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Rare underperformance from Baillie Gifford Japan

Rare underperformance from Baillie Gifford Japan – over the year to 31 August 2019, The Baillie Gifford Japan Trust net asset value total return fell by 5.3% compared to the 0.5% fall in the benchmark TOPIX index total return (in sterling terms). In this period the company’s share price total return fell by 7.4%. Nevertheless, the NAV return is 200 percentage points higher than the return on the benchmark index over 10 years.

There is a small dividend of 3.5p this year. The ongoing charges ratio fell to 0.70% from 0.73% as the lower management charges kicked in.

Extract from the manager’s report

The largest contributor to performance this year was Rakuten, mainly an online retail and finance company. It has made significant progress in its plans to launch a mobile phone network in Japan while other parts of the business continue to perform. Aside from this we had helpful contributions from Advantest, the chip-testing company, where demand and profits surged during the year; and Pan Pacific Holdings, the retailer formerly named Don Quijote, who made a significant acquisition to grow the size of the business.

On the other hand, the two largest negative contributors to performance this year were Outsourcing and ZOZO (formerly named Start Today). Both remain in the top ten positive contributors to performance over the past five years, so this year appears to be a reversal of the previous positive trend.

Outsourcing is a staffing business run by the entrepreneur Mr Doi, who owns a little over 12% of the company. It has grown its sales 7-fold and operating profits 13-fold over the past 5 years. Despite continuing to grow, the shares were weak due to the perception that tougher macro conditions might impact the business. We remain very happy to continue to back the founder and increased the company’s shareholding this year.

ZOZO is an online fashion retailer run by the entrepreneur Mr Maezawa, who owns 36% of the company. It has experienced significant success over the past several years but recent attempts to innovate have been less successful. It also gave us cause for concern when the Board decided to approve an options package to Mr Maezawa that seemed excessive relative to the performance hurdles needed to achieve it. We reduced the holding during the year. Subsequently there has been a bid for majority control of the company by the Softbank controlled Yahoo Japan so we may end up continuing to own the business indirectly.”

BGFD : Rare underperformance from Baillie Gifford Japan

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