Baillie Gifford Japan Trust PLC (LON:BGFD) today announced unaudited Interim Financial Report for the six months to 28 February 2019.
Your Board is committed to high standards of corporate governance. In particular, it recognises the need to have a balance of skills, experience and length of service, all of which forms part of our succession planning discussions during Nomination Committee meetings. After serving 5 years as your Chairman, I will be stepping down from the Board at the conclusion of the Annual General Meeting of the Company to be held in December. The Board has agreed that I will be replaced as Chairman by Keith Falconer who has been a Director since 2014 and I am confident that the Company will benefit from his stewardship. In turn, Keith will relinquish his position as Chair of the Company’s Audit Committee. A replacement Audit Chair will be appointed in due course.
During the period, the Company announced a reduction in the annual management fee payable to Baillie Gifford & Co Limited, the Company’s Managers and Secretaries. With effect from 1 January 2019 the Company’s annual management fee will be calculated at 0.75% (was 0.95%) on the first £50 million of net assets, 0.65% on the next £200 million of net assets and 0.55% on the remainder.
As a UK listed company, the Board and Managers have considered the implications of Brexit. Around half of the Company’s investments are domestically focused within Japan and the remaining holdings have minimal exposure to the UK. The Board is therefore not concerned about the impact of Brexit on the portfolio.
20 March 2019
Interim Management Report
During the six months to the end of February 2019 the NAV of your Company, after deducting borrowings at fair value, decreased by 16.0% to 700.2p whilst the share price fell by 13.6%. The TOPIX fell by 8.9% in sterling terms during the same period. This is disappointing. However, we continue to believe that it is more meaningful to consider performance over longer time horizons. Over the past 3 years the NAV of your company is up by 64.4% and the share price by 68.3%. The TOPIX rose by 40.4% in sterling terms during the same period. This is encouraging. Herein we see one of the challenges of equity investing in action. Strategies can deliver good results over the long-term but that does not make them immune to short-term challenges. To achieve a good long-term outcome we need to be prepared to accept short-term volatility and focus on actual investing – holding a portfolio of good companies with attractive growth prospects for the long term.
During the last six months there have been various signs of a global slowdown. At this stage both the depth and duration remain unclear. When we have met with management in the manufacturing sector the general indication is that there has not yet been a rebound.
The three largest individual stock detractors to performance were the holdings in Cyberagent (internet advertising and content), Outsourcing (employment placement service) and Zozo (internet fashion retail, formerly named Start Today). These had individual negative attributions of between -0.9% and -1.3% over the six-month period. These are all dynamic businesses led by founders with large personal stakes in the businesses and that have managed to deliver good long term growth rates. Interestingly, when we take a step back and look at how these shares have contributed to the portfolio over the longer term the outcomes are much more positive Compared with acquisition cost the shares in Cyberagent are 76% higher, those in Outsourcing 181% higher, and those in Zozo are 247% higher in local currency terms. We continue to hold the shares and have conviction that backing such opportunities will deliver good results over the longer-term. During the six-month period no stock added more than +1.0% to performance. The largest positive attributions were Pan-Pacific holdings (discount store chain, formerly named Don Quijote) at +0.7% and H.I.S. (discount travel agency and theme parks) at +0.5%.
The Company retains a prudent level of net gearing of around 12% at the time of writing. This allows us to benefit from the long-term effects of investing in good quality businesses using low-cost debt but with little risk of feeling pressured to sell should share prices weaken in the short-term. However, the gearing was unhelpful in the six-month period, contributing -1.7%, as is typical when the market is weaker in local currency terms.
Over the period we bought three new holdings and sold five holdings. Turnover remained low in line with our long-term time horizon. Two of the new holdings, Gree and Mixi, create and operate games for mobile phones. In each case the company has experienced a growth setback, but the market has, in our view, over-reacted with the result that at least two-thirds of the value of each company is covered by the net cash position on the balance sheet. This seems very strange to us given that these are entrepreneurial companies operating with an increasing market opportunity. DMG Mori is a machine tool manufacturer where the size of the business has been transformed by its acquisition of German machine tool manufacturer Gildermeister. As the integration continues to progress we expect significant growth in profits. Of the holdings sold, Pigeon and Iriso Electronics are both cases where the company has shown good growth in earnings and share price, but we think it will be difficult for margins to expand further and therefore it will be difficult for growth rates to match the past. Toyo Tire, Sanbio and Renesas are cases where we changed our view on the fundamental attraction of the business. Sanbio, a stem cell company, had a major trial failure and we believe the path to a successful future is now significantly more complicated, while the managements of both Toyo Tire and Renesas acted in ways that we do not believe are aligned to the interests of long-term shareholders.
We continue to be excited about the opportunities for growth stock-picking in Japan and believe that a well-executed strategy delivers results. When we consider the strengths of the businesses held in the portfolio we remain optimistic about the future.