Contenders: nine trusts in the Japan and Japanese smaller companies sectors. And the winner is...
Winner: Baillie Gifford Shin Nippon
NAV total returns for Baillie Gifford Shin Nippon (BGS) fell by just 5% last year. As a result, the smaller company specialist’s three-year NAV total returns have pulled even further ahead of both its benchmark and every other Japanese trust. It therefore retains this award.
Manager Praveen Kumar has retained many of the “disruptive” companies that have served the trust well for many years. However, issuance of new shares designed to limit the premium to 5% has contributed to a 170% increase in assets under management since he took charge.
Kumar has therefore had plenty of new money to invest. He has also been keen to replace holdings where conviction had fallen with new ideas, such as Raksul, which is disrupting Japan’s sleepy printing and logistics sector with its cloud-based system. As a result, turnover was up to 18.7% last year, and the number of stocks held rose to 75. The board has therefore lifted its limit on the number of holdings to 80.
Kumar also manages the open-ended BG Japan Smaller Companies fund and the smaller-company holdings of Baillie Gifford Japan Trust, so he now has more than £1.5 billion under his wing. Given that his mandate is to focus on the most exciting and entrepreneurial companies at the bottom end of the MSCI Japan Small Cap index, this amount may seem excessive, but Kumar says it is not a problem. His target group can have market capitalisations or turnover equal to around £1 billion, and he typically initiates investments with stakes of around 0.5% of the trust’s NAV, adding to them as he gains confidence.
Shareholder permission is being sought to allow Shin Nippon to invest up to 10% in unlisted companies. Meanwhile, its investment universe is being expanded by up to 100 IPOs a year. Kumar says around a quarter of these are large enough to consider.
Managed by Praveen Kumar since end 2015
Sector Japanese smaller companies
3-year NAV total return 86.7%
3-year share price total return 91%
Average discount for sector -3.7%
Ongoing charges 0.89%
Baillie Gifford Japan Trust (BGFD) has the second best three-year returns among Japan trusts after stablemate Shin Nippon, but has struggled to match the latter in recent years. It is managed by Matthew Brett, who worked closely with highly regarded predecessor Sarah Whitley for many years before taking over in April 2018.
BGFD focuses mainly on medium to small companies and has around a 20% overlap with Shin Nippon. It targets long-term capital growth, has a high active share compared with its benchmark and low portfolio turnover. It favours companies with innovative business models and those disrupting traditional Japanese practices or targeting market opportunities, such as growth from overseas.
Deputy manager Praveen Kumar says it suffered a perfect storm in 2018 because Japan’s auto companies were hit by weak demand in many overseas markets, and this also affected their suppliers, such as those specialising in factory automation. BGFD’s 50% exposure to overseas markets was higher than Shin Nippon’s, which proved a disadvantage, and its gearing exacerbated the downturn. However, it has recovered from similar setbacks in the past.
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