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What four decades taught us about investing in Japan.

The ups and downs of the past 40 years have taught Baillie Gifford investment managers to seek out Japanese businesses harnessing forces of change.

This year marks the 40th anniversary of Baillie Gifford’s management of Japanese equity mandates. During this period, we have experienced various bubbles (Japan’s own along with the dot.com one that burst at the turn of the century), and several natural disasters (including the great Hanshin and Tōhoku earthquakes). We have also witnessed a near transformation of the Japanese equity market from one dominated by big banks, telecoms, and utility companies to something far more tech orientated.

Uncertainty is omnipresent in investment, but in the long approach to our semicentennial celebration, we thought it might be instructive to ponder how and why more innovative Japanese businesses tend to persist, and to percolate through to deliver outsized gains. Two themes seem worthy of highlighting:

Technological progress will drive returns

Moore’s law suggests exponential growth in computing power, while 5G creates far better connectivity. Routine deployment of machine learning and artificial intelligence (AI) is quite plausible within the decade. Inevitably this creates a world where many things will be different from today. Exponential progress implies that, while next year will be similar to this, the situation in a decade will not be the simple sum of ten single years.

To quote Bill Gates:

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”


Within our funds there are many businesses we hope will benefit from these changes, ranging from Softbank (now described by its founder Masayoshi Son as “vision capitalists”) to Rakuten, which has progressed from being an ecommerce business to directly challenging the telecoms companies with its own network roll-out.

While history is littered with successful companies that have become irrelevant over time, stock markets continue to make progress. They do this because the winners add more value than the losers subtract. Our task is clear: to focus on spotting as many big winners as we can. Given the acceleration of technological progress, this principle will become even more important over the next decade than in the last.

The journey won’t be smooth

We must be transparent about this. Sometimes we will buy investments that don’t show the growth we had hoped for. Sometimes we will make the far less obvious, but probably more important, error of not buying an investment that goes on to deliver exceptional growth. But we will continue to try to find businesses that share the features of a large growth opportunity ahead, and the competitive advantages to profit from it. Hopefully by being open and honest about the inevitability of mistakes we can focus our energies on the optimistic search for successful investments. Because one success can deliver a return worth many times that of one mistake, we remain focused on the opportunity.

It would be lovely if we could deliver a good outcome for investors in a reliable straight-line but that’s not going to happen. Past decades have seen several instances of significant drawdowns for the fund, so it shouldn’t be a huge surprise if another were to happen at some point over the next 10 years. The returns available to clients from long-term investment in good quality companies are only available at the price of toleration of that shorter-term volatility.

We hope all investors are forearmed with the knowledge that setbacks will happen and are therefore steeled for the journey to the next peak and beyond.

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 September 2021 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.

Annual past performance to 30 September each year (net %)

Past performance is not a guide to future results. Changes in the investment strategies, contributions or withdrawals may materially alter the performance and results of the portfolio. All investment strategies have the potential for profit and loss.


Important information

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Ref: 13462 10005086

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