The benefits of branching out

March 2022

Key points

The best Japanese businesses have a culture that allows them to try new things, not those who stick rigidly to their founding format, as Andrew Brown explains.

The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.


Van Gogh went through five potential careers before becoming a painter of idiosyncratic genius. Roger Federer’s sports included skiing, wrestling, badminton and football before, aged 12, he settled on tennis. These examples, cited in David Epstein's book Range: How Generalists Triumph in a Specialist World, demonstrate how hard it can be to predict success in a given field.

There are parallels here with investment in general, and with the portfolio in particular. As long term-growth investors in Japan, looking 10 years into the future, we often don’t know which endeavour, product or even which business segment will generate the most shareholder value. Early promise can end in failure, but failure that leads to another kind of success. What the world’s best businesses share with great artists and sports stars are certain traits or strengths that make ultimate success more likely.

In all these cases, positive outcomes come from deeply ingrained ambition, a culture that allows experimentation and failure and a commitment to stay the course in challenging times. As investors we rate these factors highly, while keeping an open mind over what path our holdings may follow. And we know not to over-extrapolate from the success of a hit product or service – it may prove ephemeral.

© 2019 Bloomberg Finance LP.
© Shutterstock/Syafiq Adnan.

Amazon and Netflix are examples of businesses that flourished in unpredicted ways. It’s easy to forget that Amazon Prime and Amazon Web Services (the cloud infrastructure business) were only conceived over 12 years after the company was founded in 1994. Today’s Netflix bears little resemblance to the DVD sales and rental company launched in 1997. Video streaming didn’t arrive until a decade later and it wasn’t until 2013 that Netflix produced the original content that’s now its greatest strength.

Japan has many companies that, like Amazon and Netflix, have evolved by experimenting. Some are longstanding holdings, others more recent positions.

CyberAgent started out in online advertising, but it was its social blog Ameba Pigg which underpinned profits during its formative years. After Ameba Pigg amassed over a million users and began generating sustainable profits it launched a series of additional services: a foreign exchange (FX) margin business, a corporate venture capital business and a mobile advertising unit. At this point many would have challenged management for lacking focus and allocating capital to areas with no proven track record, instead of reinvesting ‘in franchise’. Indeed, we ourselves overlooked the company until 2013.

Fast forward to today and CyberAgent is Japan’s standout leader in mobile advertising. It has a formidable track record in online gaming and, more recently, has established a lead in streaming television and video content, boasting over 10 million weekly average users.

CyberAgent has had failures as well. Ameba Pigg fizzled out and the FX business was sold to Yahoo! Japan in 2013, having weighed on profits for years. Music subscription service AWA, launched in 2015, also failed to gain traction and been downplayed. But these disappointments pale into insignificance given the outstanding success of other business units. We argue that this willingness to experiment and to embrace failure has underpinned the company’s success. Back in 1998, and even 15 years after that, it was unclear what path CyberAgent would take and what would drive shareholder value. With hindsight, the components and traits of wealth creation are clear. Founder Susumu Fujita has instilled a culture in which employees are offered an attractive working environment and an opportunity to experiment.

© Junko Kimura/Bloomberg/Getty Images.

The dominant C2C used goods platform Mercari is a more recent example of a business branching out. With its eponymous portal now the default platform for trading used goods online in Japan, and with operating margins consistently 30 per cent or higher and with room for online used goods penetration to grow to a multiple of current levels, this diversification might seem premature, even foolhardy.                             

Since listing on the Tokyo Stock Exchange First Section in 2018, Mercari has reinvested profits in its US business where it lacks scale and faces tough competition from eBay, Poshmark and others. We were sceptical of this plan, having seen Japanese companies struggle in the US, yet its recent growth there has been faster than at home. Reaching $100m dollars per month, the target for turning profitable, seems imminently achievable. Similarly, Mercari’s venture into online payment with Merpay seemed questionable, given the strength of PayPay and Rakuten Pay in Japan. Again investors have been proven wrong. Last time we checked, Merpay had amassed over 10 million users.

© Kentaro Takahashi/Bloomberg/Getty Images.

Mercari’s formative years looked very different from its recent forays into new areas. Dating from 2013, Mercari tried and failed with bicycle rentals, classified media and online travel before establishing the now successful online used goods service. Had we invested then, we might have criticised its scattergun approach. Instead we should have praised management for its culture of experimentation.  

CyberAgent and Mercari have strengthened as they’ve grown. This is down to two factors: First, experimenting has provided great learning opportunities that have refined the core business. Second, connections between different business segments have strengthened the overall offering, creating natural synergies. For example, CyberAgent is now able to use reliable free cashflow from mobile advertising to fund its gaming studios, while Abema TV has proven excellent for advertising new games. Similarly, Merpay may not ultimately become Japan’s leading payment business, but it has greatly improved service on its used goods trading platform, improving its ‘stickiness’.

What does this all mean for our investment approach? That we should be open minded when investee companies experiment with new ventures: giving them the benefit of the doubt, provided they demonstrate the ambition and commitment to succeed. That when considering new investment, we should also resist our industry’s bias towards companies that specialise early and put all their eggs in that basket.

David Epstein’s book notes that when scientists study the early development of successful athletes, they often observe them spending less time practicing the sport in which they ultimately excel than lesser players of that sport. Instead they undergo what researchers call a ‘sampling period’. The same should go for businesses.

Risk Factors

The views expressed in this article are those of Andrew Brown and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in March 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

Stock Examples

Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.

This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this article are for illustrative purposes only.

Important Information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

Financial intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.


Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (‘FinIA’). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.

Hong Kong

Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713–2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.


Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.


Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a ‘wholesale client’ within the meaning of section 761G of the Corporations Act 2001 (Cth) (‘Corporations Act’). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a ‘retail client’ within the meaning of section 761G of the Corporations Act.

This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.


Baillie Gifford Overseas Limited (‘BGO’) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this material represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.


The materials contained herein are not intended to constitute an offer or provision of investment management, investment and advisory services or other financial services under the laws of Qatar. The services have not been and will not be authorised by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or the Qatar Central Bank in accordance with their regulations or any other regulations in Qatar.


Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.


Ref: 15204 10007294

About the authors