Launched in January 1981, the Baillie Gifford Japan Trust aims to provide capital growth by investing primarily in Japanese small and medium-sized companies, which offer exceptional growth opportunities with sustainable business models. It is run by the same team behind the Elite Rated Baillie Gifford Japanese fund, whose track record is among the best in the business.
Our opinion
This is a well-managed trust with a clear investment process. It is run by an experienced team, headed by Matthew Brett, with Praveen Kumar as deputy manager. Although the portfolio principally invests in small and medium-sized companies, which are typically more volatile than the Japanese stock market as a whole, the team’s disciplined approach has provided shareholders with excellent long-term returns. We see no reason as to why this enviable track record cannot continue. The trust is also reasonably priced with an ongoing charge of around 0.70%, which is competitive relative to peers.
Trust manager
Founded in 1908 and employee-owned, Baillie Gifford is based in Edinburgh but has offices in London and New York. Awarded the Elite Provider for Equities Rating each year from 2015 to 2021, it specialises globally in equities, fixed income and multi-asset portfolios. The firm is owned by 44 of its senior executives and operates as a partnership.
Baillie Gifford Japan Trust has been managed by Matthew Brett since May 2018, with assistance from deputy manager Praveen Kumar and Baillie Gifford’s 11-person Japanese investment team. Each member is responsible for researching companies in particular sectors and generating new ideas. These sector responsibilities change regularly to ensure that perspectives remain fresh. Matthew is also lead manager on the group’s Elite Rated Japanese fund and has been at the company since 2003, while Praveen also leads Elite Rated Baillie Gifford Shin Nippon.
We like quality businesses that can show secular earnings growth over time.
Matthew BrettTrust manager
Investment board
The four-strong board is chaired by David Kidd, who joined the firm as a director back in 2015. David has over 25 years investment experience, principally in the role of chief investment officer. For the past 12 years he has been a director of The Law Debenture Pension Trust Corporation, where he is an independent professional trustee. He is also a director of The Golden Charter Trust and Mid-Wynd International Investment Trust.
He is joined on the board by directors Joanna Pitman, Sharon Brown and Sam Davis.
Investment process
The Baillie Gifford Japan Trust and Baillie Gifford Japanese fund have a similar investment process. The investment team, headed by Matthew, seeks to identify well-managed businesses with a strong competitive advantage, which are not overpriced. The research process is designed to ensure that the best ideas from each individual team member are included in the portfolio, rather than a ‘lowest common denominator’ approach, which can result from team-based investment. The trust will typically consist of 40-70 stocks with a focus on smaller and medium-sized companies, which are believed to have above average prospects for growth. The trust began paying a dividend in 2018.
ESG
ESG - Limited
With this trust, Matthew takes a long-term approach, looking for growth opportunities with firms that are likely to be future leaders. He believes that this long-term approach incorporates a natural bias towards sustainable business models, however this is not a formal policy of the philosophy or process. Material ESG issues that are identified in the analysis will be considered as possible reasons to not invest, but this will be on a case-by-case basis, rather than a systematic approach. There is a strong focus on governance though, with Matthew and the team having regular engagement with the management of companies already held in the fund and those of prospective holdings.
Risk
As this trust invests mainly in small and medium-sized companies, the portfolio can experience some volatility. Currency fluctuation is another risk that investors need to be aware of. Investors comparing the Baillie Gifford Japanese fund and the Baillie Gifford Japan Trust should note that the trust has tended to be more volatile than the open-ended fund over the long term. This is down to the gearing that is employed. However, this has also enhanced the trust’s total returns over the long-term.
Gearing
The trust’s gearing is closely monitored by the board to ensure it is appropriate and has the potential to generate additional value for shareholders over the long-term. The maximum gearing limit is 30% of shareholders’ funds.
Share price discount/premium
Over the past five years the trust has tended to trade between a 12.7% discount and 10.6% premium – with a couple of brief spikes in those periods. Over the longer term it tended to trade on a double-digit discount to net asset value. The board does not have a formal discount control policy – although the board can and has repurchased shares in past periods of market volatility, having done so as recently as March 2020.
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