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Baillie Gifford Shin Nippon plc: May 2022 update

Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, ESG integration, cost and performance of Baillie Gifford Shin Nippon 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 Japanese fund manager and has run the trust since December 2015
  • Long-term performance has been strong, but this isn’t an indication of how it will perform in the future
  • The trust invests in high quality, disruptive companies that have the potential to drive change and strive for a ‘New Japan’

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 tend to be younger, more disruptive companies that 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 a portfolio with 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

Praveen Kumar has run this trust since December 2015 and has 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 these responsibilities. 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 these responsibilities.

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 provide ideas, challenge and analysis. There is also some overlap with other investment teams, including the global teams. The overlap helps with understanding broader market trends and offers another source of potential investment ideas.

Process

Kumar likes to keep things simple. He focuses on investing in fast growing companies run by young and dynamic management teams. These types of companies tend to be driving meaningful and much needed change in Japan. Things like advancements in healthcare, financial innovation and the development of new technology are a just a few examples of companies striving for a ‘New Japan’. Kumar believes companies that can spur change or benefit from these trends are key to growth over the long term.

Another crucial part of the manager’s investment process is investing for the long term. 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 means the trust typically holds stocks for longer than the market average, so turnover is kept low. There have been a few changes to the portfolio over the last 12 months though.

Following a sharp increase in independent power producers and suppliers, Enechange was added to the trust. It provides an online service to help people search for the best energy deal available and facilitate the switch if needed. Spibier, a synthetic biology company and Shima Seiki, a leader in automated knitting machines, were added to trust for their long-term growth potential.

Kumar also reduced some of the trust’s investments. Pandemic beneficiary Dame-can was reduced following a period of good performance. Demand has dropped off slightly so it’s not performing as well as it did during the pandemic, so the team wanted to take some profits and recycle elsewhere.

Outsourcing, an employment placement company, was also reduced over the last 12 months. The company is providing positive solutions to Japan’s labour issues but there were worries around a potential scandal. Kumar reduced the amount invested to limit the impact of any potential falls in share price and then engaged directly with the company to fully understand the situation. He continues to monitor the situation, but the issues turned out to be a much smaller issue than he first thought so he retains conviction in the company.

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.

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.

Aside from the firm-level controversial weapons screen, 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.

Kumar has found more recently that some of the smaller Japanese companies are reacting well to ESG engagements. They find huge value in understanding how larger companies act and the practices they use. Kumar noted that some are making 5-year commitments to improve their approach to ESG, and companies with younger management teams are particularly keen to break the ‘old school’ mould of Japanese business.

Cost

The ongoing annual charge over the trust’s financial year to 31 January 2022 was 0.66%, compared to 0.71% 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 average return of peers in the AIC Investment Trust Japan sector since it launched in 1985. Over this period the trust has been through some tougher periods though, so this is not a guide to how it will perform in the future.

This has been the case more recently. Kumar took control of the trust in December 2015 and over his time as lead manager the trust has grown 61.85%* versus the 53.59% returned by the AIC Investment Trust Japan sector. While this is a good return, the past 12 months have been particularly challenging.

In keeping with Baillie Gifford’s style of investing, Kumar focuses on companies he thinks can deliver above average earnings growth, otherwise known as growth companies. Over the last year, these companies have fallen out of favour with investors, paving the way for those undergoing a turnaround, otherwise known as value companies.

This has put pressure on the trust recently and over its most recent financial year (to the end of January 2022), it’s NAV decreased by 24.1% and its share price fell by 28.5%.

Aside from a style rotation, the demand for some of the higher growth online businesses that did well during the pandemic has fallen too. Bengo4.com, an online legal portal, has performed well over the last five years but over the trust’s last financial year, it’s one of the worst performing stocks. It remains operationally strong and is beginning to exercise its pricing power – passing on increasing costs to consumers – but decreased demand has led to a muted share price return.

Similarly, Japan’s leading online food ordering and delivery company Demae-Can, has suffered following a drop off in demand. It’s been steadily strengthening its market position but a large drop in demand and the significant investment it’s made to expand has hampered its recent performance.

It's not all been doom and gloom though. There have been a range of investments this past year that have buoyed the trust’s performance.

Snow Peak, a camping equipment manufacturer, was among the trust’s best performing stocks. Camping as a recreational activity is a growing trend in Japan and as a leading brand of high-quality equipment, Snow Peak has surged in value.

Jeol, a semiconductor manufacturer, was also one of the trust’s top performing companies. It’s developed a device which helps shorten production lead times, so is seeing growing demand, particularly at a time of semiconductor shortages.

The trust may continue to underperform while growth investing remains out of favour. However, Kumar and the team believe they can outperform the market by investing in high quality, disruptive businesses 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 Shin Nippon PLC 50.79% -2.82% -12.49% 48.83% -37.85%
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 Shin Nippon Trust including charges

Baillie Gifford Shin Nippon Trust Key Investor 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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