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Baillie Gifford Shin Nippon plc: April 2021 update

Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, cost and performance of Baillie Gifford Shin Nippon plc.

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 invests in high quality companies that have the potential to drive change in Japan
  • Praveen Kumar is an experienced Japanese manager and has run the trust since 2015
  • Long-term performance has been strong, but this is not an indication of how it will perform in the future

How it fits in a portfolio

Baillie Gifford Shin Nippon Trust aims to grow investors’ money over the long term by investing in high-quality smaller Japanese companies. These companies can offer excellent long-term growth potential, but are higher risk than their larger peers. The trust could work well as part of an adventurous investment portfolio seeking exposure to Japan or diversify 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

Praveen Kumar has run this trust since December 2015 and spent his entire investment career at Baillie Gifford, joining in 2008. He’s an investment manager on the Japanese equites team and has specialised in Japanese equities since 2011.

Kumar is also the lead manager of the open-ended Baillie Gifford Japanese Smaller Companies Fund and is deputy manager of the Baillie Gifford Japan Trust. 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.

He’s supported by the broader Japanese equities team. It’s currently made up of eleven members, including a mix of portfolio managers, analysts and product specialists which he can look to for ideas, challenge or analysis.

Process

Investing in companies for the long term is a key part of the trust’s investment philosophy - almost a quarter of the trust’s investments have been held for over ten years, and over a third have been held for between five and ten years. The manager looks for companies with dynamic management teams and the potential for fast and disruptive growth.

Another key focus is companies driving meaningful change in Japan. Over the past year, the pandemic has accelerated certain trends, and, over the long run, Kumar feels some smaller companies could benefit from this. Advancements in healthcare, financial innovation and the development of new technology are just a few examples striving towards a ‘New Japan’.

As a result, real estate platform, GA Technologies was recently added to the trust. The company developed some AI software (artificial intelligence) to allow people to manage various property tasks online, such as remote viewings and automated floor plan generation. Unique compared to most peers, the manager feels it’s positioned well to offer long-term growth.

Digital wealth management platform, WealthNavi Inc, was another addition to the trust. It offers a cloud-based robo advisory service, helping people gain access to financial advice. Historically, advice has been limited to the wealthy few, so Kumar believes it could drive meaningful change. An increased demand for online services is also set to help the company.

In contrast, digital payment provider Digital Garage and logistics and warehouse company Hamakyorex were sold. Digital Garage has been struggling to compete in the arena of Japanese digital payments, so may not be able to achieve the same levels of growth going forward.

Hamakyorex has been hit hard by labour shortages and has subsequently been paying much higher wages to secure experienced workers, which tightened profit margins. This could be a long-term issue for the company, so the manager lost conviction.

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

Culture

Baillie Gifford is an independent private partnership founded in 1908 and is owned by partners who work at the firm. This ownership structure means senior managers consider themselves investors and 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.

The Board is responsible for oversight of environmental, social and governance (ESG) matters and believes ESG factors sit naturally with the trust’s long-term approach to investment.

The manager doesn’t exclude companies purely based on ESG factors but encourages companies to act in a sustainable way. Historically, Japanese companies have struggled with governance, so a strong emphasis is placed on engagement, sustainable business practices, the structure of the board and management team of each company.

Cost

The ongoing annual charge over the trust’s financial year to 31 January 2021 was 0.71%, compared to 0.73% 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

Since Kumar took control of the trust in December 2015 it has risen 156.1%* compared to the AIC Investment Trust Japan sector’s gain of 83.2%. Remember past performance is not a guide to the future, and the trust has been through tougher periods too.

Despite the bumpy start to 2020, the trust has performed strongly over the past 12 months too. The trust returned 68.8% vs 49.6% returned by the AIC Investment Trust Japan sector. It also increased its net asset value (NAV) by 52.1%. All investments fall as well as rise in value so you could get back less than you invest.

Unsurprisingly, food delivery services, like Demae-Can, have been busier due to social distancing and lockdown measures. They have performed strongly since the virus took hold, as businesses used their services to stay afloat and continue trading whilst physical stores were closed.

Another online service that performed well is legal portal Bengo4.com. It connects lawyers to people in need of advice and has seen stellar growth through its digital contracts business, CloudSign. The pandemic accelerated the shift to digital contracts as people working from home couldn’t certify documents with the traditional Hanko seal. CloudSign has provided the solution to this.

Not all companies have done well though. Japan’s leading travel operator H.I.S was among one of the worst performers. A collapse in domestic and international travel meant that business halted, and profits fell.

Cosmetics retailer Istyle was also one of the trust’s weakest performing companies. A large portion of its business comes from its network of physical stores. As these stores were forced to close due to the pandemic, the company’s revenue was hit hard.

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Baillie Gifford Shin Nippon Trust 28.6% 43.9% -5.0% -21.2% 68.8%
AIC Investment Trust – Japan 32.2% 17.5% -7.9% -9.7% 49.6%

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021.

Find out more about Baillie Gifford Shin Nippon Trust including charges

Baillie Gifford Shin Nippon Trust Investment Company 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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