Japan Trust: Manager Insights

Matthew Brett: Japanese markets saw a mixed 12 months with US tariff announcements in April 2025 triggering a sharp sell off, followed by the year to August ending with the TOPIX surpassing its 1989 peak. The year also saw a period of corporate reform acceleration. Share buybacks tripled year-on-year, and momentum continued around dismantling legacy structures.

We have started to see a global reappraisal of Japanese equities based on expectations of long-term, sustainable earnings growth, which has narrowed the valuation gap. This shift in market dynamics should align well with the Trust's tilt towards structural growth companies, positioning us favourably over the longer term.

Against that backdrop, the sun shone on the Trust this year with an NAV [net asset value] total return of plus 20.5 per cent, ahead of the TOPIX total return of plus 12.1 per cent. Most of this positive absolute and relative return came in the second half of the fiscal year, with SoftBank Group making a key positive contribution. SoftBank, which is a technology holding company and largest position in the Trust portfolio, has become better appreciated as one of the leaders in AI. In addition to the 90 per cent stake in ARM Holdings, whose designs power almost every smartphone globally, SoftBank has invested in OpenAI, the company behind ChatGPT, which is a key driver of AI advancements globally. It should stand to benefit accordingly.

SBI Holdings, Japan's leading online financial services company and second largest position, was another top contributor over the year. It has continued to make progress across many areas. Its successful transformation from an online financial broker into a diversified financial conglomerate is well underway. Through the integration of Shinsei Bank, which it acquired in 2021, banking has grown to represent over half of the group's core profitability. A doubling of deposits since the acquisition is laying the foundation for a partial relisting, likely at a significant premium to the acquisition price.

Cyber agent, GMO Internet, and GA Technologies all continued to make solid progress. While most holdings performed well relative to the index, the trust's largest detractor was Rakuten, a large position and the top contributor to relative performance in the previous year. In our view, the market has yet to appreciate fully either the significant operational improvement in the telecoms business or the long-term growth opportunity ahead of the company. We retain conviction in the holding.

Gearing also made a significant positive contribution to performance of plus 2.2 per cent as the portfolio delivered a positive absolute return in yen terms.

During the year, we bought four new holdings and sold six holdings. Turnover was particularly low this year at 7 per cent, reflecting the extreme attractiveness of the starting portfolio. The new holdings included Money Forward, Japan's leading online accounting software platform, which is creating huge efficiencies for companies and scaling into a vast and relevant market. Shimano, another new buy, is the world's leading manufacturer of high-end bicycle components. We sold it during Covid when demand for bicycles became artificially inflated, but the subsequent significant share price correction has presented another opportunity. And lastly, new buys Square Enix and Sega Sammy are computer gaming businesses with strong global franchises such as Final Fantasy and Sonic the Hedgehog that have significant untapped monetisation potential. Both companies have robust balance sheets and are well placed to capture the structural growth in digital entertainment and gaming revenues.

We sold holdings for a variety of reasons. Topcon, a positioning systems manufacturer, accepted an offer from private equity at a significant premium. SWCC Corporation, which makes electric cables, delivered a very high return since purchase, and we therefore concluded that there was limited further upside potential. Real estate company Tokyo Tatemono was sold because we saw a larger long-term opportunity in online real estate company GA technologies. And finally, we sold several internet names including Digital Garage, Makani, and LY Corporation to fund additions to those names where we had higher long-term conviction.

Overall, the portfolio retained significant exposure to entrepreneurial growth companies, particularly those operating in the internet sector. Though it invests across the market cap spectrum, it has much more in medium-sized and very large companies compared with the topics index. It has no exposure to car assemblers or many of Japan's manufacturing conglomerates. Reflecting our focus on growth companies, the portfolio has exhibited sales growth significantly ahead of the market over the past five years and is forecast to continue to grow faster, and three years forward earnings growth is forecast to be well ahead of the market, which is encouraging.

We believe that there remains a large return opportunity for long-term growth investing in Japan. Our positioning in companies aligned with long-term secular growth, many of which have not been fully appreciated in recent years, presents a good opportunity for outperformance ahead. Reflecting this, net gearing ended the year at 12.8 per cent, putting us in a healthy position to benefit from further share price appreciation, while retaining the flexibility to take advantage of any short-term setbacks.

Over the long run, we continue to believe that a long-term approach to investing in Japan's best companies is capable of delivering excellent results for shareholders. Thank you for your support. For more details, please see the Trust's latest annual report on our website. We look forward to seeing you at the next AGM.

The Baillie Gifford Japan Trust PLC

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

Source: Morningstar, Tokyo Stock Exchange, share price, total return.

Past performance is not a guide to future returns.

Legal notice: The TOPIX Index Value and the TOPIX Marks are subject to the proprietary rights owned by JPX Market Innovation & Research, Inc. or affiliates of JPX Market Innovation & Research, Inc. (hereinafter collectively referred to as "JPX") and JPX owns all rights and know-how relating to TOPIX such as calculation, publication and use of the TOPIX Index Value and relating to the TOPIX Marks. JPX shall not be liable for the miscalculation, incorrect publication, delayed or interrupted publication of the TOPIX Index Value.

Important information and risk factors

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

This communication does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised or regulated by the Financial Conduct Authority. 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.

Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). 

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

The specific risks associated with The Baillie Gifford Japan 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.

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. You should not expect a significant, or steady, annual income from the Trust.

Further details of the risks associated with investing in the Trust, including a Key Information Document and how charges are applied, can be found in the Trust specific pages at www.bailliegifford.com, or by calling Baillie Gifford on 0800 917 2113.

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