The £290.74m Baillie Gifford Japan Trust has been managed by Sarah Whitley since its launch in 1981.
The aim of the investment trust, which has been in the Investment Adviser 100 Club in both 2013 and 2014, is to invest in businesses with above-average growth prospects that are “underappreciated” by the market. Ms Whitley notes the investment process has remained largely unchanged during her tenure, with the team continuing to adopt a “long-term investment horizon and to run highly differentiated portfolios from the index”.
The manager notes: “The Baillie Gifford Japan Trust has a bias towards higher-than-average earnings growth, higher-than-average return on equity and stronger balance sheets. There is also a bias towards mid- and small-cap investments, where we generally see more potential for growth.” The portfolio invests in roughly 40-70 companies, with Ms Whitley explaining the team are bottom-up stockpickers and therefore any positioning is a result of the attractions of each individual investment. “Having said this, the industry background is one of several quality factors that we assess as part of the investment case for each stock,” she adds.
In spite of the recent volatility in Japan, Ms Whitley notes that in the past year portfolio turnover has remained low in keeping with the trust’s long-term investment horizon. But she adds: “We have taken advantage of recent market volatility to increase the trust’s exposure to early-stage secular growth businesses where we see opportunities for substantial upside. New holdings have been taken in online recipe service Cookpad, cloud-based system provider Broadlead and burgeoning car-sharing business Park 24.”
The manager notes these transactions have been funded by the sale of several long-standing holdings “where the industry background has deteriorated and we no longer have a differentiated view from the market”. These include tobacco business Japan Tobacco, digital imaging and printing company Canon, telecommunications operator KDDI and railway operator JR East.
For the five years to December 8 2014, the trust has delivered a strong total return of 159.81 per cent, according to data from FE Analytics, and it has significantly outperformed both the AIC IT Japan Equities sector average of 110.84 per cent and the Topix index return of 36.96 per cent.
Shorter-term performance has been less impressive, with the trust slightly lagging the sector and index for the 12 months to December 8 with a return of just 5.58 per cent against the Topix index return of 6.11 per cent and the AIC sector average of 8.33 per cent.
Ms Whitley notes: “Gearing was helpful overall, but outperformance came predominantly from stock selection as we would expect.” In the past 12 months, the strongest contributors to performance came from a broad range of sectors, with six stocks in particular contributing more than 0.5 per cent. These include Irisio Electronics, Japan Exchange Group – which runs the Tokyo Stock Exchange – and staffing agency Temp Holdings. On the flip side, stocks that weighed on performance included internet-related stocks such as GMO Internet and Digital Garage, although Ms Whitley notes: “No one holding detracted more than 0.4 per cent from performance.”
Looking ahead, she points out that while Japan has been reporting inflation rather than deflation for a year, the national mindset has not yet shifted towards investment in riskier assets. Ms Whitley explains: “Personal financial assets, which are approximately two-and-a-half times the value of GDP, are still being invested predominantly in cash, and companies have record amounts of cash on their balance sheets. This is likely to change if ‘Abenomics’ achieves its target sustained inflation rate, which should benefit equities. ”
Meanwhile, she notes at the corporate level, profits are rising and valuations remain attractive. With Japanese firms now more globally minded and competitive in the manufacturing arena, there is also increased confidence in the non-manufacturing sector. “Global trends, such as the rise in e-commerce, are reflected within Japan and provide opportunities for investment,” she says. “Companies are also improving their returns to shareholders and this backdrop encourages us to substantially invest all the gearing in the market.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities
Sarah Whitley is a vastly experienced investor in Japanese equities and this has been reflected in the performance of this trust in recent years. Returns from the trust have been exceptional since ‘Abenomics’, especially when you consider that currency has not been hedged. This means returns have been driven by astute stockpicking calls, which is testament to Ms Whitley’s and the team’s buy-and-hold approach.
