05 Jan 2012 | Business

Japan - Growth Opportunities 

Japan - Finding growth in a low growth economy
 

Baillie Gifford manages two Japanese investment trusts. Both trusts were launched in the glory days of the Nikkei. The Baillie Gifford Japan Trust PLC was founded in 1981 and Baillie Gifford Shin Nippon PLC (new dawn) rose in 1985.

A fair few Japanese trusts have gone to the wall during some twenty years of deflation and woeful stock market performance. However the two Baillie Gifford trusts have more than survived. Indeed The Baillie Gifford Japan Trust managed by Head of Japanese Equities, Sarah Whitley, is often seen as bellweather for investment prospects in Japan by professional and private investors alike.

The two trusts have their differences. The Baillie Gifford Japan Trust is bigger at £135m and invests in bigger companies than Baillie Gifford Shin Nippon which has assets of £57m and focuses on smaller companies which, by nature, may be more domestically orientated. The trusts also have their similarities. Both seek out growth stocks and take a minimum three to five year view on their choices. They look for quality companies with strong prospects rather than picking things for the short term because they might be cheap.

The economic trials of Japan since the 1990s are well documented as is the terrible misfortune the country suffered in March of this year. The picture is uncertain but within a dark canvas there are some bright spots for the stock picker. It is important to see a difference between macro economic developments and the prospects of individual companies. Baillie Gifford managers are committed stock pickers and in the Japanese market both Sarah Whitley and Shin Nippon investment manager, John MacDougall invest in innovative businesses which benefit from disrupting traditional Japanese practises or market opportunities. They also closely consider companies whose growth is linked to markets outside of Japan, especially in China and developing Asia.

The internet is an area that holds considerable appeal. Start Today, a stock held in both trusts, operates as one of Japan’s largest online clothing specialists and has enjoyed fantastic growth. Yet consumers in Japan still buy a relatively small proportion of their goods online; there remains a huge opportunity for those companies who can get it right. In the same vein one of Japan’s largest social networking sites, Gree, goes from strength to strength as this kind of communication takes off.

Baillie Gifford Shin Nippon pursues other exciting themes in addition to those thriving on the web. Niche machinery and technology companies which have global ambitions in the areas of LED lighting, robotics and motion control technology can be found in the portfolio. Also featuring are firms that should benefit from the long term rise of the service sector in Japan such as Message (providing residential homes for the elderly) which is a “Silver Yen” play on the outsourcing of healthcare provision.

So don’t judge the book by its cover - within Japan there are some very attractive growth opportunities even if the economy as a whole shows signs of continuing malaise. The strength of the Yen is a double edged sword. It cuts into the margins of exporters but it provides ammunition for those companies seeking to develop businesses off shore. In this respect Japan is well placed being a major player in Asia. Again it is easy to write off returns from Japanese funds but it might surprise a few to hear that in the three years to 30 September 2011 Baillie Gifford Shin Nippon’s share price grew by 73%*, a sign that some things in the garden can be rosy.

* Source: Morningstar, share price, total return.

 

Past performance is not a guide to future performance. The Investment Trusts managed by Baillie Gifford & Co are listed UK companies. As a result, the value of the shares in them, and any income from those shares, is not guaranteed and could go down as well as up. You may not get back the amount invested. You should view your investment as long-term.

The Trusts invest in overseas securities and changes in the rates of exchange may also cause the value of investments (and any income they may pay) to go down or up.

Investment in smaller companies is generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell.

Smaller companies may do less well in periods of unfavourable economic conditions. Single country trusts are generally considered higher risk than those which invest in a number of different countries, as they are exposed to the changes in a single market and currency.

Investment trusts are UK-listed public companies and are not authorised or regulated by the Financial Services Authority.

This article contains information on investments which does not constitute independent investment research.

Author: James Budden
James Budden joined Baillie Gifford in November 2008. He is responsible for the distribution of Baillie Gifford’s range of investment trusts and other collective investment funds.