The trust stands out from the crowd with its focus on new Japan. It is best described as a high octane fund which will deliver significant upside when these businesses are in favour; however the opposite is also true.
Investing in Japan over the last 25 years has been a roller coaster ride with many false dawns. Over the last 18 months we have heard the quote “this time is different”. This may be true because if Japan does nothing it will be bankrupt.
Part of the strategy is to weaken the Yen which will help boost corporate profits; this in turn will improve employment and deliver higher salaries. In theory if investors believe this time is different then there are sound reasons to invest in Japan.
There is however a cautionary note, although corporate profits increase because the Yen is weaker investors who do not hedge the Yen see the returns reduced. As an example in the second half of 2013 the Yen weakened significantly. The Neptune Japan Opportunities Fund which hedges the Yen was up 22.05% but others which didn’t were flat despite gains in the market.
Conversely in the first quarter of 2014 the Yen has been flat and the currency hedge has meant the falls on Neptune have been greater than on the non-hedged funds.
Understanding this is really important when considering investing in Japan and the fund you choose. We recently met the manager of Baillie Gifford Shin Nippon Investment Trust. The stated aim of the trust is to invest in ‘new’ Japan with a focus on small cap companies. Assuming an investor believes in the long term outlook for Japan, there are many reasons why an investor would lean towards this fund compared to other funds which tend to invest in ‘old’ Japan.
The performance over the last five years is exceptional; it doesn’t use a hedge strategy although the managers can adopt this if they believe it is right to do so.
In this review we will unpick this further.