Japan is moving in the opposite direction to the UK and US on immigration policy, representing a development that Praveen Kumar, manager of the top-performing Baillie Gifford Shin Nippon (BGS) trust welcomes.
‘Whilst major developed economies such as the US and the UK seem buffeted by uncertainty due to a political environment where immigration appears to be a key issue, Japan is gradually moving in the opposite direction,’ Kumar noted in the trust’s results covering the year to 31 December 2016.
He was positive about the government’s new visa scheme for skilled overseas workers in certain sectors, which enables them to gain permanent residency in just a year. Likewise, the time period that highly skilled, foreign-born professionals need to live in Japan in order to qualify for permanent residency is due to be reduced from five years to three years.
‘These structural trends will help address the labour shortages in Japan,’ Kumar added.
Last year, the number of foreign workers in Japan surpassed 1 million for the first time. The fund manager was also encouraged by improving corporate governance and highlighted that shareholder returns via buybacks and dividends remain at ‘encouragingly high levels’.
‘In general, we believe that the operating environment for Japanese smaller companies continues to improve and there remains significant scope for disruptive businesses to achieve high levels of growth in future,’ he added.
Over the past 12 months, disruptive businesses helped to drive performance of the trust. For example, food delivery company Yume No Machi was the top performing stock in 2016.
‘Management are taking aggressive steps to strengthen the company's competitive position. They recently announced a capital and business alliance with Japan’s leading messaging platform LINE and this should give them access to LINE's considerable user base,’ Kumar noted.
Likewise fashion retailer Start Today performed well after the company broadened the choice of brands and products available on its online platform.
During 2016, the trust delivered a total shareholder return including dividends of 33.5%, just below the 34% growth in its net asset value.
Kumar noted that leading online real estate operator Next and iStyle, an online cosmetics rating website, had disappointed over the year.
Likewise, a broader shift by investors into lower quality ‘value’ stocks hit the performance of Shin Nippon over the short term, which led to a weak performance from a number of high-growth stocks in the portfolio during the period. Nevertheless, Kumar believed the investment case for high growth smaller companies remains strong because they are less vulnerable to macro-economic headwinds.
'These companies typically target large domestic profit pools, have a disruptive business model and generally compete with traditional, slow moving incumbents,' he added.
The manager also highlighted the structural trends supporting high growth companies in Japan. Firstly, tourism continues to grow. There were a little over 24 million visitors to the country last year, representing the highest number since records began in the early sixties. Over the last three years, the number of foreign visitors to Japan has grown 2.4 times.
‘Leading ¥100 store operator Seria is seeing a surge in sales, as tourists buy into its fixed price offering,’ Kumar added.
While Japan’s labour shortage has reached what Kumar described as ‘alarming levels’, he noted that IT staffing specialist TechnoPro was a direct play on this theme.
‘Operational execution has been excellent so far and management are likely to achieve their mid-term plan targets one year ahead of schedule,’ he said.
The trust's shares today stand on a 6.5% premium above NAV, the highest rating of all Japan trusts, which on average trade at a discount of 5.4% below NAV.
This reflects the trust's five-year track record, which with a total shareholder return of 268% is the best of all Japan trusts, beating stable mate Baillie Gifford Japan (BGFD), run by the well-regarded Sarah Whitely, which has generated 209%. The Topix Small Cap index has gained just over 107% in that time.
Kumar, who replaced John MacDougall as manager in December 2015, has broadly maintained that record with nearly 26% growth in NAV and 34% shareholder return in the past 12 months, although due to the weak pound returns from all ten Japan trusts have been strong.
The strong performance and rating enabled the trust to issue 2.6 million shares last year to soak up investor demand, improve the liquidity of its stock and lower ongoing charges, which dipped to 0.96% at the end of the year.