Matthew Brett from Baillie Gifford is our Fund Manager of the Month
11 SEPT, 2024
By Jose Luis Palmer from RankiaPro Europe
Matthew is an investment manager in the Japanese Equities Team. He joined Baillie Gifford in 2003 and became a partner in 2018. He is manager of the Japanese Fund and co-manager of the Japanese Income Growth Fund. Matthew graduated BA (Hons) in Natural Sciences (Psychology) from the University of Cambridge in 2000 and holds a PhD in Psychology from the University of Bristol.
Why and how did you decide to go into the financial sector, did you have any other vocations?
At one point I considered trying to become a veterinary surgeon but ultimately decided to study science as a generalist, before later specialising in psychology. Financial markets are an incredibly interesting place for studying psychology in action, as well as a natural place for a curious mind to end up.
What is your view of the current macro environment and how might it affect the fund?
First, it is important to stress that we are bottom-up investors, looking at each company on its own fundamental merits, and are not making investment decisions driven by macroeconomic factors. However, in terms of the current macro environment, perhaps the most notable element right now is the strengthening Yen, which appreciated on the back of the Bank of Japan’s surprise rate rise at the end of July. This was a contributory factor towards recent market turbulence, where fears over the effect of this on exporters’ earnings (as well as concern over data that seemed to indicate a slowing of the US economy – a key market for Japanese companies) caused Japan’s largest stock market fall since 1987. Though this rapidly rebounded the next day, we think this shows the fragility of those traditional companies which have performed well over the last several years, but which we view as unlikely to sustain their momentum. In contrast, the fund is invested in companies that we think are able to thrive regardless of the macroeconomic backdrop. That said, we do think that a more inflationary environment would benefit those with pricing power and a strong competitive edge, such as the businesses we hold.
How should investors orient their portfolios in this environment?
As growth investors, we believe that the most exciting opportunities are found in those fast-growing firms with business plans that stretch far into the future. Though we assess each of these companies on their own individual merits, we have also noticed several structural growth trends that we think are poised for reappraisal. One is the digitalisation of Japan. The country has long lagged other developed markets in the digital space, such as ecommerce, cashless payments and software-as-a-service. However, it has now recognised the critical need to develop such labour-saving solutions, and this is throwing up attractive opportunities at no premium to the broader market. Another trend is the acceleration of automation, with global demand for robotics solutions as an insurance policy against geopolitics, vulnerable supply chains and ageing populations. It is no surprise that Japan, known for both its technological ingenuity and older demographics, is home to many excellent businesses at the vanguard of this shift. Japan’s ageing populations also makes it fertile ground for healthcare solutions, and we are seeing exciting businesses aimed at solving for unmet health care needs, notably longer-acting diseases such as Alzheimer’s and Parkinson’s. Finally, we are seeing attractive growth drivers in emerging market consumption, where demand for high-quality Japanese products tends to rise in line with a population’s wealth. Skincare is a classic example of this, and the fund has several holdings that capitalize on this theme.
What differentiates the BG Japan Fund from others and what advantages it can bring to an investor’s portfolio in the current scenario?
The key differentiator for the fund, and for Baillie Gifford as a whole, is long-termism. The Baillie Gifford Japan team has over four decades of experience investing in Japanese equities, with the first strategy launched in 1981. We also take a long-term view on markets, with over three quarters of the portfolio held for more than five years, and many holdings held for over a decade. This low-turnover approach ensures we think beyond current investment cycles. Here we benefit from our ownership structure: as an unlimited liability partnership, we don’t have any external shareholders to account to, enabling us to eschew quarterly earnings noise and keep our sights firmly set on the future. This philosophy trickles down into the companies we invest in, with around a third of holdings run by their original founders with strong long-term alignment as business owners. The BG Japan team are also all avowedly generalist, bottom-up investors. Every member of the team, including the senior partners, are first and foremost analysts who are in the weeds of picking stocks. By taking a qualitative approach, rather than relying on quantitative models, we believe we are better able to see the opportunities the wider market overlooks. The best way to describe this is we strive to be approximately right rather than precisely wrong. This has been successful over our 40 year history investing in Japanese markets.
Can you give us an example of a position that you have held for a long time in your portfolios and why?
Nintendo is a long-standing holding of the Japanese fund. We originally owned this for a seven year period from 1997 to 2004, before selling during the Game Cube console era when we felt it was being outcompeted by both Sony and Microsoft. We then bought it again in 2009 and still hold it today, so that’s a fifteen year holding period. At the time of repurchase (always a difficult thing for investors to do), its share price had fallen to less than half of its 2008 highs, in part on fears that Apple’s recently launched iPhone would obviate the need for dedicated gaming hardware. But where many saw a console maker with its best days behind it, we saw a company with immensely strong intellectual property and a unique corporate culture. The former was illustrated by its ability to build strong brands around its characters, illustrated by the dedicated generation-spanning followers of Mario and Pokémon. The latter had been evidenced by the Wii, an innovative motion-sensing console that outsold technically more powerful competitors, and took the casual gaming market by storm. In short, Nintendo had proved naysayers wrong before and we believed it could do it again. We therefore maintained our faith throughout its difficult next console launch and the associated share price nadir, watching the firm continuously iterate and learn from its mistakes. Ultimately, gamers and investors have been rewarded with the Nintendo Switch and excellent share price performance. We continue to see significant upside in this creative company that refuses to rest on its laurels and remains committed to innovation.
What macroeconomic data are most important to monitor in order to manage investment funds?
As mentioned, our process is primarily bottom-up, with the vast majority of our value add derived from stock selection. Therefore macro data is unlikely to factor into fund decisions, and is not something we continually monitor for investment purposes. Instead of interest rates, we spend our time thinking about the second order effects of artificial intelligence; instead of panicking over the implications of China’s property crash, we are positioning ourselves for premiumisation trends within the fund. Macro data points will come in where they are directly material to a business we are looking at, but they are never the core of our investment case.
What ratios does a company have to meet to be part of your portfolio? How is Baillie Gifford’s stock-picking process structured?
This is wholly context-dependent. Whilst we are looking for companies where we can double client’s money within a five year period, there is no hard and fast rule around ratios. Fundamentally, we are looking for opportunities where we can formulate a differentiated opinion on its upside. This can come from a wide range of areas, whether growth in ’cheap’ stocks that the market is currently underestimating, or ‘expensive’ companies where we still see even greater potential and think they can grow into their multiples. Ultimately, our two times case can come from topline acceleration, margin expansion, re-rating or a combination of the three. As for our stock-picking process, this is structured around bottom-up, fundamental research.
What do you like to do in your free time?
I got into ballroom dancing at university and continue to dance regularly (if not particularly well!) today.
