The Baillie Gifford Japan Trust PLC
Legal Entity Identifier: 54930037AGTKN765Y741
Results for the year to 31 August 2023
Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws and regulations.
Over the year to 31 August 2023, The Baillie Gifford Japan Trust PLC’s net asset value total return per share was (5.4%) compared to the 6.7% total return in the TOPIX index (in sterling terms). In this period the Company’s share price total return was (4.0%).
Over the five years to the end of August 2023, the compound NAV total return was (1.2%) and over ten years 9.3% compared to the TOPIX return of 3.5% and 8.1% respectively.
¾ 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.
¾ As was the case last year, the Managers’ biases towards higher growth and smaller companies have both been unhelpful as the place to be has been in more cyclical areas and this is not a natural hunting ground for growth investors.
¾ During the period nine new investments were made. In a number of these cases, the Manager took advantage of the derating of share prices in smaller growth companies. These included Vector (public relations company), SWCC Showa (high voltage cables), Nihon M&A (mergers and acquisitions in Japan) and Lifenet Insurance (online life insurance). Seven positions were sold during the period while gearing remained at approximately 17%.
¾ The most significant development of the year from an investment perspective has been the leap forward in artificial intelligence large language models which the Manager expects to provide opportunities for many of the companies within the portfolio including, but not limited to, Softbank, Rakuten, CyberAgent and GMO Internet.
¾ The Managers believe that the opportunities for growth investing in Japan are the greatest since the Global Financial Crisis.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Source: Refinitiv/Baillie Gifford. See disclaimer at the end of this announcement.
The Baillie Gifford Japan Trust PLC aims to achieve long term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth. At 31 August 2023, the Company had total assets of £864.7m (before deduction of bank loans of £131.7m).
The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £202.3bn under management and advice as at 30 October 2023.
Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company’s shares.
You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at japantrustplc.co.uk.
See disclaimer at the end of this announcement.
Approved by the Board on 1 November 2023
For further information please contact:
Naomi Cherry – Client Director
Baillie Gifford & Co
Tel: 0131 474 5548
Jonathon Atkins, Four Communications
Tel: 020 3103 9553 or 07872495396
Chairman’s Statement
Introduction
Last year, I reported that there was a great deal of uncertainty facing investors including the global prospects for inflation, interest rates and bond yields but also the impact of other factors such as Covid-19 restrictions. These restrictions were lifted in Japan in the Autumn of 2022 and the Board visited Japan with the Managers in May 2023 – the first Board visit since 2019. I am pleased to report a most insightful trip where the Board had the opportunity to observe the Managers and their process in action and to meet with some of the most exciting companies held within the portfolio as well as several potential future investments.
Performance
In the year to 31 August 2023, the net asset value (‘NAV’) total return was (5.4%). As market sentiment remained poor, the Company’s shares continued to trade at a discount to NAV, leading to a share price total return of (4.0%). The benchmark total return was 6.7% over the same period.
The Company’s objective is to achieve long-term capital growth, and the NAV returns remain ahead of the benchmark on a 10 year time horizon.
| Compound annual returns to end August | 5 years (%) | 10 years (%) |
| Net asset value total return* | (1.2) | 9.3 |
| Share price total return* | (3.0) | 8.7 |
| TOPIX total return* (in sterling terms) † | 3.5 | 8.1 |
In June 2023, the Board conducted a thorough analysis with the Managers of the Company’s performance over the previous five years, looking at both process and outcomes. The Company has an explicit growth-focused investment strategy. The vast majority of the Company’s assets are invested in companies with higher than average growth prospects. The Board is strongly supportive of this investment strategy; the Japanese equity market is large and rich in opportunity but the Japanese economy itself grows slowly due to structural factors. As such, the Board believes companies able to demonstrate idiosyncratic growth should command a premium valuation and outperform over time. The Manager invests on a bottom-up basis, focusing on identifying the most attractive growth companies and largely ignoring macro factors. However, investors should note that there are certain market environments which do not favour growth investing and in which the Company may be more likely to underperform both its benchmark and more value-focused peers. While it is not possible to be prescriptive on this issue, 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 and Borrowing
The Board believes that borrowing will enhance returns to investors over the long-term. Net gearing fell very slightly from 17.5% to 17.0% over the year to 31 August 2023. The Board is pleased to announce that in August 2023 the Company entered into a new two year floating rate loan facility with The Bank of New York Mellon for ¥15 billion, being an increase of ¥2.8 billion on the SMBC loan that was repaid in August 2023. The new facility was used to repay the SMBC facility and Mizuho Bank revolving credit facility with the balance being available to the Managers to deploy.
Dividend
The Board is recommending a dividend of 10p per share, an increase of 11.1% on last year’s 9p. This will be put to shareholders for approval at the Annual General Meeting to be held on 12 December 2023 and, if approved, will be paid on 20 December to shareholders on the register at close of business on 17 November 2023. A dividend reinvestment plan (‘DRIP’) is available to shareholders who would prefer to invest their dividends in the shares of the Company. For those shareholders electing to receive the DRIP, the last date for receipt of election is 29 November 2023.
Share Capital and Discount Management
Over the course of the year, the share price moved from a 8.1% discount to NAV to a 6.7% discount to NAV. During this period, the Company bought back 851,845 shares at a cost of approximately £6.4 million. These shares are held in Treasury and are available to be reissued, at a premium, when market conditions allow.
Your Board believes it is important that the Company retains the power to buy back equity during the year and so, at the Annual General Meeting, is seeking to renew this facility. Further details of the buy-back facility can be found on page 53 of the Annual Report and Financial Statements.
The Company also has authority to issue new shares and to reissue any shares held in Treasury for cash on a non pre-emptive basis. Shares are issued/reissued only at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting. This authority would expire at the conclusion of the Annual General Meeting in 2024.
Regulatory Update
The FCA also introduced a new set of rules labelled as ‘Consumer Duty’. Investment Trusts, like the Company, are not directly impacted by this but Baillie Gifford, as the Company’s Manager is. The Duty raises the standard of care that FCA regulated firms, like Baillie Gifford, are expected to provide to retail consumers and includes a number of obligations that need to be met. One of these obligations is to undertake an Assessment of Value on the ‘products’ managed. The relevant report on the Company has concluded that it does provide value, meaning that distributors will be able to undertake their assessments and continue to make shares in the Company available to current and potential shareholders.
Annual General Meeting
The Company’s Annual General Meeting has been scheduled to take place on 12 December 2023 at Baillie Gifford’s offices in Edinburgh. The Board encourages all shareholders to attend in person but also to exercise their votes by completing and submitting a form of proxy. We encourage shareholders to monitor the Company’s website at japantrustplc.co.uk where any updates will be posted and market announcements will be made, as appropriate. Should shareholders have questions for the Board or the Managers or any queries as to how to vote, they are welcome to submit these by email to trustenquiries@bailliegifford.com or call 0800 917 2112.
Information on the resolutions can be found on pages 97 and 98 of the Annual Report and Financial Statements. The Directors consider that all resolutions to be put to shareholders are in their and the Company’s best interests as a whole and recommend that shareholders vote in their favour.
In particular, shareholders have the right to vote annually on whether the Company should continue in business and will have the opportunity to do so again this year. Last year, the Company again received support for its continuation with 99.99% of votes cast in favour. Your Directors believe there are attractive opportunities in selected, well-run Japanese companies benefiting the long-term favourable outlook for the Japan Trust. To that end, my fellow Directors and I intend, where possible, to vote our own shareholdings in favour of the resolution and hope that all shareholders will feel disposed to do likewise.
Board
During the year the Board undertook a recruitment process seeking to appoint an additional independent non-executive director. The Board was pleased to announce the appointment of Patricia Lewis with effect from 1 August 2023. Patricia will stand for election at the upcoming Annual General Meeting.
The Board is cognisant of good corporate governance practice and as such I should also like to mention my intention to step down from the Board at the Annual General Meeting to be held in 2025. This would mean that I serve 10 years in total on the Board with just over three of those years as Chairman, a role to which I was appointed following the untimely death of Keith Falconer.
Outlook
The portfolio contains many attractive growth companies. Your Board is confident in the long-term, and hopeful in the shorter-term, regarding the prospects for the Company.
David Kidd
Chairman
1 November 2023
* Alternative Performance Measure – see Glossary of Terms and Alternative Performance Measures on at the end of this announcement.
† The benchmark is the TOPIX total return (in sterling terms).
Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Managers’ Review
Whilst there remain various global challenges, including war and other geopolitical tensions, high inflation levels and climate challenges the most significant development of the year from an investment perspective has been the leap forward in artificial intelligence (‘AI’) large language models, as typified by ChatGPT. The investment landscape remains complex and at times contradictory but technological progress and the investment opportunities that flow from it remain a constant.
The last 12 months have certainly not been a vintage year for the Company with a NAV total return of (5.4%) compared with 6.7% for the TOPIX index, in sterling terms. Over 5 years the cumulative NAV total return was (5.8%) and over 10 years 143.5%. This compares to increases in the TOPIX index of 18.5% over 5 years and 116.9% over 10 years. To be behind the index to a material extent over a 5 year horizon is disappointing to us, and doubtless to shareholders.
As was the case last year, our biases towards higher growth and smaller companies have both been unhelpful to us. While not our natural hunting ground as growth investors the place to be has been in more cyclical areas. Since there was a positive return in Yen, being geared made a small positive contribution to performance (+0.9ppt). Despite the unsatisfactory overall result there is little to say at the stock level. Two companies subtracted more than 1.0ppt from performance, CyberAgent and Misumi, but the issue was more that we missed out on many of the successful names.
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.
Looking forward we expect continuing developments in AI to provide opportunities for many of the companies in the portfolio. AI can be thought of as comprising multiple layers – chips, datacentres, models, and applications for example. Currently much excitement has been about the opportunity in the first layer, chips, but as time progresses we expect a broader view to be taken about where the opportunities are.
Starting with the major portfolio holdings, SoftBank owns nearly 90% of recently re-listed ARM, which has a near-monopoly in mobile phone chip design, as well as many early-stage AI companies listed in the Vision Fund. Mr Son is looking towards a future not just of artificial general intelligence (where AI roughly operates at a human level across a wide variety of domains) but to a future of artificial super-intelligence (where AI is multiples more capable than humans). GMO Internet has a large exposure to internet infrastructure and datacentres in Japan. Rakuten has proprietary data across its ecosystem which provides the foundation for creating successful applications for AI. CyberAgent has developed the world’s first large language model built with the Japanese language as the base. Each of these are top 10 holdings in the Company. Additionally, we expect opportunities in many of the smaller holdings. For example, Z Holdings expect to be able to achieve huge improvements in software engineer productivity as humans work alongside AI as well as to be able to achieve big cost reductions in dealing with customer queries. Bengo4.com has already developed a prototype ‘AI lawyer’.
It is always difficult for us to assess when businesses will become better appreciated which is why we try to focus more on the underlying progress of sales and profits in the expectation that, over the long term, these will be reflected in share prices. Like you, we would like to have seen significantly better share price results over the past couple of years but, in general, we see solid ongoing progress at individual businesses and take significant comfort from that.
Meanwhile, we have continued to try to improve the portfolio. During the period we bought 9 new holdings and sold 7 holdings. Recently we have been taking advantage of the high level of pain being felt in smaller growth companies share prices to initiate new holdings in Vector (public relations agency), SWCC Showa (high voltage cables), Nihon M&A (mergers and acquisitions in Japan) and Lifenet Insurance (online life insurance). We also took a new holding in M3 (medical website) after the shares fell by more than 60% from the price that we previously sold the shares at in late 2020 due to valuation concerns. Similar to the case of Pigeon last year, the very large share price moves have exceeded the changes in the fundamentals, which we believe has created opportunity for long-term investors. The sales spanned a variety of reasons, from considering the shares to be fully valued due to cyclical increase in resource prices (Inpex, Toyota Tsusho), or becoming doubtful on the long-term prospects being realised (Shimano, Makita, Tsubaki Nakashima, Lifull). As is typical, turnover remained low at 8.8% meaning that 91.2% of the portfolio was unchanged year-on-year. Net gearing ended the year at 17%, reflecting our belief in the significant opportunities available.
As Sir John Templeton put it many years ago “outperforming the majority of investors requires doing what they are not doing”. We are sticking to an approach that has been effective over the decades of trying to buy businesses with attractive long-term growth prospects, not fiddling with the portfolio, and letting those businesses generate the returns over time. This process has never worked every year and the past 2 years have been a particularly challenging time. However, we believe that the opportunities for growth investing in Japan are the greatest since the Global Financial Crisis and ask for shareholders continued support.
Baillie Gifford
1 November 2023
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.