Baillie Gifford Shin Nippon (BGS) has achieved its best performance in years with the Japanese smaller companies trust generating a 22.9% underlying investment return in the six months to 31 July. 

While shareholders had to make do with a 19.8% total return in the half-year period as the share price gap, or discount, to net asset value (NAV) widened to 9.9% from 7.5%, gains in BGS’ artificial intelligence infrastructure, robotics and advanced semiconductor stock picks pushed the trust ahead of the MSCI Japan Small Cap index which made 13.3% in sterling terms.

Since the half-year end, the good run has continued with both the NAV per share and share price up 4.6% against 2.8% from the benchmark.

The turnaround is a boost for fund managers Brian Lum and Jared Anderson who replaced Praveen Kumar last year with a mission to save the poorly performing growth fund.

While the shares remain over 30% down over five years, they have rallied 32.5% in the past year. In terms of the underlying NAV, as at 31 July the portfolio was eight percentage points ahead of its benchmark since the start of the year with a 25.4% return compared to the MSCI index’s 17.4%. 

If that continues, the company should pass a continuation vote postponed to 2028 and will avoid the existential threat of a 100% tender offer in 2031. That requires the portfolio to beat the index in the five years to 31 December 2030.

During the half year the managers’s best stocks were: Tsugami, a precision machine-tools manufacturer; Harmonic Drive Systems, a robotic components manufacturer; Kohoku Kogyo, the global leader in a niche optical part used in subsea data cables; JEOL, a scientific microscopes make that also provides the “Multi-Beam Mask Writers” helping to produce advanced chips; and Nikkiso, a specialist pumps manufacturer. 

The two biggest detractors from performance were: Yonex, the sports equipment company hurt by softening Chinese demand, where the managers still have conviction; and Peptidream, a biotech company where they are pressing management for moves to improve its drugs pipeline. 

They added three new companies to the portfolio: Baudroie, an IT infrastructure and network engineering specialist; Sega Sammy, the video games and entertainment company; and Metaplanet, a bitcoin treasury company. Three positions were exited, including e-commerce Raksul and Inforich, operator of a mobile battery shaking platform, which were both acquired. That left BGS with 62 holdings

In addition to the heavily over-subscribed 15% tender offer in March, the company bought back 13.5m, or 5.5%, of its shares to prevent the discount widening further. The shares currently stand 9% below NAV.

Our view

James Carthew, head of investment company research at QuotedData, said: “It’s a long time since BGS shareholders had anything to celebrate, so it is perhaps understandable that its discount remains wide despite the recent improved performance, the tender offer, and the significant buyback activity. Shareholders have a backstop of a 100% performance-triggered exit opportunity in 2031. All eyes will be on whether this marks the start of a return to form.”