As the Baillie Gifford Japan Trust enters its fifth decade, manager Matthew Brett recalls past successes and discusses the prospects for some of its robotics, cosmetics and internet-focused investments.
For a growth investor such as Matthew Brett, Japan is a “much more interesting place” than at any time in his career. As the Japan Trust marks its 40th anniversary Brett’s eyes are not on its past successes in good times and bad, but on the opportunities now opening up.
Japan’s rollercoaster ride over those decades have, Brett says, made it “Marmite” for international investors: provoking strongly negative as well as positive sentiment. Himself a convinced optimist on the country, he sees the years ahead presenting the £1.1bn trust with a “a bigger opportunity set of exciting businesses” in which to invest.
Brett, who has headed the trust since 2018, notes the striking differences between Japan now and Japan in its long post-bubble phase when he joined Baillie Gifford.
“If we go back to the late 1980s, a bit before my time, Japan was dominated by the big banks, and clearly that didn’t deliver a great return for the next 15 years or whatever. When I started looking at Japan back in 2005, a mixture of three things were the big parts of Japan.
“We still had the remainder of the big banks. We also had the car companies, and we had some of the big manufacturing conglomerates.
“But as we look at Japan today, it’s fascinating how the index has changed. The top part is dominated by a mixture of technology companies and internet-related businesses. We’ve seen a proliferation of both growth and disruption, offering more opportunities.”
One obvious shift has been the rise of internet and ecommerce which “allow people to do things cheaper, more efficiently, and better than offline in many cases. That gives opportunities across retail, across financial services and many other areas.”
Meanwhile some traditional areas of Japanese strength have endured: for example, automation and robotics companies.
“I think Japan has a huge amount to offer the world here,” Brett says. “There are two handfuls of those companies globally, and one of those hands is in Japan. The quality [of the] materials and the precision engineering are very good. Their standards of quality are immensely high.
“In many parts of the world increasing manufacturing prowess means buying in Japanese technology: robots and computerised numerical controllers from Fanuc and robots from the likes of Yaskawa and machine tools from DMG Mori. Japan is providing the picks and shovels of the modern era.”
Another traditional area of Japanese strength where he sees growing momentum is cosmetics:
“This is a different type of opportunity for us, where we can see the increasing wealth in the rest of Asia, and Asian skin care [consumers] look at the Japanese brands very favourably. That could be an interesting way for us to play the rising wealth trends continuing across Asia.”
If the company opportunity set has changed, so too has corporate behaviour. When Brett joined the Japanese equities team dividends were virtually non-existent in Japan. Now many more Japanese companies are paying them.
“If you go back 15-odd years the dividend was very much an afterthought.” Brett says. “Some companies in that stage were actually paying a fixed dividend, and you’d ask them, why is the dividend ¥50? They’d say, well, it just is ¥50. There was no relation whatsoever with the profits of the company.
“During the Covid crisis you’ve seen quite a different situation, where companies have been much more reluctant to cut dividends. We’ve seen a resilient approach to dividends, backed by the large amounts of cash that many Japanese companies still have.
“I think we’re probably around halfway through this trend. The scope to continue to grow dividends ahead of earnings in Japan is probably far better than in many parts of the world. That excitement is quite different from many people’s perception of the Japanese market.”
For Brett, the fascination of Japan comes from its high level of development and divergence from the Anglo-Saxon world. These demand that we don’t look at the country through our own cultural prism. He points out how the 40-year lifetime of the trust has seen Japan become more shareholder-focused, as per the western corporate tradition, while the west has meanwhile moved towards more Japanese-style concern for companies’ role in wider society.
“It is curious how these things can converge over time, and what seemed odd [about Japan] maybe 10 or 15 years ago, now actually seems much more internationally comparable.”
After 40 years it seems Japan’s differences with the rest of the world are becoming less marked. It follows that the ‘Marmite’ gap between bullish and cautious views of the world’s third largest economy is also likely to narrow.
Words by Colin Donald
If you’d like to hear more of Matthew Brett’s views on how investing in Japan has changed over the decades, listen to our podcast, Short Briefings on Long Term Thinking. You can find the podcast at bailliegifford.com/podcasts
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