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Baillie Gifford Japan Trust plc: May 2022 update

Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Baillie Gifford Japan Trust.

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 trust is run by two experienced Japanese managers – Matthew Brett and Praveen Kumar
  • Long-term performance has been strong but the rotation in investment styles has hurt recent performance
  • Over the course of 2021 the trust’s dividend payment increased by 33%, though 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 they think have above-average growth potential.

The trust could work well as part of an adventurous investment portfolio seeking exposure to Japan, or provide some diversification alongside Japanese funds focused on larger firms. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

Matthew Brett has been at Baillie Gifford for his entire career, clocking up almost two decades of industry experience. He's an investment manager on the Japanese equities team and became lead manager of the Baillie Gifford Japan Trust in 2018.

Brett has some additional responsibilities including being a named co-manager on the open-ended Baillie Gifford Japanese fund and the Baillie Gifford Japanese Income Growth fund. These funds 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 is deputy manager of the trust. He joined Baillie Gifford in 2008 and has been an investment manager in the Japanese Equities team ever since. He is the 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. It’s currently made up of eleven members, including a mix of portfolio managers, analysts and product specialists which provide ideas, challenge and analysis. We like the fact the trust is run by an experienced team.

Process

The managers prefer to think and invest over decades. They believe investing in exceptional companies, who are capable of above average earnings growth over time is key to long-term success. This means they tend to hold companies longer than the market average – almost a third of the trust's investments have been held for over ten years, and almost another third have been held for between five and ten years.

The managers also view the trust’s investments across four categories - secular growth, growth stalwarts, special situations and cyclical growth.

Secular growth businesses are those the managers see as having the greatest potential opportunity for growth, but they're also considered riskier investments. This category currently makes up around 43% of the trust including long-standing companies like internet service provider GMO Internet and online retailer Rakuten. More recently, the managers sold medical device provider Cyberdyne and online food delivery company Demae-can because they lost confidence in management’s execution abilities.

Growth stalwarts offer the potential for steadier, more repeatable levels of growth. The managers feel companies like gaming giant Nintendo and cosmetics producer Shiseido fit the criteria and have exciting long-term potential so added them to the trust. On the flip side, the managers sold two investments because they lost faith in their long-term prospects - footwear manufacturer Asics and credit service provider Zenkoku Hosho.

The managers view special situations as companies with exciting assets beneath the bonnet, which provide opportunity for growth. This category makes up around 18% of the trust, with the two largest investments being Sony and SoftBank.

The last category is cyclical growth companies. These businesses are more sensitive to economic conditions and often grow as the economy grows. Chugoku Marine Paints which provide a specialist paint for ships to reduce drag and Shima Seiki which offers the world’s first whole garment knitting machine, were the only additions to this part of the trust.

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. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making.

Brett became a partner of the firm in 2018 and we feel this helps make sure the trust is run in a way that benefits all shareholders. We like that portfolio managers are incentivised in a way that aligns their interests with those of long-term investors.

ESG integration

All Baillie Gifford funds and trusts are run with a long-term investment horizon in mind – they see themselves as long-term owners of a business, not short-term renters. So assessing whether society will support the business model over the long term, and whether management will act as good stewards of shareholders’ capital is an important part of the investment process. All fund managers have access to a dedicated Governance and Sustainability team that is responsible for developing and coordinating the firm’s environmental, social and governance (ESG) research. Investment in controversial weapons is prohibited across the firm.

The managers 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 2021 was 0.66%, compared to 0.68% 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 broader Japanese stock market significantly since launch, buoyed by the managers growth-focused investment style. But we’ve seen a sharp rotation away from this style of investing which has hurt more recent performance and paved the way for a style known as value investing.

Brett became lead manager in April 2018 and since then the trust has underperformed the broader Japanese stock market. The trust has struggled particularly over the past 12 months and has fallen 28.07%* versus the average return of Japanese investment trusts of -16.11%. Over the same period the trust’s NAV has fallen 21.32% and the trust is trading at a discount of 6.50% (as of 27 May). Past performance isn’t a guide to future returns.

Printing service provider Raksul was one investment that hurt the trust’s performance. It operates online so has seen a drop off in demand since the start of the coronavirus pandemic. Istyle, a cosmetics company, has also detracted from performance. The business opened some physical stores, but they were forced to close them over the pandemic which hurt its revenue streams. Rakuten, another online retailer also featured as one of the poorest performing companies over the last 12 months to March 2022.

Despite the current market pressures, other parts of the trust held up well. The four categories of stocks in the trust aim to provide some diversification in difficult times. If one part of the trust falls, another can help prop it up.

We’ve seen evidence of this in parts of the special situations and cyclical growth categories. Inpex and Sumitomo Metal Mining were two of the best performing companies up to March 2022. Inpex has benefited from the stronger demand post pandemic whereas Sumitomo Metal Mining has rallied from the higher precious metal prices, including copper, nickel and gold.

For its financial year ending 31 August 2021 the trust increased its dividend by roughly 33% compared with the previous year. The managers are optimistic on the prospects for dividend growth after seeing more companies recovering from the pandemic and increasing their earnings. No interim dividend was declared though and investors need to remember income isn’t guaranteed.

The trust may continue to underperform while growth investing remains out of favour. However, the managers believe they can outperform the market over the long term. All investments fall as well as rise in value so you could get back less than you invest.

Annual percentage growth

Apr 17 – Apr 18 Apr 18 – Apr 19 Apr 19 – Apr 20 Apr 20 – Apr 21 Apr 21 – Apr 22
Baillie Gifford Japan Trust PLC 30.29% -2.02% -14.20% 58.66% -28.07%
AIC Investment Trust - Japan 23.62% -6.15% -3.26% 34.12% -16.11%

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

More on the Baillie Gifford Japan Trust including charges

Baillie Gifford Japan Trust Key Information Document

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    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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