Baillie Gifford Japan Trust plc: November 2020 update

• The trust invests in high-quality Japanese companies which hold competitive positions in their industries
• The managers aim to deliver long-term growth by investing mainly in small to medium-sized Japanese companies
• The trust aims to increase dividends from 3.50p per share to 4.50p by the end of 2020, an increase of 28.6% (income is variable and not guaranteed).

How it fits in a portfolio

Baillie Gifford Japan Trust aims to deliver long-term growth by investing in high-quality Japanese companies which hold competitive positions in their industries. The managers have the flexibility to invest in companies of any size, but typically focus on higher-risk small to medium-sized companies with what they believe to have above-average growth potential.

The trust could work well as part of an adventurous investment portfolio seeking exposure to Japan, or diversify against Japanese funds focused on larger firms. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

Manager

Matthew Brett has 17 years' experience in the investment industry and has been at Baillie Gifford throughout his entire career. He's been a part of the Japanese equities team since 2005 and became lead manager of the Baillie Gifford Japan Trust in 2018. Brett is co-manager of other open-ended funds at Baillie Gifford, including the Baillie Gifford Japanese fund and the Baillie Gifford Japanese Income Growth fund. These are run in a similar way and invest in some of the same companies. We think he can comfortably manage his commitment to each.

Praveen Kumar joined Baillie Gifford in 2008 and is deputy manager of the trust. He's been an investment manager in the Japanese Equities team since joining the firm and is lead manager of both the Baillie Gifford Shin Nippon Trust and Baillie Gifford Japanese Smaller Companies fund.

Both managers can call upon the support of a strong and well-resourced team for ideas, challenge or analysis. We like the fact the trust is run by an experienced team.

Process

The managers prefer to invest in companies for the long term – a third of the trust's investments have been held for over ten years, and a further third have been held for between five and ten years.

The trust's investments can broadly be sorted into four categories; secular growth, growth stalwarts, special situations and cyclical growth.

Secular growth businesses are where the managers see the greatest opportunity, but they're also more risky. This category currently makes up around half of the trust and long-standing companies in this area include internet service provider GMO Internet and online retailer Rakuten. The managers recently added Bengo4.com, a website that connects lawyers with people and businesses in need of legal advice, to the trust.

Growth stalwarts offer the potential for steadier, more repeatable levels of growth. Companies in this section of the portfolio include financial services provider Mitsubishi UFJ Lease & Finance and sports manufacturer Asics. High end skin care company Pola Orbis and pharmaceutical chain Sugi were added to the trust this year.

The managers view special situations as companies with exciting assets beneath the bonnet, which provide opportunity for growth. Current examples include SoftBank. The managers believe the company is attractively valued, has strong underlying assets including investments in Alibaba and the SoftBank Vision fund, and rate the management style of the company's CEO highly.

Lastly, cyclical growth companies are sensitive to economic conditions and could grow as the economy grows. Examples include banking operator Sumitomo Mitsui Trust. In the current climate of low interest rates and reduced demand for mortgages, the company is seeing lower demand for its services. But when interest rates begin to rise and people feel more financially stable, demand for their services could recover.

The trust has the flexibility to use gearing and derivatives which can magnify any gains or losses. Investors should be aware that if used, each increases risk.

Culture

Baillie Gifford was founded in 1908 and has become well-known for its investing-for-growth philosophy. The firm is an independent private partnership, allowing its managers to remain focused on long-term investing without short-term shareholder distractions. Brett is a partner of the firm and we feel this helps make sure the trust is run in a way that benefits all shareholders.

The managers of the trust consider environmental, social and governance (ESG) factors as part of their investment process. Historically, Japanese companies have struggled with governance but improvements are coming through in this area.

Brett and the team actively engage with companies and vote against companies where they feel there are significant governance improvements to be made.

Cost

The ongoing annual charge over the trust’s financial year to 31 August 2020 was 0.68%, compared to 0.70% the previous year. Investors should refer to the latest annual reports and accounts, and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform charge doesn’t apply if held in a Fund and Share account.

Performance

The trust has outperformed the Japanese stock market since launch and also since Brett became lead manager in April 2018. In recent years, the trust benefited from the managers' growth-focused investment philosophy, and a focus on companies in good financial positions.

Despite the impact of coronavirus and the volatility it has created, the trust has performed well over the past year*. The share price rose 16.5%, boosted by a narrowing in the trust's discount to net asset value (NAV). At the time of writing (10 November 2020), the trust trades at a 0.93% discount to NAV. Past performance is not a guide to future returns.

Japan's apparent ability to control the virus has led to a swifter rate of economic recovery. Companies have started to return to normal and certain trends have been accelerated. One particular trend which has contributed strongly to the trust's performance is the increased demand for online services.

Internet service provider Rakuten Inc has been notably strong over the past 12 months and continues to make good progress in building out a fourth mobile phone network in Japan. SBI Holdings, a leading online brokerage, and online medical service provider M3 Inc have also done well.

In contrast, the weaker performers include barcode operator Sato Holdings which was hit hard by supply chain disruptions and falling consumer demand. Mazda Motor Corporation also performed poorly, suffering from low vehicle demand.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10/2020.

More about Baillie Gifford Japan Trust, inc. charges

Baillie Gifford Japan Trust Key Information Document