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Investment Trust

Baillie Gifford Shin Nippon

Elite Rated by FundCalibre

Launched in 1985, the Baillie Gifford Shin Nippon trust aims to provide long-term capital growth by investing 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. The team are prepared to bide their time while these companies reach their full potential and, while the trust can be highly volatile, patient investors have been richly rewarded.

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.

Praveen Kumar took over the running of the trust in December 2015; however, he has been a core member of Baillie Gifford’s highly regarded Japan equity team since 2011 and the group’s thorough company research methodology is infused in his approach. Praveen has an MBA from the University of Cambridge and a Bachelor of Engineering in Computer Science from Bangalore University. He joined Baillie Gifford in 2008.

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We invest in high quality, disruptive and rapid growth businesses that are targeting large-end markets and run by young and dynamic entrepreneurs.

Praveen Kumar - Trust Manager

Investment Trust Board

The trust’s board comprises five members and is headed by Neil Donaldson as chairperson, who has 15 years’ experience of the investment trust industry. The other board members are P Francis Charig, Ian A McLaren, Merryn R Somerset Webb and Simon CN Somerville. Between them, they have a wealth of expertise ranging from industrial to investment management, and accountancy. Neil has been chief executive of James Donaldson & Sons Ltd, an independent Fife-based timber merchants, since 1985.

The Investment Process

Praveen seeks to identify companies that he believes offer above-average growth prospects, but that are too small for the Baillie Gifford Japan Trust (also Elite Rated). These could be companies with innovative business models, disrupters, companies that challenge traditional Japanese practices or firms with growth from overseas. Sectors that are particularly interesting to the team include Japans emerging services industry, which is expanding fast due to government deregulation and corporate outsourcing, as well as traditional areas like retail and finance where niche opportunities can be found.

Praveen has a three- to five-year time horizon when selecting stocks and does not rely on short-term valuations. He is happy to hold some stocks that may be classed as overvalued by other managers, as long as they meet his investment quality criteria.

Risk

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 companies. However, Praveen manages this risk by ensuring he holds a minimum of 40 stocks (normally between 40 and 75 stocks), as well as making sure he thoroughly researches and understands the businesses in which he invests. Currency fluctuation is another risk that investors need to consider. Gearing can also increase the trust’s volatility.

Gearing

In the last 10 years (to 31 January 2017), the trust has been geared every year in a range between 9% and 18%. The board actively monitor gearing at every meeting to ensure it remains at an appropriate level and is not destroying value for investors. Having reviewed and agreed a level at each meeting, the board then allows the manager to make use of the gearing as and when he feels it is warranted.

Share price discount/premium

This is one of the more niche investment trusts, and it tends to fall in and out of favour, based on investors’ outlook. As a result, the share price does tend to trade in a wide band compared to the net asset value (NAV). In the last ten years (to 31 January 2016), this range has been as low as a discount of 22% and as high as a premium of 7%. The board, while remaining alert to the share price behaviour versus the NAV, do not have a discount control mechanism in place.

Our Opinion

The quality of Baillie Gifford’s in-house research and its specialist Japan equity team are two factors hugely in this trust’s favour. The team delve into the small-cap area of the market where many other firms fear to tread, giving them ample opportunity to uncover hidden gems. This trust is best suited to investors who are interested in the growth potential that Japanese smaller companies can provide, but who understand and are prepared to withstand the additional risk inherent in these type of stocks.

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