Baillie Gifford’s Whitley sells under pressure companies

Baillie Gifford’s Sarah Whitley has sold long-term holdings in major Japanese companies because she believes their business models will come under increasing pressure.

The manager of the group’s £295m Japan Trust said the 12 holdings she had sold in the year to end-August “reveal some of the challenges facing investors”.

Ms Whitley said she had divested several companies that had been in her portfolio for “very many years” but saw market changes as putting pressure on their businesses.

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“Canon, the printer and camera company, faces clear threats to both its major products from technological change,” she said.

“Smartphones are increasingly supplanting cameras for photography as their capabilities increase and the rise of tablet computers and other changes are lessening the need for printed copies.

“Canon has been a great company but we struggle to see how it can adapt rapidly enough to flourish again.”

Likewise, she said Japan Tobacco had “very successfully globalised its business” but was now being threatened in the long term by the growth of e-cigarettes.

“This development is not affecting sales significantly yet but as governments toughen smoking regulations and there are more alternatives, volumes are likely to fall steadily,” Ms Whitley said.

“Another longstanding holding was Yamada Denki, Japan’s largest consumer electronics retailer.

“Here we sold the shares, as a combination of loss of market share of Japanese manufacturers and increasing competition from online suppliers dent growth prospects.

“We also sold [railway company] JR East as its business was exceptionally well positioned to benefit from deflation but may suffer as costs increase but fares do not.”

Of the manager’s purchases, she said consumer electronics giant Sony would “always be a contentious holding given the long history of serial disappointment”, although she was “encouraged” by recent changes at the business.

These included a “new effective chief financial officer, the clear success of the PlayStation 4 and the cessation of dividend payments”, which she said “increase the probability of domestic cost cutting”.

The manager said analysis of the trust’s performance for the year to the end of August showed outperformance from “all but three sectors” and that gearing – a form of borrowing used to amplify exposure to markets – “was again helpful overall”.

Elsewhere, Ms Whitley said there had been “significant improvement” in attitudes towards corporate governance in Japan.

“A total of 74 per cent of companies listed on the Tokyo market now have at least one independent director and if they don’t, now need to comply or explain why not,” she said.

“We believe that shortly an explanation will not be enough and it will become mandatory to have an outsider on the board.”

The manager added that dividends were rising and companies were showing a “lessening tendency to hoard cash”.

“For the half year to September 2014 it is likely that payouts will be at a record level in yen terms,” she said.