Long-term investors in Japan should disregard the three Ds – debt, demographics and deflation – often used to sum up the country’s economic problems. That was the message from Baillie Gifford’s Thomas Patchett when he spoke at a Sub35 event at Pewterers’ Hall, Barbican.
“[Japan is] a country long defined by its national isolation, bureaucratic inertia, aversion to risk where coercion trumps competition, a fatalistic society and a culture of subservience,” said Patchett, a product specialist on the Japanese equities team.
“None of these things actually matter when you invest in a very long-term patient manner and construct a portfolio from the bottom up. Either those problems are addressed by the companies you invest in or they are superfluous to the long-term growth opportunities that these companies exhibit. When you invest in that manner, Japan is a land ripe for opportunities.”
Baillie Gifford has the largest Japanese equities team outside Japan and runs two of the best-performing investment trusts in the sector – Baillie Gifford Japan and Baillie Gifford Shin Nippon. They have a combined market capitalisation of £1.2 billion and a distinctive growth style.
Praveen Kumar, manager of Shin Nippon, looks for smaller Japanese companies whose shares have the potential to grow fivefold over five years. He favours problem-solvers – companies that offer solutions to endemic structural threats and are often run by visionaries who are willing to challenge the status quo.
Three examples
Patchett gave three examples that are indicative of the portfolio’s 71 holdings. Shares in medical device developer Asahi Intecc have grown 21 times in the past ten years and have further potential as the business grows its market share beyond Japan. Overseas sales account for two-thirds of revenue, up from one third in recent years.
The second and third examples illustrate the “low-hanging fruit that technology provides in transforming antiquated industries”.
Iconoclastic entrepreneur Yasukane Matsumoto, founder and chief executive of online printing company Raksul, has a 30-year plan to increase the 3% share online players have of the commercial printing market in Japan, the world’s third largest economy. The company has a fabless model and low capital requirements, acting as a middleman between printers and customers and charging 25% commission while remaining 30-50% cheaper than factory-laden competitors.
Infomart is also using technology to transform an antiquated industry. It provides an online business-to-business food information and ordering system, connecting restaurants with suppliers.
“It’s worth considering the Galápagos syndrome in Japan where high tech is met with luddite or outdated practices,” said Patchett. “It’s a very curious paradox that you’ll notice if you visit Japan.
“Fax machines remain ubiquitous and crucial to businesses whereas they are a relic and gone the way of the dodo in the west. [Restaurant] businesses rely on fax machines, trade shows and pamphlets to order their ingredients. Infomart brings it all online.”
It aims to increase the 18% online penetration of this market as restaurants grapple with tighter margins amid higher labour costs, which they are unprepared to pass onto customers.
Five selling points
Baillie Gifford Shin Nippon:
- Boasts largest Japanese equities team outside Japan
- Focuses on exciting long-term growth potential among smaller Japanese companies, where there is limited analyst coverage
- Seeks fivefold return in share price over five years
- Favours companies that offer solutions to endemic structure threats and visionary management teams willing to challenge the status quo
- Able to invest up to 10% in unlisted Japanese equities