interactive investor's analysts give an update and view on the Baillie Gifford Shin Nippon Trust.
Along with global markets, Japanese equities had a tough time last year on the back of the ongoing trade war between the US and China, plus persistent concerns over a slowdown in the global economy. And it looks like these worries are not going away any time soon.
Investors have not been overly keen on Japanese equities for some time, mainly due to the country's historic economic challenges. Over the years, Japan has relied heavily on massive monetary easing, the central bank balance sheet and asset buying to fight deflation and restart growth with inflation.
In response, Prime Minister Shinzo Abe introduced economic policies to boost consumer spending and stimulate business confidence which would end deflation and help the country cope with an aging and declining population.
While Japan moves slowly through this transitionary period, investor focus has shifted from primarily auto and electronic goods exporting sectors to so-called 'New Japan' sectors that exploit and benefit from secular changes and serving domestic needs.
Baillie Gifford Shin Nippon (LSE:BGS) invests in the small, exciting, disruptive growth companies typical of 'New Japan', run by young, dynamic entrepreneurs willing to take risks.
Growth may come from innovative business models, disrupting traditional Japanese practices or market opportunities, such as growth from overseas.
For example, the trust has recently participated in the IPO of Raksul, a fast-growing business run by its young and entrepreneurial founder. It has developed an online, cloud-based system that connects service providers with clients in real-time. It is currently focussing on disrupting the domestic printing and logistics sectors, both of which are very inefficient, traditional and quite large.
The trust has been run by highly experienced portfolio manager Praveen Kumar since 2016, who is part of a Japanese equities team of 10. All team members conduct fundamental company research as their primary responsibility, meaning all have in-depth knowledge of the trust which mitigates succession risk.
The team recognises that most returns in the market come from a small number of companies and, therefore, they aim to identify big winners and hold them over the long term with a view of 5-10 years. A very long, patient approach means a low turnover of holdings within the portfolio.
What's in it?
The team run a bottom-up and high-conviction portfolio of around 45-75 stocks, with a focus on high-quality growth companies believed to have above-average prospects for growth. The portfolio is actively managed and does not seek to track the index.
In terms of sector allocation, industrials, information technology and consumer discretionary account for more than two-thirds of the portfolio, although the thematic split is more diversified and provides a clearer picture of the holdings. 'Online disruptors' or internet companies account for 31% of the portfolio.
A good example is Bengo4.com, which operates a website that connects lawyers with individuals and businesses seeking legal advice. Lawyers register as members and pay Bengo4.com a fee to market themselves on its website. This service has grown quite popular and approximately a 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.
'Niche manufacturers', mostly electronics component makers, make up 23% of the portfolio, with outsourcing and services companies benefiting from Japan’s demographics at 19%, and healthcare making up almost 16%.
How does it perform?
The trust has delivered strong outperformance relative to the index and peer group over the long run, leading to its current premium to net asset value (NAV) of around 4%. It is currently 10% geared and uses this borrowing to enhance returns over the long-term.
Investors should note that the 'quality growth' style of the trust has been in favour over recent years. However, the team believes that if you have truly selected a good company, it should perform well whatever the market conditions.
The trust is also competitively priced relative to peers, with an ongoing charge of around 0.77%.
|01/05/2018 - 30/04/2019||01/05/2017 - 30/04/2018||01/05/2016 - 30/04/2017||01/05/2015 - 30/04/2016||01/05/2014 - 30/04/2015|
|Baillie Gifford Shin Nippon Trust||-2.82||50.79||36.34||20.31||32.48|
|MSCI Japan Small Cap Index||-6.20||16.07||28.75||11.78||26.75|
|Japanese Smaller Companies Sector||-2.82||44.77||37.12||-4.34||36.83|
Source: Morningstar Direct as at 30th April 2019. Returns in GBP
The ii view
Baillie Gifford Shin Nippon Trust provides exposure to exciting high-growth opportunities in 'New Japan' that are selected by a highly experienced and well-resourced team at Baillie Gifford. Due to the trust's unconstrained, concentrated nature, plus its bias to small companies and ability to use gearing, its return profile is likely to be more volatile, making it higher-risk and a satellite (adventurous) holding in a well-diversified portfolio.
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