Baillie Gifford Shin Nippon trust backs Covid ‘problem solvers’

Food delivery, cloud-based services and drug marketing were some of the themes powering the trust's performance. 

Baillie Gifford’s Shin Nippon (LSE:BGS) investment trust, which appears in interactive investor’s Super 60 recommended funds list, has released its half-year results, revealing that food delivery, cloud-based services and drug marketing were some themes powering performance, as Covid-19 brought opportunities and challenges to Japan’s small businesses.

The £627 million trust recorded a 7.7% share price increase over the six months to 31 July, while net asset value per share rose 5.4% compared to an 8.8% fall in its benchmark, the MSCI Japan Small Cap index.

The stocks driving half-year returns

Shin Nippon focuses on achieving long-term capital growth from small Japanese companies that have above-average growth potential. The main contributors to return over the reporting period included Bengo4.com, an online legal portal that has a fast-growing, cloud-based digital contracts business called Cloudsign, which has benefited from the move to paperless.

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Other strong performers included online drug marketing platform M3, which has seen pharma companies subscribing to its online platform to market drugs as face-to-face sales are no longer possible. Meanwhile, online food delivery company Demae-Can has expanded its delivery coverage nationwide, taking advantage of the explosive growth in delivery orders as restaurants close their doors.

Physical retail, travel and manufacturing-related stocks were among the weakest performers due to Covid-19 disruption, including local lockdowns and other restrictions. Cosmetics retailer iStyle was the largest performance detractor following numerous setbacks including loss of revenues in its physical stores. Travel operator H.I.S was also a weak performer, thanks to a collapse in inbound and outbound travel because of the pandemic.

Corporate Japan adapts to home-working

“Unsurprisingly, companies operating in these sectors were among the hardest hit,” the managers noted in their report. “However, adversity also brings opportunities.” They explained that Japanese companies have underinvested in office tech, seeing it as a cost to minimise rather than investing for a competitive advantage. This means that corporate Japan is largely not set up to work from home, and firms have had to adapt quickly to get new technologies in place so they can keep operating. “This digital transformation of corporate Japan is proving to be a fantastic growth opportunity for numerous young, dynamic and fast-growing smaller companies, especially those operating in the online services and software areas,” the managers said.

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Over the six months to the end of July, the team bought five new holdings for the trust and sold one. Among its new additions was GA Technologies, a provider of cloud-based software for the real estate industry that can be used for virtual viewings and online mortgage applications. Another new stock was Modalis Therapeutics, an early stage biotech company involved in gene-editing techniques, which the managers bought into at IPO.

Covid puts pressure on old-fashioned firms

Although the pandemic has caused widespread disruption, it is accelerating much-needed and long overdue changes in the way businesses operate, the managers said. This is notable, especially in Japan, where “corporate culture is steeped in outdated business practices”.

“Japanese companies are waking up to the fact that they will have to reform or perish as their existing business models are unlikely to be fit for purpose in the long run. This is creating numerous growth opportunities for smaller businesses in Japan that are seeking to solve precisely the kind of structural issues facing traditional Japanese companies. We remain excited by the prospect of investing in these ‘problem solvers’.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.