Ian Cowie: why I am hanging on to my only Baillie Gifford trust

There’s been short-term pain, but also long-term gain for this holding in our columnist’s ‘forever fund’. Here, he explains why the trust has been tipped as a contrarian choice for the year ahead.

Contrarian investors buy when others sell, so how about considering this former high-flying investment trust that is now triply out of favour? In terms of financial popularity, it is in the wrong stock market, focusing on the wrong companies by size, and run by the wrong fund manager due to their investment stylefalling from fashion.

So those of you who prefer to follow the crowd might as well look away now. But I had better ‘fess up to a financial interest straightaway because I have been a shareholder in the Japanese smaller companies specialist Baillie Gifford Shin Nippon Ord (LSE:BGS) for more than a decade.

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Tokyo used to have the second-biggest stock market in the world, indeed I remember when it was briefly the biggest at the end of the 1980s, but prolonged poor performance since then has demoted it to fourth place today. New York leads, obviously, followed by Shanghai and then, perhaps surprisingly, Paris, with the latter gaining third place via the pan-Continental Euronext exchange.

Coming down from the clouds, this small shareholder is hanging on to BGS and intends to add to my holding when dividend income from elsewhere allows. Why? Partly out of perversity - see ‘contrarian investors’ above - but largely because BGS’s long-term returns remain excellent, even if the short and medium-term numbers are awful.

For example, BGS is currently the worst-performing investment trust in the Association of Investment Companies (AIC) ‘Japanese Smaller Companies’ sector over the last one and five-year periods, with negative ‘returns’ of -24% and -17% respectively. On a brighter note, it remains top of its AIC sector over the last decade with total returns of 271%.

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For comparison, the AIC ‘Japanese Smaller Companies’ sector average returns over the same three periods are -19%, -15% and a positive 195%. Well, you can’t call me a follower of fashion who only talks about sectors and shares that are doing well.

Despite dire recent returns, I note that BGS earns a place in ‘Winterflood Investment Trusts 2023 Recommendations’ published this week. The analyst explains: “We believe that Baillie Gifford Shin Nippon’s focus on high-growth Japanese smaller companies, coupled with the manager’s ability to select successful companies, as demonstrated by its long-term performance, is likely to deliver significant returns over the long run.

“Investors may view the strategy as more volatile, considering its high active share and the manager’s focus on small companies in disruptive sectors, which are subject to large price swings.

“However, risks are diversified across 80 portfolio companies with all position sizes less than 3% and the top 10 investments representing less than 25% of the portfolio.”

That sounds like the kind of diversification to diminish risk, and professional stock selection in a sector where I know next to nothing, for which I am happy to pay ongoing costs of 0.66% per year. Sad to say, there are no dividends at all.

This brings us back to the three ‘red flags’ with which this article began. Japan is so far out of favour that few investors even talk about the Land of the Rising Sun these days; smaller companies are shunned in times of risk aversion; and Baillie Gifford - with whom BGS is my only investment - is the fund manager most closely associated with that bygone age of low interest rates when many folk were willing to forego receiving any income in pursuit of growth in future.

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Here and now, for a description of how investors are living through the end of an era - plus shrewd analysis of what might happen next - you can’t do much better than Terry Smith’s 2023 letter to investors, also published this week. Smith talks about how “easy money” led to bad investment decisions which are exposed as the tide goes out.

Then he says: “We saw this in Japan in the late 1980s in a bull market when the Emperor’s garden was valued more than the state of California and the Tokyo Stock Exchange was on a price/earnings (P/E) ratio of about 100. The aftermath has been prolonged and worsened by a penchant for not admitting failure.

“Japan’s bubble was followed by the dotcom era in which money could be raised for an idea. The resulting meltdown was painful and especially for investors who had bought a business plan rather than a business.

“It is worth bearing in mind that real businesses survived and prospered. Amazon.com Inc (NASDAQ:AMZN)’s stock declined by about 95% during the dotcom bust. It has since risen about 600-fold to its peak.”

Similarly, BGS’s top 10 holdings are all “real businesses” - led by the motorcycle helmet-maker Shoei; followed by the outdoor clothing brand Snow Peak; and the dental, surgical and industrial tool-maker Nakanishi.

This long-suffering shareholder in BGS hopes it can eventually deliver a similar recovery from adversity. Buying low can sometimes prove to be the first step towards achieving high returns and it is always worth considering shares in sectors that most investors shun. I can’t always be right but I can always be different.

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

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS) as part of a globally diversified portfolio of investment trusts and other shares.