First 50 Funds Interview: Matthew Brett of Baillie Gifford Japanese

26 September 2018

Matthew Brett gives Moneywise’s Helen Knapman the lowdown on his fund, Baillie Gifford Japanese, one of our First 50 funds for beginner investors

What is the fund?

The fund invests in Japanese companies that we think have the potential for long-term growth.

We currently hold 62 companies. Each holding is big enough that it makes a difference, but there’s enough space for new ideas.

What do you look for in companies?

We try to think about companies over a five-year period – looking at where sales and earnings have got to and whether they can continue growing. When investing, the five key points we look for are:

  • Industry background – companies that are operating in a growing industry and one where it’s possible to earn good returns.
  • Competitive advantage – [companies that have an advantage over their peers].
  • Management – companies where there is a strong alignment between the management and ourselves. We like the management team to have a significant shareholding in the business themselves. This is important, as in Japan there’s a range of management styles and we want to invest in those looking to grow their businesses.
  • Financial characteristics – companies with strong balance sheets with little or no debt.
  • Valuation – we look at the price of companies and how we differ from the market in our view. We try to look for substantial opportunity for share price appreciation – and not just small appreciation, we’re looking for double or treble.

When do you sell companies?

Over the past 10 years the annual portfolio turnover has been 15% or less. We sell companies for three main reasons:

  • We’ve made a mistake and we’ve realised we’re not right in our analysis.
  • Where we struggle to see any further upside in the shares – the market can become aware of the attractions and become over-enthusiastic, for example.
  • We have such a weight of companies we want to buy that we need to find the money from somewhere, so we’ll sell our least favourite holding.

In the last few months we’ve sold out of Hikari Tsushin – a distributor which sells mobile phones, copiers, etc [to businesses]. We’ve held it for 10 years and it’s done very well, but we can’t see it being able to grow at the same rapid rate going forward, as the labour market is very tight and it simply can’t recruit the number of employees it will need.

Has your direction changed since co-manager Sarah Whitley left in April?

We remain growth-orientated and long term – our ethos hasn’t changed. We have nine people working on the fund and we still have the rest of the team here. I miss working with Sarah, but in a practical sense I’m confident we have the resources to keep going.

How’s the outlook for Japan?

Investors have a tendency to focus on concerns about Japan, but there are several strengths. There’s a simplicity to Japan in terms of it having one currency and an established political arrangement, as these provide a fairly stable backdrop.

So, when it comes to challenges, I don’t worry about the country as a whole, although there are some sectors that aren’t particularly exciting. For example, we’ve not found opportunities in the utilities sector for years, and growth prospects are very limited. We also struggle to see how the large conglomerates can show growth – they had great growth in the 1980s but they’re not where the growth is now. We’re looking to the future.

When we think about what Japan is good at, it’s robots. We see opportunity here, as robots are only used in narrow industries at present, such as car manufacturing and electronics, but we see the possibilities for robots to be used in different sectors. Examples of companies we own in this sector include Fanuc and Yaskawa Electric.

Our other big exposure is to internet-related businesses. One of the big areas for growth is online financial companies – SBI is an example of a firm we invest in. It’s the Japanese Hargreaves Lansdown, an online brokerage company that also offers banking services. We think these have a very big cost advantage over traditional banks.

In terms of opportunities, there are also some interesting stocks we’re thinking about in emerging healthcare. For example, PeptiDream is a company we hold at present which produces synthetic peptides to deliver drugs or be used as a therapy in their own right.

What were your best and worst investment decisions?

One of our best decisions was to invest in Hikari Tsushin. Its share price went up about 10 times from when we bought it to when we sold it.

But there are always things that go less well. One of the ones I particularly regret relates to M3, an online sales rep for pharmaceutical companies. We considered buying shares in M3 but thought it was a little expensive. That was a mistake, as the share price has continued to grow very fast since then.

What’s your top tip for a beginner investor?

I would encourage people to keep things simple and to be aware of the importance of investing in funds where they understand how they’re managed. Have an eye on costs, and be long term in your thinking.

Baillie Gifford Japanese: Key stats

Launched: October 1984
Fund size: £2,627.12 million
OCF: 0.63% (i)
Yield: 0.8%

(i) B share class. Source: Baillie Gifford Japanese Fund factsheet, 30 June 2018.

The man behind the fund

Matthew Brett joined Baillie Gifford in 2003. As well as managing the Japanese Fund, he is the manager of Baillie Gifford’s Japanese all cap and Japanese income growth strategies. Matthew graduated with a BA (Hons) in natural sciences (psychology) from the University of Cambridge and holds a PhD in psychology from Bristol University. He is a CFA charterholder.

Five-year performance of Baillie Gifford Japanese

Baillie Gifford Japanese B Acc in GB43.800.0511.9433.8926.56

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