Baillie Gifford’s £630 million Shin Nippon investment trust has reported that its net asset value (NAV) per share declined by 1.2% and its share price fell 8.9% in the year to January 31, 2023, as the fund conceded that its focus on high-growth smaller companies “is currently out of sync with investor sentiment.”
The fund’s comparative index, the MSCI Japan Small Cap Index — total return in sterling terms — appreciated by 5.7%.
Over the three years to January 31, 2023, the company’s net asset value per share appreciated by 0.5% and its share price declined by 6.8% while the fund’s comparative index return appreciated by 6.6%.
Shin Nippon aims to achieve long term capital growth through investment principally in small Japanese companies.
“The managers’ unwavering focus on high-growth smaller companies is currently out of sync with investor sentiment, so the recent performance in absolute and relative terms is not unexpected,” said the fund.
“The board recognises that the valuation downgrade of growth companies does not always correlate with their operational performance.
“Macro headwinds and the lingering effects of Covid-19 have led to poor share price performance at many of the portfolio’s internet companies such as Infomart, Japan’s leading online food ordering platform despite growing its sales over the past year and generating a decent level of profits as well as investing heavily for future growth, and online legal website Bengo4.com, despite maintaining a high growth rate in sales and a very significant increase in profitability.
“Among the positive contributors to performance over the year were insurance company Lifenet, the leading online life insurer in Japan, drugstore chain MatsukiyoCocokara and Kamakura Shinsho, an online platform for funerals and end-of-life related services.
“Nine positions were sold and seven new positions were initiated in the financial year, including one private company; plastic recycling company JEPLAN which utilises a novel chemical method to recycle PET and polyester.
“There are currently four private companies in the portfolio accounting for 3.0% of total assets.
“Growth stocks are now priced at levels that assume barely any future increase in revenues or profits, which is in stark contrast to their underlying fundamentals.
“The board and managers continue to believe that being patient and seeing through market noise increases the chances of picking exceptional companies that will deliver attractive long-term returns.”
The fund’s managers, led by Praveen Kumar, wrote in their outlook: “Given the scale and speed of the downturn in high growth stocks post-Covid, we remain very conscious that this has negatively affected Shin Nippon’s short and longer-term performance.
“However, this has also meant that growth stocks are now priced at levels that assume barely any future increase in revenues or profits, which is in stark contrast to their underlying fundamentals.
“Despite the discomfort from volatility, we believe it is important to stay true to our stated investment philosophy and process which has served shareholders well over longer periods of time. Being patient and seeing through market noise increases our chances of picking exceptional companies that will deliver attractive long-term returns.
“As Japan slowly moves out of Covid-19, the focus will return to long-term challenges. A shrinking labour force calls for increased digitalisation and more efficient ways of working.
“Global warming and high energy prices provide motivation to decarbonise the Japanese and global economy. The inexorable shift to electric vehicles requires a recalibration of the auto industry. Geopolitics is leading to a reshaping of the semiconductor industry.
“All these challenges call for dynamic and nimble enterprises, run by bold entrepreneurs willing to seize the myriad of opportunities that these changes are creating. We believe Japanese smaller companies are at the forefront of enabling many of these industry shifts, thereby providing an exciting array of investment opportunities.”