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Baillie Gifford Japan – a year of two halves

It was a year of two halves for the Baillie Gifford Japan Trust. In this update, we look at the trust's performance in more detail following the release of its annual results to the end of August 2019.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • The manager's found plenty of opportunities in smartphone-orientated gaming companies
  • Net Asset Value (NAV) fell 5.3% compared with a fall of 0.5% for the trust's benchmark
  • Share price fell 7.4% as the trust's premium narrowed
  • Use of gearing and some company-specific issues held back returns

Matthew Brett took control of the Baillie Gifford Japan Trust in April 2018 when his predecessor Sarah Whitley retired. He's been investing in Japan for more than a decade and has a strong track record running other Japanese funds. He also benefits from the support of a strong and well-resourced team.

Brett scours the Japanese stock market for high quality companies with a competitive position in their industry, financial strength and a strong management team at the helm. He has the flexibility to invest in companies of any size, but tends to focus on medium-sized and small ones. They have the potential to grow strongly over the long term but are higher risk than bigger businesses. The manager can also use derivatives, which adds risk.

Overall we think this trust is a reasonable option for exposure to the Japanese stock market and expect it to deliver good returns over the long run, although there are no guarantees.

A year of two halves

It was a volatile year for the trust. Its NAV fell 16.0% during the first half, and rose 12.7% in the second half, but ended the period 4.8% behind the broader Japanese stock market. The trust's use of gearing (borrowing to invest) was partly responsible for the underperformance.

Gearing has the potential to boost returns in the long run but adds risk and means performance can be volatile. Investors should refer to the latest annual report & accounts for details of the risks and charging structure. Past performance isn't a guide to the future. All investments can fall as well as rise in value so you could get back less than you invest.

Annual percentage growth
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
Baillie Gifford Japan Trust 13.0% 31.3% 34.0% 18.8% -3.3%
FTSE Japan 6.2% 31.3% 11.4% 13.9% 0.3%

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2019

One of the trust's weakest performers was staffing business Outsourcing. It's grown sales 7-fold over the past five years but investors worried that weaker economic conditions in Japan could impact the business. The manager continues to believe in the company's long-term prospects so added to his investment at a lower share price.

Online fashion retailer Zozo also performed poorly following the failure of its made-to-measure service. Brett also became concerned when the company approved an incentivisation package for its CEO which he viewed as excessive. He later reduced his investment. The company subsequently received a boost when Yahoo Japan made a bid to take control.

A number of the trust's investments delivered stronger performance. Online retail and finance company Rakuten performed exceptionally well when it announced significant progress in its attempts to set up a mobile phone network in Japan. Advantest, the chip-testing company, also did well when demand and profits surged during the year.

What changes were made?

Six new investments were made over the course of the year, and seven were sold from the trust. The manager found plenty of opportunities in smartphone-orientated games companies. Mixi and Gree were new additions. The manager also added to an existing investment in Colopl.

Each of these businesses has a good record of innovation, and their founders remain significant shareholders. They've had a tough few years though and haven’t managed to generate hit games to rival past successes. This means their share prices have fallen to attractive levels, in the manager's view. He thinks successful innovation or profit growth at any of these companies could cause other investors to recognise their true prospects.

More about Baillie Gifford Japan Trust, inc. charges

Baillie Gifford Japan Trust Key Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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