Shin Nippon’s style of high-growth investing in Japanese smaller companies can be very rewarding in the long run (Koji Sasahara/AP) Despite being the third largest economy in the world, the second largest country weighting in the global stock market and home to more than 3,700 listed companies, Japan remains unpopular among UK retail investors: less than 2 per cent of their assets are in Japanese equity funds.

Three decades of stagnant economic growth and deflation have not enamoured investors to the country.

Nor has the fact that the stock market has still not recovered from its bubble bursting back in 1989 and remains 33 per cent off its all-time high.

But despite this backdrop, good money has still been made – especially in the past decade as economic reforms have taken hold.

And under a newly elected prime minister, Japan continues upon its path of transformation – a transformation that has been accelerated by the pandemic. Shaking up ‘New’ Japan

Historically, Japanese businesses have been notoriously slow in adopting modern business practices.

Until recently, for example, a physical stamp (the ‘hanko’) was still used by many in place of a signature to process official documents.

Unlike in other developed markets, the discerning nature of Japanese consumers, who value personal contact and high standards of service, has also insulated bricks-and-mortar retailers from online competition.

But this state of affairs has been shaken up by Covid. “It would be fair to say that the impact of the pandemic goes far beyond just affecting businesses in Japan,” commented Praveen Kumar, manager of Baillie Gifford Shin Nippon investment trust, the focus of this week’s review.

“Old Japan was full of low or no growth companies and legacy industries. Management lacked dynamism, there was poor corporate governance, and the market deserved a low valuation.

“New Japan has exciting, high growth firms, new business models and globally relevant technologies. Younger generations embrace optimism and there is a renaissance for risk tolerance and changing consumption patterns: frugal spending habits have been dropped in favour of a loosening of purse strings.

“Innovation is opening in new sectors, increasing the crop of young, dynamic entrepreneurs. There is a greater focus on shareholders and returns and the market is under-researched – so there is real scope to add value for investors.” Baillie Gifford Shin Nippon

Launched in 1985, the Baillie Gifford Shin Nippon trust invests in smaller companies listed on the Japanese stock market.

Shin Nippon means ‘new Japan’ and this trust focuses on emerging or disrupted sectors, where the manager sees innovative growth opportunities.

Praveen is prepared to bide his time while these companies reach their full potential and, while the trust can be highly volatile, patient investors have been richly rewarded.

In the past 10 years the trust has returned 665.8 per cent versus 178.7 per cent for the MSCI Japan Small Cap index and 173.86 per cent for the Nikkei 225.

The quality of Baillie Gifford’s in-house research and its specialist Japan equity team are two factors hugely in this trust’s favour. But investing in Japan always carries high risk, which can be accentuated in this trust as it tends to invest mainly in smaller-sized companies that are traditionally more volatile than larger firms.

In the past year, this has been evident. Aggressive profit taking from some of the trust’s internet stocks and a preference for cyclical companies by other investors, has meant that some of the high growth small cap stocks have given up a lot of the share price gains made in the last year. The trust is down by 2 per cent over 12 months.

“Management teams at the companies we invest in remain committed to their long-term vision of dominating their chosen areas of operation and are investing accordingly, quite often at the expense of short-term profitability,” explained Praveen.“Although the Japanese market takes a dim view of such an approach, we believe this mindset gives the best chance for entrepreneurs in Japan to succeed in the long-term.”Top 10 holdings in the trust today range from manufacturers of scientific equipment and automated machine tools to online payment processors, employment and learning support services for people with disabilities and motorcycle helmet producers.This is not a trust for everyone – a healthy dose of risk tolerance is required. But we continue to believe that for patient shareholders, Shin Nippon’s style of high-growth investing in Japanese smaller companies can be very rewarding in the long run. Juliet Schooling Latter is research director at FundCalibre Past performance is not a reliable guide to future returns. You may not get back the […]

source Fund review: Baillie Gifford Shin Nippon – unloved Japan could be worth a look for long-term investors

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