A swift recovery in Japan’s economy from a recent setback should set the scene for a strong showing from attractively valued Japanese stocks and Shares has identified an excellent way to play this market.

Steered by an experienced team, Baillie Gifford Japanese Income Growth Fund (BYZJQH8) has built up a strong track record since its inception in 2016 as it has benefited from an increasingly shareholder-friendly attitude among Japanese companies.

This was a key plank of the late Japanese prime minister Shinzo Abe’s so-called ‘Abenomics’ approach when he assumed power a decade ago, with firms encouraged to return some of the cash they had been hoarding to investors and improve their corporate governance.

There are risks associated with investing in Japan right now, weakness in yen against the dollar helped push the economy into a surprise contraction in the third quarter. However, the reopening of Asian economies should benefit inbound tourism and Japanese consumer-facing businesses and currency weakness should be a positive for the competitiveness of Japanese exporters.

The Baillie Gifford fund has positioned itself to take advantage of these supportive trends. While the fund’s name implies an income focus, the emphasis is very much on dividend growth rather than capturing high dividend yields, reflected in a historic yield of 2.7%.

In common with other Baillie Gifford funds, it pursues a long-term approach with an investment horizon of at least three to five years and more typically five to 10 years. It also deviates significantly from the TOPIX benchmark index.

The fund splits the portfolio into four different buckets: secular growth, growth stalwart, special situations and cyclical growth.

Fund manager Karen See characterises secular growth firms as being exposed to long-term growth areas like automation, while growth stalwarts are Warren Buffett-type investments with deep moats. Special situations can be anything from companies sitting on a lot of cash to ‘companies with huge potential going through a difficult moment’.

See notes that one of the most well-known companies in the portfolio – video games giant Nintendo (7974:TYO) – has moved from the special situations to growth stalwart bucket. She says: ‘Nintendo is now better managed, less reliant on console launches which made revenue quite lumpy, and it has one of the greatest collections of characters globally.’

More broadly Japanese firms and households continue to sit on lots of cash relative to their counterparts in the West and this should engender resilience heading into a potential downturn for
the economy. The ongoing charges on the fund are 0.62%.

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