Baillie Gifford

Rated Funds 2014: Japan's smaller companies steal limelight

By Helen Pridham | Fri, 14th March 2014 - 17:29

The Nikkei 225 is up 32% over the 12 months to end February, although it has had something of a rollercoaster ride.

However, the government's reflationary programme should continue to support business growth, particularly for export-oriented companies, and active managers are finding plenty of opportunities.

Again, smaller companies are a popular focus among our Japan Rated Funds.

Other areas you may want to consider in order to secure a globally diversified portfolio of funds and trusts are Europe and the US, to complement any global income and growth holdings you have.

Aberdeen Japan Growth

Aberdeen Japan Growth won the Money Observer best Japan larger fund award last year. It is run by Aberdeen's Toyko-based Japanese equity team, led by Kwok Chern-Yeh. They describe themselves as buy-and-hold investors.

They make regular visits to companies and evaluate them rigorously based on two criteria: quality - defined in terms of transparency, balance sheet strength, management openness and fair treatment of shareholders - and then price.

No company is bought before the managers have met management, and the team continue to visit after they have invested. They take a high-conviction approach, which means the fund's portfolio consists of just 30 to 40 stocks.

Atlantis Japan Growth IT

The Atlantis Japan Growth Investment Trust received our highly commended Japanese trust award last year. It is managed by a four-person Tokyo-based team, headed by veteran Ed Merner. It can invest in any size of company but is heavily biased towards medium-sized and small companies, as that is where Merner expects to find better growth and value.

Although he places stress on choosing the right shares and going out and visiting companies in all kinds of industries, he also looks at the wider context, especially if he sees certain sectors or sub sectors are characterised by above-average sales and earnings growth.

Baillie Gifford Japanese

The Baillie Gifford Japanese fund is a member of our current Premier League. It is managed by Sarah Whitley, assisted by Matthew Brett. Whitley is optimistic that there is more growth to come from the Japanese market, due to many positive economic factors.

However, her focus is at the company level. In particular, she looks to identify businesses with attractive industry backgrounds, strong competitive positions within those industries, high-quality earnings and favourable attitudes towards shareholders. She says there are still global leading businesses in Japan which trade on a substantial discount to their peers. Portfolio turnover is low.

Baillie Gifford Japanese Smaller Companies

Baillie Gifford Japanese Smaller Companies is an Editor's Selection and is managed by John MacDougall. Thanks to Baillie Gifford's strong in-house research capabilities and screening processes, his universe of potential investments is reduced to around 200-250 smaller companies. He looks at these businesses closely, exploring the opportunities available to the companies, their ability to execute on those opportunities, and their valuations.

Currently he believes smaller companies are the best way to exploit the growth potential from the deregulation and outsourcing going on in the Japanese economy. He also sees opportunities for niche manufacturing companies exploiting demand from the rest of Asia.

CF Morant Wright Nippon Yield

CF Morant Wright Nippon Yield is an Editor's Selection. Unusually, it is run by a management group that concentrates exclusively on investing in Japan, and is also somewhat unusual in that it provides income investors with the opportunity to gain exposure to this market.

Another plus is that absolute returns and capital protection are cornerstones of the managers' approach. They are a six-strong team led by the company founders, Stephen Morant and Ian Wright. They seek to invest in undervalued Japanese companies with strong balance sheets, sound business franchises and attractive dividend yields.

JPMorgan Japanese IT

JPMorgan Japanese Investment Trust (JFJ) is another Editor's Selection. Although manager Nicholas Weindling is primarily focused on choosing the right companies, he also adopts a flexible policy taking into account economic developments. Thus, during 2013 he re-oriented the portfolio in line with changes to the macroeconomic outlook as a result of new government policies.

He reduced the trust's exposure to relatively defensive, higher-yielding companies and increased the positions in banks, real estate and construction. The two pillars of his current strategy relate to the improved outlook for export companies thanks to the weaker yen, and the drive for inflation.

Legg Mason Japan Equity

Legg Mason Japan Equity won our Best Japan smaller fund award last year. It is run by Shiozumi Asset Management, whose founder, Hideo Shiozumi, has over 30 years' experience in managing Japanese equities. He believes the best prospects for Japanese equities are offered by medium-sized and small companies, which are well-positioned to benefit from the "New Japan", rather than conventional export-oriented larger companies.

The portfolio is therefore heavily weighted to services, retail companies, and information and communications-related stocks. Shiozumi is convinced that the Japanese stockmarket has entered a long-term bull market thanks to the current government's policies.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

OEICs and Unit Trusts

Name1 Year (%)3 Years (%)5 Years (%)Fund Size (M)Yield (%)
Baillie Gifford Active Gilt Plus B Acc0.399.7117.6231.531.10Buy
Baillie Gifford Active Long Gilt Plus B Acc1.0617.5039.0240.031.80Buy
Baillie Gifford American B Acc24.8387.91153.861,065.10-Buy
Baillie Gifford British Smaller Companies B Acc7.8026.4366.08189.220.84Buy
Baillie Gifford Cash A Acc0.030.230.6480.650.10Buy
Baillie Gifford Corporate Bond B Acc5.4315.2232.77725.843.40Buy
Baillie Gifford Developed Asia Pacific B Acc14.1060.2586.85144.051.15Buy
Baillie Gifford Diversified Growth B1 Acc4.9514.1524.146,845.641.98Buy
Baillie Gifford Emerging Markets Bond B Acc1.3522.37-6.25827.677.00Buy
Baillie Gifford Emerging Markets Growth B Acc28.3162.1074.79810.330.67Buy
Baillie Gifford Emerging Markets Leading Companies B Acc26.9362.2072.27508.000.58Buy
Baillie Gifford European B Acc17.1860.6088.49425.221.11Buy
Baillie Gifford Global Alpha Growth B Acc16.5960.77112.614,679.910.56Buy
Baillie Gifford Global Discovery B Acc27.1357.62147.11361.57-Buy
Baillie Gifford Global Income Growth B Acc7.6443.3170.02503.122.66Buy
Baillie Gifford Greater China B Acc34.9991.40132.60132.560.70Buy
Baillie Gifford High Yield Bond B Acc6.1117.8730.37416.784.00Buy
Baillie Gifford International B Acc16.3863.46115.20851.650.43Buy
Baillie Gifford Japanese Income Growth B Acc11.59--361.611.88Buy
Baillie Gifford Japanese B Acc16.8772.79141.192,476.670.70Buy

Investment Trusts

Name1 Year (%)3 Years (%)5 Years (%)DiscountNAV
Baillie Gifford Shin Nippon PLC50.96194.41307.748.91870.43Buy
Baillie Gifford Japan Trust PLC33.12105.46225.345.30786.36Buy
Edinburgh Worldwide IT PLC42.4483.86147.581.57760.03Buy
Monks Investment Trust PLC29.3396.27138.703.17767.67Buy
Pacific Horizon IT PLC45.4572.49102.00-6.36352.43Buy
Scottish American Investment Company PLC8.2764.9982.092.22351.19Buy
Scottish Mortgage Investment Trust PLC32.5387.03198.151.37461.27Buy