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Investment Trust

Baillie Gifford Japan Trust

Elite Rated by FundCalibre

Launched in 1981, the Baillie Gifford Japan Trust aims to provide capital growth by investing primarily in Japanese medium and smaller-sized companies that offer exceptional growth opportunities with sustainable business models. It is run by the same team behind the Elite Rated Baillie Gifford Japanese fund, whose track record is among the best in the business.

Investment Manager

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Baillie Gifford is the investment company employed to manage this trust. Founded in 1908 and employee-owned, the firm is based in Edinburgh but also has offices in London and New York. It has a partnership structure, which has enabled it to retain key people, leading to an excellent record of corporate stability that has contributed to strong investment results.

The trust is managed by Sarah Whitley, who has headed Baillie Gifford’s 11-person Japanese investment team since 1991. Each member is responsible for researching companies in particular sectors and generating new ideas. These sector responsibilities are changed regularly to ensure that perspectives remain fresh. Sarah graduated with a Bachelor of Arts in Experimental Psychology from Oxford University in 1980. She joined Baillie Gifford in the same year and became a partner in 1986.

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We like quality businesses that can show secular earnings growth over time.

Sarah Whitley - Trust Manager

Investment Trust Board

The trust’s board comprises five members and is headed by Nick Bannerman as chairperson. The other board members are Paul Dimond, Keith Falconer, David Kidd and Martin Palling. Between them, the board have a variety of backgrounds ranging from investment management (Keith Falconer, 24 years at Martin Currie Investments) to diplomacy (Paul Dimon, a senior independent director, with more than 16 years in Her Majesty’s Diplomatic Service and time spent in Tokyo and Osaka). The board meets five times a year and the company’s year end is 31 August.

The Investment Process

The Baillie Gifford Japanese fund and the Baillie Gifford Japan Trust have a very similar investment process. Sarah and her team seek well-managed businesses with a strong competitive advantage that are not overpriced. The research process is designed to ensure that the best ideas of each individual team member are included in the portfolio rather than a ‘lowest common denominator’ approach that can result from team-based investment.

Risk

Investing in Japan always carries high risk, which can be accentuated in this trust as it tends to invest mainly in medium to smaller-sized companies that are traditionally more volatile than larger companies. However, the team manage this risk by ensuring they hold a minimum of 40 stocks (normally between 40 and 70 stocks), as well as making sure they thoroughly research and understand the businesses in which they invest. Currency fluctuation is another risk that investors need to be aware of. Investors comparing the Baillie Gifford Japanese fund and the Baillie Gifford Japan Trust should note the trust has tended to be more volatile than the fund over the long term; however, the additional volatility is well rewarded and gearing has enhanced the trust’s total returns.

Gearing

The trust’s gearing is closely monitored by the board to ensure it remains at appropriate levels and is a source of additional value for shareholders. The maximum gearing allowed is 35%; however, in the last 10 years (to 31 August 2016), the gearing has been between 15% and 19%.

Share price discount/premium

The trust’s share price tends to trade at a discount to its net asset value. This range in the last 10 years (to 31 August 2016) has been a discount of 18% to a premium of 3.4%. The board currently do not have a discount control policy.

Our Opinion

This is a well managed trust with a very clear investment process, run by a very experienced and knowledgeable team. Although more volatile than the Japanese stock market as a whole, as it does invest in medium and smaller-sized companies, the team’s disciplined approach has provided shareholders with excellent long-term returns. We see no reason as to why this enviable track record cannot continue.

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