By James Thorneley The difference in the betas of Baillie Gifford Japan and Baillie Gifford Shin Nip...
By James Thorneley
The difference in the betas of Baillie Gifford Japan and Baillie Gifford Shin Nippon is an illustration of the higher volatility among smaller companies. Shin Nippon, which invests in smaller companies, has a beta of 1.19 times compared to Ballie Gifford Japan's beta of 0.81.
Both are managed by Sarah Whitley who uses the same risk controls on the two trusts. She said: "Because neither trust has an appropriate benchmark we do not undertake a lot of Barra research. Instead, we look at the concentration of the portfolio."
Baillie Gifford Japan has around 55 holdings, but its top 10 makes up 36.9% of the portfolio. Ballie Gifford Shin Nippon has about 64 stocks, with its top 10 making up 37.9% of total assets. Whitley also monitors sector weightings in the two portfolios comparing them against those weightings in some of Japan's key indices.
One of the most highly concentrated portfolios is INVESCO Japan Discovery's, with its combined top 10 stocks making up 49.5% of the portfolio. In addition, the trust has only 38 holdings in all. Relatively large holdings paid off last year, when new Japan stocks were in vogue. Between 31 June and 31 December 1999 the trust's share price rose by 160.72%.
In contrast, from the start of the year until the beginning of June the share price had fallen by 28%. This was partly due to the derating of one of the portfolio's best performing holdings. Between 1 January 1999 and 15 February the share price of Hikari Tsushin rose by 2,971.9% in yen terms. But between 15 February and 2 June the share price fell by 97.9%
INVESCO Japan Discovery is run by Masato Kawada, who maintains a strong growth bias. He aims to identify companies that have high growth rates, a high return on equity, and which are relatively economically insensitive.
Following the recent volatility, Kawada has halved his technology exposure, to 20%. The board has also stated that no tech stock may represent more than 5% of the portfolio.
At the other end of the scale Atlantis Japan Growth has the largest number of holdings, with 114 stocks. Even with the aid of a diversified portfolio the higher level of volatility among smaller companies means the trust still has an average beta of 1.04 times compared with the sector average of 0.94.
Henderson's Japanese Smaller Companies, managed by Yuji Tsukagoshi, has the lowest beta among the small-cap trusts. The trust's beta is 0.89 times, compared with INVESCO Japan Discovery's 1.47.
Until earlier this year, William Garnett, head of Japanese equities at Henderson, co-managed the portfolio with Tsukagoshi. Since being given sole management responsibilities Tsukagoshi has made some changes to the portfolio which has further reduced its risk profile. He reduced the number of holdings from 100 to 80 and aims to reduce this number further.
The trust is benchmarked against the TSE Second Section. Before the changes only 15% of the portfolio was drawn from the index. Tsukagoshi, who has increased his exposure to index stocks to 50%, said: "This move has brought our tracking error relative to the benchmark down from over 15% to around 10%."
Becoming more closely correlated to the benchmark should help the performance of the trust. The trust's share price has the lowest monthly alpha in the sector, at -27.27. This can be said to be a reflection of the trust's NAV performance over three years relative to the index. Over the 36 months to the beginning of June its NAV fell by 12% compared with a rise in the TSE Second Section of 69.8%.
Other changes include reducing the number of stocks in the portfolio from 100 to 80. This is largely the result of cutting the trust's exposure to micro-shares which represent the bottom 5% of the whole market. Until recently the trust had 40% of its assets in these kind of equities; now it has 15%.
Of the large-cap managers, Paul Chesson, manager of Perpetual Japanese, prefers to look at risk in absolute terms. For instance, the portfolio has no exposure to banking stocks, even though the sector makes up 9% of the trust's benchmark. He said: "The absolute risk in banking is high. While I do not favour telecom stocks I would have some sort of exposure to the sector because relative to banks the absolute risk is lower."
Since taking over the running of the trust from Scott McGlashan, Chesson has halved the number of stocks in the portfolio. It has changed from a relatively diversified portfolio of 96 holdings to one with 58 stocks. The reduction in the number of stocks has only slightly affected portfolio concentration. Now the top 10 holdings make up 32% of the portfolio; before the changes it was 29.4%. He said: "The changes were not aimed at altering the risk parameters, they were made for stylistic reasons. I did not think I could select around 100 equities with which I felt comfortable, 50 is probably my limit."
The largest trust in the sector is Fleming Japanese, managed by Stephen Mitchell. Last year, its performance benefited from a heavy growth bias, while this year the portfolio is balanced between growth and value stocks. He runs a relatively diversified portfolio of 80 stocks, with 33.8% of the portfolio consisting of the top 10 holdings.
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