Baillie Gifford Japan 12 January 2024
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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.
Over the last year, Matthew Brett, manager of Baillie Gifford Japan (BGFD), has responded to his growth style being out of favour by leaning into his high-conviction ideas which have done poorly and building up gearing, reflecting his positive view on his portfolio’s prospects after a sell-off has left them looking cheap, even though they are largely performing well.
Matt, with deputy Praveen Kumar, aims to find those companies in Japan with the best long-term growth prospects, setting himself the target of finding stocks which can at least double in five years. At times this strategy has produced exceptional Performance, but the environment for the last three years has favoured different styles of investment. The last three years have seen weak performance which the managers largely attribute to short-term factors. In their view, while cyclical companies have been in favour this year thanks to an improving macro outlook for Japan, the best long-term opportunities remain in areas of secular growth, particularly given Japan is likely to remain a low growth economy.
The portfolio typically owns plenty of businesses in technology, hard and soft, and in internet-related companies, although the managers find examples of what they are looking for in a broader variety of sectors. As internet-related companies have sold off sharply over the past two years they have been adding to these, and even buying back in to some former long-term winners of theirs which they had sold on valuation grounds (see Portfolio).
The conviction is evident in the decision to retain a high level of Gearing, with facilities being renewed over the summer. The Discount remains wide by historical standards.
Investors are probably right to be sceptical when managers say they have high conviction in their portfolios: it is an unusually honest manager who will say the outlook is poor (although they do exist!). But when there is tangible evidence of the conviction being claimed, for example when the manager is committing to significant levels of gearing, we think investors should sit up and listen. This is the case with BGFD, for which Matt Brett has been happy to let net gearing rise and buy back into companies in the portfolio which have sold down. If sentiment is cyclical, then the current valuation of many of BGFD’s companies seems unlikely to last, and there is the potential for strong returns. Added to this is the potential for returns from a narrowing discount, which is c. 11% at the time of writing.
It is important to note that this is a very active portfolio, and individual stock picks are likely to be crucial to returns. Companies like Softbank and Rakuten, both in the top ten, have idiosyncratic drivers of returns, while many of the companies are at a relatively early stage of development where the risks are higher and the range of outcomes wider.
Bull
- Strong long-term track record
- Highly active approach which brings outperformance potential
- Low OCF relative to peers
Bear
- Active share increases underperformance potential as well as outperformance
- Structural gearing can amplify losses on the downside and volatility
- Strength in the Japanese economy could lead to growth style remaining out of favour
Fund History
