Japan’s cash-hoarding firms have come into their own. Buy them via this trust
While a number of Western companies with ‘efficient’ balance sheets struggle to invest, their Japanese counterparts can continue to grow
WE WROTE in one of our stocktipping columns recently that the habit among Japanese companies to stockpile cash for a rainy day, which has attracted much disapproval from Western proponents of “efficient” balance sheets, had come into its own during the pandemic by allowing those firms to avoid dividend cuts. But the practice can benefit more “growth-orientated” businesses too.
Firms that aim to grow will simply reinvest the profits that an income-focused business uses to pay dividends. How do you reinvest for growth if those profits dry up in the pandemic? It’s no problem if you have a big cash pile: you just use some of that. This is one of the reasons why Nick Wood of Quilter Cheviot, the wealth manager, has his eye on Japan at the moment. “Whatever a company wants to do during the pandemic, whether it’s maintain dividends or invest in the business by boosting research and development, for example, in general Japanese firms are in a good position,” he said. “Growth companies have capital available to them to grow.”
His favoured means to invest in Japan is via the Baillie Gifford Japan trust. He said the fund had continued to perform under new managers who took over when the very long-serving and successful Sarah Whitley retired in 2018. The new lead manager, Matthew Brett, had already worked for the firm’s Japanese equities team for 15 years and his deputy, Praveen Kumar, was already running Baillie Gifford Shin Nippon, which specialises in smaller Japanese companies.
“I have known Matthew Brett for a number of years and think he is an excellent fund manager,” Mr Wood said. Baillie Gifford is in any case renowned for its “house style” of seeking what it regards as the small minority of stocks able to grow sustainably and produce high returns in the process.
Apart from Japanese firms’ resilience in the face of Covid-19 there is another reason to buy the trust now: it is, unusually, trading at a discount. “Since 2012 it had tended to be at a premium but now there is a discount of about 3.5pc,” said Mr Wood. “Not huge, but enough to be worthwhile.”
This column has a lot of time for the Baillie Gifford approach and the rigour with which it is applied to its funds. This trust is a worthy home for any money you want to allocate to Japanese stocks as part of a well-diversified portfolio. Questor says: buy
Share price at close: 824p