Interactive Investor

Fund spotlight: Baillie Gifford Shin Nippon

28th September 2020 09:55

Teodor Dilov from interactive investor

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interactive investors analysts give an update and view on one of our Super 60 fund picks. 

The Super 60 fund

Baillie Gifford Shin Nippon (LSE:BGS) investment trust invests in smaller and disruptive growth companies, which are typical for the New Japan, run by young, dynamic entrepreneurs willing to take risks.

The trust has been run by the highly experienced portfolio manager Praveen Kumar since 2016, who is part of Baillie Gifford’s strong Japanese equities team of 10. All team members run fundamental company research as their primary responsibility, meaning that all have in-depth knowledge of the trust ,which mitigates succession risks.

The team takes a very patient long-term approach, as they recognise that most returns in the market come from a small number of companies. That is why they aim to identify big winners and hold them for at least five to 10 years.

What does it invest in?

The team runs a high-conviction portfolio of typically around 45 to 75 stocks, with a focus on quality companies believed to have above-average prospects for growth. The trust pays little attention to the wider market and, therefore, is expected to have very high active share.

In terms of sectors, industrials, information technology and consumer discretionary account for more than half of the entire portfolio, although the thematic breakdown is much more diversified.

A good stock example is the trust’s top holding Bengo4.com, which operates a website that connects lawyers with individuals and businesses seeking legal advice. This service has become quite popular and approximately one-third of Japan's lawyers are now registered members. The company also has a rapidly growing business providing online, cloud-based contracts that can be securely signed.

Performance

The trust has managed to build an outstanding track record, demonstrating strong return profile both over the short and long term. Over three years (to 17 September), it delivered 38% total return compared to just 1.7% for the MSCI Japan Small Cap index (the trust’s benchmark) and 24% for the Morningstar Japan Small/Mid Cap category. The longer-term performance is even stronger, where over five years the trust delivered 154% against 64% for the benchmark and an average of 96% for the peer group.

Currently, the trust is trading at a modest discount of -1.9%, which is in-line with its 12-month average and is moderately geared at 7%.

As expected for this higher-risk strategy, it suffered during the market sell-off in the first quarter of this year. In March, losses exceeded 30%, while those for the index were around 25%. However, the quality bias of the trust proved its efficiency and recovered much quicker – being above the benchmark in April.  

5-year discrete performance (%) 18/09/2019 -17/09/2020 18/09/2018 -17/09/2019 18/09/2017 -17/09/2018 18/09/2016 -17/09/2017 18/09/2015 -17/09/2016
Baillie Gifford Shin Nippon Investment Trust 24.24 -3.57 34.03 28.67 46.01
MSCI Japan Small Cap Index 4.52 2.48 8.41 17.61 35.12
Morningstar Japan Small/Mid-Cap Equity Category 15.48 0.54 19.99 23.13 28.81

Source: Morningstar

The ii view

The trust provides exposure to exciting high-growth opportunities in New Japan that are selected by Baillie Gifford’s highly experienced and well-resourced team. Due to its unconstrained and concentrated nature, its bias towards smaller companies and the ability to use gearing, the trust’s return profile could be more volatile. All this makes the trust higher risk and it could be best utilised as a satellite holding in a well-diversified portfolio.

If you enjoyed this article, you may also like other funds picked for interactive investor's Super 60 range of high-conviction investment ideas. Click here to find out more.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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.

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