - 314,222,074), being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.

7.  Fixed assets - investments

Investments in securities are financial assets designated at fair value through profit or loss. In accordance with Financial Reporting Standard 102, the tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement.

Level 1 - using unadjusted quoted prices for identical instruments in an active market;

Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and

Level 3 - using inputs that are unobservable (for which market data is unavailable).

8.   The bank loans are stated after deducting the arrangement fees of £98,000 which are amortised over the terms of the loans. Amortisation of the arrangement fees during the year was £45,000 (2023 - £49,000).

Borrowing facilities

At 31 January 2024

ING Bank N.V. - 3 year ¥5,000 million fixed rate loan at 1.400% maturing 8 November 2024.

ING Bank N.V. - 7 year ¥2,100 million fixed rate loan at 1.693% maturing 18 December 2024.

ING Bank N.V. - 3 year ¥2,000 million revolving credit facility maturing 3 March 2026. The rollover date is 8 March 2024.

ING Bank N.V. - 3 year ¥7,000 million revolving credit facility maturing 23 November 2026. The rollover date is 27 February 2024.

At 31 January 2023

ING Bank N.V. - 3 year ¥7,000 million loan at 1.400% maturing 27 November 2023.

ING Bank N.V. - 3 year ¥5,000 million loan at 1.400% maturing 8 November 2024.

ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December 2024.

The fair value of the bank loans at 31 January 2024 was £86,445,000 (31 January 2023 - £87,725,000). See Glossary of terms and Alternative Performance Measures at the end of this announcement.

9.   At 31 January 2024 the Company had authority to buy back 43,046,457 shares. 4,395,000 shares were bought back at a cost of £5,750,000 during the year (2023 - 100,000 at a cost of £154,000). Share buy-backs are funded from the capital reserve.

During the year the Company issued no shares on a non pre-emptive basis (2023 - no shares)

Between 1 February and 20 March 2024 the Company did not issue any shares. The company bought back 3,375,000 shares.

10. Analysis of change in net debt

11. The Annual Report and Financial Statements will be available on the Company's website shinnippon.co.uk^† on or around 12 April 2024.

12. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2024 or 2023 but is derived from those accounts. Statutory accounts for 2023 have been delivered to the Registrar of Companies, and those for 2024 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

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

Glossary of terms and Alternative Performance Measures ('APM')

An alternative performance measure is 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. The APMs noted below are commonly used measures within the investment trust industry and serve to improve comparability between investment trusts.

Total assets

This is the Company's definition of Adjusted Total Assets, being the total value of all assets held less all liabilities (other than liabilities in the form of borrowings).
Net Asset Value

Also described as shareholders' funds, Net Asset Value ('NAV') is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue.
Net Asset Value (borrowings at book value)

Borrowings are valued at adjusted net issue proceeds. The Company's yen denominated loans are valued at their sterling equivalent and adjusted for their arrangement fees. The value of the borrowings on this basis is set out in note 11 on page 107 of the Annual Report and Financial Statements.
Net Asset Value (borrowings at fair value) (APM)

This is a widely reported measure across the investment trust industry. Borrowings are valued at an estimate of their market worth. The Company's yen denominated loans are fair valued using methodologies consistent with International Private Equity and Venture Capital Valuation ('IPEV') guidelines. The value of the borrowings on this basis is set out above. A reconciliation from NAV (with borrowings at book value) to NAV per ordinary share (with borrowings at fair value) is provided below.

Premium/discount (APM)

As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.

The average discount/premium (APM) as disclosed above is calculated by taking an average of the daily discount/premium percentage using NAV (with borrowings at fair value) for the year to 31 January 2024.

Ongoing charges (APM)

The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average NAV (with borrowings at fair value). The ongoing charges have been calculated on the basis prescribed by the Association of Investment Companies.
A reconciliation from the expenses detailed in the Income statement above is provided below:

Total return (APM)

The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend. The Company did not pay a dividend in the period, therefore, the one year total returns for the share price and NAV per share at book and fair value are the same as the percentage movements in the share price and NAV per share at book and fair value as detailed above.

Gearing (APM)

At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

Gearing represents borrowings at book less cash and cash equivalents expressed as a percentage of shareholders' funds.

Gross gearing is the Company's borrowings expressed as a percentage of shareholders' funds.

* Gearing: ((a) - (b)) ÷ (c), expressed as a percentage.

^† Gross gearing: (a) ÷ (c), expressed as a percentage.

Leverage

For the purposes of the Alternative Investment Fund Managers (AIFM) Regulations, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its NAV and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
Active share (APM)

Active share, a measure of how actively a portfolio is managed, is the percentage of the quoted equity portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.
Net liquid assets

Net liquid assets comprise current assets less current liabilities, excluding borrowings.
Share split

A share split (or stock split) is the process by which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases, the total value of the shares remains the same with respect to the pre-split value.
Treasury shares

The Company has the authority to make market purchases of its ordinary shares for retention as treasury shares for future reissue, resale, transfer, or for cancellation. Treasury shares do not receive distributions and the Company is not entitled to exercise the voting rights attaching to them.

Private (unlisted) company

A private (unlisted) company means a company whose shares are not available to the general public for trading and not quoted on a stock exchange.
Turnover

Turnover is calculated as the minimum of purchases and sales in a month, divided by the average market value of the portfolio, summed to get rolling 12 month turnover data.

Third party data provider disclaimer

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom.

No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

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

MSCI Index data

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction.

The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information collectively, the 'MSCI Parties' expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability or any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (msci.com).

Automatic Exchange of Information

In order to fulfil its obligations under UK tax legislation relating to the automatic exchange of information, Baillie Gifford Shin Nippon PLC is required to collect and report certain information about certain shareholders.

The legislation requires investment trust companies to provide personal information to HMRC on certain investors who purchase shares in investment trusts. Accordingly, Baillie Gifford Shin Nippon PLC must provide information annually to the local tax authority on the tax residencies of a number of non-UK based certificated shareholders and corporate entities.

Shareholders, excluding those whose shares are held in CREST, who come on to the share register will be sent a certification form for the purposes of collecting this information.

For further information, please see HMRC's Quick Guide: Automatic Exchange of Information - information for account holders gov.uk/government/publications/exchange-of-information-accountholders.

Sustainable Finance Disclosure Regulation ('SFDR')

The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a direct impact in the UK due to Brexit, however, it applies to third-country products marketed in the EU. As Shin Nippon is marketed in the EU by the AIFM, BG & Co Limited, via the National Private Placement Regime ('NPPR') the following disclosures have been provided to comply with the high-level requirements of SFDR.

The AIFM has adopted Baillie Gifford & Co's stewardship principles and guidelines as its policy on integration of sustainability risks in investment decisions.

Baillie Gifford & Co believes that a company cannot be financially sustainable in the long run if its approach to business is fundamentally out of line with changing societal expectations. It defines 'sustainability' as a deliberately broad concept which encapsulates a company's purpose, values, business model, culture, and operating practices.

Baillie Gifford & Co's approach to investment is based on identifying and holding high quality growth businesses that enjoy sustainable competitive advantages in their marketplace. To do this it looks beyond current financial performance, undertaking proprietary research to build up an in-depth knowledge of an individual company and a view on its long-term prospects. This includes the consideration of sustainability factors (environmental, social and/or governance matters) which it believes will positively or negatively influence the financial returns of an investment. The likely impact on the return of the portfolio from a potential or actual material decline in the value of investment due to the occurrence of an environmental, social or governance event or condition will vary and will depend on several factors including but not limited to the type, extent, complexity and duration of an event or condition, prevailing market conditions and existence of any mitigating factors.

Whilst consideration is given to sustainability matters, there are no restrictions on the investment universe of the Company, unless otherwise stated within in its investment objective and policy. Baillie Gifford & Co can invest in any companies it believes could create beneficial long-term returns for investors. However, this might result in investments being made in companies that ultimately cause a negative outcome for the environment or society.

More detail on the Manager's approach to sustainability can be found in the stewardship principles and guidelines document, available publicly on the Baillie Gifford website bailliegifford.com.

The underlying investments do not take into account the EU criteria for environmentally sustainable economic activities established under the EU Taxonomy Regulation.

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