New management team overhauling the portfolio: Baillie Gifford Shin Nippon

BGS’s new management team is overhauling the portfolio…by Thomas McMahon

Overview

Baillie Gifford Shin Nippon (BGS) takes an aggressive approach to generating growth from Japanese small caps, with a long-term and highly active approach to stock selection aimed at finding companies that can double, triple, or more in size, married to a notable level of Gearing. Relative performance has gone through pronounced cycles over the decades, with the trust delivering exceptional returns over some multi-year periods and then suffering when its style falls out of favour.

Following review by Baillie Gifford in response to weak performance in recent years, the board and managers have agreed some strategic changes. Brian Lum, the former head of Baillie Gifford’s international smaller companies team, has been appointed as lead manager and Jared Anderson, an experienced member of the Japan team, as deputy manager. Brian is now part of the ten-strong Japan investment team, and going forward, all members of the Japan team will be more formally involved in idea generation and stock selection, with the aim of enhancing portfolio quality and expanding the breadth of ideas.

Brian has already begun to go over the portfolio line by line, and has some firm intentions regarding concentration, conviction and diversification, which could lead to meaningful portfolio adjustments, as discussed in the Portfolio section. However, he is wholeheartedly committed to the high-growth approach that has served the trust well in past cycles. Growth is on sale in BGS’s universe at the moment, after a period of large caps and value being in favour over growth and small caps. The result is that plenty of high-growth businesses are available at attractive valuations.

BGS’s shares trade at a Discount of 9%, which adds to the performance potential in any recovery. There is a performance-conditional tender offer for 15% of the shares to be made for the period to 31/01/2027, which provides some backstop to the discount and provides a strong incentive to the new management team to outperform.
 

Analyst’s View

 
BGS has all the hallmarks of a successful strategy that has suffered in an unhelpful environment, which is the sort of fund we think investors should be looking at on a five-to-ten-year view. Investor preference for large caps and for liquidity has worked against it for a number of years, whilst interest in Japanese equities has been focussed on value opportunities in the light of a government drive to boost corporate governance and force companies to overhaul their balance sheets. BGS performed exceptionally well in past cycles when size and style worked for it and has remained resolute in sticking to this approach as the market has changed. Its portfolio looks cheap when considering the high expected growth rates, and this higher growth would have commanded a greater premium in the past. With five-year returns having been dragged below those of the benchmark, the trust is on a wide share price discount too.

We think the decisive action that has been taken to improve performance should be welcomed. The greater formalisation of the research process, the diversification of growth opportunities, and the push for more conviction in position sizing are all sound steps and show commitment by the management company to turning performance around rather than simply waiting for the stars to align.

Bull

• Highly active and long-term in approach, which increases alpha-generating potential
• Low OCF relative to peers, with low turnover style also reducing cost drag
• Valuation premium to the market lower than it has been historically

Bear

• Tends to be volatile, with gearing contributing
• New management team have no track record on this mandate
• The Japanese market can be sensitive to a global recession

See the full research on BGS here >

_Disclaimer

_{This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}