Fund of the week: Good value in Japanese small caps

Japan's Nikkei index has just had its best first quarter in 24 years, rising by 19.3%. "Despite the events of 2011, some areas of the Japanese economy experienced impressive rates of expansion, including e-commerce, smart phones and energy-efficient products," John MacDougall, manager of Baillie Gifford Shin Nippon Investment Trust (LSE: BGS), tells Investors Chronicle.

The Shin Nippon (literally New Japan') fund focuses on smaller firms, those with a market cap of below 150bn (£1.2bn). It has a three-year annualised share price total return of 32.53%. It looks for firms with "dynamic management" in high-growth sectors, such as healthcare and outsourcing.

MacDougall says the key is finding firms that are innovating to find new markets, disrupt existing markets and take market share, or have strengths in exporting services to other growing Asian economies. "We like firms such as Message, a private nursing home operator that benefits from the deregulation of this sector in a country where the population is ageing," MacDougall told The Times. "Another stock we like is Start Today an internet shopping site selling new and established clothing brands appealing to an increasingly internet-savvy audience."

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Japan is currently a low-to-no-growth economy, so finding companies with a rising share price isn't easy. That's one reason why MacDougall likes small-cap equities, which "don't tend to be so reliant on the overall growth of an economy". The trust trades at a discount of 3.6%.

Contact: 0131-275 2000

Disclosure: MoneyWeek editor-in-chief Merryn Somerset Webb is a non-executive director of this trust.

Baillie Gifford Shin Nippontop ten holdings