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Fund Profile

Baillie Gifford Shin Nippon 26 April 2024

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.

Overview
BGS’s portfolio is seeing strong sales growth but looks cheaper and cheaper…
Overview

Baillie Gifford Shin Nippon (BGS) aims to deliver high long-term returns by investing in Japanese smaller companies with exceptional growth potential. Historically, the trust has delivered outstanding returns when the market has been moving in its favour, such as in the 2015 to 2020 period. Since 2021, however, a number of factors have been working against it, with both small caps and growth stocks falling out of favour, and Performance has suffered.

However, manager Praveen Kumar reports that company fundamentals still overwhelmingly look strong. The portfolio’s sales growth, both achieved and expected, remains over twice that of the market, while the premium being paid for this extra growth has got smaller and smaller. While he has made some efforts to ensure sources of growth in the portfolio are diversified, he remains committed to the low turnover and highly active approach and has recently been finding opportunities in companies exposed to the AI revolution. The trust retains its geared position in the market, with net gearing of c. 18% as of the end of March. Praveen notes that the strategy saw tough periods following the dot-com bust and the Great Financial Crisis, and in both cases, this was followed by strong periods of returns.

As BGS’s style has fallen out of favour, the Discount has widened. In response to this and the challenging performance of recent years, the board has committed to a performance-conditional tender offer for 15% of the shares to be made if the NAV per share underperforms the MSCI Japan Small Cap Index on a total return basis over the next three years (to 31/01/2027).

Analyst's View

Japan is in favour with investors in 2024, as corporate governance reforms aimed at unlocking value in companies with low price-to-book metrics take effect. This has pushed investors into cheaper companies, rather than the higher-growth companies that BGS invests in, and similarly to companies with poorer, complicated governance rather than the more entrepreneurial firms Praveen favours. Additionally, larger companies have taken most investor attention, perhaps due to their greater liquidity and familiarity as underweight investors look to get involved.

However, another reason for Japan being in favour is the relatively strong economic situation it is in, with modest inflation and wage growth meaning that the Bank of Japan has been able to move away from negative interest rates. In our view, this creates an encouraging picture for corporate earnings growth in Japan which could see smaller companies do well on a fundamental level. That said, we will likely need to see a broadening of investor interest into the small cap space and into higher-growth companies to see BGS outperform.

Calling a turning point is difficult, but BGS looks attractive on a fundamental level at the moment. The growth metrics look strong, while Praveen notes that the focus on profitability in the Japanese market is being felt in his portfolio companies too, and means management teams are incentivised to boost returns. If sentiment shifts, we think this could be a powerful combination.

Bull

  • Highly active and long term in approach which increases alpha-generating potential
  • Low OCF relative to peers, with low turnover style also reducing cost drag
  • Valuation premium to the market lower than it has been historically

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
Continue to Portfolio

Fund History

01 May 2024 From riches to rags to riches, is this time really different for Japan?
Japan’s decade-long corporate governance push is finally leading to significant improvements to underlying Japanese businesses…
26 Apr 2024 Fund Analysis
BGS’s portfolio is seeing strong sales growth but looks cheaper and cheaper…
22 Dec 2023 Discovering the unsung superstars of Japanese technology
Fast growing companies comprising Japan’s ‘third wave’ of industrial innovators have cornered key manufacturing markets. Praveen Kumar, manager of Baillie Gifford Shin Nippon, tells Joji Sakurai how they did it...
27 Sep 2023 Ohayō Japan!
Our analysts discuss what they think may be a new dawn for the Land of the Rising Sun...
21 Jul 2023 Shin Nippon: Japan’s hidden global champions
Discover the hidden gems in Japan’s small cap market. Praveen Kumar, manager of Baillie Gifford Shin Nippon, says there’s more to Japan than manufacturing...
09 Jun 2023 What is the long-term outlook for Japanese smaller companies?
In this update, Baillie Gifford Shin Nippon manager Praveen Kumar, shares the team’s views and provides an update on the performance over the past year...
21 Apr 2023 Fund Analysis
BGS is trading on a rarely available wide discount…
03 Mar 2023 Japan: the small businesses with big opportunities
Baillie Gifford Shin Nippon manager Praveen Kumar discovers the lesser-known businesses creating premium products in Japan...
20 Jul 2022 Ingredients for success
We identify several less conventional trusts that offer strong sources of diversification to major indices…
20 May 2022 Baillie Gifford Shin Nippon Investment Trust: Manager Update
Praveen Kumar, investment manager of Baillie Gifford Shin Nippon PLC gives an update on the performance of Shin Nippon over the past year and shares the team’s views on the long-term outlook for Japanese smaller companies...
05 Apr 2022 Fund Analysis
BGS has the best long-term track record in the Japanese sectors…
10 Nov 2021 Fantastic growth funds (and where to find them)
We found them in India, Japan, frontier markets, healthcare and the global sector – and here they are…
10 Nov 2021 Slides and Audio: Baillie Gifford Shin Nippon
Download the presentation and listen to the audio from our 'Fantastic growth funds (and where to find them)' conference on 4 November...
14 May 2021 Baillie Gifford Shin Nippon – Manager Insights
Praveen Kumar, investment manager of Baillie Gifford Shin Nippon PLC gives an update on the performance of Shin Nippon over the past year and shares the team’s views on the long-term outlook for Japanese smaller companies. Capital at risk.
12 May 2021 Fund Analysis
BGS offers a portfolio of Japan’s fastest-growing and most disruptive companies and has generated sector-leading performance…
20 Jan 2021 Kepler's top-rated investment trusts for 2021
We update our annual quantitative ratings for investment trusts…
02 Dec 2020 Can you teach an old dog new tricks?
Cheap companies in Japan are drowning in what cheap companies elsewhere would kill for: buckets of cash…
02 Dec 2020 Japan's Great Wave of Change
In Japan, crisis often sparks accelerated change and innovation. Praveen Kumar, manager of Baillie Gifford Shin Nippon, talks about the upstarts making inroads...
12 Dec 2019 Japan's cutting edge
The qualities that give the best companies their advantage are not always obvious. Praveen Kumar, manager of the Baillie Gifford Shin Nippon investment trust and deputy manager of the Baillie Gifford Japan Trust, outlines the ingredients of lasting success...
22 May 2019 On a roll
As Western economies show signs of their own 'Japanification', we explore the Japanese industries poised to take advantage of this change...
07 May 2019 Fund Analysis
This ultra-active Japanese smaller companies fund, already the cheapest in its sector, reduced its fee last year...
12 Sep 2018 Fake news...
Small cap funds, despite their reputation to the contrary, are less volatile and have delivered better risk adjusted returns than their large cap peers...
19 Jan 2018 Full steam ahead?
Jupiter Fund of Investment Trusts manager Richard Curling gives his view on the potential risks and rewards for the major equity regions around the world in 2018...
27 Sep 2017 Not the usual suspects...
We highlight a selection of equity trusts that have managed to produce returns that are lowly correlated to global markets...
27 Sep 2017 Fund Analysis
A growth focused Japanese smaller companies trust with an outstanding track record relative to its benchmark and peers...
18 Sep 2017 Business as usual
We meet the new managers of Baillie Gifford's Scottish American Investment Company and find that they have much in common with former boss Dominic Neary...
22 Aug 2017 Japan briefing
We examine the opportunities and threats facing investors seeking exposure to Japan...
20 Jun 2017 Baillie Gifford Japan Trust
A consistent performer in positive and negative market cycles, led by a management team with long experience in Japanese equities...
26 Apr 2017 The greatest...
We use technical analysis to identify some of the best stock picking fund managers over the long-term...
19 Dec 2016 Small is beautiful…
We identify the UK's most efficient trusts, all of which have operational costs below 0.1%...
03 Jun 2016 Japan: Negative interest rates are just the beginning
Helicopter money could be among the measures policymakers use to revive Japan's struggling economy...
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