Shin Nippon: Manager Insights

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Praveen Kumar: Hello and welcome to this annual update of Shin Nippon. I am Praveen Kumar, Manager of the Trust, and in today's video, I would like to discuss three topics.

First, an update on the market. Second, portfolio performance and changes. And finally, our outlook.

Market trends

In last year's annual update, we highlighted the weak yen and the high US interest rates as two main headwinds for high-growth Japanese small caps. Over the past year, both these have moderated. Due to the Trump administration's economic policies, the market is taking a risk-off approach to US assets in general, resulting in a weakening of the US dollar versus a range of currencies, including the Japanese yen. As a result, we are seeing a gradual rotation back into Japanese small caps that are focused on the domestic market. 

The US Federal Reserve has cut interest rates three times over the past 12 months, whereas the Bank of Japan has moved in the opposite direction, raising interest rates twice over the same period. Lower interest rates in the US could lead to a re-rating of growth small caps as investors apply a lower discount rate on future earnings. 

Recent tariffs imposed by the Trump administration could have damaging implications for the earnings of global cyclical businesses, including those in Japan. Such a scenario could actually benefit domestic-oriented small-cap growth stocks, as they have idiosyncratic Japan-specific growth drivers and are hence more immune to tariffs.

Performance

As noted in the annual manager's report, Shin Nippon underperformed its benchmark for the year ending January 31, 2025. While we did see a slight recovery in sentiment during the second half of the year, this was not enough to offset the weakness during the first half. 

Positive contributions to performance came from a range of stocks. Electric cable maker SWCC was the largest positive contributor. Japan is undergoing a massive exercise in upgrading its ageing power infrastructure, and SWCC is seeing strong demand for its products as a result. Sales are growing rapidly, margins are expanding, and the company is also putting up prices. 

Online life insurer LifeNet was another strong performer that is continuing to take share from traditional and sleepy incumbents. Badminton and tennis equipment maker Yonex also performed well. Its Chinese business is growing fast, and the company is expanding into tennis, which is a much larger global market compared to badminton. 

We saw poor share price performance from Letalico, which provides training and employment services for adults with disabilities.The business suffered due to a change in regulation, but management has since reoriented the business to meet the new regulatory requirements. 

We also suffered valuation downgrades at two of our unlisted holdings, synthetic biology company Spiber and plastic recycling company JEPLAN. In both cases, the downgrades were a direct result of a weakening of their respective financial positions. Management at both companies are actively looking at raising capital to address this issue, and we are monitoring their progress very closely. 

We also made personnel and process-related changes. Brian Lum, head of our smaller companies team, joins Shin Nippon as the deputy manager. We now have quarterly meetings involving experienced investors from our smaller companies and global discovery teams. We are engaging more closely with our investment risk team to identify portfolio-specific risks and take appropriate actions.
 
And finally, to better reflect our investable universe, we've replaced our market cap limit with a threshold based on the index average, allowing us to invest in high growth small caps that were previously excluded.

Outlook

We believe these changes will improve our research and portfolio construction processes. We remain cautiously optimistic about the future growth prospects of our holdings. Apart from macro headwinds turning into tailwinds, we are also comforted by the fact that the portfolio currently trades at low valuations but is expected to generate superior growth relative to its benchmark. 

On an enterprise value to EBIT or operating profit basis, Shin Nippon currently trades at 11.8 times versus 13.1 times for the benchmark. Based on market estimates, over the next three years, Shin Nippon is expected to generate just over 15 per cent per annum earnings growth versus 8.3 per cent for the benchmark. We believe this to be an extremely good starting point. As sentiment towards Japanese small caps improves, we should see this translate into meaningful outperformance. 

We are willing to be patient, trusting our holdings to deliver, but also remaining open to making changes where needed to improve our chances of success. We continue to believe at current levels, Shin Nippon represents a highly attractive investment proposition for patient long-term shareholders. Thank you for listening.

Annual past performance of Baillie Gifford Shin Nippon PLC to 31 March each year

Source: Morningstar, MSCI. Share price, total return in sterling.

Past performance is not a guide to future returns.

Legal Notices Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important information and risk factors

This communication was produced and approved in April 2025 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.

This communication should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This communication contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. 

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised or regulated by the FCA. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. 

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The specific risks associated with the Trust include: 

• The Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
• Unlisted investments such as private companies can increase risk. These assets may be more difficult to sell, so changes in their prices may be greater.
• The Trust can borrow money to make further investments (sometimes known as "gearing" or "leverage"). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust's investments fall in value, any invested borrowings will increase the amount of this loss.
• Market values for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the Trust might receive upon their sale.
• The Trust can make use of derivatives which may impact on its performance.
• Investment in smaller companies is generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions.
• The Trust's exposure to a single market and currency may increase risk.
• Share prices may either be below (at a discount) or above (at a premium) the net asset value (NAV). The Company may issue new shares when the price is at a premium which may reduce the share price. Shares bought at a premium may have a greater risk of loss than those bought at a discount.
• The Trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.
• The aim of the Trust is to achieve capital growth and it is unlikely that the Trust will provide a steady, or indeed any, income. 

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