Japan from a distance

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? Let’s just say it’s different.

It is almost 40 years since Baillie Gifford launched the Japan Trust. Over the decades we’ve built up a routine in which every investment team member (just one originally, now nine) visits Japan every year. Some of us 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 we often think about and get asked about: 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 have found the rapport is 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 rather than bingeing. It’s less exhausting, though there are advantages in seeing companies back-to-back. You get into the swing of things and can compare and contrast.

But – and this may sound silly – when I’m in Japan I get distracted from discussions with interesting companies by the chatter of the markets. Here in Edinburgh I check Japanese share prices when I wake up in the morning, we place any orders we might make during the day (although portfolio turnover is low) and then go to bed. There are no newsflashes or constant updates about the Nikkei being up or down. I’m asleep while that’s happening.

That all said, we have missed being in Japan and our regular cultural immersion. It’s less of an issue for those of us who have been visiting Japan for years and can picture more of what’s happening, but 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 has to 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. There are many different ways of being an investor. Ours doesn’t involve thinking that close attention to quarterly performance figures gives us an edge. Rather we 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.

Nor is there an investment ‘scene’ we need to be close to. Japan prioritises building things and making things over investing, which is why there aren’t that many good investors coming out of Japan, and why a great allocator of capital such as SoftBank founder Masayoshi Son stands out. Also, their tendency to build consensus can be devastating to successful investing.

More importantly, 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 eventually 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 therefore 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. On the plus side, 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 per cent of workers took their full paid holiday allowance in 2019, a figure hailed as “the highest ever”.

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.

About the author

Matthew Brett, Investment Manager, Baillie Gifford

Matthew is manager of the Baillie Gifford Japan Trust. He joined Baillie Gifford in 2003 and became a Partner in 2018. 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.

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