Get high returns at a discount with Baillie Gifford Japan

This IC Top 100 Fund has generated impressive returns for investors over the long term and is the top-performing trust in the Association of Investment Companies (AIC) Japan sector over five years. It has delivered a share price return of 143 per cent compared with 56 per cent for its benchmark, the Topix index, over the past five years.

However, more recently its share price has not kept up with its net asset value (NAV), meaning the trust is trading at a discount of 4.1 per cent, notably wider than its 12-month average premium of 0.9 per cent and one of its widest levels for about two years.

The trust's discount is most likely due to the sudden change in exchange rate between the yen and sterling, following the UK's vote to leave the European Union, rather than an indication of worsening fundamentals. The share prices of several Japanese trusts have been slow to catch up with the sharp increase in NAV following the pound's deprecation versus the yen. And this discount means it could be a good time to buy Baillie Gifford Japan.

The trust also boasts a longstanding and highly experienced manager, Sarah Whitley, who has been in place since 1991. She employs a bottom-up stock selection approach, with the aim of identifying companies that offer growth potential over a three- to five-year horizon.

The trust has a high active share score, which means it differs significantly from its benchmark, giving investors exposure to a much wider range of companies than are included in the index. Ms Whitley typically invests in 40-70 companies that she believes offer good growth opportunities. These often include innovative companies that have the potential to disrupt traditional Japanese practices or market opportunities. Nearly one-third of the trust's portfolio is invested in businesses within commerce or services.

The trust's gearing (debt) stands at 15 per cent, so if its investments fall in value any invested borrowings will increase the amount of the loss. But it could also increase its gain in rising markets.

As a result of its small-cap and growth focus, the trust's performance is likely to be volatile. The Japanese economy also continues to face difficulties and this could negatively impact the trust's performance in the event of a market setback.

However, the re-election of Prime Minister Shinzo Abe with a strong majority earlier this month gives him the authority to implement new reform measures and enables the Bank of Japan to embark on further economic stimulus. This should be supportive of Japanese equities.

Charles Cade, head of investment companies' research at Numis Securities, says: "The Japanese economy, like many other areas in the world, is struggling. But Sarah Whitley's portfolio is set up to allow for that. It is very much focused on companies that are able to generate their own growth, so despite the rather mixed outlook for the Japanese economy overall, this portfolio looks well placed."

Ms Whitley's experience of investing in a range of different market conditions in Japan over the past 25 years should also prove helpful. "Japan is a market that at different times people have avoided or been underweight in, but Sarah Whitley has always managed to find opportunities there," adds Mr Cade. "There are a lot of interesting companies out there, and I think you need somebody with expertise and quite a bit of experience to find them."

So if you're a growth investor with a long-term time horizon looking to diversify away from the UK, Baillie Gifford Japan Trust's experienced manager, outstanding performance and discount to NAV make it a good option. Buy. EA

Source: Winterflood and Morningstar as at 25/07/16

Performance

Source: Winterflood as at 25/07/16

Top 10 holdings as at 30/06/16 (%)

Source: Baillie Gifford  

Sector breakdown, as at 30/06/16 (%)

Source: Baillie Gifford  

IC Tip Rating