Baillie Gifford Japan Trust Underperforms Benchmark, Embraces Physical AI Amid Board Changes

Baillie Gifford Japan Trust’s half-year: benchmark beats them, but “physical AI” bets build

Baillie Gifford Japan Trust’s interim results show a positive absolute return but a wide gap to the market. Over the six months to 28 February 2026, NAV total return was 4.4% and the share price total return was 6.1%. The benchmark TOPIX did 22.4% in sterling. The discount narrowed from 11.4% to 10.1% as buybacks helped the share price.

The Chair is new – Sam Davis took over at the December AGM – and the Board has added seasoned NED, Robert Talbut. The tone is frank: last year’s strong outperformance didn’t carry into this half, and the Board is pressing the Manager on process and positioning.

Key numbers at a glance

NAV total return (6 months)	4.4%
Share price total return (6 months)	6.1%
TOPIX total return (sterling)	22.4%
Discount to NAV	10.1% (was 11.4%)
Shares bought back	2,925,000 for £26.9 million
NAV accretion from buybacks	0.4%
Net assets	£784.4 million
NAV per share	1,051.9p
Shares in issue	74,566,440
Net gearing	12.5%
Dividend paid	10.00p (final, paid 15 December 2025); no interim declared

Performance: the growth style ran into a value-heavy market

The trust’s style is clear: own Japanese growth companies with above-average prospects. That style has had a tougher time when cyclicals and financials lead. Over this period, Japan’s market leadership skewed more cyclical, and that left the trust well behind the TOPIX despite a rising NAV.

Importantly, the share price outpaced the NAV as the discount narrowed. That’s helpful, but the absolute gap to the benchmark is the headline.

What hurt: five big holdings dragged on relative returns

Five names knocked at least 1 percentage point off relative performance:

• CyberAgent (-1.8ppt)
• GMO Internet Group (-1.8ppt)
• Rakuten (-1.5ppt)
• SBI Holdings (-1.5ppt)
• GA Technologies (-1.4ppt)

Here’s the nuance: management says operations are improving even as share prices fell. Highlights include AbemaTV at CyberAgent turning profitable; Rakuten’s mobile business moving into profit; and GA Technologies posting 31% sales growth and 92% operating profit growth to its October year-end. SBI simplified via the IPO of SBI Shinsei Bank, which the trust bought and which has contributed positively since. GMO is being reshaped into a clearer holding company, with the team actively engaging to speed that up.

The Manager also counters the market’s AI anxiety: these businesses hold rich proprietary data, have multiple reinforcing business lines, and can deploy AI internally – more opportunity than threat, in their view.

What helped: Sumitomo Metal Mining’s threefold surge

Sumitomo Metal Mining added 1.3 percentage points to relative performance as its shares tripled, driven mainly by enthusiasm for gold exposure. The team has trimmed the position on valuation grounds. Gearing added roughly 1.0 percentage point to returns as share prices generally rose in yen terms.

Portfolio moves: doubling down on “physical AI”

Five new names and four exits were made, with two notable buys:

• Yaskawa Electric – industrial robots and factory automation
• Harmonic Drive – precision gears and robot joints

This leans into “physical AI” – robotics combined with more capable AI brains. If you believe automation has years of runway, these are sensible building blocks. Most of the portfolio was left alone, consistent with a long-term approach.

Valuation case: faster growth at lower multiples

Against the index, the portfolio has delivered faster sales growth over five years and is forecast to keep outgrowing on both sales and earnings. Yet it trades at a meaningful discount to the market on price-to-earnings and on EV/EBIT. Quick explainer: EV/EBIT compares a company’s enterprise value (equity plus net debt) to operating profit before interest and tax, making it handy for comparing businesses irrespective of capital structure.

That setup – better growth, cheaper multiples – is rare. If the forecasts land, the upside could be significant. The obvious caveat is timing: markets don’t always reward growth promptly, especially when cyclicals are in the driving seat.

Discount control and buybacks: quietly accretive

The Board stayed active with buybacks, repurchasing 2,925,000 shares for £26.9 million, adding an estimated 0.4% to NAV. The signal is clear: they’ll lean in if the discount sits wider than a high single-digit level. After period end, a further 2,780,000 shares were bought back into treasury, which should continue to support the share price if the discount persists.

Gearing and balance sheet: steady and supportive

Net gearing ended at 12.5% (gross 13.7%), supported by a mix of a yen revolving credit facility and longer-dated private notes. With assets up in yen terms, gearing helped over the half. That cuts both ways in drawdowns, but the Board reviews covenants and levels regularly.

Net assets stand at £784.4 million, with NAV per share at 1,051.9p. Cash and cash equivalents were £8.9 million at period end.

Costs and income: nothing surprising

The ongoing management fee is tiered at 0.65% on the first £250 million of net assets and 0.55% thereafter, charged quarterly. A 10.00p final dividend was paid on 15 December 2025, and no interim has been declared. Revenue return per share was 3.03p for the half.

Macro, governance and the road ahead

The Chair sets out the enduring attractions of Japan: a vast, stable economy; deep, liquid markets with new listings; leadership in advanced tech; improving governance; and a notably undervalued currency. The demographic headwind is real, but it arguably supports premium valuations for the kind of durable growers this trust prefers.

Two watch points. First, the Board is scrutinising the strategy after a mixed five-year period for growth. Second, near-term policy direction under Japan’s new Prime Minister could test the growth-premium thesis. There’s also an annual continuation vote, with the next in December 2026.

My take: frustrating half, but the ingredients remain

On the minus side: a 4.4% NAV total return against 22.4% for TOPIX is a big relative miss. The market’s love-in with cyclicals left the trust’s growth tilt exposed, and several large positions corrected despite improving operations. That dents confidence, and the Board is right to push.

On the plus side: operational momentum at key detractors, a clear push into physical AI via Yaskawa and Harmonic Drive, and a valuation setup that shows faster expected growth at lower P/E and EV/EBIT than the market. Add ongoing buybacks and a narrowing discount, and there’s clear embedded optionality if sentiment rotates back to secular growth.

Bottom line: this is one for patient capital. If the earnings inflect as forecast and AI-enabled business models compound, today’s discount and lower multiples could be a gift. If cyclicals keep ruling the roost, relative returns may stay bumpy. The next few quarters of stock-level delivery – not headlines – will be the decider.