An Alternative Way To Profit From The Deliberate Devaluation Of The Japanese Yen

 |  Includes: EWJ
by: Ben Mountifield

The deliberate devaluation of the Japanese yen has helped boost the earnings of exporters and has triggered a considerable rally in Japanese equities. Although it's possible to simply buy an ETF that tracks the Nikkei, or place a spread bet on the index, this article looks at an alternative way that investors in the UK can profit from the deliberate devaluation of the Japanese yen.

Falling yen provides boost to Japanese equities

At the end of 2012 the Bank of Japan (BoJ) began to take decisive action to weaken the Japanese currency. Since the middle of November the value of the yen has fallen against most of its currency peers. The result has been a 35% rise in the Nikkei stock index.

It is possible to simply buy an ETF that tracks the Nikkei, such as the popular iShares MSCI Japan Index Fund (NYSEARCA:EWJ), or place a spread bet on the index. However given the fact that not all of the 225 equities that make up the index are likely to perform well in a lower yen environment, an actively managed fund might make a better investment.

The Baillie Gifford Japan Fund

Launched in October 1984 the Baillie Gifford Japan fund aims to, "pursue long-term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth."

The fund is headed up by Sarah Whitley who has spent nearly 30 years investing in Japanese equities. Whitley and her team select stocks via a bottom-up approach and describe themselves as "growth orientated, long term investors" who prioritize "the selection of individually attractive companies, rather than taking top-down industry bets."

In December last year Morningstar analyst Szymon Idzikowski, described their rigorous stock selection process, noting that, "They target companies with favourable long-term earnings expectations and hold on until these have materialized… Their research extends beyond stock analysis as they also assess each company's industry; for example, they examine whether it is well regulated and consider the pricing structure. Meeting with company management is also key. They try to evaluate corporate culture, management's strategy, past stewardship, and how management's interests are aligned with shareholders."

Whitley's team believes that the Japanese economy is undergoing a structural transformation and that certain companies will be well positioned to benefit from this. The team assesses five factors when searching for companies to include in the portfolio. These are: industry background, competitive advantage, financial strength, the attitude of management and valuation.

The team's focus on sustainable profits growth has led to a portfolio with a growth bias and a mix of large, mid, and small-cap names.

Top 10 Holdings

Hikari Tsushin 3.7%

Japan Tobacco 3.6%

Fuji Heavy Industries 3.0%

KDDI 3.0%

Mitsubishi Estate 2.9%

Mitsui & Co 2.9%

Rakuten 2.8%

Nintendo 2.8%

Don Quijote 2.6%

Konica Minolta Holdings 2.6%


1 Year: +16.60%

3 Year: +6.42%

5 Year: +7.36%

Other information

Ticker symbol: BGFD

Exchange: London Stock Exchange

Management Fee: 1.00% of Net Assets

Additional Fee: Ongoing Charge of 1.20% (2012)

Dividend: None.

Morningstar Rating: 5 stars

For more information visit the Baillie Gifford website.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.