07 Jul 2010
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Person To Person
Developing Japan - Investment Opportunities
Heather Farmbrough talks to Sarah Whitley and Matthew Brett about investing in Japan
A small island, next to China and Korea, the same size as the UK and Taiwan, Japan is the world’s third largest economy, yet it is one about which many investors are persistently nervous.
Sarah Whitley, Manager of the £128.82m* Baillie Gifford Japan Trust since 1991, says patiently, “Japan is still one of the major economies in the world and yet people will tell me it’s irrelevant. People compare Japan with fast-growing Asian countries and then say, ‘oh, look, that’s pathetic’, but actually Japan belongs with the US and UK. It’s a developed country but has the benefit of being in Asia.”
In 2008 Matthew Brett became co-manager, with Sarah, of the Baillie Gifford Japanese Fund (an Open Ended Investment Company sub-fund) and helps informally in the running of the investment trust. A former member of Baillie Gifford’s Fixed Income Team, he joined the Japan desk in 2005 and is an enthusiastic proponent for investing in Japan, so much so that Sarah jokes that her main challenge in running the trust “is trying to hone down a long list of attractive buy ideas that Matthew and the eight strong team come up with and squeeze it into a finite amount of money”.
The trust invests, predominantly, in small to medium sized companies and stocks are chosen on individual merits, rather than in adherence to an index. Sarah concentrates on the companies, which make up the portfolio but recognises that there is a tendency for investors in Japan to worry about macro issues more than in other markets.
EARLY DEVELOPMENT
A psychology graduate like Sarah, Matthew offers an insight. “If you think back over 20 years people have either not made or lost money by investing in Japan, so I suppose it is quite easy to write it off. Or they may say they don’t invest in Japan because they don’t like the politics or the declining population or the debt. These are all sensible things to worry about, but may be used to justify people’s existing views, rather than constituting a genuine reason for not investing in Japanese companies.”
Political problems, an ageing population and debt are hardly unique to Japan. It is, Sarah and Matthew agree, perhaps just that these problems are hitting Japan earlier than the rest of the developed world. Japan has some advantages also: government spending on health care, for instance, is significantly lower as a percentage of GDP than it is in the US while the elderly population is one of the healthiest in the world. The fiscal deficit comes from taxes being too low and the tax regime being inefficient rather than reckless Government spending.
Sarah welcomes the appointment in June of Naoto Kan as prime minister. He has signalled that he is determined to end the corruption that has bedevilled corporate and political Japan and to try to stop the yen from going higher in order to help exports and reduce deflation. Japan also has a hitherto largely untapped rich vein of potential privatisations which could help to cut debt, including Tokyo’s metro system, which carries several million passengers a day and the 28 per cent of the banking sector (by deposits) which is state owned.
“There are very good companies in Japan which we’ve invested in for decades and they’ve done what we wanted and yet have often been de-rated just because they are listed there”, Sarah says. “People overlook the dynamic corporate sector and growth opportunities in the domestic market.
COMMERCIAL SALES
“Retail is a good example: we’re not expecting the overall furniture market in Japan to grow but we’re expecting sales from Nitori (akin to IKEA) to more than double in the next seven years. We first bought a holding in Yamada Denki, when it was the tenth-largest consumer electronics retailer and it is now the number one in Japan by a huge margin with scope to double its market share.”
Online retailing is also growing very fast: Matthew is enthusiastic about online shopping mall operator Rakuten and Sarah about young fashion retailer Start Today, both of which the Trust holds. Japan is also the world’s pre-eminent scientific research nation and much of that research is done in companies. Sarah points to the evolution of ‘geek’ companies over the last ten years, which have moved away from being just research based organisations into commercially run, outward-looking and developing businesses in which research provides a competitive advantage, such as Shimadzu, a world leader in chromatographs, a trust investment.
Sarah and Matthew also argue that tourism, particularly from Asia, is an increasingly important source of income. A recent survey revealed that Japan is the destination Chinese people would most like to holiday. Sarah recalls taking her family to the golden pavilion in Kyoto in pouring rain with several hundred Chinese tourists a few years ago, and the numbers are rising sharply still, particularly as the Chinese enjoy shopping in Japanese shops. Meanwhile, Japanese goods, often perceived as higher quality than their Chinese counterparts, are enjoying growing markets in newly affluent parts of China. The Japan Trust holds shares in Pigeon Corporation, which sells baby equipment. Currently 16.3 per cent of sales are to China but as incomes rise, this should grow.
Sarah and Matthew sit next to each other and spend much of the day discussing ongoing ideas. They don’t always agree, and they do not quite finish each other’s sentences, but I suspect they could. Although a team based approach, Sarah is fully prepared to buy things that only she likes, even if no one else is enthusiastic. “And rather to my colleagues’ annoyance, sometimes these work out,” she says.
This interview took place in June 2010
Author: Heather Farmbrough
Heather Farmbrough is a financial writer and editor of Trust.
* Net assets as at 31 May 2010
Please remember that changing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount originally invested.
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 like the Japan Trust are generally considered higher risk than those that invest in a number of different countries, as they are exposed to the changes in a single market and currency.