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Ian Cowie: ‘New Japan’ defies the cynics and does me proud

Ian Cowie: ‘New Japan’ defies the cynics and does me proud

A smallish island nation with scant natural resources, bad weather and an ageing population, whose military prowess is receding into half-remembered history but which still provokes resentment among neighbouring countries. It doesn’t sound like a recipe upon which to build one of the biggest and most dynamic economies in the world, does it?

But Japan should give Brexiteers grounds for hope because it provides an example of what can be achieved outside formal or federal trading blocs by the stunningly effective strategy of providing goods and services the rest of the world wants to buy. The odd thing is that it gets so little attention from investors.

Loss aversion – or once bitten, twice shy – might explain it after the lost decades that followed the Nikkei 225 hitting an all-time peak of 38,916 in December, 1989. After that, the index went on to lose an eye-watering three quarters of its value as the country experienced prolonged deflation that would probably have provoked insurrection among less orderly people.

But that’s all ancient history now. Next week, 16 December, will mark the fifth anniversary of the election of prime minister Shinzo Abe, whose efforts to stimulate the economy have helped the Nikkei more than double under his stewardship to its current level above 22,600.

Without wishing to provoke the ire of Little Englanders, it’s only fair to say that the Tokyo stock market’s stellar performance left our FTSE 100 lagging far behind and even pipped the remarkable recovery in the Dow Jones, which has nearly doubled during the same period.

Better still, Abe’s mandate to drive through difficult economic reforms was strengthened by his decision to hold a snap election last September, which his Liberal Democratic Party won with an increased majority. How very different from our own recent experience closer to home.

Enough of the macro-economics and politics already. Why should we care? Because Japan happens to be home to two of the very best investment trusts in the world, in terms of consistently adding value by beating the local market indices.

When I most recently mentioned my holding in Baillie Gifford Shin Nippon (BGS) last July, I reported that the smaller companies specialist had risen by 113% since I bought shares at 328p in October, 2013. One or two cynics claimed its performance was strictly historical and unlikely to be sustained into the future but I am glad I ignored them and bought more stock at 686p that month.

Since then – you guessed! – the shares have continued to rise to 868p, as I write. It just goes to show that perennial pessimism might be the easiest way to simulate wisdom about stock markets but it ain’t the way to make money. Baillie Gifford Shin Nippon – by the way, the name means ‘New Japan’ – is now the second most valuable holding in my portfolio.

Against all that, the shares yield nothing and look even more expensive than they did last July; trading at a premium of 12.5% above their net asset value (NAV). There is, of course, no guarantee they will continue to become more expensive and anyone buying today would suffer substantial loss of capital if the shares revert to the mean for investment trusts, as a whole, to trade at a discount of 3.7% below NAV.

Wiser heads than mine – such as Mark Dampier at Hargreaves Lansdown and Darius McDermott at Chelsea Financial Services – argue with some justification that this is an example of open-ended funds, such as unit trusts, actually being cheaper than their investment trust rival. Am I allowed to say that here?

But this long-term investor reckons Baillie Gifford Shin Nippon’s ongoing charge of 0.96% looks like great value for a fund focused on the other side of the world, trading while I am asleep and delivering the top performance in its sector over the last 12 months, five years and decade. Sometimes you get what you pay for.

Lest all this sound insufferably smug, it’s only fair to ‘fess up to my inept handling of another excellent trust focused on the Land of the Rising Sun: Sarah Whitley’s Baillie Gifford Japan (BGFD). I also bought shares at 368p in October, 2013, but lost faith in the blue-chip specialist and sold the lot at 360p in July, 2014. They have more than doubled since to 797.5p.

Ouch! No wonder Warren Buffett says the stock market is a mechanism for transferring wealth from the impatient to patient.

Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.


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