Heather Ferguson, Investment Analyst, reports on our view of Baillie Gifford Shin Nippon Trust plc following its recently released Annual Results for the year ending 31 January 2017.
- NAV total return of 34% compared with 34.9% for the trust’s benchmark
- Share price total return of 33.5%
- The team is positive in their outlook for Japanese smaller companies
Praveen Kumar assumed management of the Baillie Gifford Shin Nippon Trust in December 2015 and is supported by an experienced and well-resourced team. A robust and well-defined process could help drive long-term performance, although a focus on higher-risk small and medium-sized companies and a high level of gearing means performance can be volatile. Potential investors should refer to the latest annual report & accounts for details of the risks and charging structure.
The manager seeks to invest in smaller companies he believes to have above average prospects for growth. These companies, with disruptive and innovative products, typically look to poach the customers of large, slow-moving businesses. He prefers businesses able to grow strongly irrespective of the health of the wider Japanese economy. Geopolitical issues have caused investors to shift their focus from these more defensive "quality" businesses to economically-sensitive companies, which has held back the trust’s short term performance relative to the benchmark.
However, there are a number of trends developing in Japan that the trust’s investments have benefitted from:
With just over 24 million visitors last year, the highest number since records began in the early 1960's, tourism in Japan has been very strong. The trust’s investment in Seria, Japan’s answer to the UK’s £1 stores, has been a direct beneficiary and witnessed a surge in sales due to its popularity with tourists.
High levels of employment
There is a shortage of labour across the country and companies are increasingly having to compete for applicants. IT staffing specialist TechnoPro has experienced strong demand for its services and the share price has risen as a result. The company has handled the increased demand for its services well and is on track to meet its operational targets one year ahead of schedule.
Recent changes to pharmaceutical law enable innovative regenerative therapies to gain accelerated regulatory approval. Portfolio holding Healios was among the three companies recently chosen to participate in this process.
A number of companies have been sold from the portfolio over the year. Oisix, an online retailer of organic foods, was sold as the company was struggling to grow the business and Praveen Kumar lost faith in the company’s management. Elsewhere, an investment in Modec, which provides floating vessels used for oil and gas exploration, was sold on concerns relating to its largest customer Petrobras; the Brazilian national oil company is currently the subject of multiple investigations around financial impropriety.
Since Praveen Kumar assumed management of the Baillie Gifford Shin Nippon Trust it has risen 38.4%, broadly in line with the 40%* rise of the FTSE Japan Small Cap Index. The long term performance of the trust remains strong, although please remember past performance is not a guide to the future.
|Annual Percentage Growth|
| Feb 12 -
| Feb 13 -
| Feb 14 -
| Feb 15 -
| Feb 16 -
|Baillie Gifford Shin Nippon PLC||47.98||33.79||3.86||39.24||34.93|
|FTSE Japan Small Cap||11.05||2.8||16.92||8.64||43.24|
Past performance is not a guide to future returns. Source: *Lipper IM to 28/02/17. The fund’s official benchmark is the MSCI Japan Small Cap Index, the FTSE Japan Small Cap Index quoted here is very similar and our preferred measure.
While the Western world becomes increasingly focused on immigration and border protection, Japan is moving in the opposite direction. The government has recently instituted a new visa scheme for skilled overseas workers in certain sectors that would enable them to gain permanent residency in one year. The manager expects this to address Japan’s labour shortage and provide companies with the means to grow.
Elsewhere corporate governance has improved and shareholder returns via buybacks and dividends remain at encouragingly high levels, according to the manager. He believes the operating environment for Japanese smaller companies continues to improve and there remains significant scope for disruptive businesses to achieve high levels of growth in future.View the Baillie Gifford Shin Nippon PLC factsheet
Please remember all investments fall in value as well as rise and the manager has the flexibility to borrow money to invest (gearing) which magnifies losses when stock markets fall. The manager also has the flexibility to use derivatives, which adds risk. Potential investors should refer to the latest annual reports and accounts for details of these risks along with the charging structure.