REG - Baillie Gifford Shin - Annual Report Baillie Gifford Shin Nippon PLC
25/03/2024 07:00
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RNS Number : 0291I Baillie Gifford Shin Nippon PLC 25 March 2024
RNS Announcement
Baillie Gifford Shin Nippon PLC (BGS)
Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83
Results for the year to 31 January 2024
Regulated Information Classification: Additional regulated information
required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 January 2024
which was approved by the Board on 22 March 2024.
Over the year to 31 January 2024, the Company's net asset value per share(†)
declined by 14.9% and its share price by 20.5%. The comparative index*
appreciated by 6.3%.
In sterling terms over five years, the Company's comparative index* was up
24.1% while the net asset value per share(†) was down by 6.8% and the share
price was down 26.3%.
¾ Portfolio performance has remained weak since the decline in impact of
Covid-19 as large-cap value stocks have been very much in favour compared to
high growth small cap stocks. Most of the portfolio's poor performers over the
past year were companies with meaningful exposure to China. There was wide
sectoral dispersion among the portfolio's top performing stocks.
¾ The Board is committing to a one-off performance-triggered tender offer
for up to 15% of the Company's issued share capital if the Company's NAV per
share total return underperforms the MSCI Japan Small Cap Index total return
(in sterling terms) over the three years to 31 January 2027, given the period
of poor performance.
¾ Portfolio turnover for the financial year was 12.1%, with seven positions
exited and five new positions initiated. There are currently four private
companies in the portfolio accounting for 3.7% of total assets.
¾ The Company's share price ended the period at a 14.6% discount to the NAV
per share. 4,395,000 shares were bought back in the reporting period and are
currently held in treasury.
¾ The persistent share price weakness of most holdings across the
portfolio, together with their strong operational performance has meant that
the portfolio as a whole has been de-rated significantly and, relative to the
comparative index, although valued at a small premium it should deliver much
faster sales growth.
¾ As the focus on fundamentals takes a firm hold, portfolio performance
should recover. The Board and Managers remain of the view that exceptional
long term returns are likely to be generated by young, disruptive,
fast-growing and entrepreneurial smaller businesses in Japan.
¾ Revenue return per share was 0.94p (2023 1.11p). Having been in deficit
for a number of years, the Company's revenue reserve has moved to a surplus.
The Board is recommending a final dividend of 0.80p per share, being broadly
the minimum required to maintain investment trust status. The proposed final
dividend will be put before shareholders as part of the Company's Annual
General Meeting ('AGM') business in May.
(†) After deducting borrowings at fair value. For a
definition of terms see Glossary of terms and Alternative Performance Measures
at the end of this announcement.
* The Company's comparative index is the MSCI Japan Small
Cap Index (total return and in sterling terms). See disclaimer at the end of
this announcement.
Source: LSEG/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
Shin Nippon aims to achieve long term capital growth through investment
principally in small Japanese companies which are believed to have above
average prospects for growth. At 31 January 2024 the Company had total assets
of £544.3 million (before deduction of bank loans of £86.5 million).
The Company is managed by Baillie Gifford, an Edinburgh based fund management
group with approximately £227 billion under management and advice as at 20
March 2024.
Past performance is not a guide to future performance. The value of an
investment and any income from it is not guaranteed and may go down as well as
up and investors may not get back the amount invested. The Company is listed
on the London Stock Exchange and is not authorised or regulated by the
Financial Conduct Authority. Investment in investment trusts should be
regarded as long term. You can find up to date performance information about
Shin Nippon at shinnippon.co.uk.
25 March 2024
For further information please contact:
Anzelm Cydzik, Baillie Gifford &
Co
Tel: 0131 275 2000
Jonathan Atkins, Director, Four Communications
Tel: 0203 920 0555 or 07872 495396
Chair's statement
In this, my first year as Chair of the Company, I had hoped to report an
improvement in performance by the end of it. However, this has not
materialised. Over the year to 31 January 2024, the Company's net asset value
('NAV') per share* declined by 14.9% and its share price by 20.5%. The
comparative index (MSCI Japan Small Cap Index, total return in sterling terms)
appreciated by 6.3%.
As highlighted in last year's report, your Board has determined that
performance should be measured principally over rolling five-year periods to
reflect the Managers' time horizon for investment. Over the five years to 31
January 2024, the Company's NAV per share declined by 6.8% and its share price
declined by 26.3%. The Company's comparative index return appreciated by
24.1%. Much of the underperformance has occurred over the past three years
when the Company's NAV per share fell 36.2% against a 7.6% rise in the
comparative index.
We remain resolute in our belief that the companies we hold are very
well-placed to generate extremely attractive returns to investors over the
long term. Although the Company has faced the challenges of growth investing
being out of favour, we support the Managers in their core ethos of investing
in dynamic entrepreneurial small cap businesses in Japan. Despite the recent
underperformance, over the ten years to 31 January 2024 the NAV compound
annual return was 9.1% compared to 8.5% for the comparative index. More detail
on ten year performance can be viewed on page 31 of the Annual Report and
Financial Statements.
The Board has of course rigorously challenged the portfolio manager at each
Board meeting on the reasons for the portfolio's underperformance. These can
be summarised as:
• growth stocks being out of favour, with high growth Japanese small cap
stocks indiscriminately sold, particularly by domestic Japanese investors, in
favour of value stocks;
• the portfolio has had historically longstanding structural underweights in
the energy, industrials, financials and materials sectors, all of which have
done exceptionally well over the past couple of years. In aggregate, these
sectors account for just over 40% of the comparative index and being
underweight has impacted relative performance; and finally
• rising interest rates and geopolitical risks have tilted investors towards
stocks perceived to be 'safe'. These tend to be highly cyclical (global
industrials, shippers), interest rate sensitive (financials), invested in real
assets (trading companies, miners) and extremely low valuation (often less
than 0.5 times price-to-book). These characteristics are not favoured by the
portfolio manager.
The Manager's report below goes into significantly more detail on the main
drivers of portfolio performance during the period.
As at 31 January 2024, the Company's shares stood at a 14.6% discount(†),
having averaged 11.4% over the year, from 8.6% as at 31 January 2023. As part
of the process of becoming the Company's Chair, I and my fellow Director
Abigail Rotheroe undertook some shareholder meetings to canvass views on a
number of matters. The Company's use of share buybacks featured strongly in
the feedback we received. Over the year, the Company has bought back 4,395,000
shares to be held in treasury, equivalent to 1.4% of the Company's issued
share capital at the start of the period, split over 62 separate buyback
transactions. Since then, the buybacks have accelerated, and a further
3,375,000 shares have been purchased. The Board remains committed to utilising
the buyback authority appropriately.
The poor investment performance has, not surprisingly, led to selling by the
same investors that the Board wishes to attract and retain on the share
register. The 'retail' weighting on the register (holding shares on investment
platforms) has declined from 78.9% to 68.7% over the year. It is the Board's
hope that this trend reverses once performance improves. To this end, the
Board has agreed to an increased annual marketing budget of £100,000. The
Company is part of a Baillie Gifford marketing programme which includes all
the investment trusts managed by them. The cost is borne in partnership by the
Company and the Manager, with the Manager matching the Company's marketing
contribution and providing the resource to manage and run the programme. This
marketing programme is a key method of shareholder communication and, in our
opinion, represents good value for money for our shareholders.
Tender offer
As I have said, the Board maintains a keen interest in the performance of the
portfolio and the resultant impact this has on the level of the Company's
share price discount or premium to the underlying NAV per share. Whilst
cognisant of the drivers of performance and remaining supportive of the
portfolio manager, the Board has concluded that, given the period of poor
performance, it would be in the best interests of the Company to commit to a
one-off performance-triggered tender offer for up to 15% of the Company's
issued share capital (excluding any shares held in treasury). This tender
offer would be triggered if the Company's NAV total return per share,
measuring debt at fair value, underperformed the total return of the MSCI
Japan Small Cap Index (in sterling terms) over the three years to 31 January
2027. The tender would be at a price equal to a 2% discount to the cum income
NAV per share (calculating debt at fair value) less costs.
If the tender offer is triggered, it is expected to be implemented around the
time of the Company's 2027 Annual General Meeting ('AGM') and subject to
shareholder approval at that time.
Borrowings
The Company's gearing(†) increased over the course of the year from 15.0% to
18.1% whilst gross gearing increased from 16.1% to 18.9% following the drawing
of a new secured ¥2,000 million three-year revolving credit facility from ING
Bank N.V. The ¥7,000 million fixed rate facility matured on 27 November 2023
and was refinanced with a three-year ¥7,000 million revolving credit facility
from ING Bank N.V. As at 31 January 2024, the Company had total borrowings of
¥16.1 billion (£86.5 million) at an average blended interest rate of 1.7%.
The Board agreed to increase the level of borrowing during the year and is
committed to the strategic use of borrowing at attractive rates to invest in
exciting opportunities, enhancing shareholder returns over the long term.
During the year the yen weakened against sterling by 14.0%. The Company
undertook no currency hedging during the year and has no plans to do so.
Revenue return and ongoing charges
Revenue return per share was 0.94p compared to 1.11p the prior year. Having
been in deficit for a number of years, the Company's revenue reserve has moved
to a surplus, principally due to increased dividend payments from the
portfolio's underlying holdings and a drop in the NAV of the Company resulting
in reduced investment management fees. The Board is recommending a final
dividend of 0.80p per share, being broadly the minimum required to maintain
investment trust status. The proposed final dividend will be put before
shareholders as part of the Company's AGM business in May. I should add that,
as the Company's focus is on capital growth, shareholders should not rely on
their investment in the Company to provide a regular and stable source of
income.
The Company's ongoing charges(†) were 0.72% compared to 0.74% last year, due
largely to the decline in the Company's expenses from £3.8 million to £3.5
million. A reconciliation of this can be found at the end of this
announcement.
Share issuance, buybacks and treasury
As part of this year's AGM business, approval is again being sought to renew
the Company's share issuance, buyback and treasury share authorities. Share
issuance, either of new shares or from treasury, on a non pre-emptive basis,
would only be undertaken at a premium to the Company's NAV per share and
therefore be NAV accretive for existing shareholders. The Board is of the view
that being able to increase the size of the Company, when conditions permit,
helps to improve liquidity, reduces costs per share and potentially increases
the appeal of the Company to a wider range of shareholders. The buyback
facility is being sought to enable the Company to keep buying back shares if
the discount to NAV is substantial in absolute terms or in relation to its
peers, should that continue to be deemed desirable. Any such activity would
enhance the NAV attributable to existing shareholders.
TCFD and Consumer Duty
As Manager to the Company, Baillie Gifford is now required to produce a
product-level TCFD (Task Force on Climate-Related Financial Disclosures)
report outlining the portfolio's climate-related risks and opportunities. The
report, which is based on backward looking historic data, is to be produced
annually. The report on our Company can be found at shinnippon.co.uk.
A further new regulatory requirement introduced by the FCA is that of
'Consumer Duty'. The Duty raises the standard of care that FCA regulated
firms, such as Baillie Gifford, are expected to provide to retail consumers
and includes a number of obligations that need to be met. One of these
obligations is to undertake an Assessment of Value on their products,
including investment trusts. This assessment is similar, though not identical,
to the annual evaluation of the Managers conducted by the Board of performance
and quality of service, costs and shareholder interest. This year's assessment
has concluded that the Company is expected to provide value for a reasonably
foreseeable period, meaning that distributors, such as trading platforms, will
be able to undertake their assessments and continue to make the Company's
shares available to current and potential shareholders.
Annual General Meeting
This year's AGM will take place in London rather than in Edinburgh. The
Company is trialling this approach following a decline in the number of
shareholders attending the Company's AGM in Edinburgh. The AGM is an important
opportunity for engagement and enables shareholders to meet and question
in-person those managing their assets as well as us the Directors, charged
with acting in your best interests. The AGM will take place on Thursday 23 May
2024 at The Cavendish London, 81 Jermyn Street, St James's, London SW1Y 6JF,
commencing at 11.00 and I look forward to seeing as many of you there as
possible.
In recent years, a UK governance service provider has decided to recommend to
the Company's shareholders that they oppose AGM resolutions relating to
receiving the Company's Annual Report. The reason given is that, because
Baillie Gifford & Co Ltd undertakes the Company's administration and
company secretarial duties whilst also being the Manager, the interests of
shareholders are considered to be in conflict with Baillie Gifford as Manager
due to the impact of management fees. My fellow Directors and I strongly
refute this claim. There is no evidence of this compromising the standards of
governance or reporting the Company receives, nor of it creating conflicts
which compromise the efficacy or independence of your Board. What is more, the
Company Secretary has a fiduciary duty to the Company to act in good faith in
the interests of the Company and to avoid conflicts of interest. Each year the
Board reviews and evaluates the administration and company secretarial
services provided by Baillie Gifford & Co Ltd to the Company. This year,
as in previous years, the Board has been pleased with the service provided and
sees no benefit in engaging another party to undertake these services.
In addition, the same provider recommends voting against the resolution to
authorise share repurchases, because the Company has not made a separate
public statement addressing a number of points (which are largely already
disclosed in the Company's Annual Report) or has not quantified or attributed
their impact on the discount of the Company's shares versus the NAV per share.
The suggestion is that the supply and demand for investment trust shares is
materially impacted by these points and that they can somehow be quantified
and failing to do so means the buyback authority should be opposed.
Both these recommendations are an outlier among such service providers and are
not unique to this Company. They appear to be that particular provider's view
on best practice, despite being out of line with Financial Reporting Council
guidelines as well as with the AIC Code of Corporate Governance.
Outlook
The past couple of years have been very challenging for high growth investing
and some of the headwinds (heightened macroeconomic and geopolitical concerns)
over this period persist. However, there are some encouraging signs. Inflation
in the US is showing signs of cooling which has led to expectations of an end
to the current cycle of interest rate increases. Japanese corporate earnings
and profits remain resilient, with several companies guiding higher. Contrary
to popular belief, the weak yen has accounted for surprisingly little of this
profit growth; rather it has been due to a combination of price hikes,
stringent cost control and aggressive marketing.
Your portfolio manager is seeing strong results being reported by holdings
across sectors and valuations are attractive. Nearly 60% of the portfolio now
trades on a price-to-sales ratio of 2x or less, which is generally considered
as a no or low growth multiple. The Managers' report below goes into further
detail on the portfolio and the outlook for Japanese smaller companies.
The Board and Managers are confident that the current portfolio can generate
superior growth relative to the comparative index. Considering the current low
valuation and a mid teens discount, we think the Company should be top of mind
for investors looking for Japanese equity exposure.
Jamie Skinner
22 March 2024
Past performance is not a guide to future performance.
* After deducting borrowings at fair value. For a definition of terms see
Glossary of terms and Alternative Performance Measures at the end of this
announcement.
† Alternative Performance Measure - see Glossary of terms and Alternative
Performance Measures at the end of this announcement.
Source: LSEG/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
Managers' report
It is extremely disappointing to report another year of weak portfolio
performance. For shareholders, of which I am one, this will undoubtedly be
disappointing, frustrating and possibly puzzling, especially when the Japanese
large cap-oriented indices, TOPIX and Nikkei 225, are near their all-time
highs recorded at the peak of Japan's asset bubble of the late 1980s. There
are specific factors, which we discuss below, for this performance gap between
large and small caps.
The strong performance of the Japanese market over the past year has been
driven largely by so-called value stocks. These are mostly large cap stocks
from traditional resource intensive sectors with cash rich balance sheets and
large cross-shareholdings. The Tokyo Stock Exchange has issued directives,
including the threat of delisting, aimed at forcing such companies to improve
their financial performance. This has led many companies, especially those
trading below book value, to increase their dividend significantly, conduct
large buybacks and sell down their cross-shareholdings. Such companies have
attracted considerable investor interest and feature prominently among the
best performing stocks. This has hurt our relative performance as we do not
invest in such companies given our philosophy of investing in high growth
small caps.
Despite moderation in inflation, especially in the US, the major central banks
across the developed world are yet to cut interest rates. There is a
possibility that interest rates may remain higher for longer and some market
participants seem to have taken this view. The inevitable consequence of this
has been continued selling of high growth stocks, including those in Japan.
This is due to the perception that they all require access to third-party
funding at increased rates of interest, slowing their progress to
profitability. In Japan, the Central Bank's favoured measure of inflation
(which excludes fresh food and fuel) remains above its target level. This has
stoked speculation of a potential rate rise in Japan after years of negative
interest rates and has led to considerable buying of banks and other interest
rate sensitive stocks.
For the first time in decades, we are witnessing significant levels of
corporate action in Japan. Activist investors and private equity groups, both
domestic and from overseas, are taking large stakes in underperforming
Japanese companies and agitating for change. This, along with the pressure
being applied on such companies by the Tokyo Stock Exchange, is resulting in a
major change in corporate behaviour. This includes, but is not limited to,
changes in dividend policy, share buybacks and the sale of unproductive or
loss-making assets. While this is very positive for the overall health of
corporate Japan, this unfortunately has also resulted in a significant flight
of shareholder capital from young, disruptive and fast-growing companies into
traditional, old economy businesses. Data from the Tokyo Stock Exchange shows
that Japan's domestic individual cash investors, traditionally among the
largest buyers of small caps, have been net sellers over the past year.
Given these developments, it is unsurprising that Japanese small caps as an
asset class remain completely out of favour, in particular the pool of growth
names in which we invest. However, it is precisely for these reasons that we
remain cautiously optimistic about the future. At a fundamental level, the
majority of the Company's holdings are continuing to deliver strong sales and
profit growth. Some of our portfolio companies like business-to-business
online food ordering system provider Infomart, housing renovation specialist
Katitas, and semiconductor valves manufacturer Kitz have also been raising
prices which should support structurally higher margins in the long run.
The persistent share price weakness of most holdings across the portfolio,
together with their strong operational performance, has meant that the
portfolio as a whole has been de-rated significantly. On an EV (enterprise
value)/EBIT (earnings before interest and taxes) basis, the portfolio
currently trades at 13.3 times versus 12.5 times for our comparative index.
However, for the portfolio as a whole, the one year forward sales growth rate
is estimated to be 9.3% compared to 2.3%. This means we have a portfolio that,
relative to the comparative index, is valued at a small premium but should
deliver much faster sales growth. We believe this to be a very encouraging
starting point for future portfolio outperformance.
Performance
For the year ending 31 January 2024, the Company's net asset value ('NAV')
decreased by 14.9% compared to an increase of 6.3% in the MSCI Japan Small Cap
Index (all figures total return and in sterling terms, NAV with borrowings at
fair value). Performance has remained weak since the decline in impact of
Covid-19 as large cap value stocks have been very much in favour compared to
high growth small cap stocks. Consequently, the Company's NAV now lags the
comparative index over three and five years, falling 36.2% and 6.8% versus
gains of 7.6% and 24.1% respectively for the comparative index over these
periods.
Over the past year, there was wide sectoral dispersion among the portfolio's
top performing stocks. The top contributor to relative performance was
Megachips, the largest supplier of custom-made chips for Nintendo's gaming
consoles. The company has benefited from the success of Nintendo's Switch
console and is using the profits generated from this business to expand into
new areas where it is already making strong progress. Recent holding SWCC, was
another strong performer. It makes electrical wires and cables for power
companies and was first purchased for the portfolio in May 2023. Since then,
the share price has risen by nearly 80%. It is run by its first ever female
president in its nearly 90-year history. Under her leadership, it is
transforming itself from a manufacturer of commodity products to a high
value-added component supplier. It has expanded its opportunity set by
capturing demand in renewables and electric vehicles. Margins have been on an
improving trend, and it appears that there is considerable upside remaining in
the shares. Online shoe retailer Jade Group (previously named Locondo) was
another strong performer. It is forecast to grow profits at nearly 80% in the
current fiscal year and yet trades at very low multiple of profits. It has
secured a leading market share in Japan and is continuing to expand rapidly.
Management has also been buying back shares regularly which is quite unusual
for what is an immature small cap company.
Longstanding holding Bengo4.com also performed well. Growth of its online
legal business has accelerated following the introduction of a range of
artificial intelligence enabled services which have been well received by the
legal community. Its digital contracts business, CloudSign, is also making
rapid progress and has already achieved a dominant share of the public sector
market. Elsewhere, enterprise software provider oRo generated stronger than
expected sales and profit growth. Its cloud-based project management and cost
accounting software attracted increased interest among small and medium
enterprises. Its good operational performance was rewarded by the market,
resulting in a strong share price. Japan's largest drugstore chain,
MatsukiyoCocokara, was also among the portfolio's top performers. It is
benefiting from a revival in inbound tourism and the integration with Cocokara
Fine, a smaller peer acquired three years ago, continues to progress well,
resulting in significant synergies.
Most of the portfolio's poor performers over the past year were companies with
meaningful exposure to China. They suffered from a sharp fall in demand as a
weak Chinese economy forced corporate and individual consumers to rein in
spending. Premium motorcycle helmet manufacturer Shoei was among the largest
negative contributors to performance. Along with weak consumer demand, it is
also facing regulatory change in China which has forced it to modify the
specification of its helmets to comply with the new rules. This has resulted
in additional costs which have squeezed its profit margins in the short term.
Sensor manufacturer Optex is also suffering from weak demand in China. Factory
automation is its key end market, and the Chinese factory automation sector
continues to remain sluggish following a period of inventory correction. It
was a similar story for automatic lathe manufacturer Tsugami which experienced
a sharp fall in orders from its Chinese customers who are taking a cautious
stance towards forward-looking investments.
Second-hand home renovation specialist Katitas was another holding that
performed poorly. It was embroiled in a tax dispute with a regional tax agency
that resulted in the company taking a one-off hit to profits as it was forced
to pay a fine. This incident was taken negatively by the market. We believe
this was an isolated incident. Fundamentally, Katitas remains a strong
business, with a solid competitive edge and very attractive growth prospects.
Litalico, which provides education and welfare for disabled adults and
children, also performed poorly. Its shares have halved over the past two
years despite sales growing at over 20% per annum and profits at over 30% per
annum over this period. Management is investing aggressively in rolling out
learning centres nationwide and this has held back further margin expansion in
the short term, and which was taken by the market as a disappointment. In
contrast, we see this as positioning the company for future growth.
As alluded to earlier, there has been a significant uptick in corporate
activity in Japan, driven by activist investors and private equity groups.
Although this is centred mostly around old economy large cap companies, we are
seeing some of this activity spill over to small caps. Within the Company's
portfolio we have had two stocks, outdoor camping equipment manufacturer Snow
Peak and staffing company Outsourcing, that have both announced a management
buy-out supported by Bain, one of the largest private equity groups globally.
This has been done at an average premium of around 50%. Another portfolio
holding, Wealthnavi, announced a capital and business alliance with MUFG Bank,
part of the MUFG Group which is one of the world's largest financial
conglomerates by assets. Wealthnavi is Japan's largest robo-advisory firm for
wealth management and as part of this deal, MUFG is taking a 16% stake in
Wealthnavi. By leveraging MUFG's considerable resources and vast customer
base, we believe Wealthnavi can potentially transform its growth opportunity.
Portfolio
The Company's active share remains high at 95.4%, implying only a 4.6% overlap
with the comparative index. This is consistent with our investment approach of
seeking out and investing in under researched, dynamic and high growth smaller
businesses in Japan, and being agnostic of the index constituents and their
weights. Portfolio turnover for the year was 12.1% which is in line with our
investment horizon of five to ten years. Gearing is 18.1% which is consistent
with our philosophy of maintaining structural gearing which is based on not
taking a view on the market but focusing solely on the attractions of
individual companies to enhance long-term capital growth.
Over the course of the year, we purchased five new holdings. As noted earlier,
the market dynamics around high growth small cap stocks in Japan have changed.
Our approach towards idea generation has therefore adapted too, but without
compromising on our high growth investment philosophy and style. As avowed
growth investors, we do not chase value stocks or stocks with poor long-term
growth prospects just because they are currently in vogue. Instead, we try
hard to identify stocks with different drivers of growth, including in sectors
to which we have traditionally not had much exposure.
SWCC is a classic example of this. This is a company that operates in a
terribly unattractive sector but one where management has successfully
reoriented the business to growth areas. Even within its core market of
supplying cables and wires to electric utilities, SWCC has developed new high
value added and high margin products that make its clients' operations more
efficient. This has resulted in steady margin improvement. Management has also
managed to pivot the business to newer growth areas like renewables and
electric vehicles. Another new purchase was Vector, Japan's largest public
relations agency. Vector is using its dominant position in public relations to
disrupt the online and offline advertising market in Japan. This is another
example of a growth stock from a sector not normally associated with producing
high growth businesses.
We also took holdings in Oisix and Appier Group, more typical high growth
companies that we have a bias towards. Oisix is Japan's leading online meal
kit provider that is continuing to grow its sales and profits despite the
overall market being sluggish following a Covid-19 induced boom. It is
achieving this by expanding its product range, building a sophisticated
storage and delivery system and offering compelling pricing for its customers.
Appier is an artificial intelligence software company founded by a Taiwanese
couple but headquartered in Tokyo. It has developed a suite of software tools
that allow its clients to track and analyse consumer behaviour and improve
consumer acquisition and retention. Its software is proving to be extremely
popular, and it already has a growing business outside of Japan, resulting in
ongoing rapid growth in sales and profits.
As part of our process, we closely monitor the investment case and performance
for every single stock held in the portfolio. Where there is a divergence, we
have taken decisive action in either reducing our position or selling the
stock outright. The latter has usually been the case where we lose conviction
in the investment thesis. Overall, we sold seven stocks over the Company's
fiscal year.
Baby bottle manufacturer Pigeon, a long-term portfolio holding, was one such
stock. It had a large and highly profitable business in China but has been
struggling of late in this market due to intensifying competition. Having
given management time to respond to this challenge, we were disappointed by
its apparent lack of ambition and therefore lost conviction in its ability to
respond to competition. Tsubaki Nakashima was another stock that was sold. It
makes steel and ceramic balls that are used in ball bearings. It is one of
only three companies globally that make this product. It has struggled to
recover post Covid-19 and demand has stayed muted for longer than we had
anticipated. It also had a weak balance sheet with a lot of debt. Cognisant of
the current macro environment, we took the view that the financial burden
would prove too much for the company and there was a material risk of a large
equity issuance to shore up the balance sheet and massively dilute
shareholders in the process. We also sold artificial intelligence consultant
Brainpad where we were left disappointed with the inability of management to
scale the business and grow more aggressively, despite a very favourable
operating environment.
Outlook
We acknowledge the frustration that shareholders have had to endure as a
result of the Company's underperformance for the third year running. While it
may seem like an uphill task to turn performance around given the headwinds
discussed earlier in this report, it might be worth remembering that we have
been here before. Small caps can be extremely volatile at the best of times
and in the current environment they remain very much out of favour. However,
we believe that the stocks that are driving the current market rally in Japan
have a time-bound investment appeal. As their attraction in terms of improving
shareholder returns plays out, there is little else to get excited about in
terms of their fundamentals. It is at this point, we think, that investor
interest will refocus on the prospects for dynamic small cap growth companies
in Japan.
Already, based on recent quarterly results, we have observed tentative signs
of such a move. Portfolio holdings that have reported strong results have seen
a sharp and sustained upward move in their share price. As the focus on
fundamentals takes a firm hold, we should start seeing a strong recovery in
the performance of the portfolio. In the meantime, we intend to remain focused
on factors that are within our control. This means staying patient,
disciplined and staying true to the Company's core ethos of focusing on,
identifying and investing in dynamic, entrepreneurial high growth smaller
businesses in Japan.
Baillie Gifford & Co
22 March 2024
Source: LSEG/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
For a definition of terms see Glossary of terms and Alternative Performance
Measures at the end of this announcement.
Past performance is not a guide to future performance.
Baillie Gifford - valuing private companies
We hold our private company investments at an estimation of 'fair value', i.e.
the price that would be paid in an open-market transaction. Valuations are
adjusted both during regular valuation cycles and on an ad hoc basis in
response to 'trigger events'. Our valuation process ensures that private
companies are valued in both a fair and timely manner.
The valuation process is overseen by a valuations group at Baillie Gifford,
which takes advice from an independent third party (S&P Global). The
valuations group is independent from the investment team, as well as Baillie
Gifford's Private Companies Specialist team, with all voting members being
from different operational areas of the firm, and the investment managers only
receive final valuation notifications once they have been applied.
We revalue the private holdings on a three-month rolling cycle, with one-third
of the holdings reassessed each month. During stable market conditions, and
assuming all else is equal, each investment would be valued four times in a
twelve month period. For Shin Nippon, and our other investment trusts, the
prices are also reviewed twice per year by the respective boards and are
subject to the scrutiny of external auditors in the annual audit process.
Beyond the regular cycle, the valuations team also monitors the portfolio for
certain 'trigger events'. These may include changes in fundamentals, a
takeover approach, an intention to carry out an Initial Public Offering
('IPO'), company news which is identified by the valuation team or by the
investment team, or meaningful changes to the valuation of comparable public
companies. Any ad hoc change to the fair valuation of any holding is
implemented swiftly and reflected in the next published net asset value. There
is no delay.
The valuations team also monitors relevant market indices on a weekly basis
and updates valuations in a manner consistent with our external valuer's
(S&P Global) most recent valuation report where appropriate.
Continued market volatility has meant that valuations continue to be reviewed
much more frequently, in some instances resulting in valuation movements. The
data below quantifies the revaluations carried out during the year to 31
January 2024, however does not reflect the ongoing monitoring of the private
company investment portfolio.
Shin Nippon*
Instruments (lines of stock reviewed) 4
Revaluations performed 20
Percentage of portfolio revalued at least 4 times 100%
Percentage of portfolio revalued 5+ times 50%
In the year to 31 January 2024, we have seen a number of the investments in
the portfolio raise additional capital at flat and increased valuations, with
private investments now seeking public market listings in the near term. The
average movement in company valuations and share prices for those are shown
below.
Average Average
movement
movement
in company
in share price
valuation
Shin Nippon* 25.6% 15.2%
*Data reflecting period 1 February 2023 - 31 January 2024 to align with the
Company's reporting period end.
Review of investments
A review of the Company's ten largest investments together with a list of the
new acquisitions in the year.
Top ten
GMO Financial Gate
% of total assets* 2.4%
GMO Financial Gate is a leading offline digital payments provider. Offline
digital payments involve a credit or debit card and take place at physical
stores or internet of things enabled terminals like vending and ticketing
machines. This is a large market in Japan using mainly outdated technology.
GMO is attempting to modernise this sector with its new technology and is
growing rapidly as it gains increasing traction with merchants.
Megachips
% of total assets* 2.4%
Megachips is a fabless semiconductor chip design company. The company is a
significant supplier of chips for Nintendo's gaming consoles and has been
enjoying strong growth thanks to the ongoing success of Nintendo's latest
console, Switch. It also has a fast growing US-listed subsidiary called SiTime
that is emerging as a global leader in advanced and energy efficient timing
devices for electronic devices.
Litalico
% of total assets* 2.4%
Litalico provides training and employment assistance for disabled people, and
educational and training services for children with developmental
difficulties. It targets the roughly five million adults and children in Japan
who suffer from cognitive and mental disabilities. The Japanese government has
put in place policies to improve access and employment opportunities for
disabled people. This should benefit Litalico which is the largest national
service provider.
Cosmos Pharmaceuticals
% of total assets* 2.2%
Cosmos is a leading Japanese discount drugstore with a compelling
everyday-low-price model that is hard to replicate. The company is growing
rapidly through aggressive store rollouts and is gaining market share on a
consistent basis from slow-moving traditional incumbents. The founder owns and
manages the company, creating strong alignment between management and minority
shareholders.
Toyo Tanso
% of total assets* 2.2%
Toyo Tanso makes specialty carbon products used mainly in renewable energy
related systems and semiconductor manufacturing. Both these end markets are
growing strongly. The company has a leading global market share in its
products and is in pole position to benefit from the growth in its end
markets. This is a family run business where the founding family has a
significant stake, thereby ensuring strong alignment with minority
shareholders.
Lifenet Insurance
% of total assets* 2.2%
Lifenet is a fast-growing online life insurer. It offers a limited range of
easy to understand life insurance products sold predominantly through its own
website. Its direct- to-consumer model enables it to price competitively,
resulting in a potentially enduring competitive edge. Incumbents are large,
slow moving and traditional insurers which lack technological prowess and
employ a labour intensive sales model. This is allowing Lifenet to gain market
share on a consistent basis.
Sho-Bond
% of total assets* 2.2%
Sho-Bond specialises in reinforcing concrete structures like bridges,
highways, and tunnels with its proprietary resin. The demand background has
been improving due to the need to repair and replace Japan's ageing
infrastructure. The competitive environment has become more favourable for
Sho-Bond as it operates a fabless model whereas competitors are more labour
intensive and are suffering from cost escalations due to labour shortages in
Japan.
Horiba
% of total assets* 2.2%
Horiba makes analysers and measuring devices for automobiles, semiconductors
and in healthcare. It has high global market shares in its products and a good
long-term financial record. Tightening emissions standards, the rapid growth
of electric vehicles and strong demand for semiconductors across a range of
applications are all resulting in strong and sustained demand for Horiba's
products.
GA Technologies
% of total assets* 2.1%
GA Technologies provides online B2B ('business-to-business') services for the
real estate sector. It has developed a suite of artificial intelligence based
software applications that allows clients to manage numerous tasks like remote
viewing, rental property management, end-to-end processing of mortgages and
automated generation of building floor plans, to name a few. It is run by its
ambitious and young founder who owns a large stake, thereby ensuring strong
alignment with minority shareholders.
Anest Iwata
% of total assets* 2.0%
Anest Iwata makes oil-free air compressors, vacuum pump equipment and paint
application systems. Its compressors and paint application systems are
environmentally friendly, which is a key feature. Tightening environmental
regulations are driving demand for its products and this should result in a
steady expansion of sales and profits longer term.
New buys
Appier Group
% of total assets* 1.5%
Founded in 2012, Appier products use AI to help clients acquire data on and
understand customer behaviour and automate a range of related business
processes. There are significant opportunities for it to add new clients and
cross-sell its products to existing clients. A major competitive advantage is
that the company's clients achieve fantastic returns from Appier's products,
which in turn improve over time. Furthermore, pricing is closely aligned with
clients' success. After multiple engagements with the company, we have been
impressed by the ambition of the founders and the management team, the
effectiveness of the products and the company's operational performance.
Cellsource
% of total assets* 0.4%
Cellsource provides contract processing services to medical institutions in
Japan. It processes blood samples received from patients and extracts specific
proteins which it then converts into powdered form using its patented
technology. This is then injected back into the patient to stimulate growth.
Currently, Cellsource is focused on treating patients with osteoarthritis, but
its products have potential applications across a range of other chronic
diseases, meaning that the addressable market is potentially very large. It is
managed by its two co-founders who between them have significant stake in the
company thereby ensuring strong alignment with minority shareholders.
Oisix
% of total assets* 0.9%
Oisix provides high-quality meal kits and organic food through online
ordering. Both areas have been growing from a low base in Japan and appear to
have a long growth runway ahead. Oisix has strong relationships with organic
farmers and has been investing in distribution efficiency, which will depress
short-term profits but deepen its long-term competitive edge. The business is
run by its founder who owns a sizeable part of the business thereby ensuring
strong alignment with minority shareholders.
SWCC
% of total assets* 1.2%
SWCC Showa is an electric wire/cable manufacturer. Its traditional business
relates to the manufacture and supply of low and high voltage cables for
private and public electric power utilities. It is in the process of moving
away from its low growth and low margin legacy business, of supplying cables,
to becoming a component supplier. It has developed a set of unique,
lightweight and high margin connector components, branded as SICONEX, that are
driving strong profit growth. The market continues to rate the company as an
undifferentiated supplier of commoditised products, ignoring the radical
changes occurring within the business, and as such the shares remain very
lowly rated.
Vector
% of total assets* 1.1%
Vector is one of Japan's largest PR companies. It is run by a dynamic and
entrepreneurial founder who retains a large stake in the company. The PR
industry in Japan is relatively small but has been growing at a steady rate
over the past decade. Vector is disrupting Japan's traditional advertising
market by using its expertise in PR to offer a bundled package of services.
This will allow clients to deal with just one counterparty, instead of many,
for all their PR and advertising needs.
*For a definition of terms see Glossary of terms and Alternative Performance
Measures at the end of this announcement.
Baillie Gifford's stewardship principles
Baillie Gifford's overarching ethos is that we are 'Actual' investors. That
means we seek to invest for the long term. Our role as an engaged owner is
core to our mission to be effective stewards for our clients. As an active
manager, we invest in companies at different stages of their evolution across
many industries and geographies, and focus on their unique circumstances and
opportunities. Our approach favours a small number of simple principles rather
than overly prescriptive policies. This helps shape our interactions with
holdings and ensures our investment teams have the freedom and retain the
responsibility to act in clients' best interests.
Long-term value creation
We believe that companies that are run for the long term are more likely to be
better investments over our clients' time horizons. We encourage our holdings
to be ambitious, focusing on long-term value creation and capital deployment
for growth. We know events will not always run according to plan. In these
instances we expect management to act deliberately and to provide appropriate
transparency. We think helping management to resist short-term demands from
shareholders often protects returns. We regard it as our responsibility to
encourage holdings away from destructive financial engineering towards
activities that create genuine value over the long run. Our value will often
be in supporting management when others don't.
Alignment in vision and practice
Alignment is at the heart of our stewardship approach. We seek the fair and
equitable treatment of all shareholders alongside the interests of management.
While assessing alignment with management often comes down to intangible
factors and an understanding built over time, we look for clear evidence of
alignment in everything from capital allocation decisions in moments of stress
to the details of executive remuneration plans and committed share ownership.
We expect companies to deepen alignment with us, rather than weaken it, where
the opportunity presents itself.
Governance fit for purpose
Corporate governance is a combination of structures and behaviours; a careful
balance between systems, processes and people. Good governance is the
essential foundation for long-term company success. We firmly believe that
there is no single governance model that delivers the best long-term outcomes.
We therefore strive to push back against one-dimensional global governance
principles in favour of a deep understanding of each company we invest in. We
look, very simply, for structures, people and processes which we think can
maximise the likelihood of long-term success. We expect to trust the boards
and management teams of the companies we select, but demand accountability if
that trust is broken.
Sustainable business practices
A company's ability to grow and generate value for our clients relies on a
network of interdependencies between the company and the economy, society and
environment in which it operates. We expect holdings to consider how their
actions impact and rely on these relationships. We believe long-term success
depends on maintaining a social licence to operate and look for holdings to
work within the spirit and not just the letter of the laws and regulations
that govern them. Material factors should be addressed at the board level as
appropriate.
Environmental, social and governance engagement
By engaging with companies, we seek to build constructive relationships with
them, to better inform our investment activities and, where necessary, effect
change within our holdings, ultimately with the goal of achieving better
returns for our shareholders. The issues we consider in our assessment of ESG
factors are varied but may include governance arrangements, human rights,
labour rights, diversity and inclusion,
climate change, nature and biodiversity, respect for legal and regulatory
guidelines and consideration of stakeholder perspectives. The examples below
demonstrate our approach to proxy voting and stewardship through constructive,
ongoing engagement.
M3 - navigating trade-offs in digitalising healthcare
% of total assets* 0.3%
M3 is a Japanese company involved in multiple areas of digitalising
healthcare. The company's core business is a medical platform for physicians,
providing them with all the information they need to make the best decisions
for their patients.
Objective: During a meeting with the CEO, Itaru Tanimura, we discussed how M3
manages the trade-offs between the needs of pharmaceutical companies,
physicians, and patients.
Discussion: During the meeting, Tanimura san was forthright about the need for
patients to come first in order for M3's business model to be sustainable. He
emphasised that the company must navigate the practicalities of working with
pharmaceutical companies and only pursue business activities where the balance
of return to risk is attractive.
Tanimura san provided examples of where M3 facilitated the success of superior
treatments. However, he emphasised that the company's core business, a medical
platform for physicians, must be a neutral marketplace. He acknowledged that
successfully managing these evolving issues will be critical to M3's future
success.
Outcome: The meeting with Itaru Tanimura provided valuable insight into the
thinking of one of Japan's most exciting entrepreneurs. Tanimura san
appreciated the discussion and suggested establishing some form of internal
stakeholder review board to ensure these ideas are robustly discussed. This
would help M3 navigate the trade-offs between the needs of pharmaceutical
companies, physicians and patients, and ensure that the company's core
business remains a neutral marketplace that provides doctors with all the
information they need to make the best decisions for their patients.
Successfully managing these evolving issues will be critical to M3's future
success and its clients' returns.
Nihon M&A Center - lessons learned and building culture
% of total assets* 0.4%
Nihon M&A Center is Japan's leading M&A advisory firm, with a focus on
smaller companies.
Objective: We met with Suguru Miyake, the President of Nihon M&A, to
discuss the company's response to the accounting and marketing challenges it
faced in late 2021. The focus was on understanding the steps taken, in the
time that had elapsed since the incident, to remediation following the
premature recording of deals in order to meet revenue targets.
Discussion: In our discussion Miyake san emphasised his direct involvement
with measures to improve compliance and transparency, and to revitalise the
company's culture. This effort led to changes in the consultant team, with
some members leaving, either by encouragement or voluntarily. This paved the
way for a renewed growth trajectory in consultant numbers, which saw an over 8
year-on-year increase.
The company's morale has seemingly since improved, as evidenced by a recent
staff survey. Employees now see more opportunities, thanks to focused talent
development initiatives. Miyake san also discussed maintaining a balance
between entrepreneurship and compliance, stating they can coexist without
conflict, aligning with the employees' aspirations for growth.
The company had also taken steps to improve 'group unity', an area identified
as needing enhancement. This included dividing all employees into small groups
for teaching sessions and face-to-face meetings with the President to improve
company culture. These initiatives, coupled with feedback from 50 meetings,
have reportedly improved morale. Despite a second wave of departures mid-year,
following bonus pay-outs, the remaining employees are described as more
cohesive, with an increase in productivity and a recovery in deal activity.
Outcome: Our meeting with Miyake san provided valuable insights into Nihon
M&A's response to its recent challenges and that he had made a concerted
effort to identify and rectify root causes. We learned more about the
company's focused efforts on remediation, culture enhancement and employee
engagement, and how they have laid a foundation for recovery and future
growth.
Descente - developing a resilient portfolio of brands
% of total assets* 1.9%
Descente manufactures and sells sportswear. It has a portfolio of 14 brands
across a range of price points, including the likes of ski apparel brand
Descente, Le Coq Sportif, Umbro, and Srixon.
Objective: During a meeting with corporate planning officer, Tomoko Kitazawa,
we discussed how Descente is considering the impacts of climate change on its
portfolio of brands.
Discussion: Skiing may become increasingly difficult in some places like the
Alps and there may also be increasing challenges to growing market share in a
sport that will likely decline should global temperatures rise. Management is
keenly aware that the long term risk is significant. Reassuringly, this is a
topic of live discussion and management is actively considering how it can
introduce new products to hedge against possible obsolescence.
Outcome: The meeting provided us comfort in the short term that the matter is
under ongoing consideration and provided useful context to monitor how
Descente will continue to evolve its portfolio in response.
Proxy voting - 'active ownership' in action
Harmonic Drive
% of total assets* 1.0%
Meeting 2023 Annual General Meeting
Vote Abstain
Reason: We abstained on the election of the chair of the board in order to
escalate our voting approach due to the ongoing practice of granting bonuses
to non-executive directors. We have been opposing the resolution to grant
bonuses to directors since 2014 and have fed back concerns to the company. We
believe granting performance-based pay to non-executives could impact their
ability to think independently and view it as a potential conflict of
interest. The company continues to grant performance based pay to outsiders
and did not address our concerns and we therefore escalated our response.
DaikyoNishikawa
% of total assets* 0.8%
Meeting 2023 Annual General Meeting
Vote Against
Reason: We opposed the election of one internal statutory auditor due to
ongoing concerns with the low level of independence on the statutory auditor
board. In 2022 we opposed the election of an affiliated external statutory
auditor as we viewed the statutory auditor board as being only 33% independent
when we believe it should be at least 50% independent to provide effective
objective oversight of the audit process. We communicated our concerns to the
company however as these concerns were not addressed, and the statutory
auditor board remains only 33% independent, at the 2023 Annual General Meeting
we continued to oppose non-independent members of the statutory auditor board.
Again, we communicated our concerns to the company and encouraged increasing
levels of independence.
Yonex
% of total assets* 1.3%
Meeting 2023 Annual General Meeting
Vote Against
Reason: We opposed a resolution relating to retirement bonuses due to the lack
of disclosure of the director receiving the bonus and the exact amounts to be
paid. We opposed the same resolution at the 2019, 2021 and 2022 Annual General
Meetings. While the company is not required to disclose this information we do
not feel we have sufficient information to make a judgement on whether the
retirement bonus is appropriate or not.
*For a definition of terms see Glossary of terms and Alternative Performance
Measures at the end of this announcement.
List of investments as at 31 January 2024
Name Business 2024 % of Absolute(†) performance 2023
Value total % Value
£'000 assets # £'000
GMO Financial Gate Face-to-face payment terminals and processing services 13,482 2.4 8.0 10,181
Megachips Electronic components 13,289 2.4 57.5 10,209
Litalico Provides employment support and learning 13,272 2.4 (29.1) 17,296
support services for people with disabilities
Cosmos Pharmaceuticals Drugstore chain 12,231 2.2 8.3 9,900
Toyo Tanso Electronics company 12,219 2.2 6.5 14,181
Lifenet Insurance Online life insurance 12,017 2.2 (18.0) 13,364
Sho-Bond Infrastructure reconstruction 12,017 2.2 4.5 12,445
Horiba Manufacturer of measuring instruments 11,742 2.2 78.1 7,775
GA Technologies Interactive media and services 11,586 2.1 5.0 11,594
Anest Iwata Manufactures compressors and painting machines 10,924 2.0 33.9 7,852
Wealthnavi Digital robo wealth-management 10,763 2.0 5.6 7,074
Asahi Intecc Specialist medical equipment 10,658 1.9 8.2 8,774
JEOL Manufacturer of scientific equipment 10,589 1.9 57.6 6,878
Nifco Value-added plastic car parts 10,387 1.9 0.6 10,574
Descente Manufactures athletic clothing 10,284 1.9 (16.3) 15,573
Shoei Manufactures motor cycle helmets 9,917 1.8 (29.7) 15,876
MatsukiyoCocokara Retail company 9,887 1.8 8.5 14,731
Nakanishi Dental equipment 9,721 1.8 (22.8) 16,153
Bengo4.com Online legal consultation 9,371 1.7 29.2 6,488
Optex Infrared detection devices 9,190 1.7 (23.8) 13,314
Top 20 223,546 40.7
OSG Manufactures machine tool equipment 9,168 1.7 (11.6) 11,135
Technopro IT staffing 9,094 1.7 (25.0) 15,571
Raksul Internet based services 8,843 1.6 (28.3) 12,867
SIIX Out-sources overseas production 8,340 1.5 (0.9) 6,579
Noritsu Koki Holding company with interests in biotech 8,183 1.5 25.0 8,886
and agricultural products
Appier Group Software as a service company providing AI platforms 8,128 1.5 22.8* -
Katitas Real estate services 8,072 1.5 (48.6) 12,455
eGuarantee Guarantees trade receivables 8,053 1.5 (30.2) 12,543
Enechange IT service management company 7,767 1.4 0.0 6,922
Infomart Internet platform for restaurant supplies 7,714 1.4 (16.8) 7,751
Kumiai Chemical Specialised agrochemicals manufacturer 7,638 1.4 (14.2) 8,200
Cybozu Develops and markets internet and intranet application software for businesses 7,470 1.3 (25.9) 10,534
I-ne Hair care range 7,290 1.3 (33.2) 3,111
Kitz Industrial valve manufacturer 7,127 1.3 31.5 5,352
Outsourcing Employment placement services 7,116 1.3 52.9 7,076
Nikkiso Industrial pumps and medical equipment 6,958 1.3 (5.3) 5,017
Avex Group Entertainment management and distribution 6,916 1.3 (28.2) 8,960
Yonex Sporting goods 6,913 1.3 (17.2) 9,828
SpiderPlus Construction project management platform 6,811 1.3 (8.3) 5,347
Gojo & Company Inc Class D Preferred (u) Diversified financial services 6,807 1.3 20.5 5,650
SWCC Electric wire and cable manufacturer 6,756 1.2 53.1 * -
Torex Semiconductor Semiconductor company 6,380 1.2 (42.7) 12,857
Nittoku Coil winding machine manufacturer 6,364 1.2 (38.4) 6,403
Tsugami Manufacturer of automated machine tools 6,357 1.2 (25.1) 12,250
Spiber (u) Textiles 6,172 1.1 20.3 5,131
Vector PR Company 6,073 1.1 (22.4)* -
Iriso Electronics Specialist auto connectors 5,962 1.1 (30.1) 8,500
KH Neochem Chemical manufacturer 5,800 1.1 (25.3) 7,436
Kamakura Shinsho Information processing company 5,732 1.1 (48.7) 8,937
Seria Discount retailer 5,712 1.0 (16.5) 7,120
Harmonic Drive Systems Robotic components 5,620 1.0 (28.0) 9,342
Kohoku Kogyo Manufacturer of undersea cable lead terminals 5,429 1.0 (30.7) 4,374
JEPLAN (u) Chemical PET recycling 5,372 1.0 (5.0) 5,653
Peptidream Drug discovery and development platform 5,069 0.9 (44.1) 7,829
Nippon Ceramic Electronic component manufacturer 4,852 0.9 (1.2) 4,882
Demae-Can Online meal delivery service 4,722 0.9 (14.5) 3,947
GMO Payment Gateway Online payment processing 4,674 0.9 (34.2) 7,351
oRo Develops and provides enterprise planning software 4,667 0.9 34.2 2,991
Oisix Organic food website 4,375 0.9 2.6* -
Inter Action Semiconductor equipment 4,210 0.8 (32.5) 6,813
DaikyoNishikawa Automobile part manufacturer 4,203 0.8 8.5 2,837
Weathernews Weather information services 4,155 0.8 (33.4) 6,935
WDB Holdings Human resource services 4,120 0.8 (4.3) 4,465
Nabtesco Robotic components 4,086 0.8 (33.4) 6,449
Crowdworks Crowd sourcing services 4,054 0.7 (29.8) 5,481
Istyle Beauty product review website 3,928 0.7 (27.6) 1,516
Kitanotatsujin Online retailer 3,759 0.7 (39.5) 7,492
Jade Group Ecommerce services provider 3,633 0.7 65.3 2,401
Shima Seiki Machine industry company 3,498 0.6 (33.3) 5,402
Snow Peak Designs & manufactures outdoor lifestyle goods 3,470 0.6 (63.7) 14,943
MonotaRO Online business supplies 3,304 0.6 (37.9) 6,552
Nihon M&A Center M&A advisory services 2,307 0.4 (40.3) 7,907
Cellsource Company engaged in regenerative medicine 2,026 0.4 (31.4)* -
Akatsuki Mobile games developer 2,004 0.4 2.2 2,833
M3 Online medical services 1,501 0.3 (42.1) 3,454
Moneytree K.K. AI based fintech platform 1,401 0.3 (39.4) 2,312
Class B Preferred (u)
Total investments 539,701 99.2
Net liquid assets# 4,566 0.8
Total assets# 544,267 100.0
Bank loans (86,475) (15.9)
Shareholders' funds 457,792 84.1
† Absolute performance (in sterling terms) has been calculated on a total
return basis over the period 1 February 2023 to 31 January 2024.
Source: Baillie Gifford/Revolution and relevant underlying index data
providers. See disclaimer at the end of this document.
* Figure relate to part period returns where the investment has been purchased
in the period.
u ( )Private company (unlisted) investment.
# See Glossary of terms and Alternative Performance Measures at the end of
this announcement.
Past performance is not a guide to future performance.
Income statement
For the year ended 31 January
Notes 2024 Revenue £'000 2024 2024 2023 Revenue £'000 2023 2023
Capital Total Capital Total
£'000 £'000 £'000 £'000
Losses on investments - (97,913) (97,913) - (12,749) (12,749)
Currency gains 2 - 13,058 13,058 - 2,214 2,214
Income 8,870 - 8,870 9,617 - 9,617
Investment management fee 3 (2,878) - (2,878) (3,154) - (3,154)
Other administrative expenses (628) - (628) (679) - (679)
Net return before finance costs 5,364 (84,855) (79,491) 5,784 (10,535) (4,751)
and taxation
Finance costs of borrowings 4 (1,533) - (1,533) (1,332) - (1,332)
Net return before taxation 3,831 (84,855) (81,024) 4,452 (10,535) (6,083)
Tax on ordinary activities (887) - (887) (962) - (962)
Net return after taxation 2,944 (84,855) (81,911) 3,490 (10,535) (7,045)
Net return per ordinary share 6 0.94p (27.13p) (26.19p) 1.11p (3.35p) (2.24p)
Note: Dividends per share payable and paid in respect of the year 5 0.80p -
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital return columns are prepared
under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing
operations.
A Statement of Comprehensive Income is not required as all gains and losses of
the Company have been reflected in the above statement.
The accompanying notes below are an integral part of the Financial Statements.
Balance sheet
As at 31 January
Notes 2024 2024 2023 2023
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 7 539,701 625,922
Current assets
Debtors 3,521 3,047
Cash at bank 2,965 6,946
6,486 9,993
Creditors
Amounts falling due within one year 8 (88,395) (46,154)
Net current liabilities (81,909) (36,161)
Total assets less current liabilities 457,792 589,761
Creditors
Amounts falling due after more than one year 8 - (44,308)
Net assets 457,792 545,453
Capital and reserves
Share capital 6,285 6,285
Share premium account 260,270 260,270
Capital redemption reserve 21,521 21,521
Capital reserve 167,114 257,719
Revenue reserve 2,602 (342)
Shareholders' funds 457,792 545,453
Net asset value per ordinary share* 147.8p 173.6p
* See Glossary of terms and Alternative Performance Measures at the end of
this announcement.
The accompanying notes below are an integral part of the Financial Statements.
Statement of changes in equity
For the year ended 31 January 2024
Notes Share capital £'000 Share premium account £'000 Capital redemption reserve Capital Revenue reserve Shareholders'
£'000 reserve* £'000 funds
£'000 £'000
Shareholders' funds at 1 February 2023 6,285 260,270 21,521 257,719 (342) 545,453
Ordinary shares bought back into treasury 9 - - - (5,750) - (5,750)
Net return on ordinary activities after taxation 6 - - - (84,855) 2,944 (81,911)
Shareholders' funds at 31 January 2024 6,285 260,270 21,521 167,114 2,602 457,792
For the year ended 31 January 2023
Notes Share capital Share premium account £'000 Capital redemption reserve £'000 Capital Revenue reserve Shareholders' funds
£'000 reserve* £'000 £'000
£'000
Shareholders' funds at 1 February 2022 6,285 260,270 21,521 268,408 (3,832) 552,652
Ordinary shares bought back into treasury 9 - - - (154) - (154)
Net return on ordinary activities after taxation 6 - - - (10,535) 3,490 (7,045)
Shareholders' funds at 31 January 2023 6,285 260,270 21,521 257,719 (342) 545,453
* The capital reserve balance as at 31 January 2024 includes investment
holding losses of £23,847,000 (2023 - gains of £60,696,000).
The accompanying notes below are an integral part of the Financial Statements.
Cash flow statement
For the year ended 31 January
Notes 2024 2024 2023 2023
£'000
£'000
£'000
£'000
Cash flows from operating activities
Net return on ordinary activities before taxation (81,024) (6,083)
Net losses on investments 97,913 12,749
Currency gains (13,058) (2,214)
Finance costs of borrowings 1,533 1,332
Overseas withholding tax (922) (892)
Decrease/(increase) in debtors, accrued income 351 (681)
and prepaid expenses
Increase in creditors 150 27
Cash inflow from operations 4,943 4,238
Interest paid (1,462) (1,292)
Net cash inflow from operating activities 3,481 2,946
Cash flows from investing activities
Acquisitions of investments (91,610) (137,003)
Disposals of investments 78,423 108,576
Net cash outflow from investing activities (13,187) (28,427)
Ordinary shares bought back into treasury and stamp duty thereon 9 (5,750) (154)
Bank loans repaid 12,313 -
Net cash inflow/(outflow) from financing activities 6,563 (154)
Decrease in cash and cash equivalents (3,143) (25,635)
Exchange movements (838) (924)
Cash and cash equivalents at 1 February 10 6,946 33,505
Cash and cash equivalents at 31 January* 10 2,965 6,946
* Cash and cash equivalents represent cash at bank and deposits repayable on
demand.
The accompanying notes below are an integral part of the Financial Statements.
Notes to the Financial Statements
1. The Financial Statements for the year to 31 January 2024 have been
prepared in accordance with FRS 102 'The Financial Reporting Standard
applicable in the UK and Republic of Ireland' on the basis of the accounting
policies set out in the Annual Report and Financial Statements for the year
ended 31 January 2024.
2. Currency gains
2024 2023
£'000 £'000
Exchange differences on bank loans 13,896 3,138
Other exchange difference (838) (924)
13,058 2,214
3. Investment management fee
2024 2023
£'000 £'000
Investment management fee 2,878 3,154
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford
& Co, has been appointed as the Company's Alternative Investment Fund
Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has
delegated portfolio management services to Baillie Gifford & Co. Dealing
activity and transaction reporting have been further sub-delegated to Baillie
Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited.
The Investment Management Agreement sets out the matters over which the
Managers have authority in accordance with the policies and directions of, and
subject to restrictions imposed by, the Board. The Management Agreement is
terminable on not less than six months' notice. Compensation fees would only
be payable in respect of the notice period if termination were to occur
sooner. The annual management fee for the year to 31 January 2024 was 0.75% on
the first £50m of net assets, 0.65% on the next £200m of net assets and
0.55% on the remainder. The fees are calculated and paid on a quarterly basis.
4. The Company paid interest of £23,000 (2023 - £37,000) in respect of
yen deposits held by the custodian bank.
5. Ordinary dividends
We set out below the total dividends proposed in respect of the financial
year, which is the basis on which the requirements of section 1158 of the
Corporation Tax Act 2010 are considered. There is a revenue surplus at 31
January 2024 of £2,602,000 which is available for distribution by way of a
dividend payment (2023 - a revenue deficit of £342,000).
2024 2023 2024 2023
p p £'000 £'000
Amounts paid and payable in respect of the financial year:
Proposed final dividend per ordinary share (payable 30 May 2024) 0.80p - 2,478 -
If approved, the recommended final dividend on the ordinary shares will be
paid on 30 May 2024 to shareholders on the register at the close of business
on 19 April 2024. The ex-dividend date is 18 April 2024.
6. Net return per ordinary share
2024 2024 2024 2023 2023 2023
Revenue Capital Total Revenue Capital Total
Net loss on ordinary activities 0.94p (27.13p) (26.19p) 1.11p (3.35p) (2.24p)
after taxation
The returns per ordinary share set out above are based on the net revenue gain
of £2,944,000 (2023 - gain of £3,490,000) and net capital loss of
£84,855,000 (2023 - net capital loss of £10,535,000) and on 312,785,827
ordinary shares (2023 - 314,222,074), being the weighted average number of
ordinary shares in issue during the year. There are no dilutive or potentially
dilutive shares in issue.
7. Fixed assets - investments
Investments in securities are financial assets designated at fair value
through profit or loss. In accordance with Financial Reporting Standard 102,
the tables provide an analysis of these investments based on the fair value
hierarchy described below, which reflects the reliability and significance of
the information used to measure their fair value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the basis on which the fair values of
financial instruments held at fair value through the profit or loss account
are measured is described below. Fair value measurements are categorised on
the basis of the lowest level input that is significant to the fair value
measurement.
Level 1 - using unadjusted quoted prices for identical instruments in an
active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
As at 31 January 2024 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Quoted equities 519,949 - - 519,949
Unlisted securities - - 19,752 19,752
Total financial asset investments 519,949 - 19,752 539,701
As at 31 January 2023 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Quoted equities 607,176 - - 607,176
Unlisted securities - - 18,746 18,746
Total financial asset investments 607,176 - 18,746 625,922
8. The bank loans are stated after deducting the arrangement fees of
£98,000 which are amortised over the terms of the loans. Amortisation of the
arrangement fees during the year was £45,000 (2023 - £49,000).
Borrowing facilities
At 31 January 2024
ING Bank N.V. - 3 year ¥5,000 million fixed rate loan at 1.400% maturing 8
November 2024.
ING Bank N.V. - 7 year ¥2,100 million fixed rate loan at 1.693% maturing 18
December 2024.
ING Bank N.V. - 3 year ¥2,000 million revolving credit facility maturing 3
March 2026. The rollover date is 8 March 2024.
ING Bank N.V. - 3 year ¥7,000 million revolving credit facility maturing 23
November 2026. The rollover date is 27 February 2024.
At 31 January 2023
ING Bank N.V. - 3 year ¥7,000 million loan at 1.400% maturing 27 November
2023.
ING Bank N.V. - 3 year ¥5,000 million loan at 1.400% maturing 8 November
2024.
ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December
2024.
The fair value of the bank loans at 31 January 2024 was £86,445,000 (31
January 2023 - £87,725,000). See Glossary of terms and Alternative
Performance Measures at the end of this announcement.
9. At 31 January 2024 the Company had authority to buy back 43,046,457
shares. 4,395,000 shares were bought back at a cost of £5,750,000 during the
year (2023 - 100,000 at a cost of £154,000). Share buy-backs are funded from
the capital reserve.
During the year the Company issued no shares on a non pre-emptive basis (2023
- no shares)
Between 1 February and 20 March 2024 the Company did not issue any shares. The
company bought back 3,375,000 shares.
10. Analysis of change in net debt
31 January 2023 Cash flows Exchange movement Other non-cash changes 31 January
£'000 £'000 £'000 £'000 2024
£'000
Cash and cash equivalents 6,946 (3,143) (838) - 2,965
Loans due within one year (43,705) (12,313) 13,896 (44,353) (86,475)
Loans due in more than one year (44,308) - - 44,308 -
(81,067) (15,456) 13,058 (45) (83,510)
11. The Annual Report and Financial Statements will be available on the
Company's website shinnippon.co.uk(†) on or around 12 April 2024.
12. The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 January 2024 or 2023 but is derived
from those accounts. Statutory accounts for 2023 have been delivered to the
Registrar of Companies, and those for 2024 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
(†) Neither the contents of the Company's website nor the contents of any
website accessible from hyperlinks on the Company's website (or any other
website) is incorporated into, or forms part of, this announcement.
Glossary of terms and Alternative Performance Measures ('APM')
An alternative performance measure is a financial measure of historical or
future financial performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial reporting
framework. The APMs noted below are commonly used measures within the
investment trust industry and serve to improve comparability between
investment trusts.
Total assets
This is the Company's definition of Adjusted Total Assets, being the total
value of all assets held less all liabilities (other than liabilities in the
form of borrowings).
Net Asset Value
Also described as shareholders' funds, Net Asset Value ('NAV') is the value of
total assets less liabilities (including borrowings). The NAV per share is
calculated by dividing this amount by the number of ordinary shares in issue.
Net Asset Value (borrowings at book value)
Borrowings are valued at adjusted net issue proceeds. The Company's yen
denominated loans are valued at their sterling equivalent and adjusted for
their arrangement fees. The value of the borrowings on this basis is set out
in note 11 on page 107 of the Annual Report and Financial Statements.
Net Asset Value (borrowings at fair value) (APM)
This is a widely reported measure across the investment trust industry.
Borrowings are valued at an estimate of their market worth. The Company's yen
denominated loans are fair valued using methodologies consistent with
International Private Equity and Venture Capital Valuation ('IPEV')
guidelines. The value of the borrowings on this basis is set out above. A
reconciliation from NAV (with borrowings at book value) to NAV per ordinary
share (with borrowings at fair value) is provided below.
31 January 2024 31 January 2023
NAV per ordinary share (borrowings at book value) 147.8p 173.6p
Shareholders' funds (borrowings at book value) £457,792,000 £545,453,000
Add: book value of borrowings £86,475,000 £88,013,000
Less: fair value of borrowings (£86,445,000) (£87,725,000)
NAV (borrowings at fair value) £457,822,000 £545,741,000
Shares in issue at year end 309,757,485 314,152,485
NAV per ordinary share (borrowings at fair value) 147.8p 173.7p
Premium/discount (APM)
As stockmarkets and share prices vary, an investment trust's share price is
rarely the same as its NAV. When the share price is lower than the NAV per
share it is said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is
usually expressed as a percentage of the NAV per share. If the share price is
higher than the NAV per share, this situation is called a premium.
2024 2024 2023 2023
NAV (book) NAV (fair) NAV (book) NAV (fair)
Closing NAV per share 147.8p 147.8p 173.6p 173.7p
Closing share price 126.2p 126.2p 158.8p 158.8p
Discount (14.6%) (14.6%) (8.5%) (8.6%)
The average discount/premium (APM) as disclosed above is calculated by taking
an average of the daily discount/premium percentage using NAV (with borrowings
at fair value) for the year to 31 January 2024.
Ongoing charges (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a
percentage of the average NAV (with borrowings at fair value). The ongoing
charges have been calculated on the basis prescribed by the Association of
Investment Companies.
A reconciliation from the expenses detailed in the Income statement above is
provided below:
31 January 2024 31 January 2023
£'000 £'000
Investment management fee £2,878,000 £3,154,000
Other administrative expenses £628,000 £679,000
Total expenses (a) £3,506,000 £3,833,000
Average daily cum-income NAV (b) £485,043,000 £521,337,000
(with borrowings at fair value)
Ongoing charges (a) as a percentage of (b) 0.72% 0.74%
Total return (APM)
The total return is the return to shareholders after reinvesting the net
dividend on the date that the share price goes ex-dividend. The Company did
not pay a dividend in the period, therefore, the one year total returns for
the share price and NAV per share at book and fair value are the same as the
percentage movements in the share price and NAV per share at book and fair
value as detailed above.
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an
investment trust can borrow money to invest in additional investments for its
portfolio. The effect of the borrowing on the shareholders' assets is called
'gearing'. If the Company's assets grow, the shareholders' assets grow
proportionately more because the debt remains the same. But if the value of
the Company's assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in
falling markets.
Gearing represents borrowings at book less cash and cash equivalents expressed
as a percentage of shareholders' funds.
Gross gearing is the Company's borrowings expressed as a percentage of
shareholders' funds.
31 January 2024 31 January 2023
Gearing * Gross gearing (†) Gearing * Gross gearing (†)
£'000 £'000 £'000 £'000
Borrowings (a) 86,475 86,475 88,013 88,013
Cash and cash equivalents (b) 3,596 - 6,082 -
Shareholders' funds (c) 457,792 457,792 545,453 545,453
18.1% 18.9% 15.0% 16.1%
* Gearing: ((a) - (b)) ÷ (c), expressed as a percentage.
(†) Gross gearing: (a) ÷ (c), expressed as a percentage.
Leverage
For the purposes of the Alternative Investment Fund Managers (AIFM)
Regulations, leverage is any method which increases the Company's exposure,
including the borrowing of cash and the use of derivatives. It is expressed as
a ratio between the Company's exposure and its NAV and can be calculated on a
gross and a commitment method. Under the gross method, exposure represents the
sum of the Company's positions after the deduction of sterling cash balances,
without taking into account any hedging and netting arrangements. Under the
commitment method, exposure is calculated without the deduction of sterling
cash balances and after certain hedging and netting positions are offset
against each other.
Active share (APM)
Active share, a measure of how actively a portfolio is managed, is the
percentage of the quoted equity portfolio that differs from its comparative
index. It is calculated by deducting from 100 the percentage of the portfolio
that overlaps with the comparative index. An active share of 100 indicates no
overlap with the index and an active share of zero indicates a portfolio that
tracks the index.
Net liquid assets
Net liquid assets comprise current assets less current liabilities, excluding
borrowings.
Share split
A share split (or stock split) is the process by which a company divides its
existing shares into multiple shares. Although the number of shares
outstanding increases, the total value of the shares remains the same with
respect to the pre-split value.
Treasury shares
The Company has the authority to make market purchases of its ordinary shares
for retention as treasury shares for future reissue, resale, transfer, or for
cancellation. Treasury shares do not receive distributions and the Company is
not entitled to exercise the voting rights attaching to them.
Private (unlisted) company
A private (unlisted) company means a company whose shares are not available to
the general public for trading and not quoted on a stock exchange.
Turnover
Turnover is calculated as the minimum of purchases and sales in a month,
divided by the average market value of the portfolio, summed to get rolling 12
month turnover data.
Third party data provider disclaimer
No third party data provider ('Provider') makes any warranty, express or
implied, as to the accuracy, completeness or timeliness of the data contained
herewith nor as to the results to be obtained by recipients of the data. No
Provider shall in any way be liable to any recipient of the data for any
inaccuracies, errors or omissions in the index data included in this document,
regardless of cause, or for any damages (whether direct or indirect) resulting
therefrom.
No Provider has any obligation to update, modify or amend the data or to
otherwise notify a recipient thereof in the event that any matter stated
herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability
whatsoever to you, whether in contract (including under an indemnity), in tort
(including negligence), under a warranty, under statute or otherwise, in
respect of any loss or damage suffered by you as a result of or in connection
with any opinions, recommendations, forecasts, judgements, or any other
conclusions, or any course of action determined, by you or any third party,
whether or not based on the content, information or materials contained
herein.
MSCI Index data
Source: MSCI. The MSCI information may only be used for your internal use, may
not be reproduced or redisseminated in any form and may not be used as a basis
for or a component of any financial instruments or products or indices. None
of the MSCI information 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. Historical data and analysis should
not be taken as an indication or guarantee of any future performance analysis,
forecast or prediction.
The MSCI information is provided on an 'as is' basis and the user of this
information assumes the entire risk of any use made of this information. MSCI,
each of its affiliates and each other person involved in or related to
compiling, computing or creating any MSCI information collectively, the 'MSCI
Parties' expressly disclaims all warranties (including, without limitation,
any warranties of originality, accuracy, completeness, timeliness,
non-infringement, merchantability and fitness for a particular purpose) with
respect to this information. Without limiting any of the foregoing, in no
event shall any MSCI Party have any liability or any direct, indirect,
special, incidental, punitive, consequential (including, without limitation,
lost profits) or any other damages (msci.com).
Automatic Exchange of Information
In order to fulfil its obligations under UK tax legislation relating to the
automatic exchange of information, Baillie Gifford Shin Nippon PLC is required
to collect and report certain information about certain shareholders.
The legislation requires investment trust companies to provide personal
information to HMRC on certain investors who purchase shares in investment
trusts. Accordingly, Baillie Gifford Shin Nippon PLC must provide information
annually to the local tax authority on the tax residencies of a number of
non-UK based certificated shareholders and corporate entities.
Shareholders, excluding those whose shares are held in CREST, who come on to
the share register will be sent a certification form for the purposes of
collecting this information.
For further information, please see HMRC's Quick Guide: Automatic Exchange of
Information - information for account holders
gov.uk/government/publications/exchange-of-information-accountholders.
Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a
direct impact in the UK due to Brexit, however, it applies to third-country
products marketed in the EU. As Shin Nippon is marketed in the EU by the AIFM,
BG & Co Limited, via the National Private Placement Regime ('NPPR') the
following disclosures have been provided to comply with the high-level
requirements of SFDR.
The AIFM has adopted Baillie Gifford & Co's stewardship principles and
guidelines as its policy on integration of sustainability risks in investment
decisions.
Baillie Gifford & Co believes that a company cannot be financially
sustainable in the long run if its approach to business is fundamentally out
of line with changing societal expectations. It defines 'sustainability' as a
deliberately broad concept which encapsulates a company's purpose, values,
business model, culture, and operating practices.
Baillie Gifford & Co's approach to investment is based on identifying and
holding high quality growth businesses that enjoy sustainable competitive
advantages in their marketplace. To do this it looks beyond current financial
performance, undertaking proprietary research to build up an in-depth
knowledge of an individual company and a view on its long-term prospects. This
includes the consideration of sustainability factors (environmental, social
and/or governance matters) which it believes will positively or negatively
influence the financial returns of an investment. The likely impact on the
return of the portfolio from a potential or actual material decline in the
value of investment due to the occurrence of an environmental, social or
governance event or condition will vary and will depend on several factors
including but not limited to the type, extent, complexity and duration of an
event or condition, prevailing market conditions and existence of any
mitigating factors.
Whilst consideration is given to sustainability matters, there are no
restrictions on the investment universe of the Company, unless otherwise
stated within in its investment objective and policy. Baillie Gifford & Co
can invest in any companies it believes could create beneficial long-term
returns for investors. However, this might result in investments being made in
companies that ultimately cause a negative outcome for the environment or
society.
More detail on the Manager's approach to sustainability can be found in the
stewardship principles and guidelines document, available publicly on the
Baillie Gifford website bailliegifford.com.
The underlying investments do not take into account the EU criteria for
environmentally sustainable economic activities established under the EU
Taxonomy Regulation.
- ends -
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