Best In Class  

Best in Class: Baillie Gifford Japan Trust

Best in Class: Baillie Gifford Japan Trust
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“Progress in Japan is rarely straightforward. Some areas jump ahead, and others are a bit behind. Its firms sometimes struggle with dynamic change.”

I love a good quote and this one from Baillie Gifford Japan Trust manager Matthew Brett really does bring home the challenges of investing in the region.

The Japanese were hailed as one of the masters of modern capitalism in the 1980s. On December 29 1989, the Nikkei 225 stood at a record high of 38,957 – it did not exceed 30,000 again until February 2021.

We know the backstory: seeking to keep inflation under control, the Bank of Japan sharply raised interbank lending rates in late 1989. The unintended effect was the bursting of the bubble, causing equity and asset prices to collapse – pessimists would argue the bubble is still deflating today.

Ever since, the discussion has been about when or if Japanese equities will ever be an attractive option for investors again. Take last year for example, when global equities returned 23 per cent to investors, Japanese equities fell 5 per cent.

Finding value 

But could Japan offer value in today’s inflationary climate? There are reasons to be bullish, not least because Japan’s earnings growth and general improvements in cash flow generation – courtesy of innovation, productivity and capital efficiencies – have not been reflected in valuations compared with other regions in the past decade.

Rising rates could also be attractive for cyclical names in the manufacturing, auto and technology sectors.

Japan is also used to operating in a climate of flat consumer demand, ageing populations and premium land use. The technology, manufacturing and healthcare sectors have all flourished in this environment and are well positioned to export their businesses overseas at a time when a number of these trends become global issues.

Ultimately, Japan is an excellent hub for stock pickers, and this week’s trust has more than a 40-year track record of delivering for its clients. The Baillie Gifford Japan Trust is run by the aforementioned Brett, with Praveen Kumar as deputy.

The trust aims to provide capital growth by investing primarily in Japanese small and medium-sized companies, which offer exceptional growth opportunities with sustainable business models.

Management

Brett has run the trust since April 2018 and is ably supported by the market-leading Japanese investment team at Baillie Gifford. Each member is responsible for researching companies in particular sectors and generating new ideas. These sector responsibilities change regularly to ensure perspectives remain fresh.

The investment team seeks to identify well-managed businesses with a strong competitive advantage, which are not overpriced. The research process is designed to ensure that the best ideas from each individual team member are included in the portfolio, rather than a ‘lowest common denominator’ approach, which can result from team-based investment.

The trust will typically consist of 40-70 stocks, which are believed to have above-average prospects for growth. The team take a long-term approach, with each holding typically held for five years. No position is able to exceed 5 per cent of the portfolio at the time of purchase.