Top 100 Funds update: Baillie Gifford Japan

This trust invests in a concentrated portfolio of predominantly medium- and smaller-sized Japanese companies that are believed to have above-average prospects for growth. The trust's benchmark is the Topix total return index and it is managed by Sarah Whitley, who has spent nearly 30 years investing in Japanese equities at Baillie Gifford and heads the Japanese equity team.

We first tipped Baillie Gifford Japan on 11 November 2010 at 160p. On 16 March 2011, we reiterated our buy tip because the shares had fallen 23 per cent to 167p, pummeled by events related to the earthquake and tsunami that hit Japan on 11 March 2011. We said: "Enormous events often prompt an over-reaction from the market. Shareholders should hang on and brave investors could use this as a buying opportunity."

Today the Baillie Gifford Japan trades at 293.5p, a 75 per cent increase over two years. It actually trades at a small premium of 0.6 per cent to net asset value, a rarity in the sector and for the trust, which has a 12-month average discount of 8.19 per cent.

Analysts at Investec say the premium has been driven in part by the outperformance as retail clients have bought into the fund chasing the good returns. "The fund has been delivering excellent performance with a focus on smaller mid-sized and smaller companies along with a capacity to hold larger caps when it's appropriate. Currently in its portfolio, we see a decent holding in the large caps, which has helped it outperform," they say.

After such strong performance, many investors would be tempted to cash in their shares in BGFD at a premium. However, analysts are continuing to recommend Japanese equities. Andrew Cole, manager of the multi-asset fund at Barings, says: "We believe the recent recovery in Japanese equities is sustainable, given the authorities commitment to manipulating a weaker yen and boosting a flagging domestic economy. The measures taken by the Bank of Japan appear to be more credible than anything we have seen in the past. As such, we believe Japanese equities are set to provide good opportunities for investors. There are signs of traction in the Japanese economy as the sentiment of small companies, consumer confidence and industrial production growth have started to improve."

Also, looking for a replacement for Baillie Gifford Japan is difficult. Its sister trust, Baillie Gifford Shin Nippon, which invests solely in small Japanese companies, trades on a 3.1 per cent premium to net asset value. Investec suggests Fidelity Japanese Values (FJV), which invests solely in the smaller and mid-cap sectors. FJV is trading at a discount of 17 per cent, slightly below its average and leagues away from the premium of BGFD. However, Investec warns: "The fund's performance has lagged the index drastically and could be approached as a recovery play or mean reversion play, although admittedly a brave one."

Price and performance figures as at 18 March 2013; Source: Morningstar and *Trustnet

Top 10 holdings (as at 28 February 2013)

Sector analysis (as at 28 February 2013)