Tough year for Baillie Gifford Shin Nippon as ‘favourable environment stalled’ – Baillie Gifford Shin Nippon has published its full year results for the 12 months to 31 January 2022, during which time its NAV increased by 10.9% while its share price returned only 1.9%. This compares with a 10.4% increase from its comparative index (MSCI Japan Small Cap Index, total return in sterling terms).
The board said whilst frustrating that the returns over the three years are not stronger, they need to be set against the backdrop of 2021 when there was a pronounced shift in investor sentiment away from high growth smaller businesses, despite their good ongoing operational performance, in favour of larger and more cyclically exposed companies.
Over the year, the managers continued to use gearing, with invested gearing up from 8% to 11% and potential gearing from 9% to 16%. Total borrowings increased by ¥5bn (£32.3m) to ¥14.1bn (£91.1m) as the company drew ¥5bn from a new three-year fixed rate facility with an interest rate of 1.4%. During the year the yen weakened against sterling by 7.0%. BGS undertook no currency hedging during the year and has no plans to do so.
Revenue return per share was a positive 0.29p compared to a loss of 0.05p the prior year and the revenue reserve remains in deficit therefore BGS is not in a position to pay a dividend.
Statement from the chair:
2021 created a difficult backdrop for small cap growth investing in Japan. The favourable environment for disruptive small caps stalled last year. This was particularly pronounced due to their inherent characteristics: many are embryonic, operate in niche areas and have sparse investment analyst coverage. The share price underperformance of high growth businesses is disappointing but perhaps not unusual as one period of strong outperformance will often lead to a period of underperformance. Over the course of the last year, investor sentiment shifted away from the growth companies in which we invest in favour of so-called value names. That said, sentiment and macro matters often have no bearing on the fundamentals of small cap growth businesses adding significant value over longer, more meaningful, time periods as can clearly be demonstrated by Shin Nippon’s five-year performance.
The appalling situation developing in Ukraine has weighed heavily on global markets and the Company’s share price and NAV are not immune. There is a key emerging risk from the interconnectedness of global economies and the related exposure of the Company’s portfolio to the societal and financial implications of the military conflict. This may well restrain growth in some of the Company’s investments.
Our Managers will continue to promote a ‘bottom-up’ stock picking approach dedicated to researching and sourcing disruptive companies and technologies that will allow those businesses to outperform in the long term. A proposed Board trip to Japan has been postponed for two years and it is hoped that our trip, planned for November 2022, will proceed. This will allow your Board to visit existing and potential holdings within the portfolio. Inevitably after the disappointing short-term performance of the Company your Board will look to the Managers to reverse this trend by continuing to look for good quality companies which have the ability to challenge norms.
BGS : Tough year for Baillie Gifford Shin Nippon as ‘favourable environment stalled’