Over the year to 31 August 2023, Baillie Gifford Japan’s NAV total return was -5.4%, well behind the 6.7% total return from the TOPIX index. The trust now lags its benchmark by a considerable margin over five years.
A slight narrowing of the discount meant that the return to shareholders was -4.0%. This was helped by a buyback of 851,845 shares at a cost of approximately £6.4m over the period.
A final dividend of 10.0p per ordinary share will be put to shareholders for approval at the Annual General Meeting. This represents an 11% increase on the 9.0p paid in relation to the prior year.
The considerable underperformance is attributed to the fund’s bias towards higher growth and smaller companies. The board notes that an environment of rising inflation and interest rates, such as we have seen over the past two years, tends to be unfavourable for growth stocks’ relative performance. Gearing was kept fairly high at 17%.
Extracts from the manager’s statement
The low returns over the past 5 years merit discussion. Has something gone wrong with our process? Where do we get conviction on a forward-looking basis? When will these businesses become better appreciated?
The first point to make is that this 5 year period can be split into two halves. In the period from August 2018 to August 2021 the performance was positive in both absolute and relative terms. However, this good 3 year period has been followed by 2 challenging years. As a reminder, your Company’s portfolio is very different to the underlying market. The Trust holds no investments in around half of the 33 industries included in the Company’s benchmark index, TOPIX. Some of the top performing sectors over the past twelve months include iron and steel, banks, marine transportation and construction – areas where we have little exposure. If these stocks go up we will underperform. But our view remains that these areas offer little fundamental opportunity for growth investors. Another measure of how different your Company’s portfolio is to the TOPIX is the percentage of the portfolio with founder shareholders. For The Baillie Gifford Japan Trust, 29% of the portfolio has a founder-owner in charge compared with 8% for the TOPIX as a whole (source: MSCI). In the long run we believe that having a founder at the helm better aligns the interests of management and shareholders.
Tentatively, it may be that the investment environment created by the pandemic suited the types of businesses that we favour while the investment environment created by the exit from that environment suited more cyclical businesses. The net result of this is that performance over the 5 years is behind. However, inevitably, we are trying to analyse a story containing large swings in opposing directions that has not yet completed. The conclusions that we can draw from this period will only be secure when more time has passed, and we know what the ultimate results are.
The fundamentals of our process remain the same. Our team remains intact with no changes to the senior investors over the past 5 years and our approach to selecting stocks is substantially unchanged. We continue our steady fundamental research-based approach of trying to identify companies with good growth prospects at a similar tempo to the past.
We can look at the stocks in the portfolio with the worst contributions to performance over the past 5 years. These are CyberAgent, Rakuten, Outsourcing, Sato Holdings, and GA Technologies. They had a negative attribution ranging from (2.1%) to (1.1%) respectively. The first obvious question is, has something gone wrong with these businesses? For the most recent 5 full years available these companies grew their sales by 14% p.a., 15% p.a., 25% p.a., 5% p.a., and 64% p.a. respectively. If we didn’t know the share price return, I would certainly be more than happy with the average underlying growth. And as a reminder, these are the worst contributors to performance. A lot of the challenge has come from profit growth not keeping up with sales. For example, CyberAgent had a very successful hit in its gaming business that it has yet to be able to better. Meanwhile, Rakuten has been rolling out a new mobile network in Japan that has proven more costly than we expected and has yet to reach profitability. Looking forwards we expect CyberAgent to be able to achieve new peak profits and think that Rakuten is past the worst of its investment phase and that ultimately its mobile business will be successful.
BGFD : Woes pile up for Baillie Gifford Japan, better year for growth needed