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Buy growth at a discount with Baillie Gifford Japan

Both Japanese equities and Baillie Gifford Japan Trust are trading at what look like attractive prices
Buy growth at a discount with Baillie Gifford Japan

Japan equities have been out of favour with investors for many years, but since the outbreak of the coronavirus earlier this year they have held up relatively well. The only major developed market that has recently outperformed Japan is the US: over one year to 27 July MSCI Japan rose 2.64 per cent while MSCI USA increased 6.49 per cent. But Japan has held up significantly better than the UK and European markets.

IC TIP: Buy at 797p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Attractive sector

Unusually wide discount

Competitive ongoing charge

Proven investment process

Bear points

Recent manager change

“After three decades of stagnant growth, it has taken almost another decade for both businesses and investors to have faith that Prime Minister Abe’s reforms will actually work,” commented Juliet Schooling Latter, research director at FundCalibre. “But work they have and, while Europe, the UK and the US are questioning their futures, Japan now has one of the most stable political backdrops in the world. And the conservative practices of managements have left its cash-rich companies well prepared for the global lockdown."

 

Japanese companies are also generally trading at very attractive valuations. MSCI Japan Index has a price/earnings (PE) ratio of 15.86, compared with 20.61 for MSCI World and 24.33 for MSCI USA.

A good way to get exposure to Japan is Baillie Gifford Japan Trust (BGFD), which has a very good long-term performance track record and a competitive ongoing charge. And as of 27 July, the trust was trading at a discount to net asset value (NAV) of 5.6 per cent, whereas over the past few years it has often traded at a premium to NAV because of its good performance. If Japanese equities come back into favour the discount could tighten again.

The trust focuses on medium to smaller Japanese companies that its managers believe have above-average prospects for growth. They typically hold 40 to 70 stocks and buy companies with innovative business models, that disrupt traditional practices or exploit market opportunities such as growth from overseas. 

Ben Yearsley, director at Shore Financial Planning, says that the trust is a “core long-term Japan holding with an excellent management team”. 

The trust’s biggest holding is communications company SoftBank (9434:TYO), shares in which hit a 20-year high earlier this month, rising over 140 per cent to 27 July since panic-induced March lows. SoftBank had been a lag on the fund’s performance in 2019, but its managers are confident that it has more scope for growth. 

Baillie Gifford Japan Trust's strong long-term performance record was largely generated under lead manager Sarah Whitley, who ran it between 1991 and the end of April 2018. Since then, Matthew Brett has been lead manager, with Praveen Kumar as deputy manager.

However, Baillie Gifford runs its funds via a team-based approach, which should mean the trust’s investment process hasn't changed much due to the departure of one manager. And Mr Brett is highly experienced and has worked on Baillie Gifford’s Japan team for several years. He was co-manager of Baillie Gifford Japanese Fund (GB0006011133), alongside Ms Whitley, from 2008 to 2018 and is now its sole manager. He is also co-manager of Baillie Gifford Japanese Income Growth (GB00BYZJQG71). 

Praveen Kumar has been a member of Baillie Gifford's Japanese equities team since 2011 and took over the management of Baillie Gifford Japanese Smaller Companies (GB0006014921) and Baillie Gifford Shin Nippon (BGS) in December 2015.  

So if you want to get exposure to Japanese equities on attractive valuations, via a trust with a proven investment process at what appears to be a cheap entry point, now could be a good time to buy Baillie Gifford Japan Trust. Buy. 

 

Baillie Gifford Japan Trust (BGFD)
Price797pGearing5%
AIC sectorJapanNAV 844.5p
Fund typeInvestment trustPrice discount to NAV5.60%
Market cap£732mOngoing charge0.7%*
No of holdings69**Yield0.40%
Set-up date01.12.1981*More detailsbailliegifford.com
Source: Winterflood 27 July 2020 *Baillie Gifford,**Morningstar as at 30 April 2020

 

Performance
Fund/benchmark1 year total return (%)3 year cumulative total return  (%)5 year cumulative total return  (%)
Baillie Gifford Japan Trust NAV72984
Baillie Gifford Japan Trust share price-11671
Tokyo Stock Exchange 1st Section21151
General Japan trust NAV average82470
General Japan trust share price average31760
Source: Winterflood as at 27 July 2020

 

Top 10 holdings
SoftBank6.9%
GMO Internet3.9%
Rakuten3.7%
SBI Holdings3.0%
Sysmex2.5%
CyberAgent2.5%
Kubota2.4%
Colopl2.4%
mixi2.4%
Misumi2.3%
Source: Baillie Gifford 30 June 2020

 

Sector allocation (% of NAV)
Commerce & services19.9%
Info, comm & utilities18.7%
Electricals & electronics14.1%
Manufacturing & machinery13.8%
Financials8.1%
Chemicals & other materials5.5%
Retail4.1%
Pharmaceuticals & foods3.0%
Real estate & construction2.8%
Net liquid assets10.0%
Source: Baillie Gifford 30 June 2020