Baillie Gifford Shin Nippon 05 April 2022
Disclaimer
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 Shin Nippon (BGS) is an unashamedly high growth strategy, with manager Praveen Kumar aiming to identify those small Japanese companies which have exceptional growth potential and can grow an initial investment many times over the course of multiple market cycles. Performance has been outstanding over the long run, the trust more than doubling the returns of its nearest peer over the past decade. This has been boosted by some exceptional returns in single stocks; the portfolio’s top performers over the past decade have returned two or three thousand per cent, and the majority of the best performers remain in the portfolio as Praveen thinks the returns potential is still exceptional.
This outperformance has come at the expense of volatility. The portfolio is tilted to the smallest companies, often less liquid and driven by sentiment, and tends to be run with gearing, all of which raise the market price risk. The strong exposure to the growth factor is another risk to bear in mind and has contributed to a sharp sell-off in the trust’s NAV and share price over the past year.
Praveen remains focused on the operational performance of his holdings and reports this has remained strong over the period, with the sell-off attributable to sentiment and external factors. He has, therefore, not made major changes, believing the majority of his portfolio is looking as promising as it was pre-pandemic, if not more so (see Portfolio). BGS has usually traded on a premium over the past five years but has fallen onto a small Discount during the sell-off of the past year.
Praveen’s approach is to be patient and long-term, and this has paid off in a big way in the past. We think investors will need to demonstrate the same qualities to benefit from this strategy. The volatility we have seen over the past year is extreme – a 30% sell-off in 12 months – but the trust has always tended to be more volatile, and a portfolio with such an active set of exposures should be expected to underperform at times. Over the long run, if Praveen has picked the right stocks, then their earnings growth should be more significant to long-term returns than valuation multiples, although there is potential for further downside on the way and no guarantee the amount of outperformance in the future will be the same as seen in the past.
We think BGS has exciting growth potential for investors who can stomach the risk, offering exposure to some areas in which Japan excels – high-end manufacturing – as well as to global trends to digitalisation and increased healthcare spending. The portfolio is cheaper than it was in the past, and BGS’ own share price rating is lower, which should increase future return potential. That said, the current economic environment looks less favourable to growth stocks than it did a few years ago, so there may be more volatility in the short term.
Bull
- Excellent track record of adding alpha
- Highly active and long-term in approach which increases alpha-generating potential
- Has the lowest charges in the sector
Bear
- Tends to be very volatile, with gearing contributing
- Growth factor is out of favour and this could weigh on the trust in the near future
- The Japanese market can be very sensitive to a global recession
Fund History
