Fidelity Japanese Values PLC · 2015-12-28 · Fidelity Japanese Values PLC Annual Report For the year ended 31 December 2006. Contents ... taken the tactical view that the Japanese

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Fidelity JapaneseValues PLCAnnual Report

For the year ended 31 December 2006

ContentsObjective & Highlights 1

Financial Summary 2

Chairman’s Statement 3

Manager’s Review 5

Distribution of the Portfolio 8

Summary of Performance 9

Corporate Information 12

Board of Directors 12

Directors’ Report 14

Business Review 14

General 16

Statement of Directors' Responsibilities 19

Corporate Governance Statement 20

Directors’ Remuneration Report 25

Independent Auditors’ Report 27

Financial Statements 28

Full Portfolio Listing 43

Notice of Meeting 47

Investing in Fidelity Japanese Values PLC 49

Objective & Highlights

To achieve long term capital growth from

an actively managed portfolio of securities

primarily of small and medium-sized

Japanese companies listed or traded

on Japanese stockmarkets.

Standardised Performance (on a total return basis)

01/01/2002 01/01/2003 01/01/2004 01/01/2005 01/01/2006to to to to to

31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/12/2006

NAV (debt at par) -19.4% +41.1% +17.9% +73.4% -35.6%

Share price -15.2% +45.7% +21.1% +110.9% -43.6%

Sources: Fidelity and Datastream(Past performance is not a guide to future returns)

Performance

NAV Total Return -35.6%

Share Price Total Return -43.6%

Russell Nomura Mid/Small Cap Index -18.6%

Equity Shareholders’ Funds £78.2m

Market Capitalisation £72.2m

Capital Structure: Ordinary shares of 25p, 98,207,453 in issue

William Thomson,Chairman

Fidelity Japanese Values PLC Annual Report 2006 Page 1

Financial Summary

2006 2005 %change

Assets at 31 DecemberTotal assets employed1 £91.80m £137.05m -33.0

Shareholders’ funds £78.17m £121.35m -35.6

Potential gearing 17.4% 12.9%

Actual gearing 16.9% 11.5%

NAV per share 79.59p 123.56p -35.6

Results for year to 31 December – see page 28

Capital (loss)/return per ordinary share (43.29)p 52.32p

Revenue loss per ordinary share (0.68)p (1.02)p

Stockmarket Data at 31 DecemberRussell Nomura Mid/Small Cap Index2 1.898 2.332 -18.6

Yen/£ exchange rate 233.21 202.46 -15.2

Share price year end 73.50p 130.25p -43.6

high 133.50p 131.00p

low 68.00p 61.75p

(Discount)/premium year end (7.7)% 5.4%

low (11.0)% (14.8)%

high 6.9% 5.7%

Returns for the year to 31 DecemberNAV -35.6% +73.4%

Share price -43.6% +110.9%

Russell Nomura Mid/Small Cap Index2 -18.6% +45.5%

Total Expense Ratio3 1.46% 1.83%

1 Total assets less current liabilities, excluding fixed term loan liabilities2 Sterling adjusted3 Operating expenses (excluding interest) before tax based on average daily shareholders’ funds


Page 2 Fidelity Japanese Values PLC Annual Report 2006

The Year’s Results: NAV 79.59p (-35.6%)The Share Price and the (Discount)/Premium:Price: 73.50p (down 56.75p; -43.6%) (Discount)/Premium: (7.7)% (5.4% premium in 2005)

PERFORMANCE REVIEWThe Japanese stockmarket produced disappointingresults in 2006. The performance of small cap stocks, in which your Company invests, was particularly adverse.As a result, it is with regret that I must report to you thatwe could not achieve our primary objective of increasingshareholder value. Further, we did not, this year,outperform the market - which is our secondary butequally important objective. The net asset value of theCompany fell by 35.6%, underperforming the RussellNomura Mid/Small Cap Index (-18.6%) which is ourbenchmark index of mid and small cap stocks.

After last year’s excellent results, it is naturally disappointingto report such a reversal of fortunes. Investing in smallcompanies does carry a degree of risk and returns areinevitably volatile. Over the longer term, which webelieve to be a more realistic period to consider, returnsare better – for example over three years the NAV hasincreased by 31.7%, compared with 30.0% for the RussellNomura Mid/Small Cap Index (in sterling terms).

Your Company’s performance is in part a result of itslarge exposure to mid and small cap stocks, which fell onheavy profit taking after achieving strong gains in 2005,for example the JASDAQ Index was down 34% in 2006and some of the smaller indices such as Mothers weredown as much as 56% (in yen terms). Given the exposureto these markets during 2006 the impact of stock pickingon the portfolio has been disappointing and has meantthat we have given up the strong stock selection resultswe saw in the previous two years. This was compoundedby the effects of gearing and in particular adversemovements in the yen:sterling exchange rate. Your Boardkeeps the level of borrowing under regular review and,while gearing was detrimental to performance over theyear, over the longer term it has proven beneficial toshareholders. All borrowing is in yen, and so thisprovides a natural hedge against currency movementsfor that part of the portfolio funded by borrowing.

MARKET REVIEW2006 proved not to be the year of continued growth inJapanese equity prices which many anticipated at thestart of the year. In January, the market was forced tocontend with the effects of the scandal at the internetcompany, Livedoor. In May, the Japanese market falteredwith the rest of the world’s major equity markets. Whileother markets rebounded from this setback, Japan failedto do so. Japan’s poor performance cannot be explainedby a large scale deterioration in economic and businessfundamentals. Rather, several factors compounded todamage confidence. Starting with the Livedoor scandal,the Japanese corporate sector has been witness to a

series of financial scandals that undermined someinvestors’ confidence. Further, some investors becameconcerned about the economic cycle and thesustainability, at least in the short term, of the Japaneseeconomic recovery and corporate earnings growth. The result is an investor base that is divided on its view of the attractiveness of the Japanese market. Some havetaken the tactical view that the Japanese economy isquite exposed to a global slowdown and that assetscould be better placed elsewhere. Others believe thatthe structural reforms in Japan not only make it attractivebut also that the current weakness makes shares moreattractive than they have been for some time. A tug ofwar between cyclical bears and structural bulls continuedthroughout the year, which resulted in a series of ralliesending in sell-offs.

THE PORTFOLIO MANAGERHaving been with Fidelity since 1981, Asako Kibe, thePortfolio Manager, will retire on 30 September 2007.Your Board, working closely with Fidelity, has agreed thatShinji Higaki should be appointed as Portfolio Managerto your Company. Shinji Higaki joined Fidelity as aresearch analyst in 1999, having previously worked as an auditor in Tokyo. He holds a BA from Keio Universityand an MBA from London Business School. Since joiningFidelity, he has gained a wealth of experience analysingcompanies in a range of sectors and is now one of themost experienced analysts within Fidelity’s Tokyo office.Shinji’s extensive sector coverage has equipped him witha broad and in-depth knowledge of the Japanese stockmarket. Shinji Higaki and Asako Kibe will work togetherover the next few months to ensure a smooth transitionin the management of the Company’s investments andwill continue to be supported by Fidelity’s research teamwhich is one of the largest in Tokyo, comprising 30analysts/research associates. Your Board would like totake this opportunity to record our thanks to Asako forher contribution to the Company and to welcome ShinjiHigaki as the new Portfolio Manager.


Chairman’s Statement

405060708090

100110120

31Dec2006

30Nov2006

31Oct

2006

30Sep2006

31Aug2006

31Jul

2006

30Jun

2006

31May2006

30Apr

2006

31Mar2006

28Feb2006

31Jan

2006

31Dec2005

-35.6%-43.6%

-18.6%

Performance for the year to 31 December 2006


Prices rebased to 100

NAV Share price Russell Nomura

Your Board believes that it is in the best interests of all shareholders that they should vote in favour of theCompany continuing in business as an investment trust at the Annual General Meeting.

THE BOARDYour Board continues to monitor corporate governanceissues, reviewing and updating processes as appropriate.

In accordance with the Listing Rules, Simon Fraser,President of Fidelity International’s European InstitutionalBusiness, will retire and, following an evaluation of hisperformance by his fellow Directors and on theirrecommendation will seek re-election at the forthcomingAnnual General Meeting. Having been on the Board formore than nine years I will also retire and, following anevaluation of my performance by my fellow Directors andon their recommendation, I will seek re-election at theforthcoming Annual General Meeting. In accordancewith the Company’s Articles of Association, which requirethat one third of the Directors retire by rotation eachyear, Nicholas Barber will also retire and, following anevaluation of his performance by his fellow Directors and on their recommendation will seek re-election at the forthcoming Annual General Meeting.

SHARE REPURCHASESPurchases of shares for cancellation are made at thediscretion of your Board and within guidelines set fromtime to time by the Board in the light of prevailingmarket conditions. Share repurchases will only be madewhen they will result in an enhancement to NAV for theremaining shareholders. In recent years sharerepurchases have been used sparingly due to theirimpact on liquidity and gearing and no repurchases weremade in the year to 31 December 2006. Your Boardcontinues to believe that the ability to repurchase sharesis a valuable tool and therefore a resolution to renewyour Company’s authority to repurchase shares will beproposed at the forthcoming Annual General Meeting.

ANNUAL GENERAL MEETING – 3 MAY 2007The Annual General Meeting will be held at midday on 3 May 2007 at Fidelity’s offices at 25 Cannon Street in theCity of London and all investors are encouraged to attend.It is the one occasion in the year when shareholders canmeet all of the Directors as well as representatives fromthe Manager. You may have questions, comments orsuggestions which we would welcome. Following themeeting the Portfolio Manager will give a presentationon the past year and the prospects for the current year.

William ThomsonChairman8 March 2007


Chairman’s Statement

THE MARKET AND OUTLOOKThe Japanese stockmarket produced disappointingresults in 2006. The performance of small cap stocks, inwhich your Company invests, was particularly adverse. Thisdoes not, however, reflect any wholesale deterioration ineither economic or corporate fundamentals within Japan,and your Board therefore believes that we are nearingthe end of a correction in the share prices of small capstocks. Company valuations have reduced substantiallyand, on valuation grounds, the underperformance ofJapanese small cap stocks is increasingly hard to justify.Your Board and the Manager believe that long termvalue is evident in the Japanese small cap universe,where earnings growth momentum remains healthy.

Looking ahead, while it is important to keep an eye onpotential risk factors that could derail the marketrecovery, a number of emerging trends suggest that theJapanese equity market will go higher. We believe thatthe current slowdown in personal consumption does notspell the end of Japan’s economic recovery. The currentsituation is somewhat similar to the soft patch thatoccurred in the summer of 2004. More significant are thestructural improvements which have occurred includingtighter supply/demand conditions in the labour market, a rebound in asset prices, a healthier financial systemand a sounder corporate sector. The Japanese economyis now better able to withstand downside risks than it hasbeen for many years.

While it is still possible that a global slowdown will impactJapan, the Board believes that any such slowdown wouldnot reflect more than short term cyclical issues. Conversely,the structural arguments for investing in Japan are longerterm in nature and remain intact.

CONTINUATION VOTEEvery three years your Board of Directors puts a resolutionto shareholders concerning the continuation of theCompany as an investment trust. Your Board takes thisresolution most seriously and certainly does not take arecommendation to continue for granted.

Your Board has considered the prospects for theeconomy of Japan, for the corporate sector and itsprofits and finally for those of smaller companies, inparticular with a view to assessing whether or not thereare good prospects for a rise in the net asset value over the next three years. Your Board has also met theCompany’s stockbrokers to discuss shareholders’ views.

Finally, your Board has carefully considered the returnsachieved by the Company’s portfolio over the three yearperiod since the last continuation vote. These aredetailed in the Business Review and confirm that thedecision to continue as an investment trust was positivefor shareholders who have remained invested over thepast three years.


Manager’s Review

PORTFOLIO REVIEWIn this environment, the Company’s performancesuffered, due to its large exposure to mid-and smaller-cap stocks. The single largest detractor was theJASDAQ-listed small cap stock Telewave, a provider of IT equipment and maintenance services for smallcompanies. This company’s share price declined sharplyas it revised its sales and earnings projections for theyear to March 2007 due to declining profitability as a result of an increase in the number of sales staff.Although we trimmed positions in Telewave and tookprofits, we kept a holding in the portfolio, as we remainof the view that the company is well positioned tobenefit from increasing capital spending in ITinfrastructure by domestic small companies. Anothermajor detractor was Sodick, which was also one of theprevious year’s best performing stocks in the portfolio.While this niche manufacturer of electrical dischargemachines has a strong presence in Asia, where growthprospects appear favourable, a stronger Thai baht haseroded its operating margins because it has a factory in Thailand from which products are exported to Japan,the rest of Asia, Europe and the US. Moreover, investorsbecame increasingly concerned about rising costs, as it appeared that the company was focused on gainingmarket share at the expense of profitability. While wereduced our holding in Sodick partly due to the nearterm contraction in profit margins, we remainedoverweight relative to the benchmark. In our view, the company remained attractive in the long termsupported by its dominant global market share andniche technological advantages.

A number of internet related stocks, that had rankedamong the largest contributors to the Company’s relativereturns in 2005, also hurt performance in 2006. Whiletheir share price valuations had, with the benefit of

PERFORMANCE REVIEWAs shown in the Financial Summary on page 2, the netasset value of the Company fell by 35.6% compared witha fall in the Russell Nomura Mid/Small Cap Index, of18.6% and the Tokyo Stock Exchange First Section Index(“TOPIX”), which fell 11.4% (all figures in sterling terms).

Japanese equities fell in value in the first half of 2006.This was in part a reaction to what was, in hindsight, anexcessive rise during the fourth quarter of 2005. A spateof scandals, concerns about a contraction in globalliquidity, concerns about the outlook for the US economyand Japanese companies’ conservative profit projectionsall undermined investor confidence. From June onwards,a series of rallies ended in sell-offs, each triggered byfears of a cyclical downturn in the global economy andlacklustre domestic consumption. As a result, Japanremained a highly cyclical market. This was particularlydisappointing, as many investors had expected thatdomestic demand and the return of modest inflationwould enable Japan’s economy to decouple from theglobal cycle.

During the year under review, the Japanese marketbecame increasingly polarised as large cap stocks had been undervalued relative to smaller companies,significantly outperforming mid-to-smaller cap stocks.The Financial Supervisory Agency’s investigation intoLivedoor’s accounting irregularities triggered profit taking on a range of small cap stocks that had postedsignificant gains since 2003. Earnings downgrades byinternet related companies also weighed on marketviews of emerging growth companies listed on theJASDAQ, TSE Mothers Section, and Hercules markets.Investor sentiment towards small cap stocks did notrecover throughout the year.

Fidelity Investments International

The Company is managed by FidelityInvestments International (which isauthorised and regulated by the FinancialServices Authority). Fidelity InvestmentsInternational is part of the FidelityInternational Limited group which, as at 31December 2006, had total assets undermanagement exceeding £140.9 billion.

Asako Kibe (age 50)

Asako Kibe is a fund manager with FidelityInvestments Japan Limited based in Tokyo.She joined Fidelity in 1981 as an equityresearch analyst having attained a Bachelorof Arts from the University of Hawaii. Asako will retire from Fidelity at the end of September 2007.

Shinji Higaki (age 37)

Shinji Higaki will take full responsibility for themanagement of the Company's portfolio onMs Kibe's retirement at the end of September2007. He joined Fidelity in 1999 as anequity research analyst prior to which hewas employed as an auditor of Chuo AuditCorporation in Tokyo. Shinji received anMBA from the London Business School anda Bachelor of Arts from Keio University.


Manager’s Review

hindsight, become stretched, a series of financialscandals – the accounting manipulation by Livedoorbeing the most publicised - compounded by downwardearnings revisions by key internet based serviceproviders such as Usen, Index and Opt underminedconfidence in such companies. Livedoor aside, wemaintained overweight positions in a number of thesecompanies as we continued to believe in their long termgrowth potential. However, this proved to bedetrimental, particularly during the second quarter of2006 when the market’s attention moved from emerginggrowth small cap stocks to large cap blue chips.

Elsewhere, the share price of consumer loan provider NIS Group, formerly known as Nissin, fell sharply due toconcerns about the regulatory changes in the consumerfinance industry. As the government took initiatives tolower the maximum lending rates for consumer loans,investors shied away from consumer loan providers,whose profit margins are expected to shrink. Despite this regulatory change, we continued to believe that NISGroup remains a promising investment as its long termearnings driver should be its real estate financing andleasing business and a recovery of the real estate marketis increasingly evident.

On a positive note, overweight positions in SumitomoTitanium, Fujikura and Mitsubishi Estate added value.While higher titanium prices supported the performanceof Sumitomo Titanium, Fujikura enjoyed a recovery indemand for optical fibre and other electronic parts.

During the year under review, several key changes weremade to the portfolio positioning.

First, as described above, we reduced positions in anumber of internet-based service providers in the serviceand information & communications sectors, as theirgrowth appeared to be unsustainable and their shareprice valuations too expensive.

Second, we increased positions in various technologymanufacturers. A number of new holdings were added tothe portfolio, including Sumco, Micronics Japan, MurataManufacturing, Konica Minolta and Elpida Memory.These are makers of silicon wafers, electronic parts andmaterials that are seeing strong demand from consumerelectronics and automobile companies. As a result, the weight of the electrical appliances sector significantlyincreased and represented nearly 20% of the portfolio as at the end of the review period.

Third, we added to positions in speciality retailers withstrong sales growth and improvements in profit margins.These included Yamada Denki (consumer electronicsretailer), Shimamura (clothing retailer), ABC-Mart(discount shoe retailer) and Tokyu Store Chain(supermarket chain operator). Although personal

consumption was not as strong as we had expected, we maintained a high level of conviction in individualstock names in the retail sector.

Fourth, we took profit in REIT (Real Estate InvestmentTrust) managers in the service sector. To replace theseholdings, we invested in shares of real estate developers,Mitsubishi Estate and Sumitomo Realty & Development,which are better positioned to benefit from rising assetprices in the central Tokyo area and the high levels of office occupancy. As a result, the real estate sector was overweight in the portfolio as at the end of thereview period.

OUTLOOKOver the short term, Japanese share prices are likely to remain sensitive to swings in overseas markets anddomestic economic data. However, the relativeunderperformance which we have already seen in theJapanese stockmarket suggests that concerns aboutglobal and domestic economic growth and corporateearnings have already been largely discounted.

On the macro economic front, personal consumption has been the biggest disappointment to many investorswho envisaged growth driven by domestic demand.Although consumer confidence has remained at highlevels and inflation expectations are rising, anaemicwage growth and unseasonable weather stalledconsumer spending growth. However, we continue tobelieve that the retirement of the baby boomergeneration will in due course translate into wage growth(due to labour shortages) and consumer spending.

As Japan breaks free from the complexities of adeflationary environment, a more normal growth patternis expected to emerge. Inflation is beginning to reappearin the economy, led by a recovery in property prices.After years of underinvestment in the country’s capitalinfrastructure, pent-up replacement demand and risinginvestment in automation should support capitalexpenditure by companies and underpin the domesticdemand that failed to live up to expectations in 2006.

Japanese companies’ earnings projections still appearoverly cautious, particularly in the light of earnings trendssince the start of fiscal year 2002 which have not shown a contraction in earnings even during temporary lulls ineconomic momentum. As a result, it is highly likely thatwe will start to see a rash of full year earnings upgradesfrom January onwards.

While domestic demand will require careful monitoring,we should not lose sight of the fact that Japan’seconomy is now on a much more stable footing than at any time since the early nineties. This has led us tobelieve that the structural case for investing in Japanremains intact.


Manager’s Review

In the Japanese small cap universe, share prices havefallen over the year and an increasing number of smallcap stocks appear to offer attractive value relative totheir growth prospects. Any share price weakness shouldbe viewed as an opportunity to invest in high qualitycompanies at cheaper prices. Our stock selection willcontinue to focus on companies with improved earningsvisibility, as well as special situations that are likely tobenefit from corporate restructuring or industryconsolidation.

Fidelity Investments International8 March 2007

Mistubishi EstateInvests in real estate properties 2,177 2.4

Sumitomo Realty & DevelopmentDevelops, manages and sells real estate 2,025 2.2

Daiwa House IndustryDesigns and builds residential, commercial and institutional buildings 1,811 2.0

SumcoManufactures silicon wafers for the semiconductor industry 1,600 1.7

MitsuiGeneral trading 1,519 1.7

Ryohin KeikakuRetailer 1,516 1.6

FanclProduces and sells additive-free skin care cosmetics 1,479 1.6

Yaskawa Electric CorporationManufactures and markets servomotors, controllers, inverters and industrial robots 1,472 1.6

SodickDevelops, manufactures and sells electric machines and equipment 1,437 1.6

Otsuka CorporationDesigns, constructs and develops computer information systems and software 1,351 1.5

Top 10 Holdings (2005: 23.5%) 16,387 17.9Other Holdings (131) (2005: 76.1%) 75,230 81.9

91,617 99.8Cash and other net current assets (2005: 0.4%) 181 0.2

91,798 100.01 % of total assets less liabilities, excluding loan liabilities

Ten Largest Investments as at 31 December 2006(The full portfolio is set out on pages 43 to 46) %1

Fair Value£’000


Distribution of the Portfolio1at 31 December 2006

2006 2005Equities % %

Electrical Machinery 17.8 8.9

Retail Trade 13.3 9.2

Wholesale Trade 9.4 10.5

Machinery 8.6 10.8

Services 7.0 15.4

Real Estate 6.1 -

Information & Communications 5.0 10.6

Chemicals 4.9 4.3

Banks 4.7 4.4

Construction 4.4 0.6

Other Financing Business 2.5 3.6

Metal Products 2.4 1.3

Steel Products 2.4 0.5

Non-ferrous Metals 2.1 3.9

Textiles & Apparel 1.7 0.8

Electric Power & Gas 1.6 -

Land Transportation 1.6 2.0

Transport Equipment 1.6 0.5

Other Products 0.7 0.1

Glass & Ceramics 0.6 0.9

Securities 0.6 4.3

Marine Transportation 0.5 -

Precision Instruments 0.2 0.6

Foods 0.1 0.7

Insurance - 2.7

Oil & Coal Products - 1.4

Warehousing & Harbour Transport Services - 1.1

Pharmaceutical - 0.5

Cash & other net current assets 0.2 0.4

Total 100.0 100.0 n 2006 n 2005

1 Distribution of the portfolio shown as a percentage of total assets less liabilities excluding fixed term loan liabilities


Summary of Performance

The Company was launched on 17 November 1994 with one warrant attached to every five shares (the finalsubscription date for the warrants was 30 April 2004).The original subscription price for each share was £1.The Company is a member of The Association ofInvestment Companies (“AIC”) from whom generalinformation on investment trusts can be obtained by telephoning 020 7282 5555 (email address:[email protected]).

PRICE INFORMATIONThe market price of the ordinary shares is published dailyin the Financial Times under the heading “InvestmentTrusts”. The ordinary share price is also published in The Times, The Daily Telegraph and The Independent.You can also obtain current price information by phoningFT Cityline on 0906 843 then 4021. The Reuters code for Fidelity Japanese Values is FJV.L.

NAV INFORMATIONThe net asset value of the Company is calculated on adaily basis and released to the London Stock Exchange.

CAPITAL GAINS TAXYour Directors have been advised that, for the purposesof calculating an investor’s possible liability to capitalgains tax, the base cost of ordinary shares and warrants,acquired at the time of the Company’s launch, is 90.21p.All UK individuals under present legislation are permittedto have £8,800 of capital gains in the current tax year2006/2007 (£8,500 2005/2006 tax year) before beingliable for capital gains tax. Capital gains are treated asthe top slice of income and will be taxable at 10% fortaxpayers up to the starting rate limit, 20% for basic rate taxpayers or 40% for higher rate taxpayers.

Historical Recordas at 31 December 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

Total assets employed (£m) 92 137 86 76 59 71 100 215 59 48 72

Shareholders’ funds (£m) 78 121 70 59 42 54 73 186 42 33 56

NAV per share (p) 79.59 123.56 71.26 60.42 42.82 53.12 69.81 176.88 40.20 31.48 53.12

Share price (p) 73.50 130.25 61.75 51.00 35.00 41.25 63.75 161.75 28.75 26.50 47.25

Warrant price (p) n/a n/a n/a 0.35 1.50 7.50 14.25 82.50 4.75 6.50 11.25

(Discount)/premiumto NAV (%) (7.7) 5.4 (13.3) (15.6) (18.3) (22.3) (8.7) (1.4) (28.5) (15.8) (11.1)

Revenue loss per ordinary share (p) (0.68) (1.02) (0.89) (0.65) (0.69) (1.22) (2.01) (1.64) (0.65) (0.66) (0.99)

Dividend per ordinary share (p) nil nil nil nil nil nil nil nil nil nil nil

Cost of running trust (total expense ratio) (%) 1.46 1.83 1.83 1.93 1.63 1.93 1.52 1.50 1.88 1.66 1.45

Actual gearing ratio (%) 16.9 11.5 22.0 22.6 32.6 28.2 28.3 11.6 23.9 24.5 17.1

NAV (%) -35.6 +73.4 +17.9 +41.1 -19.4 -23.9 -60.5 +340.0 +27.7 -40.7 -33.2

Share price performance (%) -43.6 +110.9 +21.1 +45.7 -15.2 -35.3 -60.6 +462.6 +8.5 -43.9 -37.0




0

50

100

150

200

250

31Dec2006

31Dec2005

31Dec2004

31Dec2003

31Dec2002

31Dec2001

31Dec2000

31Dec1999

31Dec1998

31Dec1997

31Dec1996

31Dec1995

31Dec1994

15Mar1994

-18.5%-16.9%-16.3%

%


Total return performance from launch to 31 December 2006

0

20

40

60

80

100

120

140

160

180

200

31Dec2006

31Dec2005

31Dec2004

31Dec2003

31Dec2002

31Dec2001

31Dec2000

31Dec1999

31Dec1998

31Dec1997

31Dec1996

31Dec1995

31Dec1994

15Mar1994

73.50p 79.59p

Pence

NAV and share price in pence from launch to 31 December 2006



NAV Share price

Sources: Fidelity and Datastream




-30

-25

-20

-15

-10

-5

0

5

10

31Dec2006

31Dec2005

31Dec2004

31Dec2003

31Dec2002

31Dec2001

31Dec2000

31Dec1999

31Dec1998

31Dec1997

31Dec1996

31Dec1995

31Dec1994

15Mar1994

-7.7%%

Share price (discount)/premium to NAV from launch to 31 December 2006

50

100

150

200

250

300

31Dec2006

31Dec2005

31Dec2004

31Dec2003

31Dec2002

31Dec2001

31Dec2000

31Dec1999

31Dec1998

31Dec1997

31Dec1996

31Dec1995

31Dec1994

15Mar1994

-0.7%-2.7%

%

Total return performance relative to the index from launch to 31 December 2006

Based on figures at month end only



Sources: Fidelity and Datastream


Corporate Information

BOARD OF DIRECTORSWilliam Thomson (Chairman)Nicholas Barber, CBE (Senior Independent Director)Simon FraserPhilip KayDavid Miller, OBE

MANAGER, SECRETARY AND REGISTERED OFFICEFidelity Investments InternationalBeech Gate, Millfield LaneLower KingswoodTadworthSurreyKT20 6RP

FINANCIAL ADVISERS AND STOCKBROKERSDresdner Kleinwort30 Gresham StreetLondonEC2P 2XY

INDEPENDENT AUDITORSRSM Robson Rhodes LLPChartered Accountants and Registered Auditors30 Finsbury SquareLondonEC2P 2YU

BANKERS AND CUSTODIANJPMorgan Chase Bank (London Branch)125 London WallLondonEC2Y 5AJ

REGISTRARSCapita RegistrarsThe Registry34 Beckenham RoadBeckenhamKentBR3 4TU

LAWYERSSlaughter and MayOne Bunhill RowLondonEC1Y 8YY

WILLIAM THOMSON1

(Chairman) (age 66, date ofappointment: 1 May 1997,date of appointment asChairman: 31 December2004) is Chairman of E G Thomson (Holdings)Limited. This business is primarily involved in the

provision of shipping agency services in Asia and ininternational logistics management. He is also non-executive Chairman of John Menzies plc and BritishAssets Trust plc and a non-executive director ofseveral companies including Dobbies GardenCentres plc.

NICHOLAS BARBER, CBE2

(Senior IndependentDirector) (age 66, date of appointment: 4December 2000, date of appointment as SeniorIndependent Director: 10March 2005) is Chairman

of Bolero International Limited and Kappa ITVentures (GP) Limited. His other directorshipsinclude The Maersk Co. His executive career waswith Ocean Group plc (later Exel PLC), with whomhe spent a year in Japan; he was Group ChiefExecutive from 1986 to 1994.


Board of Directors

SIMON FRASER3

(age 47, date ofappointment: 11 May 2000)has been President of FidelityInternational’s EuropeanInstitutional Business since2005. He started his career atFidelity in 1981 as an analystand he has spent a number

of years in Japan, most recently as Chief InvestmentOfficer for the Asia/Pacific region. He returned to the UK in 1999 to take up the position of ChiefInvestment Officer for Fidelity International, aposition he held until 2005. He was the PortfolioManager for Fidelity Japanese Values PLC from itslaunch in 1994 until August 1997. He is also adirector of Fidelity European Values PLC.

PHILIP KAY2

(age 51, date of appointment:29 October 2004) is a formerManaging Director andSenior Advisor of CreditSuisse First Boston where heran the global Japanese cashequity business. He is adirector of a Japanese hedgefund, Akamatsu Fund, and

was previously a director of Schroder Securities Limitedand of Smith New Court PLC.

DAVID MILLER, OBE2

(age 60, date ofappointment: 29 October2004) is a director of FBGInvestment Limited and a number of other unquotedcompanies. He was withRobert Fleming Group from1972 to 1991, was resident

in Japan for nearly eight years and was head of theFleming group’s Tokyo office.

1 Chairman of the Audit, Management Engagement and Nomination and Remuneration Committees2 Member of the Audit, Management Engagement and Nomination and Remuneration Committees3 Member of the Nomination and Remuneration Committee


Directors’ Report

The Directors have pleasure in presenting their reporttogether with the audited financial statements of theCompany for the year ended 31 December 2006.

The Company was incorporated in England and Wales as a public limited company on 7 January 1994 underthe name of Savemargin Public Limited Company withthe registered number 2885584.

STATUSHM Revenue & Customs has approved the Company as an investment trust under Section 842 of the Incomeand Corporate Taxes Act 1988 for the year ended 31December 2004 and has granted provisional approval for the year ended 31 December 2005, although thisapproval may be subject to review should there be any subsequent enquiry under Corporation Tax SelfAssessment. The Directors are of the opinion that theCompany has subsequently conducted its affairs in amanner which will satisfy the conditions for continuedapproval as an investment trust under that Section.

The Company is not a close company and has noemployees. The Company has given notice to theRegistrar of Companies of its intention to carry onbusiness as an investment company as defined in Section266 of the Companies Act 1985 and operates as such.

BUSINESS REVIEW

INTRODUCTIONThe Company is required to present a “BusinessReview”, which provides a fair review of the Companyand a description of the principal risks and uncertaintiesfaced and includes an analysis of the performance of theCompany, both during the financial year and the positionat the year end, taking into account its objective,strategy and risks and how these are measured using Key Performance Indicators (“KPIs”).

OBJECTIVE & STRATEGYThe primary objective of your Company is to enhanceshareholder value, achieved through long term capitalgrowth. The Company aims to achieve this with anactively managed portfolio of investments, consistingprimarily of small and medium sized Japanesecompanies listed or traded on Japanese stock markets.As part of the strategy the Board has delegated themanagement of the investment portfolio and certainother services to Fidelity Investments International.

ACTIVITYThe Company’s activity is to pursue the objectivethrough operating as an investment trust company. A review of the year’s activities and an indication of likely future developments are given in the Chairman’sStatement on pages 3 and 4 and in the Manager’sReview on pages 5 to 7.

FIDELITY’S INVESTMENT MANAGEMENTPHILOSOPHY, STYLE AND PROCESSFidelity’s distinctive investment approach is “bottom up”stock picking – investing in companies on the basis oftheir underlying strengths, facilitated by extensiveresearch capabilities. Fidelity International has over 160 analysts and research associates, including 30 basedin Tokyo with a hands-on approach to knowledgeaccumulation. Fidelity’s analysts evaluate companies,meet their management and workforce and interpret the effects of international and local events. They contacthundreds of companies every week. This first handresearch is fundamental to Fidelity’s ability to seek thesuccess stories of the future. Fidelity International hasover 80 portfolio managers, 19 of whom are based inTokyo. Portfolio managers work closely with the Fidelityanalyst team and also have access to a wide range ofresearch produced by third parties.(Data as at 30 September 2006)

Year ended 3 Years ended 5 Years ended 31 December 2006 31 December 2006 31 December 2006

Net Asset Value Return -35.6% +31.7% +49.8%

Share Price Return -43.6% +44.1% +78.2%

Russell Nomura Mid/Small Cap Index (in sterling terms) -18.6% +30.0% +47.6%

The Directors also monitor the various factors contributing to investment results, as set out in the attribution analysisopposite (all data in pence per share):

KEY PERFORMANCE INDICATORS (“KPIs”)Given the identification of the Company’s objective and strategy, the Board has identified KPIs against whichperformance can be measured, detailed below:


Directors’ Report

RESULTS AND DIVIDENDSThe revenue column of the Income Statement shows a deficit after taxation for the year of £666,000 andtherefore the Directors do not recommend the payment of a dividend. This amount has been charged to reserves.

NET ASSET VALUEInvestments were valued at £91,617,000 as at 31December 2006. Shareholders’ funds amounted to£78,166,000 resulting in a net asset value per share of 79.59p. Changes to investments are shown in note 8 to the financial statements on page 35.

RISKS, UNCERTAINTIES AND RISKMANAGEMENTThe Board, with the assistance of the Manager, hasdeveloped a risk matrix which, as part of the internalcontrol process, identifies the key risks that the Companyfaces. The matrix has identified strategic, marketing,investment management, statutory and administrativeand operational and support function risks. The key risksidentified within this matrix are:

Market The Company’s assets consist mainly of listed securitiesand the principal risks are therefore market related.

Investment managementThe risk that the Manager makes poor investmentdecisions leading to underperformance.

The Board relies on the Manager’s skills and judgementto make investment decisions based on research andanalysis of individual stocks and sectors.

The Board reviews the performance of the asset value of the portfolio against the Company’s benchmark andcompetitors and the outlook for the market with theManager at each Board meeting. The emphasis is onlong term investment performance and the Boardaccepts that by targeting long term results the Companyrisks volatility in the shorter term.

Share price The risk that the share price does not reflect the value of the underlying investments.

The Board is not able to control the share price at whichthe Company’s shares trade. However, it can have amodest influence in the market by maintaining the profileof the Company through an active marketing campaignand, under certain circumstances, through repurchasingshares.

CurrencyThe Company’s total return and balance sheet areaffected by foreign exchange movements because theCompany has assets and income which are denominatedin yen whilst the Company’s base currency is sterling.While it is the Company’s policy not to hedge currency,as the borrowings are in yen that part of the investmentportfolio funded by borrowing is naturally hedged againstchanges in the yen:sterling exchange rate. Further detailcan be found in Note 17 to the financial statements.

GearingThe Company’s policy is to be geared in the belief thatlong term investment results will exceed the cost ofborrowing. The effect is that if markets move down thenet asset value will be adversely impacted and if marketsmove up the net asset value will be positively impacted.

ATTRIBUTION ANALYSISYear to 3 Years to

Year ended 3 years to31 December 2006 31 December 2006

(pence) (pence)

Opening Net Asset Value 123.56 60.42

Impact of the Index (in yen terms) -7.71 35.61

Impact of stock selection (in yen terms) -14.81 -1.70

Impact of currency -15.19 -17.03

Impact of gearing (in yen terms) -3.77 6.75

Impact of other costs -2.49 -4.46

Net Asset Value at 31 December 2006 79.59 79.59

As well as the statistics set out above, the Directors also regularly monitor other relevant statistics, including:• Investment performance compared to the Company’s peer group• The level of gearing• The Company’s total expense ratio• The discount or premium of the Company’s share price to net asset value


Directors’ Report

Your Board is responsible for the level of gearing in theCompany and reviews the position on a regular basis.

Governance/regulatory, financial, operational administration While it is believed that the likelihood of poor governance,compliance and operational administration by other thirdparty service providers is low, the financial consequencescould be serious, including the associated reputationaldamage to the Company. Your Board is responsible for theCompany’s system of internal control and for reviewing itseffectiveness. Details of this process are provided in theCorporate Governance Statement within this annual report.

Other RisksOther risks which the Company faces, and which formpart of the market/investment management risks referredto above are included in note 17 to the financialstatements together with the summaries of the policiesfor managing these risks. The risks identified comprise:equity price risk; market price risk; foreign currency risk;interest rate risk and liquidity risk.

GENERAL

SHARE ISSUESNo shares were issued during the year (2005: nil).

SHARE REPURCHASESAt the Annual General Meeting held on 27 April 2006the Company’s shareholders passed a special resolutionwhich granted the Directors authority to purchase up to14,721,297 ordinary shares in the market for cancellation.No shares were repurchased for cancellation during theyear. The authority expires on 3 May 2007 and a specialresolution to renew the authority will therefore be put toshareholders for approval at the forthcoming AnnualGeneral Meeting.

As at 31 December 2006, the total number of shares in issue was 98,207,453 (2005: 98,207,453).

GEARINGThe Company’s level of net gearing is now 15.9% andthe Board has instigated a policy that it will in normalcircumstances maintain its net gearing level at below 30%.

In the year to 31 December 2006 the Company’s gearing reduced the Company’s NAV by approximately3.77 pence.

The Board is responsible for the level of gearing in theCompany and continues to review it on a regular basis.

FINANCIAL INSTRUMENTS RISKSThe financial instruments risks faced by the Company are shown in note 17 to the financial statements.

POLITICAL AND CHARITABLE DONATIONSThe Company has not made any political or charitabledonations in the year (2005: nil).

PAYMENT OF CREDITORSThe Company’s principal supplier is the Manager who is paid in the month following the end of each calendarquarter, in accordance with the terms of the ManagementAgreement. The Company’s policy for all suppliers, is tofix terms of payment when agreeing the terms of eachbusiness transaction to ensure that the supplier is awareof these terms and to abide by the agreed terms ofpayment. The Company did not have any trade creditorsduring the year (2005: nil). Other suppliers are paid inaccordance with the individual payment terms agreedwith each supplier.

MANAGEMENT COMPANYA Management and Secretarial Services Agreement (the “Agreement”) dated 6 February 2006 (amendingthe Agreement dated 22 February 1994), was madebetween the Company and Fidelity InvestmentsInternational (the “Manager”), under which the Managerhas agreed to provide investment management,administrative and secretarial services to the Company.Details of the Agreement are set out in the CorporateGovernance Statement on pages 22 and 23.

The Manager also provides certain other services,including marketing and administration, in connectionwith the Fidelity Investment Trust Share Plan, the FidelityInvestment Trust Personal Equity Plan and the FidelityIndividual Savings Account under an Agreement dated 12March 1996. Fees payable under this Agreement for theyear to 31 December 2006 were £57,500 (2005: £41,830).

An amount of £398,700 (2005: £455,300) was due to theManager under the above agreements at 31 December2006 and is included in creditors in note 10 on page 36.

Fidelity has adopted a broker segmentation policy, whichhas reduced the number of brokers used, and allows it toconcentrate on those brokers who, in its opinion, offerthe best service in terms of overall execution. Thesebrokers are Fidelity’s “core” brokers. At the same time,the Manager evaluates the research provided by otherbrokers and uses some of them for their research. Thesebrokers are called Secondary State Research firms (“SSRs”).

As a consequence of the policy, the “core” brokers earna larger percentage of the commission paid. These “core”brokers pay away some of the increased commissionearned to the SSRs to compensate them for the researchprovided to Fidelity. Under FSA regulations this type ofpayment from one broker to another is currently treatedas “softing”. The Manager’s soft commission policycomplies with the UK regulations. Fidelity adopts a bestexecution policy that applies to all transactions in all


Directors’ Report

instruments, regardless of the fund or account or locationof the trading desk.

The Manager has an arrangement with certain brokerswhereby a portion of commissions from securitytransactions may be paid to the Company to reducetransaction costs. Amounts received by the Companyunder this arrangement are credited to capital. In the yearto 31 December 2006 £8,200 was received (2005: £3,400).

The Company participates in the Manager’s interfundprogramme whereby Fidelity’s traders, on occasion,identify situations where one fund managed by Fidelity is buying the same security that another fund is selling. If a trader can confirm that it would be in the interests of both accounts to execute a transaction between themrather than in the market then an interfund transaction is executed. There is a regulatory requirement on theManager to obtain best execution and no individual deal is entered into which prevents compliance with this requirement.

Simon Fraser is President of Fidelity International’sEuropean Institutional Business, Fidelity InternationalLimited is the holding company of Fidelity InvestmentsInternational. He is also a director of other companieswithin the Fidelity International group of companies.

As at the date of this report Fidelity International Limitedhas an interest in 6,854,100 shares in the Company (6.98%).

SOCIALLY RESPONSIBLE INVESTMENTThe Manager’s primary objective is to produce superiorfinancial returns to investors. It believes that highstandards of corporate social responsibility (“CSR”) makegood business sense and have the potential to protectand enhance investment returns. Consequently, itsinvestment process takes social, environmental andethical issues into account when, in its view, these have a material impact on either investment risk or return.

The Manager recognises and supports the view thatsocial, environmental and ethical best practice should be encouraged so long as the potential for financialreturn is not reduced. It favours companies committed to high standards of CSR and to the principles ofsustainable development.

The Manager does not set out to manage an “ethicalinvestment fund” and does not screen out companiesfrom its investment universe purely on the grounds of poorsocial environmental or subjective ethical records. Insteadit adopts a positive engagement approach whereby social,environmental and ethical matters are discussed withmanagement with the aim of improving procedures andattitudes. The Manager believes that this is the mosteffective way to improve the attitude of business towardsCSR and the Board endorses this approach.

CORPORATE ACTIVISMThe Board believes that the Company should, whereappropriate, take an active interest in the affairs of thecompanies in which it invests and that it should exerciseits voting rights at their general meetings. Unless therewere any controversial issues (which were then referred to the Board), it delegates the responsibility forcorporate activism and shareholder voting to Fidelity.These activities are reviewed annually.

DIRECTORSDetails of the Directors who served during the year to 31 December 2006 are set out on pages 12 and 13.

In accordance with the Listing Rules, Simon Fraser, as an employee of the Manager, is subject to annual re-election. He has waived his entitlement to Director’s fees.

Having served for more than nine years, Mr WilliamThomson will seek annual re-election and, being eligible,offers himself for re-election at the forthcoming AnnualGeneral Meeting.

Nicholas Barber will retire by rotation and, being eligible,offers himself for re-election at the forthcoming AnnualGeneral Meeting.

No Director is under a contract of service with theCompany and no contracts existed during or at the end of the financial period in which any Director wasmaterially interested and which was significant in relationto the Company’s business, except as disclosed inrelation to Simon Fraser’s interest in the ManagementAgreement. There have been no other related partytransactions requiring disclosure under FinancialReporting Standard (“FRS”) 8.

The interests of the Directors in the ordinary shares of the Company as at 31 December 2006 and 31December 2005 were as in the table below. There havebeen no changes in these holdings since the year end:

31 December 2006 31 December 2005shares shares

Nicholas Barber 10,000 10,000

Simon Fraser 30,000 30,000

Philip Kay 10,144 10,144

David Miller 20,000 20,000

William Thomson 15,000 15,000

DIRECTORS’ AND OFFICERS’ LIABILITYINSURANCEIn addition to benefits enjoyed under the Manager’s globalDirectors’ and Officers’ liability insurance arrangements, theCompany maintained insurance cover for its Directors andOfficers under its own policy as permitted by Section 309Aof the Companies Act 1985 (as amended).


Directors’ Report

SUBSTANTIAL SHARE INTERESTSAs at the date of this report, 16.56% of the issued sharecapital was held by investors in the Fidelity IndividualSavings Account, Fidelity Investment Trust PEP and theFidelity Investment Trust Share Plan.

As at the date of this report notification had beenreceived of the following interests in 3% or more of the voting rights and/or issued share capital of the Company:

ANNUAL GENERAL MEETINGAt the Annual General Meeting, resolutions will beproposed to renew the Directors’ authority to allotsecurities in the Company. The authorities sought bythese resolutions are to replace the existing powers ofthe Directors which expire on the date of the AnnualGeneral Meeting and will provide the Directors with theflexibility to issue further ordinary shares if they deem itappropriate to do so. By law, directors are not permittedto allot new shares (or to grant rights over shares) unlessauthorised to do so by shareholders.

Resolution 8 provides the Directors with a generalauthority to allot securities in the Company up to anaggregate nominal value of £1,227,593. If passed, thisresolution will enable the Directors to allot a maximum of 4,910,372 ordinary shares which representsapproximately 5% of the issued ordinary share capital of the Company as at 8 March 2007.

This authority provides the Directors with a degree offlexibility to increase the assets of the Company by theissue of new shares should any favourable opportunitiesarise to the advantage of shareholders. If new ordinaryshares are to be allotted for cash, Section 89(1) of the

Companies Act 1985 requires such new shares to beoffered to existing holders of ordinary shares (pre-emption rights). In certain circumstances it is beneficialfor the Directors to allot shares for cash otherwise thanpro rata to existing shareholders and the Companies Act 1985 provides for shareholders to give such power to the Directors by waiving their pre-emption rights.

Resolution 9 is a special resolution disapplying pre-emption rights and granting authority to the Directors,without the need for further specific shareholderapproval, to make allotments of equity securities for cashby way of (a) rights issues where practical considerations,such as fractions and foreign securities laws, make thisdesirable and (b) other issues up to an aggregatenominal value of £1,227,593 (5% of the issued sharecapital of the Company as at 8 March 2007).

The Directors would not issue ordinary shares pursuantto this power at less than the then current net asset valueper share (“NAV”).

The authority to issue ordinary shares for cash underResolution 9 will enable the Directors to issue additionalnew ordinary shares to participants in the FidelityInvestment Trust Share Plan and ISA in the event that theordinary shares are trading at a premium to their NAV.

Resolution 10 is a special resolution which renews theDirectors’ authority to repurchase the Company’s sharesfor cancellation. It is proposed that the Board beauthorised to make arrangements to purchase throughthe London Stock Exchange up to 14,721,297 ordinaryshares of 25 pence (equivalent to 14.99% of the shares in issue at 8 March 2007). By utilising this power torepurchase shares when they are trading at a discount tonet asset value, the Company will increase the resultingnet asset value per share for remaining shareholders.Purchases of shares will be made at the discretion of the Board and within guidelines set from time to time by the Board in the light of prevailing market conditions.Purchases will only be made in the market at pricesbelow the prevailing net asset value per share.

Resolution 11 is an ordinary resolution regarding thecontinuation of the Company as an investment trust,which is put to shareholders every three years.

The Directors recommend that shareholders vote in favour of each of these resolutions.

The full text of the resolutions is set out in the Notice of Meeting contained on pages 47 and 48.

CORPORATE GOVERNANCEFull details are given in the Corporate GovernanceStatement on pages 20 to 24.

Substantial share interests %

Fidelity International Limited 6.98

Barclays PLC 5.94

Asset Value Investors Limited 5.88

Legal & General Group PLC 3.17

Analysis of ordinary shareholders as at 31 December 2006

% of issuedshare capital

Retail Investors1 61.46

Mutual Funds 12.52

Insurance 11.15

Pensions 6.13

Trading 3.46

Investment Trusts 3.35

Charities 1.93

100.001 Includes Share Plan, PEP and ISA investors


Statement of Directors’ Responsibilities

The Directors are responsible for preparing the annualreport and the financial statements in accordance withapplicable law and regulations.

Company law requires the Directors to prepare financialstatements for each financial period. Under the law theyhave elected to prepare the financial statements inaccordance with UK Generally Accepted AccountingPractice.

The financial statements are required by law to give atrue and fair view of the state of affairs of the Companyand of the profit or loss for the period.

In preparing these financial statements the Directors are required to:

• select suitable accounting policies and then applythem consistently;

• make judgements and estimates that are reasonableand prudent;

• state whether applicable UK Accounting Standardshave been followed, subject to any materialdepartures disclosed and explained in the financialstatements; and

• prepare the financial statements on the goingconcern basis unless it is inappropriate to presumethat the Company will continue in business.

The Directors are responsible for ensuring that properaccounting records are kept which disclose withreasonable accuracy at any time the financial position of the Company and to enable them to ensure that thefinancial statements comply with the Companies Act1985. They are also responsible for safeguarding theassets of the Company and hence for taking reasonablesteps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors arealso responsible for preparing a Directors’ Report,including a Business Review, a Directors’ RemunerationReport and a Corporate Governance Statement thatcomply with that law and those regulations.

The financial statements may be published on a website.The Directors are responsible for the maintenance andintegrity of the corporate and financial informationincluded on the Company’s website.

The independent Auditors have represented to yourBoard that their work does not involve any considerationof the maintenance and integrity of any websites and,accordingly, the Auditors accept no responsibility for any changes that may have occurred to the financialstatements since they were approved. Visitors to anywebsite need to be aware that legislation in the UnitedKingdom governing the preparation and dissemination

of the financial statements may differ from legislation in their jurisdictions.

AUDITORS’ RIGHT TO INFORMATIONThe Directors in office as at the date of this report eachconfirm that, so far as they are aware, there is no relevantaudit information of which the Auditors are unaware andeach Director has taken all the steps that ought to havebeen taken as a Director to make themselves aware ofany relevant audit information and to establish that theAuditors are aware of that information.

AUDITORS’ APPOINTMENTThe Board carried out a review of audit services duringthe year and agreed a change of auditors.PricewaterhouseCoopers LLP resigned as Auditors of the Company and the Board appointed RSM RobsonRhodes LLP to fill the casual vacancy arising followingthis resignation. Special notice having been received, a resolution to re-appoint RSM Robson Rhodes LLP asthe Company’s Auditors will be proposed at the AnnualGeneral Meeting together with a resolution regardingthe Auditors’ remuneration.

By Order of the Board

Fidelity Investments InternationalSecretary8 March 2007


Corporate Governance Statement

The Company is committed to high standards ofcorporate governance. Accordingly, the Board has put inplace a framework for corporate governance, which itbelieves is appropriate for an investment trust company.

The Board has considered the principles andrecommendations of the Association of InvestmentCompanies’ AITC Code of Corporate Governance (the“AITC Code”), by reference to the Corporate GovernanceGuide (the “AITC Guide”). The AITC Code, as explainedin the AITC Guide, addresses all the principles set out inSection 1 of the Combined Code as well as setting outadditional principles and recommendations on issuesthat are of specific relevance to the Company. The Boardconsiders that reporting against the principles andrecommendations of the AITC Code, and by reference tothe AITC Guide (which incorporates the Combined Code),will provide better information to shareholders.

The Board is accountable to the Company’s shareholdersfor good governance and considers that the Companyhas complied with the recommendations of the AITCCode, and therefore has met its obligations in relation to the Combined Code and associated disclosurerequirements of the Listing Rules.

THE BOARD AND ITS COMMITTEES

THE BOARDThe Board of Directors has overall responsibility for theCompany’s affairs. All matters which are not delegated to the Company’s Manager under the ManagementAgreement are reserved for the Board’s decision. Matters reserved for the Board include, inter alia,decisions on strategy, management, structure, capital, gearing, financial reporting, risk management,investment performance, share price discount, corporategovernance, the appointment of the Company Secretaryand Board appointments.

The Board currently consists of five Directors, of whomfour are independent of the Company’s Manager. SimonFraser is an employee of the Manager and cannottherefore be classed as independent. The Chairman andthe other independent Directors form the membershipof the Audit Committee and the Management

Engagement Committee. All Directors are members of the Nomination and Remuneration Committee.

The Board considers that it meets sufficiently regularly to discharge its duties effectively and the table belowgives the attendance record for the meetings held during the year.

SENIOR INDEPENDENT DIRECTORThe Board appointed Nicholas Barber as SeniorIndependent Director on 10 March 2005.

BOARD BALANCEThe Board consists of Directors who, between them,have good knowledge and wide experience of businessin Japan and of investment trusts. Biographical details of all Directors including their relevant directorships aregiven on pages 12 and 13 of this report. The Boardensures that it conducts its business at all times with onlythe interests of the shareholders in mind and quiteindependently of any other associations. It meets at leastfour times a year, including an annual meeting in Tokyo,and endeavours to provide leadership in terms of thedirection of the Company. Between these meetings thereis regular contact with the Manager.

APPOINTMENTS TO THE BOARDThe Nomination and Remuneration Committee isresponsible for identifying possible candidates forconsideration by the Board. Whilst the independentDirectors take the lead in the appointment of newDirectors, any proposal for a new Director will bediscussed and approved by the entire Board. Externalconsultants are also used to identify potential candidates.Upon appointment, each Director receives training on the investment operations and administration functions of the Company, together with a summary of their dutiesand responsibilities. The Directors also receive regularbriefings from, amongst others, the AIC, the Company’sAuditors and the Company Secretary regarding anyproposed developments or changes in law or regulationsthat affect the Company and/or the Directors.

The terms and conditions of appointment of Directors are available for inspection at the registered office of the Company.

William Thomson 3/4 1/1 1/2 1/1Nicholas Barber 4/4 1/1 2/2 1/1Simon Fraser 4/4 1/1 N/A N/APhilip Kay 4/4 1/1 2/2 1/1David Miller 4/4 1/1 2/2 1/1

(Figures indicate those meetings for which each Director was eligible to attend and attended in the year)

Regular Nomination Audit ManagementBoard & Remuneration Committee Engagement

Meetings Committee Meetings CommitteeMeetings Meetings



PERFORMANCE EVALUATIONA process for the evaluation of the Board, its Committeesand its Directors is in place and takes the form of writtenquestionnaires and, if appropriate, interviews. Theperformance of the Chairman is evaluated by the otherDirectors on an annual basis. The Company Secretaryand Portfolio Manager also participated in part of theseprocesses to provide all-round feedback to the Board.The results of these evaluations were issued to anddiscussed by the Board. The process is considered to beconstructive in terms of identifying areas for improvingthe functioning and performance of the Board.

RE-ELECTIONAll newly appointed Directors stand for election by the shareholders at the next Annual General Meetingfollowing their appointment. The Directors retire byrotation and offer themselves for re-election byshareholders every three years. Directors who havereached the age of 70 are subject to annual re-election.Directors who have served on the Board for more than nine years are subject to annual re-election. The representative of the Manager is subject to annual re-election. A procedure has been put in place wherebyformal letters of appointment, which specify the terms of appointment, are issued to new Directors onappointment and to existing Directors upon subsequentre-election at the Annual General Meeting.

Simon Fraser will retire in accordance with the provisionsof the Listing Rules and will be seeking re-election at theforthcoming Annual General Meeting. The proposal forSimon’s reappointment was considered by theNomination and Remuneration Committee. Simon is the Director who is also employed by the Manager and as mentioned in previous reports, we believe that it is important that the Manager should be party to the responsibility, authority and accountability to thoseinvesting in their management. Simon’s knowledge and experience of Japan and, in particular, investment in Japan, are of enormous benefit and we recommendthat shareholders vote in favour of his re-election.

Having served for more than nine years, WilliamThomson, Chairman, will retire, and, following a proposalby his fellow Directors, will be seeking re-election at theforthcoming Annual General Meeting. The othermembers of the Board independently considered his re-appointment, to the Board and as Chairman, as partof the performance evaluation process and formallyconsidered the proposal, during his absence, for his re-appointment at the Nomination and RemunerationCommittee meeting.

Nicholas Barber will retire by rotation, and, following a review by the Nomination & Remuneration Committeein his absence and that Committee’s recommendationthat Nicholas seeks re-election, he will be seeking re-election at the forthcoming Annual General Meeting.

THE AUDIT COMMITTEEConsists of all of the independent Directors and WilliamThomson chairs the Committee. The Committeeconsiders that collectively the members of theCommittee have sufficient recent and relevant financialexperience to discharge its responsibilities fully.

The Committee’s authority and duties are clearly definedin its written terms of reference which are available forinspection at the Company’s registered office and areincluded on the Company’s website. These includeresponsibility for reviewing the interim report and annualreport and financial statements, reviewing the scope andresults of the audit and the effectiveness and cost of theaudit process and reviewing the Company’s internalfinancial controls. They also include responsibility forreviewing and monitoring the external Auditors’independence and objectivity with particular regard to the provision of non-audit services taking intoconsideration relevant UK professional and regulatoryrequirements. No work other than the audit was carriedout by the Company’s Auditors during the year. The Audit Committee of the Board meets with theAuditors at least once a year to review these and other appropriate matters.

In the year to 31 December 2006 the Audit Committeedischarged its responsibilities by, inter alia:-

• Reviewing the Company’s draft annual and interimfinancial statements prior to Board approval andreviewing the external Auditors’ report on the annualfinancial statements

• Reviewing the appropriateness of the Company’saccounting policies

• Reviewing and approving the audit fee• Reviewing the external Auditors’ terms of

engagement• Reviewing the external Auditors’ plan for the audit

of the Company’s financial statements• Reviewing the external Auditors’ quality control

procedures• Reviewing and monitoring the effectiveness of

the external audit process and the external Auditors’independence and objectivity

• Reviewing the overall services provided by theCompany’s external Auditors and alternative auditservices available, which led to a change in Auditorsduring the year

• Considering the scope of work undertaken by theManager’s internal audit department

• Reviewing the Manager’s semi-annual report oninternal controls and reporting to the Board

• Considering and reconfirming that it does not needan internal audit function given that the Companydelegates its day to day operations to third parties.



THE NOMINATION AND REMUNERATIONCOMMITTEEThe Committee consists of all of the Directors andWilliam Thomson chairs the Committee. The Committee ischarged with nominating new Directors for considerationby the Board of Directors, and subsequent approval byshareholders. It believes that the best way of ensuringthat the Board as a whole and each independent Directorindividually carry out their duties in an independentmanner, irrespective of the interests of the Manager, is to ensure that the search for, the interview of andrecommendation to the Board of a candidate is entirelycontrolled by this Committee. The Nomination andRemuneration Committee also considers the re-electionof Directors who are retiring by rotation.

The Committee also concerns itself with theremuneration of the Directors, considering as it does theremit of the job and the responsibility and time involved.It also makes itself aware of the directors’ fees of otherinvestment trust companies and other comparableentities. The level of remuneration of the non-executiveDirectors is set by the Nomination and RemunerationCommittee. The Director who is employed by theManager waives his fee.

This Committee meets on an annual basis and as andwhen required, making recommendations to the Boardwhere appropriate.

The Committee’s terms of reference are available forinspection at the Company’s registered office and areincluded on the Company’s website.

THE MANAGEMENT ENGAGEMENTCOMMITTEEThe Committee consists of all of the independentDirectors and William Thomson chairs the Committee.The Committee is charged with reviewing andmonitoring the performance of the Manager in respectof its contract and the fees it is paid. This Committeemeets at least once a year and reports to the Board ofDirectors, making recommendations where appropriate.

The level of remuneration of the Manager is determinedby the Management Engagement Committee; it relatesto the investment management function, on which apercentage of the funds under management is paid(thereby relating this part of its remuneration toperformance) and to the administrative function. TheBoard of Directors is mindful that the amounts paid tothe Manager should be sufficient to ensure that both thePortfolio Manager and the administrators within themanagement house appointed to look after its affairs arehighly skilled and that those individuals should be largelyfocused on the Company’s business.

The criteria which are taken into consideration inreviewing the performance of the Manager are set out below:

• Quality of team – the skills and particularly theexperience of the team involved in managing all aspects of the Company’s business

• Commitment of the Manager to the investment trustbusiness generally and to the Company in particular

• Managing the Company – in running and controllingthe administration, the accounting and the CompanySecretarial function of the Company

• Investment management – portfolio managementskills, experience and track record and otherinvestment related considerations

• Shareholders – shareholder consciousness andrelations, discount management and commitment to the Company’s goals

• Management Agreement – consideration of fees,notice period and duties

• Marketing – commitment to and execution ofactivities designed to secure sustainable demandfrom prospective long term shareholders.

The Committee met and reviewed the performance ofthe Manager for the year to 31 December 2006. Havingreviewed the criteria set out above, the Committeeconcluded that it was in the interests of shareholders thatthe Management Agreement should continue.

The Committee’s terms of reference are available forinspection at the Company’s registered office and on the Company’s website through the Fidelity website(www.fidelity.co.uk/its). Details of the ManagementAgreement are set out below.

MANAGEMENT AGREEMENTA Management and Secretarial Services Agreement (the“Management Agreement”) dated 6 February 2006(amending the Management Agreement dated 22February 1994), was made between the Company andFidelity Investments International (the “Manager”), underwhich the Manager has agreed to provide investmentmanagement, administrative and secretarial services to theCompany for a quarterly fee of an amount equal to 0.25per cent (plus VAT) of the value of the Company’s assetsunder management (as defined in the ManagementAgreement, which excludes investments in other fundsmanaged by the Manager) payable quarterly in arrearand calculated as of the last business day of March, June,September and December in each year. In addition theCompany has agreed to pay to the Manager a fee forsecretarial and administration services, payable quarterly inarrear, at the current rate of £34,196 per annum (plus VAT).

The notice period by either party is six months. The Management Agreement may, however, beterminated without compensation if the Company



is liquidated pursuant to the procedures laid down in theArticles of Association of the Company regarding theCompany’s continuation. The Management Agreementmay also be terminated forthwith as a result of a materialbreach of the Management Agreement or on theinsolvency of the Manager or the Company.

In addition, the Company may terminate theManagement Agreement by two months’ notice inwriting if the Manager ceases to be a subsidiary ofFidelity International Limited.

SUPPLY OF INFORMATIONThe quarterly Board meeting papers are the key source of regular information for the Board, the contents ofwhich are determined by the Board and contain sufficientinformation on the financial condition of the Company.Key representatives of the Manager attend each Boardmeeting, enabling the Board to probe further on mattersof concern or seek clarification on certain issues. TheDirectors have access to the advice and services of theCompany Secretary through its appointed representative,who is responsible to the Board for ensuring that Boardprocedures are followed and that applicable rules, lawsand regulations are complied with. The Directors alsohave the ability to take independent professional advice,if necessary, at the Company’s expense. The Companymaintains Directors’ and Officers’ liability insurance.

DIRECTORS’ REMUNERATIONThe level of Directors’ fees is determined by theNomination and Remuneration Committee. Directors’fees are disclosed fully in each annual report (see theDirectors’ Remuneration Report on pages 25 and 26).

FINANCIAL REPORTINGSet out on page 19 is a statement by the Directors of their responsibilities in respect of the financial statements.The Auditors have set out their reporting responsibilitieswithin the Independent Auditors’ Report on page 27.

GOING CONCERNDetails of the Board’s recommendation to shareholdersthat they vote in favour of the forthcoming continuationvote are given in the Chairman’s Statement. In light of thisthe Directors believe that it is appropriate to continue toadopt the going concern basis in preparing the financialstatements since the assets of the Company consist mainlyof securities which are readily realisable and, accordingly,the Company has adequate financial resources to continuein operational existence for the foreseeable future. Detailsof the forthcoming continuation vote may be found in theChairman’s Statement.

INTERNAL CONTROLThe Combined Code requires the Directors to review the effectiveness of the Company’s systems of internalcontrol. The identification, control and evaluation of risk

is formulated by a series of quarterly investmentperformance reports, a semi-annual internal controlsreport and quarterly compliance reports as provided by the Manager. The systems of internal controls aredesigned to manage rather than eliminate risk of failure to achieve business objectives and can only providereasonable, but not absolute, assurance against materialmis-statement or loss. The Board has contractuallydelegated to external agencies, including the Manager,the management of the investment portfolio, thecustodial services (which include the safeguarding of the assets), the registration services and the day-to-dayaccounting and Company Secretarial requirements. Eachof these contracts was entered into after full and properconsideration by the Board of the quality and cost ofservices offered including the control systems in operationin so far as they relate to the affairs of the Company.

The Board, assisted by the Manager, has undertaken a semi-annual risk and control assessment. The businessrisks have been analysed and recorded in a risk andinternal controls report which is regularly reviewed. Whilstthe Company, in common with most investment trusts, has no internal audit department, the effectiveness ofthese controls is monitored by the Manager’s complianceand internal audit functions. The Audit Committee hasreceived and reviewed the report on the effectiveness ofthe internal controls maintained on behalf of the Companyand an annual compliance report from the Manager’sGlobal Oversight Director. The Board also receives eachyear from the Manager a report on its internal controlswhich includes a report from the Manager’s reportingaccountants on the control procedures in operationaround the investment management and administrationprocesses. By means of the procedures set out above andin accordance with the Financial Reporting Council’s“Internal Control: Revised Guidance for Directors on the Combined Code”, the Directors have established anongoing process for identifying, evaluating and managingthe significant risks faced by the Company and havereviewed the effectiveness of the internal control systemsthroughout the year.

WHISTLE-BLOWING PROCEDUREPart of the Manager’s role in ensuring the provision of agood service pursuant to the Management Agreementincludes the ability for employees of Fidelity to raiseconcerns through a workplace concerns escalation policy(or “whistle-blowing procedure”). Fidelity is committedto providing the highest level of service to its customersand to applying the highest standards of quality, honesty,integrity and probity. The aim of the policy is toencourage employees and others working for Fidelity to assist the Company in tackling fraud, corruption andother malpractice within the organisation and in settingstandards of ethical conduct. This policy has beenendorsed accordingly.



VOTING POLICYThe Board has adopted the Manager’s Principles ofOwnership in relation to investments. These principlesinclude the pursuit of an active investment policythrough portfolio management decisions, voting onresolutions at general meetings and maintaining acontinuing dialogue with the management of investeecompanies. In its Principles of Ownership, the Managerexpressly declares that it supports the Statement ofPrinciples drawn up by the Institutional Shareholders’Committee setting out the responsibilities of institutionalshareholders and agents.

The Manager instructs proxy voting on behalf of theCompany in accordance with the Manager’s existingguidelines and policies.

SHAREHOLDERSThe Board regularly monitors the shareholder profile of the Company and liaises with the Manager and theCompany’s broker to canvass shareholder opinion andcommunicate its views to shareholders. The Board aimsto provide the maximum opportunity for dialoguebetween the Company and shareholders. It believes the Company’s institutional shareholders do have properaccess to the Manager at any time and to the Board if they so wish. If any shareholder wishes to contact amember of the Board directly they should contact theCompany Secretary whose details are given on page 12.All shareholders, particularly individual shareholders, areencouraged to attend the Annual General Meeting atwhich there is always a presentation of the past year’sresults and the forthcoming year’s prospects, followed bythe opportunity to meet representatives of the Managerand the Board.

All proxy votes received in respect of the Annual GeneralMeeting are counted and, except where a poll is called,are reported for each resolution after it has been dealtwith on a show of hands.

The Notice of Meeting on pages 47 and 48 sets out the business of the Annual General Meeting. A separateresolution is proposed on each substantially separateissue including the annual report and financialstatements.

The Chairman of the Board, who is also Chairman of the Audit Committee, will be available to answerquestions at the Annual General Meeting.

The Notice of the Annual General Meeting and relatedpapers are sent to shareholders at least 20 working daysbefore the meeting.

On behalf of the Board

William Thomson

8 March 2007


Directors’ Remuneration Report

REMUNERATION COMMITTEEThe Board of Directors is comprised solely of non-executive Directors and has established a Nominationand Remuneration Committee, which comprises thewhole Board. This Committee meets annually and as andwhen required. At its annual meeting it determines thefees paid to Directors.

The Company’s Articles of Association limit theaggregate fees payable to the Board of Directors to atotal of £100,000 per annum. Subject to this overall limit,the Nomination and Remuneration Committee makesrecommendations to the Board regarding the level ofDirectors’ fees, having regard to their duties andresponsibilities, to their time commitments, to their

potential liabilities (both financial and reputational) and finally to levels of fees in the investment trustindustry generally.

No Director has a service contract with the Company.The Company does not make payments to Directors on termination.

The Company’s performance has been measured againstthe Russell Nomura Mid/Small Cap Index as this is themost appropriate benchmark in respect of its investmentobjective.

No Director received any bonus, taxable expenses, compensation for the loss of office or non-cash benefits for theyear ended 31 December 2006 or the year ended 31 December 2005.

REMUNERATION OF DIRECTORS1

2006 2005Name £’000 £’000

William Thomson 27 25

Nicholas Barber 17 16

Simon Fraser2 – –

Philip Kay 17 16

David Miller 17 16

Sir John Stanley3 N/A 4

Total 78 77

1 Audited information2 Simon Fraser waived his fees of £14,000 in 2006 and £13,000 in 20053 Retired as a Director on 31 March 2005


Directors’ Remuneration Report

0

50

100

150

200

250

300

350

31Dec2006

31Dec2005

31Dec2004

31Dec2003

31Dec2002

31Dec2001

+47.6%+49.8%

+78.2%

Performance from 31 December 2001 to 31 December 2006 (on a total return basis)




Financial Calendar

31 December 2006 – financial year end

8 March 2007 – announcement of results

27 March 2007 – publication of this report

3 May 2007 – Annual General Meeting

30 June 2007 – half year end

July/August 2007 – announcement of interim results to 30 June 2007

August 2007 – publication of Interim Report

Financial Calendar – the key dates in the Company’s calendar for the year from 31 December 2006:

On behalf of the Board

William Thomson

Chairman8 March 2007

Shareholders should note that the Companies Act requirement is for the points on the graph to be plotted on a year end to yearend basis. This has the effect of “flattening” out the Company’s performance and therefore will differ in format from the othergraphs provided in this report.


Independent Auditors’ Report to the Shareholders of Fidelity Japanese Values PLC

We have audited the financial statements on pages 28 to 42. These financial statements have been preparedunder the accounting policies set out therein. We havealso audited the information in the Directors' RemunerationReport that is described as having been audited.

This report is made solely to the Company’s shareholders,as a body, in accordance with Section 235 of theCompanies Act 1985. Our audit work has been undertakenso that we might state to the Company’s shareholdersthose matters we are required to state to them in anauditors' report and for no other purpose. To the fullestextent permitted by law, we do not accept or assumeresponsibility to anyone other than the Company and the Company’s shareholders as a body, for our auditwork, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORSAND AUDITORSThe Directors’ responsibilities for preparing the AnnualReport, the Directors' Remuneration Report and thefinancial statements in accordance with applicable lawand United Kingdom Accounting Standards (UnitedKingdom Generally Accepted Accounting Practice) areset out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the financial statements andthe part of the Directors' Remuneration Report to beaudited in accordance with relevant legal and regulatoryrequirements and International Standards on Auditing(UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and whether thefinancial statements and the part of the Directors'Remuneration Report to be audited have been properlyprepared in accordance with the Companies Act 1985.We also report to you whether in our opinion theinformation given in the Directors' Report is consistentwith the financial statements. The information given inthe Directors’ Report includes that specific informationpresented in the Chairman’s Statement and Manager’sReview that is cross-referred from the Business Reviewsection of the Directors’ Report.

In addition we report to you if, in our opinion, theCompany has not kept proper accounting records, if wehave not received all the information and explanationswe require for our audit, or if information specified bylaw regarding Directors’ remuneration and othertransactions is not disclosed.

We review whether the Corporate Governance Statementreflects the Company's compliance with the nineprovisions of the 2003 FRC Combined Code specifiedfor our review by the Listing Rules of the FinancialServices Authority, and we report if it does not. We arenot required to consider whether the Board's statementson internal control cover all risks and controls, or form an

opinion on the effectiveness of the Company’s corporategovernance procedures or its risk and control procedures.

We read other information contained in the annual report,and consider whether it is consistent with the auditedfinancial statements. The other information comprisesonly the Objective & Highlights, Financial Summary,Distribution of the Portfolio, Full Portfolio Listing, theDirectors' Report, the Manager’s Review, the unauditedpart of the Directors' Remuneration Report, theChairman's Statement, and the Corporate GovernanceStatement. We consider the implications for our report if we become aware of any apparent misstatements ormaterial inconsistencies with the financial statements. Ourresponsibilities do not extend to any other information.

BASIS OF AUDIT OPINIONWe conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by theAuditing Practices Board. An audit includes examination,on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It alsoincludes an assessment of the significant estimates andjudgements made by the Directors in the preparation ofthe financial statements, and of whether the accountingpolicies are appropriate to the Company's circumstances,consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statements and the part of the Directors'Remuneration Report to be audited are free frommaterial misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited.

OPINIONIn our opinion:• the financial statements give a true and fair view, in

accordance with United Kingdom Generally AcceptedAccounting Practice, of the state of affairs of theCompany as at 31 December 2006 and of its loss forthe year then ended;

• the financial statements and the part of the Directors'Remuneration Report to be audited have beenproperly prepared in accordance with the CompaniesAct 1985; and

• the information given in the Directors' Report isconsistent with the financial statements.

RSM Robson Rhodes LLPChartered Accountants and Registered AuditorsLondon, England8 March 2007


Income Statement for the year ended 31 December

2006 2005revenue capital total revenue capital total

Notes £’000 £’000 £’000 £’000 £’000 £’000

(Losses)/gains on investments 8 – (44,456) (44,456) – 51,970 51,970

Income 2 1,027 – 1,027 827 – 827

Investment management fee 3 (998) – (998) (1,174) – (1,174)

Other expenses 4 (412) – (412) (369) – (369)

Exchange gains/(losses) 3 (130) (127) 3 28 31

Exchange gains on loans 13 – 2,070 2,070 – 364 364________ ________ ________ ________ ________ ________

(LOSS)/NET RETURN BEFORE FINANCE COSTS AND TAXATION (380) (42,516) (42,896) (713) 52,362 51,649

Interest payable 5 (214) – (214) (227) – (227)________ ________ ________ ________ ________ ________

(LOSS)/NET RETURN ON ORDINARYACTIVITIES BEFORE TAXATION (594) (42,516) (43,110) (940) 52,362 51,422

Taxation on ordinary activities 6 (72) – (72) (58) – (58)________ ________ ________ ________ ________ ________

(LOSS)/NET RETURN ON ORDINARY ACTIVITIES AFTER TAXATION FOR THE YEAR ATTRIBUTABLE TO EQUITY SHAREHOLDERS (666) (42,516) (43,182) (998) 52,362 51,364____ ____ ____ ____ ____ ____(LOSS)/RETURN PER ORDINARY SHARE 7 (0.68p) (43.29p) (43.97p) (1.02p) 53.32p 52.30p____ ____ ____ ____ ____ ____

A Statement of Total Recognised Gains and Losses has not been prepared as there are nogains and losses other than those reported in this Income Statement

The total column of the Income Statement is the profit and loss account of the CompanyAll revenue and capital items in the above statement derive from continuing operationsNo operations were acquired or discontinued in the yearThe notes on pages 32 to 42 form an integral part of these financial statements

called up share capital capital capital share premium redemption other reserve reserve revenue total

capital account reserve reserve realised unrealised reserve equity

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000Opening shareholders’ funds:1 January 2005 24,551 44 1,780 60,369 (6,351) (213) (10,196) 69,984

Net return/(losses) as recognised in the Income Statement – – – – 9,344 43,018 (998) 51,364

________ ________ ________ ________ ________ ________ ________ ________Closing shareholders’ funds: 31 December 2005 24,551 44 1,780 60,369 2,993 42,805 (11,194) 121,348

Net return/(losses) as recognised in the Income Statement – – – – 14,504 (57,020) (666) (43,182)

________ ________ ________ ________ ________ ________ ________ ________Closing shareholders’ funds: 31 December 2006 24,551 44 1,780 60,369 17,497 (14,215) (11,860) 78,166____ ____ ____ ____ ____ ____ ____ ____


Reconciliation of Movements in Shareholders’ Funds for the year ended 31 December

The notes on pages 32 to 42 form an integral part of these financial statements


Balance Sheet as at 31 December

2006 2005Notes £’000 £’000

FIXED ASSETS

Investments at fair value through profit or loss 8 91,617 136,508________ ________

CURRENT ASSETS

Debtors 9 417 252

Cash at bank 419 1,710________ ________

836 1,962________ ________

CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR

Other creditors 10 (655) (1,420)________ ________

(655) (1,420)________ ________

NET CURRENT ASSETS 181 542________ ________

TOTAL ASSETS LESS CURRENT LIABILITIES 91,798 137,050________ ________

CREDITORS – AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Fixed rate unsecured loans 11 (13,632) (15,702)________ ________

TOTAL NET ASSETS 78,166 121,348____ ____CAPITAL AND RESERVES

Called up share capital 12 24,551 24,551

Share premium account 13 44 44

Capital redemption reserve 13 1,780 1,780

Other reserve 13 60,369 60,369

Capital reserve – realised 13 17,497 2,993

Capital reserve – unrealised 13 (14,215) 42,805

Revenue reserve 13 (11,860) (11,194)________ ________

TOTAL EQUITY SHAREHOLDERS’ FUNDS 78,166 121,348____ ____NET ASSET VALUE PER ORDINARY SHARE 14 79.59p 123.56p____ ____The financial statements on pages 28 to 42 were approved by the Board of Directors on 8 March 2007 and were signed on itsbehalf by:

William ThomsonChairman


2006 2005Notes £’000 £’000

OPERATING ACTIVITIES

Investment income received 923 783

Interest received 4 5

Investment management fee paid (1,114) (1,007)

Directors’ fees paid (99) (88)

Other cash payments (233) (280)________ ________

NET CASH OUTFLOW FROM OPERATING ACTIVITIES 15 (519) (587)________ ________

RETURNS ON INVESTMENTS AND SERVICING OF FINANCE

Interest paid (218) (227)________ ________

NET CASH OUTFLOW FROM SERVICING OF FINANCE (218) (227)________ ________

FINANCIAL INVESTMENT

Purchase of investments (73,870) (62,792)

Disposal of investments 73,321 64,647________ ________

NET CASH (OUTFLOW)/INFLOWFROM FINANCIAL INVESTMENT (549) 1,855

________ ________(DECREASE)/INCREASE IN CASH 16 (1,286) 1,041____ ____



Cash Flow Statement for the year ended 31 December

1. ACCOUNTING POLICIES

The Company has prepared its financial statements in accordance with United Kingdom Generally Accepted AccountingPractice ("UK GAAP") and the AITC Statement of Recommended Practice ("SORP") for Investment Trusts dated January2003 and revised in December 2005.

a) Basis of accounting – The financial statements have been prepared on a going concern basis and under the historical costconvention, modified to include the revaluation of fixed asset investments and on the assumption that approval as aninvestment trust will be granted. A resolution proposing the continuation of the Company as an Investment Trust will be putto shareholders at the Annual General Meeting on 3 May 2007. The Directors are recommending that shareholders vote infavour of this resolution. In light of their recommendation and in accordance with Financial Reporting Standard ("FRS") 18:"Accounting Policies", the Directors believe that it is appropriate to prepare the financial statements on a going concernbasis. Accordingly the financial statements do not include any adjustments that may arise from a reconstruction or liquidationof the Company. Such adjustments would include expenses of reconstruction or liquidation along with any costs associatedwith realising the portfolio.

b) Income – Income from equity investments is credited to the Income Statement on the date on which the right toreceive the payment is established. Interest receivable on fixed interest securities is accounted for on an accruals basis so as to reflect the effective interest rate on the security. Interest receivable on short term loans and deposits is dealtwith on an accruals basis. Where the Company has elected to receive its dividends in the form of additional shares ratherthan cash, the amount of the cash dividend is recognised as income. Any excess in the value of the shares received overthe amount of the cash dividend is recognised in the capital column of the Income Statement.

c) Special dividends – Special dividends are treated as a capital receipt or a revenue receipt depending on the facts andcircumstances of each particular case.

d) Expenses and finance costs – All expenses are accounted for on an accruals basis and are charged in full to therevenue column of the Income Statement. Finance costs are accounted for on an accruals basis and in accordance with the provisions of FRS26:"Financial Instruments: Measurement".

e) Taxation – Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, at thebalance sheet date, where transactions or events that result in an obligation to pay more, or a right to pay less tax in thefuture have occurred. A deferred tax asset is only recognised when it is more likely than not that the asset will be recoverable.

f) Foreign currency – The Directors, having regard to the currency of the Company's share capital and the predominantcurrency in which its investors operate, have determined the functional currency to be sterling. Transactions denominated inforeign currencies are calculated in sterling at the rate of exchange ruling as at the date of transactions. Assets and liabilitiesin foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Realised and unrealised capitalgains and losses, including exchange differences on the translation of foreign currency assets and liabilities, are dealt with incapital reserves - realised and unrealised.

g) Valuation of investments – The Company’s business is investing in financial assets with a view to profiting from theirtotal return in the form of income and capital growth. This portfolio of financial assets is managed and its performanceevaluated on a fair value basis, in accordance with a documented investment strategy, and information about theportfolio is provided internally on that basis to the Company’s Board of Directors and other key management personnel.Accordingly, upon initial recognition the investments are designated by the Company as ‘at fair value through profit orloss’. They are included initially at fair value, which is taken to be their cost. Subsequently the investments are valued at‘fair value’, which is measured as follows:

• Investments listed overseas are valued at bid prices, where the bid price is available, or otherwise at fair value basedon published price quotations;

• Unlisted investments where there is not an active market are valued using an appropriate valuation technique so as to establish what the transaction price would have been at the balance sheet date.

Transaction costs – FRS26 requires that the cost of purchasing investments be recognised and accounted for as aseparate item from investment gains. The Company includes these costs in the cost of investments purchased and hasdisclosed them in Note 8.


Notes to the Financial Statements

h) Loans – Loans are initially included in the financial statements at cost, being the fair value of the consideration received,net of any issue costs relating to the borrowing. After initial recognition, the loans are measured at amortised cost usingthe effective interest method. The amortised cost is calculated by taking into account any issue costs and any discount orpremium on settlement.

i) Capital reserve – realised – Gains and losses on the realisation of investments and realised exchange differences of acapital nature are accounted for in the Income Statement and then transferred to the capital reserve – realised.

Capital reserve – unrealised – Increases and decreases in the valuation of investments held at the year end andunrealised exchange differences of a capital nature are accounted for in the Income Statement and then transferred tothe capital reserve – unrealised.

2006 2005£’000 £’000

2. INCOME

Income from listed investments

Overseas dividends 1,023 822

Other income

Deposit interest 4 5________ ________

Total income 1,027 827____ ____

2006 2005£’000 £’000

3. INVESTMENT MANAGEMENT FEE

Investment management fee 998 1,174____ ____A summary of the terms of the Management Agreement is provided in the Directors’ Report on pages 16 and 17.

2006 2005£’000 £’000

4. OTHER EXPENSES

Directors’ fees 78 77

Directors’ expenses 33 57

Registrars’ fees 30 16

Custody fees 23 19

Printing and publication expenses 64 54

Marketing expenses 58 42

Legal and professional fees 38 31

AIC and other fees and subscriptions 17 14

Other expenses 54 38

Auditors’ remuneration

Fees payable to the Company’s Auditors for 17 17the audit of the annual financial statements

Fees payable to the Company’s Auditors for – 4all other services ________ ________

412 369____ ____Details of the breakdown of Directors' fees are provided on page 25 within the Directors’ Remuneration Report.



2006 2005£’000 £’000

5. INTEREST PAYABLE

On loans repayable within five years

Bank overdraft 1 –

Fixed rate unsecured loans 213 227________ ________

214 227____ ____

2006 2005£’000 £’000

6. TAXATION ON ORDINARY ACTIVITIES

a) Analysis of charge in the year

Overseas taxation suffered 72 58________ ________

Total current taxation for the year (see note 6b) 72 58____ ____b) Factors affecting the taxation charge for the year

The taxation assessed for the year is higher than the standard rate of corporation tax in the UK for an investment trustcompany (30%) (2005: 30%).

The differences are explained below:

2006 2005£’000 £’000

Loss on ordinary activities before taxation (594) (940)____ ____Loss on ordinary activities multiplied by the standard rate of corporation tax of 30% (2005: 30%) (178) (282)

Effects of:

Excess expenses for the year 178 282

Overseas taxation 72 58________ ________

Current tax charge (note 6a) 72 58____ ____Investment trust companies are exempt from taxation on capital gains if they meet the HM Revenue & Customs criteriaset out in S842 Income and Corporation Taxes Act 1988 for a given period. Therefore, any capital return is not includedin the above reconciliation.

c) The deferred tax assets of £3,411,000 in respect of unutilised expenses at 31 December 2006 (2005: £3,234,000) and£343,000 (2005: £272,000) in respect of eligible unrelieved foreign taxation have not been recognised as it is unlikelythat there will be sufficient future taxable profits to utilise these expenses.

2006 2005revenue capital total revenue capital total

7. (LOSS)/RETURN PER ORDINARY SHARE

Basic (0.68p) (43.29p) (43.97p) (1.02p) 53.32p 52.30p____ ____ ____ ____ ____ ____

(Losses)/returns per ordinary share are based on the net revenue loss on ordinary activities after taxation of £666,000(2005: £998,000), the capital loss in the year of £42,516,000 (2005: return £52,362,000) and the total loss in the year of£43,182,000 (2005: return £51,364,000) and on 98,207,453 ordinary shares (2005: 98,207,453) being the weightedaverage number of ordinary shares in issue during the year.



2006 2005£’000 £’000

8. INVESTMENTS

Listed overseas 91,617 136,508________ ________

Total listed investments 91,617 136,508________ ________

2006listed overseas

£’000

Opening book cost 94,055

Opening unrealised appreciation 42,453________

Opening valuation 136,508________

Movements in the year

Purchases at cost 73,112

Sales – proceeds (73,547)

Sales – realised gains on sales 14,629

Decrease in unrealised appreciation (59,085)________

Closing valuation 91,617____Closing book cost 108,249

Closing unrealised depreciation (16,632)________

Closing valuation 91,617____

2006 2005£’000 £’000

Realised gains on sales based on cost 14,629 9,312

(Decrease)/increase in unrealised appreciation (59,085) 42,658________ ________

(Losses)/gains on investments (44,456) 51,970____ ____The annualised portfolio turnover rate for the year is 65% (2005: 67%).

2006 2005Costs of investment transactions £’000 £’000

Purchases expenses 104 91

Sales expenses 104 90________ ________

208 181____ ____

2006 2005£’000 £’000

9. DEBTORS

Securities sold for future settlement 307 145

Accrued income 66 38

Other debtors 42 68

Brokers’ rebate receivable 2 1________ ________

417 252____ ____



2006 2005£’000 £’000

10. CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR

Securities purchased for future settlement 128 824

Loan interest payable 23 27

Other creditors 504 569________ ________

655 1,420____ ____

2006 2005£’000 £’000

11. CREDITORS – AMOUNTS FALLING DUE AFTER ONE YEAR

Fixed rate unsecured loan @ 1.565% per annum 6,428 7,404

Fixed rate unsecured loan @ 1.34% per annum 7,204 8,298________ ________

13,632 15,702____ ____

The fixed rate unsecured loan from The Royal Bank of Scotland PLC of yen 1,499,040,000 was drawn down on 13 August 2004 for a period of five years at a fixed rate of 1.565% per annum. The loan is repayable on 13 August 2009.

The fixed rate unsecured loan from The Royal Bank of Scotland PLC of yen 1,680,000,000 was drawn down on 25 November 2004 for a period of five years at a fixed rate of 1.34% per annum. The loan is repayable on 25 November 2009.

The Company has entered into an arrangement with The Royal Bank of Scotland PLC, whereby if total borrowingsexceed 39% of the Company's assets, sufficient money is placed in a charged account with the bank to reduceborrowings to below 39%. The release of the charge is contingent on the borrowing ratio of the Company beingreduced to 37% for a period of five consecutive business days.

As at 31 December 2006 there were no cash deposits with the bank subject to a charge in favour of The Royal Bank ofScotland PLC (2005: nil). As at the date of this report there were no cash deposits subject to the charge.

2006 2005£’000 £’000

12. CALLED UP SHARE CAPITAL

Authorised:

230,000,000 (2005: 230,000,000) ordinary shares of 25 pence each 57,500 57,500____ ____Issued, allotted and fully paid:

98,207,453 (2005: 98,207,453) ordinary shares of 25 pence each 24,551 24,551____ ____



2006share capital capital capital

premium redemption other reserve reserve revenueaccount reserve reserve realised unrealised reserve

£’000 £’000 £’000 £’000 £’000 £’00013. RESERVES

Beginning of year 44 1,780 60,369 2,993 42,805 (11,194)

Exchange losses – – – (125) (5) –

Net gain on realisation of investments – – – 14,629 – –

Decrease in unrealised appreciation – – – – (59,085) –

Exchange gains on loans – – – – 2,070 –

Revenue loss for the year – – – – – (666)________ ________ ________ ________ ________ ________

End of year 44 1,780 60,369 17,497 (14,215) (11,860)____ ____ ____ ____ ____ ____

14. NET ASSET VALUE PER SHARE

The basic net asset value per ordinary share is based on net assets of £78,166,000 (2005: £121,348,000) and on98,207,453 (2005: 98,207,453) ordinary shares, being the number of ordinary shares in issue at the year end.

2006 2005£’000 £’000

15. RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES

Net (loss)/return before finance costs and taxation (42,896) 51,649

Capital return/(loss) for the year 42,516 (52,362)________ ________

Net revenue loss before finance costs and taxation (380) (713)

(Decrease)/increase in other creditors (65) 149

(Increase)/decrease in other debtors (2) 35

Overseas taxation suffered (72) (58)________ ________

Net cash outflow from operating activities (519) (587)____ ____



2006 2005£’000 £’000

16. RECONCILIATION OF NET CASH MOVEMENTS TO MOVEMENT IN NET DEBT

Beginning of year (13,992) (15,393)________ ________

Net cash (outflow)/inflow (1,286) 1,041

Unrealised foreign exchange movement (5) (4)

Foreign exchange movement on fixed rate unsecured loans 2,070 364________ ________

Change in net debt 779 1,401________ ________

End of year (13,213) (13,992)____ ____

Change in Exchange2006 the year movements 2005£’000 £’000 £’000 £’000

Analysis of balances

Cash at bank 419 (1,286) (5) 1,710

Fixed rate unsecured loans (13,632) - 2,070 (15,702)________ ________ ________ ________

End of year (13,213) (1,286) 2,065 (13,992)____ ____ ____ ____



17. FINANCIAL INSTRUMENTS

Management of riskThe investment objective of the Company is detailed in the Objective & Highlights on page 1. In pursuit of this objective,the Company may be exposed to various forms of risk, as described below.

The Company's financial instruments comprise:• Equity shares held in accordance with the Company's investment objective and policies• Cash, liquid resources and short term debtors and creditors that arise from its operations• Yen borrowings to finance operations

The risks arising from the Company's financial instruments are market price risk, which comprises equity price risk,interest rate risk, foreign currency exposure and liquidity risk. The Board reviews and agrees policies for managing eachof these risks, which are summarised below. These policies have remained unchanged since the beginning of theaccounting period.

Counterparty credit risk is not significant as transactions are carried out with a large number of brokers, all transactionsare settled on a delivery versus payment basis and limits are set on the amount that may be due from any one broker.

It is, and has been throughout the year under review, the Company's policy that no trading in financial instruments shallbe undertaken.

Market price riskMarket price risk arises mainly from uncertainty about future prices of financial instruments used in the Company'sbusiness. It represents the potential loss the Company might suffer through holding market positions in the face of price movements and changes in exchange rates. The Board meets quarterly to consider the asset allocation of theportfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Investment Manager is responsible for actively monitoring the existing portfolio selected in accordance with theoverall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptablerisk/reward profile.

Foreign currency riskThe Company's total return and balance sheet can be affected by foreign exchange movements because the Companyhas assets and income which are denominated in currencies other than the Company's base currency (sterling).

The Board has identified three principal areas where foreign currency risk could impact the Company:• Movements in rates affecting the value of investments and loans• Movements in rates affecting short term timing differences• Movements in rates affecting the income received

The Company does not hedge the sterling value of investments or other net assets priced in other currencies by the useof derivatives. However, it has increased finance available to the Company for its investment activities with foreigncurrency borrowings, thereby hedging part of the movements which are a result of exchange movements.

The Company might also be subject to short term exposure from exchange rate movements, for example between thedate when an investment is bought or sold and the date when settlement of the transaction occurs. Incomedenominated in foreign currencies is converted to sterling on receipt.

Interest rate riskThe Company finances its operations through share capital raised. In addition, financing has been obtained through two yen denominated fixed rate unsecured bank loans, which fall due for repayment in August and November 2009. The Company is exposed, therefore, to a fair value interest rate risk if yen interest rates change. The fixed rate unsecuredloan from The Royal Bank of Scotland PLC of yen 1,499,040,000 was drawn down on 13 August 2004 for a period of fiveyears at a fixed rate of 1.565% per annum. The Company pays a quarterly fixed fee of 0.915% less the quarterly LIBORrate on the swap facility. The fixed rate unsecured loan from The Royal Bank of Scotland PLC of yen 1,680,000,000 wasdrawn down on 25 November 2004 for a period of five years at a fixed rate of 1.34% per annum. The Company pays aquarterly fixed fee of 0.69% less the quarterly LIBOR rate on the swap facility. The Board imposes borrowing limits toensure gearing levels are appropriate to market conditions.



Liquidity risk

The Company's assets mainly comprise readily realisable securities, which can be easily sold to meet fundingcommitments if necessary. Short term flexibility is achieved by the use of overdraft facilities as required. Details of theCompany's borrowing commitments are explained in note 11 to the financial statements.

Financial Assets

The Company's financial assets comprise equity investments, short term debtors and cash. The currency cash flow profileof these financial assets is shown below.

2006 investmentsat fair value through short term

profit or loss debtors cash at bank total£’000 £’000 £’000 £’000

Yen 91,617 373 193 92,183

UK sterling – 42 225 267

US dollar – 2 1 3________ ________ ________ ________

91,617 417 419 92,453____ ____ ____ ____

2005 investmentsat fair value through short term

profit or loss debtors cash at bank total£’000 £’000 £’000 £’000

Yen 136,508 183 1,701 138,392

UK sterling – 69 5 74

US dollar – – 4 4________ ________ ________ ________136,508 252 1,710 138,470____ ____ ____ ____

Financial Liabilities

The Company finances its investment activities through its ordinary share capital, reserves and borrowings. The Company’s financial liabilities comprise its yen denominated unsecured loans, and other short term creditors. The currency cash flow profile of these financial liabilities is shown below.

2006 2005yen denominated short term yen denominated short term

unsecured loans creditors total unsecured loans creditors total£’000 £’000 £’000 £’000 £’000 £’000

Yen 13,632 151 13,783 15,702 851 16,553

UK sterling – 504 504 – 569 569____ ____ ____ ____ ____ ____13,632 655 14,287 15,702 1,420 17,122____ ____ ____ ____ ____ ____



Interest rate risk profile of financial assets and liabilities

The analysis below summarises the extent to which the Company's assets and liabilities are affected by changes ininterest rates.

2006 cash flow fair valueinterest interest no interestrate risk rate risk rate risk total

£’000 £’000 £’000 £’000

Investments at fair value through profit and loss – – 91,617 91,617

Other debtors – – 417 417

Cash balances 419 – – 419________ ________ ________ ________

Total financial assets 419 – 92,034 92,453

Creditors – – (655) (655)

Fixed rate unsecured loans – (13,632) – (13,632)________ ________ ________ ________

Total financial liabilities – (13,632) (655) (14,287)________ ________ ________ ________

Net financial assets/(liabilities) 419 (13,632) 91,379 78,166____ ____ ____ ____

2005 cash flow fair valueinterest interest no interestrate risk rate risk rate risk total

£’000 £’000 £’000 £’000

Investments at fair value through profit and loss – – 136,508 136,508

Other debtors – – 252 252

Cash balances 1,710 – – 1,710________ ________ ________ ________

Total financial assets 1,710 – 136,760 138,470

Creditors – – (1,420) (1,420)

Fixed rate unsecured loans – (15,702) – (15,702)________ ________ ________ ________

Total financial liabilities – (15,702) (1,420) (17,122)________ ________ ________ ________

Net financial assets/(liabilities) 1,710 (15,702) 135,340 121,348____ ____ ____ ____



Fair value of financial assets and liabilities

Financial assets and liabilities are stated in the balance sheet at values which are not materially different to their fairvalues. As explained in Note 1 investments are shown at fair value which is bid market price. In the case of cash, bookvalue approximates to fair value due to the short maturity of the instruments. The exceptions are the long term fixed rateloans, whose fair values as at 31 December 2006, given below, have been calculated by discounting future cash flows atcurrent yen interest rates.

2006 2005fair value book value fair value book value

£’000 £’000 £’000 £’000

Fixed rate unsecured loan @ 1.565% per annum 6,497 6,428 7,608 7,404

Fixed rate unsecured loan @ 1.34% per annum 7,244 7,204 8,471 8,298________ ________ ________ ________

13,741 13,632 16,079 15,702____ ____ ____ ____

18. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS

There were no contingent liabilities or capital commitments as at 31 December 2006 (2005: nil).

19. TRANSACTIONS WITH THE MANAGER

The Directors have complied with the provisions of FRS8 which require disclosure of related party transactions andbalances. Fidelity Investments International is the Manager and Secretary of the Company and details of the servicesprovided and fees paid are given on pages 16 and 17.




Full Portfolio Listing as at 31 December 2006

Mistubishi Estate 2,177 2.4

Sumitomo Realty & Development 2,025 2.2

Daiwa House Industry 1,811 2.0

Sumco 1,600 1.7

Mitsui 1,519 1.7

Ryohin Keikaku 1,516 1.6

Fancl 1,479 1.6

Yaskawa Electric Corporation 1,472 1.6

Sodick 1,437 1.6

Otsuka Corporation 1,351 1.5

Micronics Japan 1,295 1.4

Yamada Denki 1,243 1.4

Meiko Electronics 1,226 1.3

Intelligence 1,224 1.3

Cross Plus 1,186 1.3

Doshisha 1,177 1.3

Miyachi Technos 1,177 1.3

Sumitomo Trust & Banking 1,167 1.3

Hitachi Construction Machinery 1,167 1.3

Sumitomo 1,157 1.3

Suruga Bank 1,105 1.2

Tokyo Tomin Bank 1,095 1.2

Hamakyorex 1,068 1.2

Murata Manufacturing 1,048 1.1

Shimamura 1,037 1.1

Konica Minolta Holdings 1,036 1.1

Aida Engineering 1,034 1.1

Elpida Memory 1,029 1.1

ABC-Mart 1,016 1.1

Itochu 1,006 1.1

Tokyu Store Chain 1,001 1.1

JFE Holdings 991 1.1

Ozeki 971 1.0

Ulvac 953 1.0

Otsuka Kagu 943 1.0

Juki 935 1.0

Shinko Electric Industries 905 1.0

Studio Alice 871 0.9

Token 869 0.9

Iriso Electronics 840 0.9

H.I.S. 839 0.9

Holding %1

Fair Value£’000



JFE Shoji Holdings 818 0.9

Advan 809 0.9

Konaka 793 0.9

Bit-Isle 781 0.8

Aeon Credit Service 763 0.8

Tohoku Electric Power 762 0.8

Osaka Gas 729 0.8

Daimei Telecom Engineering 716 0.8

Honeys 707 0.8

Hikari Tsushin 701 0.8

Nishio Rent All 693 0.8

Hogy Medical 676 0.7

Shinko Electric 675 0.7

Toridoll 652 0.7

Asics 650 0.7

SFCG 631 0.7

DCM Japan Holdings 627 0.7

Tokyo Steel Manufacturing 625 0.7

Seiko Epson 608 0.7

Daido Steel 603 0.7

JGC 599 0.7

Mazda Motor 599 0.7

Toray Industries 596 0.6

Furukawa Electric 593 0.6

Yokogawa Electric 573 0.6

SBI E*Trade Securities 569 0.6

Pegasus Sewing Machines Manufacturing 564 0.6

Sasakura Engineering 557 0.6

Hokuriku Electric Industry 553 0.6

Gakujo 536 0.6

CAC 533 0.6

NOK 527 0.6

Nippon Electric Glass 517 0.6

Neomax 513 0.6

Index Holdings 508 0.6

Haba Laboratories 508 0.5

Leopalace21 500 0.5

Star Micronics 487 0.5

Rasa Industries 486 0.5

Kitz Corporation 486 0.5

Grandy House 482 0.5

Holding %1

Fair Value£’000



Sumitomo Chemical 481 0.5

Mitsui O.S.K. Lines 481 0.5

Kansai Urban Banking 475 0.5

KOA 468 0.5

Rorze 466 0.5

Nissen 465 0.5

Fujikura 465 0.5

Nidec 464 0.5

Nippon Valqua Industries 463 0.5

JSR 459 0.5

Rakuten 457 0.5

Ishikawajima-Harima Heavy Industries 455 0.5

NHK Spring 453 0.5

Sumitomo Titanium 447 0.5

Nittoku Engineering 434 0.5

Chiba Bank 434 0.5

Telewave 431 0.5

Fullcast 424 0.5

OBIC Business Consultants 422 0.5

Land 419 0.5

Sumitomo Metal Mining 415 0.4

Yamato Holdings 402 0.4

Alpen 402 0.4

NIS Group 390 0.4

Cyber Agent 388 0.4

SMC 386 0.4

Opto Electronics 369 0.4

Fujipream 360 0.4

Toyota Industries 358 0.4

Shizuki Electric 324 0.4

DIP 306 0.3

Nippon Chemical Industries 300 0.3

Yamaichi Electronics 265 0.3

Tow 263 0.3

SBI Holdings 262 0.3

Ryoshoku 250 0.3

Digital Arts 243 0.3

Kuraudia 240 0.3

Karula 236 0.3

Narumiya International 215 0.2

Fintech Global 207 0.2

Holding %1

Fair Value£’000

Pado 200 0.2

Watabe Wedding 185 0.2

Tay Two 173 0.2

Okamoto Glass 167 0.2

Hirata Technical 147 0.2

AMS Life Science 124 0.1

Netprice.com 100 0.1

Raytex 80 0.1

Japan Tecseed 77 0.1

Japan Medical Dynamix Marketing 70 0.1

FT Communications 68 0.1

Nexus 67 0.1

Verisign Japan 65 0.1

Haruyama Trading 54 0.1

Forval 42 –

Prime Network 35 –

KOBE Securities 15 –

Nippon Mining Holdings 1 –

Total Holdings 91,617 99.8

Cash and other net current assets 181 0.2

91,798 100.0

1 % total assets less current liabilities, excluding loan liabilities

All securities held are classed as equity securities

Holding %1

Fair Value£’000




Notice of Meeting

Notice is hereby given that the Annual General Meeting of Fidelity Japanese Values PLC will be held at 25 Cannon Street, London EC4M 5TA, on 3 May 2007at 12 noon for the following purposes:

ORDINARY BUSINESS1. To receive and adopt the Directors’ Report and

Accounts for the year ended 31 December 2006.

2. To re-elect Mr Simon Fraser as a Director.

3. To re-elect Mr William Thomson as a Director.

4. To re-elect Mr Nicholas Barber as a Director.

5. To approve the Directors’ Remuneration Report for the year ended 31 December 2006.

To consider the following resolution, special noticehaving been received of the intention to propose the resolution as an ordinary resolution:

6. To re-appoint RSM Robson Rhodes LLP as Auditors ofthe Company (having previously been appointed bythe Board to fill the casual vacancy arising by reasonof the resignation of PricewaterhouseCoopers LLP) to hold office until the conclusion of the next generalmeeting at which financial statements are laid beforethe Company.

7. To authorise the Directors to determine the Auditors’remuneration.

SPECIAL BUSINESSResolutions 8 and 9 will, if approved, authorise theDirectors to allot a limited number of currently unissuedordinary shares for cash without first offering such sharesto existing ordinary shareholders pro rata to their existingholdings. The limit set by the Board is 5% of the numberof ordinary shares of the Company in issue on 8 March2007. The Directors will only issue new shares under thisauthority to take advantage of opportunities in the marketas they arise and only if they believe it is advantageous tothe Company’s shareholders to do so.

To consider and, if thought fit, to pass the followingresolutions of which Resolution 8 will be proposed as anordinary resolution and Resolution 9 as a special resolution:

8. THAT the Directors be and they are hereby generallyand unconditionally authorised in accordance withSection 80 of the Companies Act 1985 (the “Act”) to exercise all the powers of the Company to allotrelevant securities (as defined in that section) up to an aggregate nominal amount of £1,227,593(approximately 5 per cent of the aggregate nominalamount of the issued share capital of the Company asat 8 March 2007) such authority to expire at the

conclusion of the next Annual General Meeting of theCompany or the date 15 months after the passing ofthis resolution, whichever is the earlier, but so that thisauthority shall allow the Company to make offers oragreements before the expiry of this authority whichwould or might require relevant securities to beallotted after such expiry as if the authority conferredby this resolution had not expired.

9. THAT, subject to the passing of Resolution 8 set outabove, the Directors be and they are herebyauthorised, pursuant to Section 95 of the Act to allotequity securities (as defined in Section 94 of the Act)for cash pursuant to the authority given by the saidResolution 8 as if Section 89(1) of the Act did notapply to any such allotment, provided that this powershall be limited:

a) to the allotment of equity securities in connectionwith a rights issue in favour of all holders of a class ofrelevant equity securities where the equity securitiesattributable respectively to the interests of all holdersof securities of such class are either proportionate (as nearly as may be) to the respective numbers of relevant equity securities held by them or areotherwise allotted in accordance with the rightsattaching to such equity securities (subject in eithercase to such exclusions or other arrangements as theBoard may deem necessary or expedient in relationto fractional entitlements or legal or practicalproblems under the laws of, or the requirements of,any regulatory body or any stock exchange in anyterritory or otherwise); and

b) to the allotment (otherwise than pursuant to a rightsissue) of equity securities up to an aggregate nominalamount of £1,227,593 (approximately 5 per cent ofthe aggregate nominal amount of the issued sharecapital of the Company as at 8 March 2007); and

c) to the allotment of equity securities at a price of notless than the net asset value per share and this powershall expire at the conclusion of the next AnnualGeneral Meeting of the Company or the date 15months after the passing of this resolution, whicheveris the earlier, save that this authority shall allow theCompany to make offers or agreements before theexpiry of this authority, and the Directors may allotequity securities in relation to such an offer oragreement as if the authority conferred by thisresolution had not expired.

Resolution 10 is a special resolution which, ifapproved, will renew the Company’s authority topurchase its shares for cancellation. The limit set bythe Board is 14.99% of the number of ordinary sharesin issue on 8 March 2007. Purchases of shares will bemade at the discretion of the Board and within


Notice of Meeting

guidelines set from time to time by the Board and inthe light of prevailing market conditions. Purchaseswill only be made in the market at prices below theprevailing net asset value per share, thereby resultingin an increase in the net asset value per share.

10.THAT the Company be and is hereby generally andunconditionally authorised in accordance with Section166 of the Companies Act 1985 (the “Act”) to makemarket purchases (within the meaning of Section 163 of the Act) of shares of 25p each in the capital of theCompany (the “shares”) provided that:

a) the maximum number of shares hereby authorised to be purchased shall be 14,721,297;

b) the minimum price which may be paid for a share is 25p;

c) the maximum price which may be paid for a share is an amount equal to 105% of the average of themiddle market quotations for a share taken from the London Stock Exchange Official List for the fivebusiness days immediately preceding the day onwhich the share is purchased;

d) the authority hereby conferred shall expire at theconclusion of the next Annual General Meeting of the Company unless such authority is renewed prior to such time; and

e) the Company may make a contract to purchaseshares under the authority hereby conferred prior to the expiry of such authority which will or may beexecuted wholly or partly after the expiration of suchauthority and may make a purchase of sharespursuant to any such contract.

11.THAT the Company continue to carry on business asan investment trust.

By Order of the Board

Fidelity Investments InternationalSecretary 27 March 2007

Notes:1 A shareholder entitled to attend and vote is entitled

to appoint a proxy (or proxies) to attend and, on apoll, vote instead of him. A proxy need not be ashareholder of the Company.

2 A form of proxy is enclosed for use by shareholders.Completion and return of the form of proxy will notprevent a shareholder from subsequently attending the meeting and voting in person if they so wish.

3 To be effective, the instrument appointing a proxy,and any power of attorney or other authority underwhich it is signed (or a copy of any such authoritycertified notarially or in some other way approved by the Directors), must be deposited with theCompany’s Registrars, Capita Registrars, ProxyProcessing Centre, Telford Road, Bicester OX26 4LDnot less than 48 hours before the time for holding themeeting or adjourned meeting or, in the case of apoll taken more than 48 hours after it is demanded,not less than 24 hours before the time appointed forthe taking of the poll at which it is to be used.

4 In the case of joint holders, the vote of the senior whotenders the vote shall be accepted to the exclusion ofthe votes of the other joint holders and for thispurpose, seniority shall be determined by the order inwhich the names stand in the Register of Members.

5 Pursuant to Regulation 41 of the UncertificatedSecurities Regulations 2001, the Company hasspecified that only those shareholders registered inthe Register of Members of the Company at 5.30pmon 1 May 2007 shall be entitled to attend and vote atthe meeting in respect of the number of sharesregistered in their name at that time. Changes to theRegister of Members after 5.30pm on 1 May 2007shall be disregarded in determining the rights of anyperson to attend and vote at the meeting.

6 Shareholders and any proxies or representatives theyappoint agree by attending the meeting that they areexpressly agreeing that they are willing to receive anycommunications, including communications relatingto the Company’s securities, made at the meeting.

7 No Director has a service contract with the Company.

Registered Office: Beech Gate, Millfield Lane, LowerKingswood, Tadworth, Surrey KT20 6RP


Investing in Fidelity Japanese Values PLC

INVESTING INSIDE AN ISAA Fidelity ISA (“Individual Savings Account”) can be anexcellent way to get more from your investment,because you will not have to pay income or capital gainstax on your returns.

• up to £7,000 in a Maxi ISA

• up to £4,000 in a Mini stocks and shares ISA

The minimum investment in the Fidelity ISA is £1,000 asa lump sum, £250 as a top-up or £50 a month in aregular savings plan.

5 in 1 ISA – Fidelity Japanese Values PLC is one of fiveinvestment trusts managed by Fidelity. You can invest inthe entire range through the Fidelity 5-in-1 ISA, whichspreads your money equally across all five trusts. Thisoffers a simple and convenient way to invest acrossEurope, the UK, Japan and Asia – giving you a broadlydiversified portfolio in a single investment.

Charges – The standard initial charge for the Fidelity ISAis 3.5%. Fidelity pays stamp duty from the initial charge.There are no other charges for the Fidelity ISA, but theCompany pays an annual management charge to Fidelityof 1% plus VAT, as set out in the Annual Report.

MOVING MONEY FROM PREVIOUS PEPS AND ISASIf you have opened ISAs or PEPs with other investmentcompanies, you can move them into the Fidelity ISA andinvest in Fidelity Japanese Values PLC without losing anytax benefits. This is known as a transfer and it can be agreat way to give your portfolio a new focus, or to realignit with your current investment goals. Please note thatduring the transfer your money will not be invested in thestockmarket so you may miss out on any growth duringthis time.

Charges – The standard initial charge for a transfer is3.5%. You will not have to pay any additional transfercosts. However, please bear in mind that your current ISAor PEP manager may ask you to pay an exit fee. The

annual management charge is as described above in the“Investing in an ISA” section.

INVESTING OUTSIDE AN ISAIf you prefer to invest outside an ISA, or have alreadyused your full ISA allowance, the Fidelity InvestmentTrust Share Plan offers you a low cost and convenientway to put money into Fidelity Japanese Values PLC.

The minimum investment is £1,000 as a lump sum, £250as a top-up or £50 a month in a regular savings plan.

Investing for children – The Share Plan is a flexible andinexpensive way to invest on behalf of children. All youhave to do is enter the initials or name of the child in theDesignation Box on the Share Plan application form. Aspecial leaflet on investing for children throughinvestment trusts is available from Fidelity.

Charges – There are no charges for buying, selling orholding shares through the Fidelity Investment TrustShare Plan other than Stamp Duty of 0.5%, which iscurrently payable on all share purchases. However, if youinvest through a Financial Adviser, there may be an initialcharge of up to 3% to pay for advice.

Holding shares directly – If you have shares in FidelityJapanese Values PLC that you bought through a brokeror share shop, you can transfer them into the FidelityInvestment Trust Share Plan. Doing this allows you toreinvest your dividends and make further investmentswithout having to pay brokerage fees.

You will also be able to set up a monthly savings planand receive statements and valuations twice a year.

INVESTING ONLINEYou can invest online in Fidelity Japanese Values PLCshares via www.fidelity.co.uk/sharenetwork. FidelityShare Network enables you to buy or sell shares in anylisted company during normal London Stock Exchangetrading hours – between 8am and 4.30pm any workingday. Shares in Share Network can either be held director in an ISA, subject to the normal ISA limits and

The Manager of the Company – Fidelity Investments International – offers a range of options, so that you caninvest in the way that is best for you. As Fidelity Japanese Values PLC is a company listed on the London StockExchange you can also buy its shares through a stockbroker, share shop or bank.



restrictions. You will be shown a live price and be able to buy or sell immediately. If an order is placed when the market is closed, it will be processed as soon as the market re-opens. Unlike many online share dealingservices, Fidelity Share Network gives you CRESTpersonal membership for shares held direct. This means that shares are registered on the CRESTsystem in your own name and everything relating to your shares – dividends, annual reports and so on – will be sent direct to you and you will be able to attendand vote at shareholder meetings in your own name.Personal CREST membership does not apply to ISA holdings which must be held in the name of the ISA manager’s nominee under ISA regulations. Fidelity Share Network has a very competitive coststructure. Share purchases or sales are executed on line for only £9 per trade. (Stamp duty is also payable on purchases at the rate of 0.5%). There is an accountadministration fee of £5 per month, however manydifferent shares you own and whatever their value.

CONTACT INFORMATIONPrivate investors: call free to 0800 41 41 10, 9am to 6pm.

Financial advisers: call free to 0800 41 41 81, 8am to 6pm, Monday to Friday.

Existing shareholders who have a specific queryregarding their holding or need to provide updatedinformation, for example a change of address, should contact the appropriate administrator:

Holders of ordinary sharesCapita Registrars, Registrars to Fidelity Japanese ValuesPLC, The Registry, 34 Beckenham Road, Beckenham,Kent BR3 4TU Telephone: 0870 162 3100Through the website of our Registrar, Capita Registrars,shareholders are able to manage their shareholdingonline by registering for the Share Portal, a free, secure,online access to your shareholding. Facilities include:

- Account Enquiry;

- Allows shareholders to access their personalshareholding, including share transaction history,dividend payment history and to obtain an up-to-dateshareholding valuation;

- Amendment of Standing Data. This allows you to change your registered postal address and add,change or delete dividend mandate instructions.

You can also download from this site forms such aschange of address, stock transfer and dividend mandateforms as well as buy and sell shares in the company.

To make use of any of these facilities, please log on to the Capita Registrars website atwww.capitaregistrars.com/shareholders and follow the links to the Share Portal.

Should you have any queries in respect of the abovefacilities, please do not hesitate to contact the CapitaShare Portal helpline on 0870 162 3191, overseas +44 208639 3367, or by e-mail at [email protected].

Share Plan investorsFidelity Investment Trust Share Plan, Lloyds TSBRegistrars, The Causeway, Worthing, West Sussex BN99 6DA Telephone: 0870 601 5366

ISA/PEP investorsFidelity, using the freephone numbers given opposite, or by writing to:UK Customer Service, Fidelity Investments, Oakhill House, 130 Tonbridge Road, Hildenborough,Tonbridge, Kent TN11 9DZ

Fidelity Share Network:www.fidelity.co.uk/sharenetwork

General enquiries should be made to Fidelity, theInvestment Manager and Secretary, at the Company’sregistered office:Fidelity Investments International Investment TrustsBeech Gate, Millfield Lane, Lower Kingswood, Tadworth,Surrey KT20 6RPwww.fidelity.co.uk/its

KEEPING YOU UPDATEDIf you hold Fidelity Japanese Values PLC shares in an ISA or PEP, you will receive a yearly report detailing

all of your transactions and the value of your shares. Investors with the Fidelity Investment Trust Share Plan will receive statements and valuations twice a year.

The share price of Fidelity Japanese Values PLC appears daily in The Financial Times.

Price and performance information is also available at fidelity.co.uk/its

Investors can obtain the real-time share price by phoning FT Cityline on 0906 843 2287.

Calls are charged at a premium rate.



FURTHER INFORMATION

For application forms or more information about any of the investment options described here,

please call the Fidelity Investment Trust Line

on 0800 41 41 10 and talk to a Fidelity customer representative (9am to 6pm).

Alternatively, you may like to visit the Fidelity London Investor Centre at 25 Cannon Street,

next to St Paul’s Cathedral. You can also find out more by visiting fidelity.co.uk/its or contacting

your Financial Adviser.

The Fidelity Individual Savings Account (“ISA”) is offered and managed by Financial Administration Services Limited. The FidelityInvestment Trust Share Plan is managed by Fidelity Investments International. Both companies are authorised and regulated by theFinancial Services Authority. The Fidelity Investment Trust Share Plan is administered by Lloyds TSB Registrars and shares will be held in the name of Lloyds TSB Registrars Savings Nominees Limited. The value of savings and eligibility to invest in an ISA will depend on individual circumstances and all tax rules may change in the future. Fidelity investment trusts are managed by Fidelity InvestmentsInternational. Fidelity only gives information about its own products and services and does not provide investment advice based onindividual circumstances. Should you wish to seek advice, please contact a Financial Adviser. Issued by Fidelity InvestmentsInternational, authorised and regulated by the Financial Services Authority.

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Please note that the value of investments and the income from them may fall as well as rise and the investor may not get back theamount originally invested. Past performance is not a guide to future returns.

For funds that invest in overseas markets, changes in currency exchange rates may affect the value of your investment. Investing in small and emerging markets can be more volatile than other more developed markets.

Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but isincluded for the purposes of illustration only. Investees should also note that the views expressed may no longer be current and mayhave already been acted upon by Fidelity.

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Documents

Fidelity Japanese Values PLC · 2015-12-28 · Fidelity Japanese Values PLC Annual Report For the year ended 31 December 2006. Contents ... taken the tactical view that the Japanese