Best in Class: Baillie Gifford Japan Trust

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“Progress in Japan is rarely simple. Some areas jump ahead, others a little behind. His businesses sometimes struggle with dynamic change.

I like a good quote and this one from Matthew Brett, director of Baillie Gifford Japan Trust, really drives home the challenges of investing in the region.

The Japanese were hailed as one of the masters of modern capitalism in the 1980s. On December 29, 1989, the Nikkei 225 reached a record high of 38,957 – it did not exceed 30,000 again until February 2021.

We know the backstory: Seeking to control inflation, the Bank of Japan raised interbank lending rates sharply in late 1989. The unintended effect was the bursting of the bubble, causing the collapse of stock and asset prices – pessimists would say the bubble is still there. deflate today.

Since then, the discussion has been about when Japanese equities will once again become an attractive option for investors. Take last year, for example, when global stocks returned 23% to investors, Japanese stocks fell 5%.

Find value

But could Japan offer value in the current inflationary climate? There are reasons for optimism, not least because Japan’s earnings growth and general improvements in cash flow generation – driven by innovation, productivity and capital efficiency – are not are not reflected in valuations relative to other regions over the past decade.

Rising rates could also be attractive for cyclical stocks in the manufacturing, auto and technology sectors.

Japan is also accustomed to operating in an environment of sluggish consumer demand, an aging population and prime land use. The technology, manufacturing and healthcare sectors have all thrived in this environment and are well positioned to export their businesses overseas at a time when a number of these trends are becoming global issues.

Ultimately, Japan is a great hub for stock pickers, and this week’s trust has over 40 years of experience delivering for its clients. The Baillie Gifford Japan Trust is headed by the aforementioned Brett, with Praveen Kumar as deputy.

The trust aims to provide capital growth by investing primarily in Japanese small and medium-sized enterprises, which offer exceptional growth opportunities with sustainable business models.

Management

Brett has led the trust since April 2018 and is effectively supported by the market-leading Japanese investment team at Baillie Gifford. Each member is responsible for researching businesses in particular industries and generating new ideas. These sector responsibilities change regularly to ensure that the outlook remains fresh.

The investment team seeks to identify well-managed companies with a strong competitive advantage, which are not overvalued. The research process is designed to ensure that each team member’s best ideas are included in the portfolio, rather than a “lowest common denominator” approach, which can result from team investing.

The trust will typically consist of 40 to 70 stocks, which are believed to have above average growth prospects. The team takes a long-term approach, with each stake typically held for five years. No position may exceed 5% of the portfolio at the time of purchase.

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