Japan from a distance

Matthew Brett, manager of the Baillie Gifford Japan Trust and the Baillie Gifford Japanese Fund, explains why distance needn’t mean disadvantage.

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

Here’s a funny thing: since the outbreak of the pandemic and Baillie Gifford’s firm-wide ban on non-essential international travel, the quantity of our face-to-face interactions with Japanese companies has actually increased.

Is the quality of that engagement better or worse in the Zoom age? Well, it’s different.

In the 40 years since Baillie Gifford launched the Japan Trust we’ve built up a routine in which every investment team member visits Japan every year. Some go twice. Now we’re socially distancing from the businesses we look at and invest in by more than 5,000 miles.

The lack of disruption to business as usual raises a question: would a permanent presence in Tokyo make us better investors in Japan?

Distance from our target market, common in the investment business, seems to have served us well since 1981. This remoteness hasn’t felt as odd as it might appear. Indeed, remoteness is now the norm. Because of Covid-19, even local investors are working from home and talking to Japanese firms by Zoom. We’ve found the rapport easier if we’re dealing with management teams we know already, but we see benefits as well as drawbacks.

Pre-Covid, we tended to fly in for a week or more and hold a bunch of meetings while dealing with jet lag from the nine-hour time difference. Now we hold Zoom meetings at the best time of day for both parties – late afternoon for them, early morning for us and space them out. It’s less exhausting, though seeing companies back-to-back, you get into the swing of things and can compare and contrast.

We have certainly missed being in Japan and our regular cultural immersion, and it was a blow that trips for new colleagues were kiboshed by the virus. Japan has taken a different path from the rest of the world and must be experienced first-hand.

Experienced, and then considered at a distance. Maybe more so in Japan than elsewhere, the complexities of ‘local knowledge’ can be a distraction. Our approach is to strip investment back to its fundamentals, focusing on long-term predictable trends such as the growth of the internet or of food delivery, or of robotics.

Also, we’ve never fully bought into the belief in a unique and unchanging ‘Japaneseness’, which can distort views of how things might develop. Regular visits allowed us to see clearly that profound changes are indeed happening, changes we might miss if we were there all the time. Japan is very different, but that doesn’t mean it doesn’t succumb to similar buying patterns and products as the rest of the world. It can be harder to predict that convergence from within.

For example, Japan’s early-2000s craze for ‘feature phones’, packed with games, messaging tools and emojis, took off long before the rest of the world had anything resembling a smartphone.

It was confidently asserted that Apple’s iPhone wouldn’t do well, as it couldn’t do certain things that feature phones could. But the homegrown phones had limitations that the iPhone moved beyond and ultimately it succeeded against many local predictions to the contrary.

Progress in Japan is rarely straightforward. Some areas jump ahead and others are a bit behind. Covid-19 has illustrated how, while great at incremental improvements, Japanese firms sometimes struggle with dynamic change. Note the contrast between how well the country’s ingrained levels of hygiene and advanced mobile technology have coped with the public health aspects, while its outdated bespoke office IT systems have made adjusting to working from home tricky. We’ve spoken to companies whose workers are unable to remotely access company emails, or even use Zoom. Companies are now looking at a whole load of opportunities to update their IT systems, working practices and general work-life balance in a country where overtime is the norm. Only 56% of workers took their full paid holiday allowance in 2019, a figure hailed as “the highest ever”.

The opportunity for the Japan Trust is to anticipate where new ideas and new products that improve efficiency can be most profitable. The iPhone example illustrates a key point about Japan: once it was accepted that it was a better device, suddenly everyone had one. Good ideas penetrate very rapidly in this society.

We’ve got many ideas from visiting Japan, but many more by reflecting at a distance. While I expect the Japanese to be on the cautious side when it comes to resuming business as usual, we will, eventually, be back.

Important information

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. Investment in smaller companies is generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions. Exposure to a single market and currency may increase risk.

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

Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. A Key Information Document for The Baillie Gifford Japan Trust is available at bailliegifford.com

Words by Colin Donald.

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