Baillie Gifford Japan's cyclical curse is broken
Baillie Gifford Japan’s (BGFD ) growth focus has finally come good following years in the doldrums as cyclical stocks dominated.
The £926m portfolio run by Matthew Brett delivered a net asset value (NAV) total return of 20.5% in the 12 months to end of August, almost doubling the 12.1% return from the Topix.
Brett said it may be ‘surprising’ that the growth-orientated portfolio has performed so well given ‘political challenges and a slowing global economy’.
‘Our long experience suggests that in slightly tougher conditions, genuine growth businesses are more appreciated as they are able to keep making progress in spite of headwinds,’ he said.
Investors have had a long wait for the ‘genuine growth’ companies to deliver, given the uptick in cyclical stocks seen in Japan since Covid. This downturn for the trust is reflected in its longer-term performance; over the past five years, the trust’s NAV total return is just 27% versus a 53.4% rise in the Topix, but over 10 years it is 152.2% versus the index’s 137.2%.
While Brett retained a cautious tone around the macroeconomic backdrop, he confirmed that artificial intelligence (AI) will remain a ‘central theme’ across global markets.
BGFD has ridden the AI wave through its largest holding Softbank, which makes up 8.3% of the portfolio. While the shares ‘did nothing’ in the first half, they almost doubled in the second, propelling founder Masayoshi Son back into the position of Japan’s richest person.
‘In addition to the 90% stake in Arm Holdings, whose designs power almost every smartphone globally, Softbank has invested in OpenAI, the company behind ChatGPT, which is a key driver of AI advancements globally,’ said Brett.
The fund’s second-largest position, financial services company SBI, also made progress, including a ‘successful transformation from an online financial broker into a diversified financial conglomerate’.
There was just one stock which detracted more than 1 percentage point from performance: Rakuten.
The technology group offering e-commerce, digital, fintech and banking services is the fifth largest position in the fund at 3.9%. Brett said it is yet to be ‘fully appreciated’ by the market, which has failed to recognise ‘either the significant operational improvement in the telecoms business or the long-term growth opportunity ahead of the company’.
‘We retain conviction in the holding,’ Brett added.
Brett bought four new stocks over the period, including online accounting software Money Forward, bicycle component maker Shimano, computer gaming groups Square Enix and Sega Sammy.
Shimano was held in the trust previously but sold during Covid when ‘demand for bicycles became artificially inflated’ but the ‘subsequent significant share price correction has presented another opportunity’.
Six stocks were sold, including positioning systems manufacturer Topcon, electric cable group SWCC, real estate company Tokyo Tatemono, and internet names Digital Garage, Mercari, LY Corp.
The portfolio has a significant weighting to ‘entrepreneurial growth’ companies, particularly in the internet sector, with no exposure to car assemblers or many of Japan’s manufacturing behemoths.
Long-term secular growth companies have ‘not been fully appreciated in recent years’ and are now offering the opportunity for outperformance.
Brett said earnings growth in the portfolio has lagged the market due to ‘the lack of exposure to the very strong returns from some of Japan’s most cyclical companies’, but ‘looking forward, the earnings growth is forecast to be ahead of the market again’.
