More change at the £333m Japanese smaller companies trust looms following the appointment of a new fund manager in May as chair Jamie Skinner acknowledges the impatience of shareholders with its poor performance.
The chair of Baillie Gifford Shin Nippon (BGS) has said its plans for a 15% tender offer if the Japanese smaller companies fund underperforms in the three years to 31 January 2027 may not be sufficient to appease angry shareholders.
Commenting on half-year results showing that as of 31 July, half way through the review period, the £333m investment trust trailed its benchmark index by 19.4%, Jamie Skinner said: “Whilst only halfway through the measurement period, clearly the level of underperformance needing to be recouped is notable. I have been in regular communication with a number of ‘professional’ shareholders and have had correspondence with a number of ‘retail’ shareholders and, although there remains a loyal supportive base both of Baillie Gifford and Japanese small cap growth equities, I am in no doubt that patience in some quarters is being tested.
“If poor performance continues into the medium term, then I do not believe that a 15% tender offer will be sufficient and the board will not hesitate to assess all available options.”
In addition to increasing the amount of shares investors could sell in the tender offer, the statement implies the board could dismiss Baillie Gifford and appoint a new fund management group, seek a merger with another investment trust or wind up the company altogether.
In May, following an internal review, Baillie Gifford removed Praveen Kumar as fund manager, promoting his recently appointed deputy Brian Lum in his place, after a 37% slump in the shares over five years.
Today’s interims show the trust continued to underperform in the six months to 31 July with net asset per share rising 3.4% against a 7.9% increase in the MSCI Japan Small Cap index. However, the shareholder total return was slightly ahead, up 8.2%, as the discount, or gap, between the share price and NAV narrowed in response to the buyback of 23.1m shares, or 8.3 of the company. The discount is currently 10%.
The main detractors to performance in the half year included Harmonic Drive Systems as investor excitement to humanoid robots cooled, and poor results from Inforich, a provider of a charger rental service for smartphones, and JEOL, a manufacturer of electron microscopes. However, GA Technologies, a real estate investing platform, Yonex, a golf, tennis and badminton racket supplier, and Cybozu, a “groupware” provider, did well following strong operational progress, Shin Nippon said.
Five new positions were added, and seven holdings sold. The two bigest new positions were in cutting machine tools maker DMG Mori and business management software provider Money Forward.
Despite the pressure from poor performance, Skinner was positive on prospects. “With US-Japan trade negotiations now seemingly concluded and agreed, inflation re-establishing itself and expectations of further monetary policy normalising, macro-economic conditions in Japan appear to be improving. This should provide a tailwind for Japanese growth equities. In addition, reduced uncertainty and a return of risk tolerance should prove beneficial to well-managed Japanese smaller companies.”
Our view
James Carthew, head of investment company research at QuotedData, said: “As much as we like AVI Japan Opportunity (AJOT) and Nippon Active Value (NAVF), it cannot be right that the only way to invest successfully in Japanese smaller companies is via corporate governance driven vehicles. Japan is adapting to an unfamiliar environment of inflation and positive interest rates, but large cap growth-focused trusts such as JPMorgan Japanese (JFJ) are coping well (almost matching AJOT’s impressive performance over the past year). The board needs to take radical steps to rebuild confidence, and soon.”
