Baillie Gifford Japan 16 November 2022
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Baillie Gifford Japan Trust (LON:BGFD) is managed with a highly-active, resolutely long-term investment strategy aimed at identifying the best long-term growth opportunities in a market packed with innovative companies in a variety of fields. Matt Brett and his colleagues on the Baillie Gifford Japanese equity team aim to ignore received wisdom and short-term chatter and identify companies which can at least double in market cap over five years, ideally looking for those long-term winners which can continue to compound even faster than the market for much longer than this.
The trust has an excellent long-term track record of outperformance. As we discuss in the Performance section, it has more than doubled the returns of the Topix Index over a decade. However, it has suffered over the past 18 months as the market has rotated from growth to value amidst rising interest rates, growing inflationary pressures and fears of an imminent global recession. Matt has, however, only become more excited as prices have fallen and his companies have generally performed well, operationally. He has been steadily increasing the Gearing level on the trust as the market has fallen, reinvesting in companies in which he has high conviction in the internet and software industries and in premium consumer stocks which have sold off the most over the past year.
BGFD’s portfolio tends to have major exposures to technology, both hardware and software, as well as internet-related companies. This area has been under pressure but Matt remains focussed on the long-term prospects and believes periods of underperformance are an unavoidable consequence of high-conviction, long-term investing.
As risk aversion has risen in the market, BGFD’s shares moved out to a double-digit Discount to NAV, although at the time of writing this has closed to 1%.
It has clearly been a rough year for BGFD, but, as the managers argue, a highly-active strategy is always likely to go through periods of underperformance. Matt’s strategy is to find companies with a strong competitive advantage in their field and resilience in their business models, which means that they should be able to compound their earnings faster than the market over the long run. If he has chosen correctly, then we believe this should outweigh the vagaries of valuation, over a long holding period.
Additionally, we note that the valuation of the portfolio at the end of August was in line with the market rather than higher, out of keeping with the historic tendency for the portfolio and implying that the balance of risks may be tilted back in favour of investors. We think Matt’s decision to gear up in the light of what he sees as a disconnect between valuation and fundamentals is strong evidence of his conviction.
It may well be that the exceptional outperformance seen in 2020 was a result of particular circumstances which favoured the strategy in multiple ways. However, we would point to the trust’s history of outperformance in multiple rising markets (see Performance) and the diversity of the portfolio as evidence that the trust has the potential to outperform when risk appetite returns, even if the short-term outlook remains cloudy.
- Exceptional long-term track record
- Highly-active approach which brings outperformance potential
- Low OCF relative to peers
- Not a discount opportunity in absolute terms
- Structural gearing can amplify losses on the downside and volatility
- Active share increases underperformance potential as well as outperformance