EquitiesFeb 5 2016

BG Japan trust employs labour market play

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BG Japan trust employs labour market play

The Baillie Gifford Japan Trust is playing “tightness in the labour market” as the country’s economic reforms boost employment figures and wage growth.

The unemployment rate in Japan fell to a 10-year low in 2015, ending the year at 3.1 per cent.

Andy Brown, part of Baillie Gifford’s Japanese equities team, said labour market tightening had prompted the initiation of two extra positions in manager Sarah Whitley’s trust.

The £330m vehicle now holds around 2.5 per cent in temporary staffing business Temp Holdings and 0.7 per cent in Outsourcing.

Mr Brown said Temp Holdings was a traditional temporary employee business, which benefited from shifting employment demographics, particularly among women.

“Temporary staff wages [are] going up quicker than permanent staff,” he said.

“We are also seeing a lot of females going back into the workforce, in temporary roles initially.”

The stock returned 58 per cent in 2015, leading to a 0.7 percentage point contribution to returns.

Mr Brown said Outsourcing had a slightly difference structure, hiring seasonal workers and then leasing them to companies. He said that this meant Outsourcing did not need to “bid up” for workers, and firms did not need to deal with hiring.

“It is quite an interesting model and the first-mover advantage has proven very successful,” he added.

Outsourcing returned 85 per cent over 2015, also leading to a 0.7 percentage point contribution to the fund, which holds between 40 and 70 stocks overall.

The trust’s bottom-up focused investment team holds thematic discussions as part of its research.

Alongside the labour market, the team has recently identified foreign tourism and improving corporate governance as two areas of interest.

Mr Brown said: “The growth in inbound tourism has surged in the past 12 months, much faster than people expected. But that’s a bit more difficult to find great businesses.”

The Japan Trust “does not fiddle too much with [its] holdings”, with a lot of its other strong performers held for some years. It typically invests over a five-year term.

However, more recently the team has invested in real estate firm Iida Group Holdings, a ‘build for sale’ company that sells condominiums in the Japanese market.

“The Japanese real estate market is having something of a revival after a long period of decline,” Mr Brown said.

He noted the firm had become the “go-to place” to buy a new condominium at a time when affordability metrics were becoming more attractive.

“It’s cheaper to take out a mortgage for an Iida Group condominium than to rent in a similar area, which underpins the opportunity.”

Other property companies the trust owns have not fared as well.

These include office real estate firms Tokyo Tatemono and Mitsubishi Estate. Tokyo Tatemono’s share price fell 30 per cent in the 12 months to January 18, with Mitsubishi Estate dropping 5.9 per cent.

“This is slightly confusing to us. The office market is tightening strongly and we bought these companies as they have the most attractive real estate in Tokyo,” Mr Brown said.

“So we stand by them, but we haven’t been rewarded in share price terms.”

Despite such blips, over the past three years the Japan Trust delivered 94 per cent, compared with a rise of 40 per cent for the Topix index, data from FE Analytics shows.