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Tough act to follow: Kumar steps up to Shin Nippon
Baillie Gifford Shin Nippon was among the best performing investment trusts last year. New manager Praveen Kumar hopes to keep it that way.
by Jennifer Hill on Jan 29, 2016 at 08:00
Praveen Kumar is beginning to stamp his mark on the top-performing investment trust he took over in December, Baillie Gifford Shin Nippon (BGS ).
Shin Nippon was among the best performing investments last year, with its shares jumping 50.9% during the course of 2015. Last year also saw John MacDougall, the Japanese small company trust's manager for eight years, step down and replaced by Kumar.
MacDougall has handed Kumar a tough act the follow. Over five years the shares have delivered 136.2%, nearly twice the returns of its closest rival, Fidelity Japanese Values (FJV ).
Among Kumar's first tasks has been travelling to Japan from his Edinburgh base to assess some of the companies Shin Nippon holds, and a few possible additions.
Speaking to Citywire ahead of the trip, Kumar said: ‘There are a few names whereby I’m not convinced of the merits of the investment case, so I want to meet these companies to see how they stack up,’ he said. ‘Equally, there are a couple of names I’m pretty excited about; I want to see them bought for the trust sooner rather than later.’
Kumar refused to be drawn on stock specifics, but he has had his eye on one potential addition to the portfolio for the past three years, a ¥100 billion (£540 million) store operator that is using technology to establish its competitive edge.
‘It’s recently had a setback in terms of share price performance, but it remains a competent operator and the management has executed its growth strategy extremely well,’ he said.
Companies that are creating new business models using the internet and those that are disrupting existing industries by removing inefficiencies are two trends providing rich pickings for Kumar, who has specialised in Japanese equities for four years.
Shin Nippon holdings range from Kenko.com (3325.T), a ¥6 billion (£33 million) online drugs retailer, to Asics (7936.T), the running footwear brand that has grown into a ¥567 billion (£3 billion) company. ‘One of my key investment philosophies is to run your winners as much as possible,’ said Kumar.
Kumar expects the number of holdings to remain around its current level of 73 and for gearing, or borrowing, to remain at around 7%.
From Edinburgh to Japan
Is Baillie Gifford at a disadvantage to rival Japanese fund managers by not having its eight-strong Japanese equities team on the ground in Japan? ‘Rather than hinder us it keeps us at a distance from the market chatter and noise, which can be quite overwhelming at times,’ argued Kumar.
A regular stream of Japanese management visit the team in Edinburgh, and each member travels to Japan at least once a year, typically for a week-long stay.
‘We don’t feel we’re missing out on access to companies,’ said Kumar, who had already met two companies on the day of this interview and will meet another one afterwards.
Nippon Soda (4041.T), a traditional 100-year-old chemicals company, was the first through Baillie Gifford’s door that morning. ‘It has woken up to the fact that foreigners own about one-quarter of the company and is trying to engage with shareholders,’ said Kumar.
It is unlikely that Kumar will take a position. ‘I have an aversion to traditional-style Japanese companies that don’t seem to have a competitive advantage or focus on profitability and returns,' he said. 'It probably falls a little bit into that category.’
The second, ball-bearings maker Tsubaki Nakashima (6464.T), is the type of disruptive company that Kumar likes, though he is not jumping to any conclusions on whether or not the trust will invest. ‘I like to take a step back, have a think about it and discuss it with the team,’ he said.
The third visitor, ‘fast fashion’ e-tailer Start Today (3092.T), is his sixth largest position at present. ‘It’s the Japanese version of Asos (ASOS) and is one of my favourites,’ he said.
Kumar is intently focused on stock fundamentals: ‘The companies we invest in live or die by their own decisions and have very little to do with where the yen is trading or what’s happening in the economy. They’ve created whole new business models.’ However, he has a more positive outlook than the headlines telling of a technical recession in Japan.
The rise of inbound tourism, mostly from China and helped by a weak yen, is a big plus. Holdings that stand to benefit include Zojirushi (7965.T), which makes rice cookers (one of the two most popular purchases by Chinese tourists to Japan, the other being heated toilet seats) and Pigeon (7956.T), which manufactures baby bottles and is doing a roaring trade following China’s tainted milk scandal, which has made Chinese parents ‘suspicious of things made locally; they will pay a premium for foreign brands,’ said Kumar.
Director of investment companies research Numis Securities
Praveen Kumar took over as portfolio manager of Baillie Gifford Shin Nippon on 1 December, having joined Baillie Gifford in 2008. He graduated with a BEng in computer science from Bangalore University in 2001, and has an MBA from Judge Business School, University of Cambridge. He joined the Japanese equities team in 2011 and worked closely with previous lead manager John MacDougall during the 12 months leading up to the change.
We do not expect the change in manager to have a significant impact on the portfolio or approach. Baillie Gifford operates with a team-based approach and the Japanese equities team is well resourced, consisting of five managers and three analysts.
Shin Nippon is an attractive way to gain exposure to Japan via under-researched, innovative smaller companies. The fund focuses on high growth, entrepreneurial businesses which have the potential to disrupt traditional Japanese business models or exploit niche market opportunities.
Over the last five years the trust has more than doubled the return on the MSCI Japan Smaller Companies index. Reflecting the strong performance it trades on the narrowest discount in the Japanese Smaller Company investment companies peer group, which averages 12%.
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