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  • Baillie Gifford Shin Nippon - June 2020 update

    Investment Analyst Dominic Rowles shares our analysis on the manager, process, culture, cost and performance of the Baillie Gifford Shin Nippon investment 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.

    • Praveen Kumar is an experienced investor and he's supported by a well-resourced team
    • He's delivered strong returns since taking control of the trust in December 2015
    • We think the trust is a more adventurous option, but could work well as a small part of a well-diversified portfolio

    How it fits in a portfolio

    This trust aims to grow investors' money over the long term by investing in high-quality smaller companies. They have excellent long term growth potential but are higher-risk than their larger, more developed peers. We think this trust could be a good addition to a broader investment portfolio. It's a more adventurous option though, so should only make up a small part of a well-diversified portfolio. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

    Manager

    The trust's been run by Baillie Gifford manager Praveen Kumar since December 2015. He's been with Baillie Gifford since 2008 and has analysed and invested in Japanese companies since 2011. He manages this trust alongside the Baillie Gifford Japanese Smaller Companies Fund, and is deputy manager of the Baillie Gifford Japan trust. We think this is a manageable workload given the similarities in the way the three portfolios are managed.

    He also has the support of the broader Japanese Equities team which is currently made up of nine portfolio managers and analysts.

    Process

    Kumar invests in high-quality Japanese smaller companies with dynamic, entrepreneurial management teams and outstanding growth prospects. These companies tend to offer disruptive and innovative products and look to poach customers from large, slower moving businesses.

    The trust currently invests in around 75 companies. The managers have found plenty of opportunities in industrials and technology-related businesses – the two sectors make up around 50% of the trust. The rest is spread across a wide range of sectors including healthcare, financial services and real estate.

    Recent investments include Kitanotatsujin, a specialist online cosmetics retailer. It offers a service where customers are sent a selection of personalised cosmetic products in return for a monthly fee. Given the company's successful track record of developing premium cosmetic products that customers like, Kumar believes the company can continue to grow quickly for a number of years.

    In contrast, he sold an investment in online fashion retailer ZoZo after Z Holdings (formerly known as Yahoo Japan) acquired a majority stake in the business and its entrepreneurial founder Yusaku Maezawa stood down as CEO. Kumar's conviction in the company's future growth prospects dropped severely as a result.

    The trust’s use of derivatives and high level of gearing (borrowing to invest) adds risk and means performance can be volatile. Please see the latest annual report & accounts and Key Information Document for details of the risks and charging structure.

    Culture

    Baillie Gifford is an independent private partnership founded in 1908. It's owned by partners who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its investment portfolios, performing well. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making. We also like that portfolio managers are incentivised in a way that aligns their interests with those of long-term investors.

    Baillie Gifford takes the risks posed by Environmental, Social and Governance (ESG) issues seriously and uses its position to encourage companies to act in a sustainable way. The company has a dedicated Governance and Sustainability Team of sixteen which is responsible for producing ESG research which challenges and contributes to the investment decision-making process. They also monitor companies' progress on an ongoing basis, engaging with them on ESG matters where appropriate.

    Cost

    The trust’s current annual ongoing charge is 0.73%. This compares well with other Japan-focused investment trusts listed on the London Stock Exchange. We also think it's positive that the trust doesn’t levy a performance fee. If held in a SIPP or ISA the annual HL platform fee of 0.45% (capped at £200 p.a. for a SIPP and £45 p.a. for an ISA) also applies. Investment trusts are free to hold in a Fund & Share Account.

    Performance

    During the trust's financial year to 31 January 2020, the trust's Net Asset Value (NAV) rose 9.0%, slightly behind the 10.2% gain in the broader market of Japanese smaller companies. The share price fell 0.5% as the trust's shares moved from a large premium to a small discount.

    Since then, the coronavirus crisis has rocked stock markets worldwide. Despite the volatility, the trust's share price rose 8.2% in the four months to the end of May 2020. The broader market rose 0.5% over that time. Drug marketing business M3 was a strong performer. It's featured in the trust for a number of years and continues to expand into new areas like clinical testing and doctor recruitment.

    The trust's long term track record is impressive too. Since Kumar took control in December 2015, it's risen 113.9%, beating the broader Japanese smaller companies market by 57.4%. Past performance is not a guide to the future though. All investments will fall as well as rise in value so you could get back less than you invest.

    Annual percentage growth
    May 15 -
    May 16
    May 16 -
    May 17
    May 17 -
    May 18
    May 18 -
    May 19
    May 19 -
    May 20
    Baillie Gifford Shin Nippon 39.4% 27.6% 46.6% -9.8% 3.8%
    FTSE Japan Small Cap 9.9% 35.8% 17.5% -13.0% 7.5%

    Past performance is not a guide to the future. Source: Lipper IM to 31/05/2020

    Find out more about the trust, including charges

    Key Investor Information


    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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