Baillie Gifford Japan Trust: November 2026 investment trust update

• Matthew Brett has a long history of investing in Japanese companies and is supported by a highly experienced team

• The manager focuses on companies that he believes have long-term growth potential

• The trust’s investment style has been a headwind to recent performance

How it fits in a portfolio

The Baillie Gifford Japan Trust invests in companies based in Japan. It invests in companies of all sizes, including higher-risk small and medium-sized businesses. The trust is managed in line with Baillie Gifford's growth-focused investment philosophy, concentrating on companies with high or durable growth potential.

The trust could be used to diversify a global investment portfolio and add long-term growth potential. It could also sit alongside other funds or trusts using a value investment style and a focus on companies with recovery potential.

Investors in closed-ended funds should be aware that trusts can trade at a discount or premium to net asset value (NAV).

Manager

Matthew Brett is the trust’s lead manager. He has more than 20 years’ experience in the investment industry, all of which have been spent at Baillie Gifford. This means that he’s well-embedded in the firm’s culture and style of investing.

Brett joined Baillie Gifford’s Japan team in 2003 and became lead manager of the Japan Trust in 2018. He became co-manager of the Baillie Gifford Japanese fund (which has significant overlap with the trust) in 2008, alongside Sarah Whitley, another experienced investor in Japan, and later became the fund’s lead manager. He continued to work closely with Whitley until she retired in 2018 and learned a lot from her knowledge and experience during their time working together.

Brett also co-manages the Baillie Gifford Japanese Core Growth fund with Iain Campbell, but his primary focus is on the Japanese fund and investment trust.

We believe that Brett’s fund management responsibilities are manageable given the overlap in investments and process. He also has the support of, and works with, the wider Japanese team. We like the collaborative approach, with ideas coming from across the team and a focus on developing talent.

Process

The trust’s philosophy is aligned with other Baillie Gifford funds and trusts, focusing on the fundamentals of individual companies and their long-term growth potential. Brett invests in what he believes to be some of the best companies in Japan with at least a five-year investment view.

The trust invests in companies at different stages of growth, which are split into four buckets:

Secular Growth - companies with higher growth potential

Growth Stalwart - steady compounders that may deliver steadier rates of growth

Special Situations - larger conglomerates or businesses trading on a low share price that the managers don’t believe reflects their true worth

Cyclical Growth - companies that could be more sensitive to changes in the health of the economy

This makes the managers ‘growth’ investors, but they’re flexible and invest in a range of companies with different drivers of growth, including some that may not be typical of peers with a similar investment style. Importantly, each business must have an adaptable or resilient competitive advantage that could help them grow during the next 5-10 years.

The trust has large investments in technology, electronics, and manufacturing businesses. The manager tends to avoid industries that he believes are in long-term decline, such as autos, ‘old-fashioned’ financial companies (including banks), and materials like iron.

Increasing opportunities in companies related to artificial intelligence (AI) led to some changes to the trust during the past year. Investments were made in semiconductor companies Tokyo Electron and Shin-Etsu Chemical. The trust sold its investment in electronics business Nippon Ceramic as the manager believes that growth won’t be as strong in the future. The trust also no longer invests in digital platform Raksul, after the business delisted from the stock market.

Culture

Baillie Gifford is an independent private partnership founded in 1908. It is owned by partners who work full time at the firm. This ownership structure means that senior managers have a vested interest in the company and want to see its funds and trusts performing well. Brett is a partner in the firm, which means that he’s well-incentivised for this trust to perform well, as well as to ensure that he makes a valuable contribution to the wider business and its success.

We think that 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 fund managers are incentivised in a way that aligns their interests with those of long-term investors and should retain talented managers.

ESG Integration

All of Baillie Gifford’s funds and investment trusts are run with a long-term investment horizon in mind. The firm’s fund managers see themselves as long-term owners of a business, not short-term renters. Assessing whether society will support, or at the very least, tolerate, the business model over the long term, and whether management will act as good stewards of shareholders’ capital, are important parts of the investment process.

Investment teams, including the Japan team, have access to dedicated ESG (Environmental, Social, and Governance) specialists, and the firm also has a Climate team and ESG services team, which is responsible for voting operations and ESG data. Individual investment teams are responsible for voting and engagement for the companies they invest in. Investment in controversial weapons and companies involved in recreational drugs are prohibited across the firm.

The firm reports all its voting decisions and provides rationale in situations where it votes against management or abstains, in a detailed quarterly voting report. There is also a quarterly engagement report that details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Investment Stewardship Activities report.

Baillie Gifford withdrew from the Net Zero Asset Managers’ Initiative and Climate Action 100+ in 2024, citing concerns that membership had become contested and risked distracting from its core responsibilities. We viewed this as a disappointing backward step, but the firm stated that this decision did not change its approach to analysing climate-related risks or engaging with investee companies.

Sustainability and ESG issues form a key part of the team’s research and analytical framework, but this trust isn’t managed to a sustainable mandate.

Cost

The trust’s ongoing annual charge for the year to 31 August 2026 was 0.70%. Investors should refer to the latest annual report and accounts, and Key Investor Information for details of the risks and charging structure.

The annual charge to hold investment trusts in the HL ISA, SIPP, or Fund & Share Account is 0.35% (capped at £150 p.a. in each account) and 0.25% in the HL Lifetime ISA (capped at £45 p.a.). There are no charges from HL to hold investment trusts within the HL Junior ISA. As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since Brett became the trust’s manager in 2018, it has returned 36.2%* in share price terms, compared with 85.1% for the average trust in the AIC Investment Trust Japan sector. The trust’s NAV grew 57.0% during the same period. Past performance isn’t a guide to future returns.

Given the trust’s growth-focused investment style, it tends to perform better when growth companies are in favour. This was the case for the first few years of Brett’s management, but the trust has struggled more recently as the value style of investing has been in favour. Smaller companies have also been weaker than larger ones, acting as a further headwind for the trust.

In the trust’s most recent financial year, the 12 months to the end of August 2026, NAV rose 17.7% and the share price returned 20.9%. However, both trailed the 30.3% return of the average trust in the AIC Japan sector.

Electrical components manufacturer Murata and technology conglomerate SoftBank were among the largest contributors to performance. Both benefited from exposure to the market’s focus on companies linked to AI opportunities. Sumitomo Mitsui Trust Group, one of Japan’s largest banks, also performed well, helped by rising interest rates.

Investments detracting from performance included internet platform Rakuten and mobile gaming company CyberAgent. Some investors expressed concerns that both companies may see their growth disrupted by future AI developments. Financial services business SBI Holdings also detracted.

The trust uses gearing (borrowing to invest), which increases returns when markets rise but also losses when they fall, so is a higher-risk approach. The level of gearing reduced during the year from 12.8% to 8.9% at the end of August 2026. At the time of writing the trust trades on a discount to NAV of 9.9%, compared to a 12-month average of 9.7%.