The Ian Cowie portfolio: a classy trust worth a second look

Baillie Gifford Shin Nippon have delivered sector-leading total returns over both five and 10 years yet, even after a coronavirus recovery, still trades at a discount to net asset value.

After a few fallow years, characterised by low or no returns, one of my longest-held and biggest investment trusts is bouncing back strongly. Shares in this smaller companies specialist have surged by a remarkable 58% in the last three months, but it has attracted relatively little attention, perhaps because it is invested on the other side of the world.

Baillie Gifford Shin Nippon (LSE:BGS) (stock market ticker: BGS) - or ‘new Japan’ - focuses on that country’s more entrepreneurial firms, rather than its better-known very big businesses. This niche has not proved immune to the coronavirus crisis with negative returns - or, in plain English, losses - of 3.3% over the last year.

But BGS remains worth a second look when you see that it delivered sector-leading total returns of 134% over the last five years and 526% over the last decade, according to independent statisticians Morningstar. Despite this strong medium to long-term performance, the trust’s shares continue to be priced 4% below their net asset value (NAV).

Source: TradingView.  Share price performance only.  Past performance is not a guide to future performance.

As you might expect from Baillie Gifford, the emphasis is on seeking capital growth from disruptive new technology. Whether in healthcare (13% of underlying assets); niche manufacturing (also 13%); or automation and efficiency (10%), the aim is to identify the winners of tomorrow.

Here and now, it’s an ill wind that blows no good and the coronavirus is already boosting demand for goods and services that can be consumed remotely; that is, at home rather than in an office or restaurant. So BGS’s 15% exposure to what it calls “online disruption” is already paying off.

One of the characteristics that this DIY investor particularly appreciates is how BGS, which has been run by Praveen Kumar since December 2015, gives professionally-managed exposure to businesses about which I know nothing. These include  Bengo4.com, the online legal advice service that is its biggest stake and accounts for 4.2% of assets; Infomart, the ecommerce and payments specialist, at 2.5%; and Monotaro, an online supplier of tools and safety equipment, also at 2.5% of NAV.

Kumar claims the Japanese spend more on cosmetics per head than any other country, and this sector certainly provides plenty of scope for fat profit margins based on ‘added value’, however illusory the latter may be. These factors support another top 10 holding in BGS; Kitanotatsujin, the online supplier of skincare treatments.

Despite all that, BGS fell out of my top 10 holdings last year, and I decided to diversify my exposure to this sector with a new position in JPMorgan Japan Smaller Companies (LSE:JPS), partly attracted by its 4.3% dividend yield. Although income is enhanced with the capital reserves of this £286 million trust, which may worry those who fear such transfers damage total returns, this investor - whose prime motivation is to build a satisfactory pension - does like to be paid to be patient.

Better still, JPS shares have also bounced back 35% from their coronavirus low-point of three months ago and remain 10% ahead over the last year. Despite JPS’s short-term outperformance, it remains priced at a more attractive discount to NAV of 12%, according to Morningstar.

In addition to Japan’s competitive advantage in many areas of newish technology, both BGS and JPS might benefit from a completely separate macro-trend. Low oil prices cut costs in a country which has next to none of its own.

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Of the two, BGS is both bigger and better-regarded. For example, the analyst Priyesh Parmar of Numis Investment Companies, said: “BGS is an attractive way to gain exposure to Japan via under-researched, innovative smaller companies.

“The continued level of global market uncertainty is giving rise to numerous investment opportunities. Many high-quality and fast-growing companies have seen sharp share price falls which do not reflect their long-term fundamentals.”

Similarly, Simon Elliott, head of research at Winterflood Investment Trusts, said: “BGS is well placed to benefit from the structural shifts that are being seen across Japanese society.

“It seems likely that the current crisis will only hasten the adoption of practices that play to the portfolio’s positioning. The fund’s relative outperformance so far this year is therefore not a surprise, however, its rating has weakened with the fund’s shares trading on a discount to NAV.

“Given BGS was trading on a premium to NAV last year and has an extremely strong long-term performance record, we believe that this represents a value opportunity and offers the potential for attractive long-term capital growth.”

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Against all that, there have been several false dawns in the Land of the Rising Sun, since its stock market peaked in 1989 at an all-time high that it has never come close to revisiting.

More positively, this investor buys individual investment trusts’ shares, rather than macro-economic statistics, so the bounce at BGS tends to confirm my long-term view that form is temporary but class is permanent.

Ian Cowie holds shares in BGS and JPS as part of a globally-diversified portfolio.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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