When casting about for an example of a market with shining investment demographics, Japan rarely comes to mind. Its population is ageing, decreasing and steadily spending less, while Abenomics remains a work in progress. So is it really the place to look for a portfolio of innovative, growth-focused disrupters? In my view, absolutely.
A key piece of the puzzle in Japan’s recovery has always been its labour market. Put simply, the country needs more workers earning more in order to boost consumer spending, help with inflation and increase the tax base to fund state pensions. Yet years of deflation have made firms very reluctant to raise wages.
But under the headline figures there are signs the landscape is starting to change. This year’s annual spring salary review was greeted with dismay by the media as the big companies offered a minimal rise, much less than in the previous two years. On the other hand, small and medium-sized firms accelerated their pace of increase amid more job changers and tighter supply-demand conditions.
The overall participation rate is also slowly increasing after bottoming-out in 2012. Prime minister Shinzo Abe’s plans to get more women into the workforce – through the introduction of female management quotas and more help with childcare costs – are beginning to feed through to the system, as is a later retirement age.
In addition, the government recently introduced a visa scheme to enable skilled overseas workers in certain sectors to gain permanent residency within just one year. Another step to help to plug the labour gap. This scheme may also make it easier for companies to hire international expertise, which could benefit innovative small businesses and start-ups that often seek diverse skill sets from around the world.
For those looking for a decisive way to invest, I like the evocatively named Baillie Gifford Shin Nippon investment trust, which means ‘new Japan’. The vehicle was created in addition to the perhaps better-known Baillie Gifford Japan Trust to truly focus on the dynamic, young and entrepreneurial side of the country. It is an area of the market not widely covered by analyst teams and therefore one where strong active managers such as Baillie Gifford can shine – as indeed they have done.
In a track record of more than 30 years, the trust has delivered total returns far beyond the market. Over the four and half years since Mr Abe came to power, it has outstripped its MSCI Japan Small Cap benchmark by more than 100 percentage points.
The portfolio is positioned to tap into the country’s most positive trends, with significant overweights to information technology, consumer discretionary and health care sectors. Companies are chosen for their potential to disrupt large, established players.
Among manager Praveen Kumar’s favourite stocks are online beauty product retailer and reviewer iStyle; Asahi Intecc, a specialist medical device maker expanding into China and the US; and Monotaro, which supplies goods to the motor, manufacturing and construction industries.
For those who believe in Japan’s turnaround story and are willing to accept a decent level of risk along the way, this trust offers very pure exposure.
