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Tough period for Baillie Gifford Shin Nippon but optimism remains

230113 Japan

Baillie Gifford Shin Nippon (BGS) has published its full-year results for the 12 months to 31 January 2023. Over the year the company’s NAV declined by 1.2% while its share price fell 8.9%, trailing the MSCI Japan Small Cap Index benchmark which returned  5.7%. Despite the underperformance, the discount narrowed slightly from its average of the past 12 months, closing just under 9%. Over the past three years, NAV has increased by 0.5% while shares are down 6.8% in sterling terms.  This compares to a benchmark return of  6.6%. 

While the board acknowledged the relatively disappointing performance they highlighted the manager’s focus on high-growth, smaller companies, which are currently out of sync with investor sentiment, so the recent performance in absolute and relative terms is not unexpected. The board recognises that the valuation downgrade of growth companies does not always correlate with their operational performance. However, they note that growth stocks are now priced at levels that assume barely any future increase in revenues or profits, which they believe is in stark contrast to their underlying fundamentals. Therefore both the board and managers continue to believe that being patient and seeing through market noise increases the chances of picking exceptional companies that will deliver attractive long-term returns.

Commenting on the outlook, Chairman M Neil Donaldson continued:

“The war in Ukraine is continuing to undermine sentiment in many ways. High inflation is now a real threat to global growth and the inevitable increases in interest rates will continue to provide headwinds in many economies. Shin Nippon will not be immune to these issues.

“That said, your board was very encouraged to meet twenty-four different companies on its recent trip to Japan. We met companies already owned in the portfolio as well as some potential new holdings both in the listed and the unlisted space. It was apparent that the negative effects of Covid-19 over the last couple of years have largely dissipated, leading to a more positive outlook with no visible evidence of any doom and gloom. However, there is no getting away from the issue of the aging population in Japan where people are living longer and, where the economy is trying to grow, this inevitably puts pressure on the ability to recruit suitable skilled labour. I have mentioned this structural issue in previous statements. The companies we met were all aware of these issues and your Board was left confident that they were being addressed. The number of foreign workers in Japan continues to grow and this trend will inevitably continue in the years ahead. There is no doubt that the companies we met were engaging and confident about their future growth prospects. We met some highly skilled individuals who are still trying to disrupt norms and we were left feeling that the small-cap sector in which the company invests is in good shape.

“The managers have for many years adopted a stock-picking approach when shaping the portfolio. As the directors discovered on the trip, opportunities will continue to present themselves and we are wholly supportive of the managers in seeking those out and continuing to strengthen the portfolio. The start-up environment for companies is changing and Government policies are more supportive. There is a positive attitude to creating wealth and starting exciting, disruptive businesses. The board and the managers remain encouraged by the outlook.”

BGS : Tough period for Baillie Gifford Shin Nippon but optimism remains

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