Buy potential growth for less with Baillie Gifford Japan Trust

“The sell-off of growth versus value stocks globally has affected sentiment towards all Baillie Gifford investment trusts,” explains Ewan Lovett-Turner, director of investment companies research at Numis Securities. “But Baillie Gifford Japan Trust’s NAV performance has stood up relatively well, so the de-rating may not be warranted. Sentiment towards all Japan trusts has also weakened due to a slowing outlook for growth and [the risk of a] global trade war, so [ratings on] Japan investment trusts have widened.”

Alan Brierley, analyst at Investec Securities, adds that the trust “continues to perform well [but] the share price has struggled to keep up with the NAV. The whole equity sector has de-rated in recent months and Baillie Gifford Japan Trust has not been immune to this. Global economic data has not been great, and we’ve seen some profit-taking across the sector after a blistering start to the year. But we still like the trust.”

If sentiment improves on Japan equities and/or broader markets, Baillie Gifford Japan Trust’s share price could do better and it could move back to a higher premium. A number of market analysts also think that Japanese equities look relatively cheap, so this could be an opportunity to buy both this trust and its underlying holdings at a relative discount.

The trust’s main attractions remain: its managers seek companies with long-term growth potential, typically over three to five years. They do not frequently churn holdings – the trust's annual turnover for its financial year to 31 August 2018 was 16 per cent, meaning that trading costs eat less into returns.

The trust's asset allocation is fairly different to the Topix index and it has an active share of 84 per cent. So, even if overall markets do not do well or the wider economic picture is not good, the trust could still make good returns – as it has shown it can do in the past.

It is also one of the cheapest active Japan funds available, with an ongoing charge of 0.73 per cent, and this could fall further because, as of 1 January, the fee on its first £50m of assets fell from 0.95 per cent to 0.75 per cent.

Most of the trust’s long-term performance record was generated under its previous manager, Sarah Whitley, who left at the end of April 2018. So it is not certain if the trust can continue to make such strong returns going forward – for example, over 2018 it underperformed the Topix index

However, Baillie Gifford funds are run very much via a team approach, with investment ideas generated from a number of sources, including other areas of the company. As a result, the trust’s investment process has not changed following Ms Whitley’s departure. The trust’s lead manager since then has been Matthew Brett, who joined Baillie Gifford in 2003. Between June 2008 and April 2018 he was co-manager of Baillie Gifford Japanese Fund (GB0006011133) alongside Ms Whitley and is now its sole manager. He also attended Baillie Gifford Japan Trust’s board meetings prior to becoming its manager.

Although the trust underperformed the Topix index during 2018, this was in part due to its exposure to cyclical companies. And this year it is ahead of this index, for example, over six months the trust has made a NAV total return of 11 per cent against 7 per cent for the index.

So if you want to buy into a fund that looks as though it can deliver growth over the long term at a better price than normal, Baillie Gifford Japan Trust remains a good option. Buy. LW

Baillie Gifford Japan Trust (BGFD)

Source: Winterflood as at 8 October  *Association of Investment Companies, **Morningstar

Performance

Source: Winterflood as at 8 October

Top 10 holdings (%)

Source: Baillie Gifford as at 31 August 2019

Sector breakdown (%)

Source: Baillie Gifford as at 31 August 2019