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Baillie Gifford Japan turns round performance but JPMorgan overtakes on inside

12 October 2020

Top-performing Japan mid-cap growth trust over last decade bounces back from last year’s underperformance, but rival JPMorgan Japanese has the edge over three and five years.

Baillie Gifford Japan (BGFD ), the top-performing Japan mid-cap growth trust over the last decade, has bounced back from last year’s underperformance but, although the investment trust remains ahead of the Japanese stock market over all time periods, it has been surpassed by rival JPMorgan Japanese (JFJ ) over three and five years. 

Matthew Brett, lead fund manager since Sarah Whitely retired two-and-a-half years ago, oversaw a 6.8% total return on net assets in the year to 31 August, annual results showed last week, with the shares returning a more modest 3.7%. Both oustripped the Topix index benchmark which eased 0.1%, reversing the situation in the last financial year when the trust’s net asset value (NAV) fell 5.3% and the Topix gained 0.5%.

Analysts at JPMorgan Cazenove said the latest annual return represented ‘a big turnaround’ from the half-year end in February when NAV had dropped 7.8% against the Topix’s 5.1% decline, but was rectified by a second-half performance that saw the NAV rally 15.8% ahead of just 5.3% from the benchmark.

A resurgence in Softbank (9980.T), the investment holding company weighed down by its stakes in WeWork and Uber last year, and other cash-rich Japan corporates, helped bolster BGFD’s performance. Up to last Friday’s close the underlying NAV growth over 10 years was 378.6%, underpinning an impressive total shareholder return of 474%, that was better than its immediate rivals (excluding Japan smaller company  trusts) and smashed the index’s 132%.

However, Nicholas Weindling’s JPMorgan Japanese has had an even stronger 2020. Having stood in BGFD’s shadow during the manay years Whitley was in charge, JFJ’s shares have soared nearly 40% this year to give shareholders a total return of 72.6% and 148.6% over three and five years, that beats the Baillie Gifford trust and gives it a market value of over £1bn compaed to BGFD’s £852m. 

Effective in pandemic

Largest holding Softbank, which makes up 8.1% of the portfolio, held back returns last year when the shares tumbled after the multinational was forced to bailout office sharing group WeWork, but this year it has proved to be a boost for Brett and deputy Praveen Kumar.

Softbank shares soared just under 40% in the 12 months to 31 August, and delivered a total return of 26% in sterling terms for the fund. 

Brett said the ‘combination of attractive underlying assets, a share price that trades at a large discount, and value-added management mutually reinforce each other to create a compelling investment opportunity’. 

The prudence of Japanese company balance sheets, which are well known for large cash piles, has also played into returns. Brett said cultural norms and an ‘effective health service’ have helped restrict outbreaks of Covid-19 and companies have fared well and continue to pay dividends thanks to ‘strong balance sheets’.

‘Often, they attribute this approach to the need to be able to continue to pay wages in the event of a significant earthquake or other natural disaster - but it has proven equally effective during the pandemic,’ said Brett. 

Brett (pictured) said the rising dividends received will enable the trust to pay an increased dividend this year. The trust only started paying dividends in 2018 at 0.6p per share, which rose to 3.5p in 2019 and this year the board has recommended a 4.5p per share giving it a yield of just 0.5%.

It has not all been good news in Japan, which has been affected by the drop in global demand caused by the outbreak and restrictions on movement put in place by governments around the globe. 

‘Manufacturing sectors have had a particularly difficult time, but reduced confidence has also had a significant effect on the domestic economy,’ said Brett. 

‘Nonetheless, we can be reasonably satisfied with the underlying position of corporate Japan during a difficult period.’

The manageres bought six new holdings in the year and sold eight, with internet and e-commerce business Rakuten (4755.T) being the stock that is ‘exciting us at the moment’, said Brett. 

Rakuten is making progress building a fourth mobile phone network in Japan and Brett said ‘the opportunity to create wealth from this effort is substantial’.

‘Meanwhile, Rakuten’s core e-commerce business is growing well in the current environment which helps to provide the strong cashflows needs to fund its telecoms investment,’ he said. 

Brett is also backing online brokerage SBI (8473.T), which is partnering with regional banks and ‘exploring blockchain technologies in an effort to become a comprehensive financial services provider’. 

‘The world is changing and as investors we must try to be at the vanguard of the changes rather than left behind,’ said Brett. 

Analyst support

‘Although performance has been eclipsed by JPMorgan Japanese, we like the Balllie Gifford approach and remain comfortable with our “overweight” recommendation,’ said JPMorgan Cazenove analyst Christopher Brown when the shares stood at 930p.

Numis’ Priyesh Parmar agreed, describing the trust’s then 5% discount as ‘an attractive entry point’ for a core holding for Japan. The shares have added 7p to 941p today and stand on a reduced discount of 1.4% below the estimated NAV per share of 947.9p. 

 

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