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Is Japan the investment play of 2023?
This article first appeared on moneymarketing.co.uk on 17th January 2023 History has taught me to be...
Baillie Gifford Japanese Income Growth
Launched in July 2016, Baillie Gifford Japanese Income Growth aims to benefit from the improving corporate governance in Japan, as more and more businesses move towards a progressive dividend-paying policy. The managers apply the same well-tested growth investing philosophy and process used by their other Elite Rated funds, combined with a focus on companies with the best dividend growth opportunities.
Our opinion
The Baillie Gifford Japanese equity team is one of the best around. This relatively new fund taps into the exciting change in dividend attitudes in Japan: a new corporate governance code, coupled with a large cash pile on Japanese balance sheets is a big opportunity for investors. While the headline yield figures may be low by Western standards, there is certainly plenty of room for growth.
Company description
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.
Fund manager
The fund is run by Matthew Brett and Karen See. Matthew also manages the Elite Rated Baillie Gifford Japanese fund. Matthew joined Baillie Gifford in 2003, after achieving a BA in Natural Sciences from the University of Cambridge, and a PhD in Psychology from Bristol University. Karen See has been part of the broader Japanese equities team since 2012. She has a degree in Economics from Birmingham University and is a Japanese speaker.
We tackle the income opportunity through the lens of a growth investor. Picking companies that can grow their earnings over time, as this is the most sustainable way to grow the income stream in the long term.
Karen SeeFund manager
Investment process
The process is designed to find growing companies that can sustain high returns on their invested capital. The key factor will be for companies to show a competitive advantage versus their competitors and stocks will fall into one of four growth buckets; secular growth, growth stalwarts, special situations and cyclical growth. Analysis will focus on financial strength and a management willingness to grow the dividend. Investments are made with a three to five year outlook, so a thematic overlay is put on the portfolio to monitor exposure to the long-term trends in the region.
ESG
ESG - Limited
With this fund, Karen takes a long-term approach, looking for growth opportunities with firms that are likely to be future leaders. She 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 Karen and the team having regular engagement with the management of companies already held in the fund and those of prospective holdings.
Risk
Investing in Japan always carries high risk. This fund is reasonably concentrated at 45-65 holdings, and will have a natural mid-cap bias. As the team has a total return mindset, rather than a pure income-seeking mandate, it does differentiate this fund and the stocks it will buy. The portfolio therefore can have more high growth style companies compared with its peers, which could see the fund under perform when this style is out of favour.
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