Baillie Gifford Shin Nippon (BGS) has announced its results for the year to 31 January 2017. Over the year the Company’s net asset value per share (after deducting borrowings at fair value) rose 34.0%, whilst it says its comparative index, the MSCI Japan Small Cap Index, rose by 34.9% in sterling terms. The share price increased by 33.5%.
BGS says that, among the positive contributors to performance were a number of disruptive online businesses targeting large and underdeveloped domestic markets, including food delivery business Yume No Machi and fashion retailer Start Today. It also says that online real estate operator Next and online cosmetics ratings website iStyle were two of the more disappointing stocks over the year. Both companies have reportedly MSCI Japan Small Cap Index investing heavily to secure future growth and BGS’s Managers remain excited about their prospects. Turnover within the portfolio remains low, at 13.4% although BGS’s managers made new investments in what they describe as a number of exciting companies with high growth prospects, including DesignOne and EGuarantee.
The manager says that the past twelve months were tough and volatile for high growth small cap stocks in Japan as geopolitical and macroeconomic factors caused a rotation into value and lower quality stocks which, in the short term, hurt performance. It says that share prices of a number of high growth companies held in the portfolio remained weak through this period. However, it says that it strongly believes that the high growth smaller companies in which it invests have the ability to grow at high rates irrespective of macro headwinds or sluggishness in the domestic economy. It says that this is because these companies typically target large domestic profit pools, have a disruptive business model and generally compete with traditional, slow moving incumbents. Furthermore, it says that there are also structural trends playing out in Japan that it believes will act as tailwinds for these high growth companies.
Looking to performance, the manager says that sterling based investors benefitted from the currency’s weakness versus the yen over the course of the past year. It says that Yume No Machi is emerging as the clear leader in the nascent online takeaway industry and was the top performing stock over the past year. Inn its view, management are taking aggressive steps to strengthen the company’s competitive position (they recently announced a capital and business alliance with Japan’s leading messaging platform LINE – the manager says that this should give them access to LINE’s considerable user base). Start Today was another strong performer over the year. The manager says that Start Today continues to increase its dominance in online fashion apparels and that growth has recently accelerated as the company has broadened the choice of brands and products available on its online platform.
Next and iStyle were two of the more disappointing stocks over the year. BGS’s manager says that management of both companies have been investing heavily to secure future growth and that it remains quite excited by the long-term prospects of both companies. Specialist medical device maker Asahi Intecc and niche plastic car parts maker Daikyonishikawa also performed poorly. BGS’s manager says that both companies have meaningful overseas businesses and yen strength through the year depressed sales and profits although operationally, they continue to execute well.
BSG made a number of new investments over the year in what its manager describes as exciting companies with high growth prospects. It says that DesignOne helps small businesses by building and maintaining an online presence for them and that their clients typically would have little prior experience of doing business online. BEG’s manager says that the growth potential for DesignOne is significant as there are a large number of such small businesses in Japan. Another addition is Eguarantee, which BGE’s manager says is emerging as the dominant player in the large but underdeveloped domestic trade receivables guarantee market. It is reortedly backed by the giant trading company Itochu, which is also its largest shareholder. BGS’s manager says that, through Itochu’s extensive business links, EGuarantee has unparalleled access to small and medium sized businesses that are still in the early stages of improving their balance sheet and working capital management. The amanger has also been adding to the holdings in high growth companies where the share price has been particularly weak (this includes Next and iStyle).
There were also a number of disposals. The manager says that Oisix, an online retailer of organic foods, has struggled to scale up its business and its management are venturing into new and less attractive areas. BGS’s managers say that they are not convinced by management’s strategy so decided to sell the holding. Komehyo, a specialist retailer of second hand luxury bags, was also sold due to significant deterioration in its competitive environment. Modec, a global player in floating vessels used for oil and gas exploration in harsh environments, was sold on concerns relating to its largest customer Petrobras, the Brazilian national oil company, that is currently the subject of multiple investigations around financial impropriety.
In terms of outlook, the manager says that it remains excited by the long-term prospects for Japanese smaller companies and continues to find a number of new and exciting high growth ideas. It says that there are tailwinds in the form of long-term structural trends and, with an increasing level of government support, it believes that the operating environment for smaller companies in Japan is excellent.
Baillie Gifford Shin Nippon mildly underperforms in ‘tough and volatile’ environment : BGS