Baillie Gifford Japan 22 December 2021
This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Baillie Gifford Japan (BGFD) owns a portfolio of Japanese equities chosen for their explosive growth prospects. The Japanese Equity Team at Baillie Gifford, with Matt Brett taking the lead manager role since 2018 (see Management), aim to find companies they believe can double in value over five years, and build a portfolio of their highest-conviction ideas, paying no attention to any index.
Matt, deputy manager Praveen Kumar and the team are rigorously active in their approach. Right from the idea-generation stage to the stock-selection decision, the intention is to look through the noise of market movements, investor trends and short-term earnings and valuations to focus on the long term. While the main investment horizon is five years, in practice the average holding period is closer to a decade, with the team having delivered exceptional returns by correctly identifying companies with huge return potential and holding on as they compound their advantages. As we discuss in the Portfolio section, BGFD has more than doubled the returns of the TOPIX Index over the past decade, and is far and away the best-performing Japan trust over that time.
Matt and the team are flexible in their approach to growth. The Japanese market is highly cyclical, and BGFD owns plenty of cyclical companies which meet their long-term growth potential target, with companies like tyre manufacturer Bridgestone sitting alongside tech incubator SoftBank. What unites them is the potential for exceptional returns over the long run.
This year (2021) has been more difficult for BGFD. A preference for value over growth at the start of the year and some stock-specific issues have seen it underperform the market over 12 months. As a result, the shares have fallen from a significant premium to trade close to par.
BGFD has an exceptional track record, built on an investment process with some highly attractive characteristics. By taking a long-term view and building a highly active portfolio, Matt and his team have increased the chance of outperformance. The team’s execution (i.e. stock selection) has been exceptional over recent decades, with numerous stock picks paying off in a big way and delivering that outperformance.
One reason not all managers take this approach is the fear of active decisions going against them. BGFD has been through a rough patch this year, resulting in some underperformance over a 12-month period. Matt and the team have remained focussed on the long term, looking through any short-term underperformance of their stocks to the long-term growth potential.
The shares de-rating close to par could be an opportunity in our view. While nobody can know whether the trust will repeat its success, if the managers’ view of the return potential in their stocks is correct, even the deflation of a small premium to par would be swamped by the effects of NAV returns.
The use of structural gearing amplifies the return potential. While it also amplifies the sensitivity to market falls, for those who can hold over multiple market cycles the overall effect should be positive, assuming that economies continue to grow.
|Exceptional track record
|Not a discount opportunity in absolute terms
|Highly active approach which brings outperformance potential
|Structural gearing can amplify losses on the downside and add volatility
|Low OCF relative to that of the peer group
|Active share increases potential for both underperformance and outperformance