Keeping on track

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Praveen Kumar, Shin Nippon’s new manager, on Japan’s resurgent entrepreneurial culture.

AUTHOR: Ian Fraser.

Praveen Kumar, manager of Baillie Gifford Shin Nippon PLC, is so interested in the opportunities within Japan’s smaller companies sector that he has moved to Tokyo for six weeks with his wife and young son. Based in a rented Tokyo apartment, Kumar is immersing himself in what he describes as “Japan’s resurgent entrepreneurial culture”. He has been meeting research and development personnel in Japanese universities, government officials, and the founders of promising high-growth firms and technology start-ups.

Kumar, who succeeded John MacDougall as Shin Nippon’s manager on 1 December 2015, says: “We’re looking to invest in firms with disruptive technologies and differentiated business models which are led by charismatic, dynamic and entrepreneurial owners and managers.”

He adds that there are many more such firms in Japan than there were a few years ago and that they are displacing existing less efficient ways of doing business.

Kumar has been a member of the company’s eight-strong Japanese equities team – led by the manager of The Baillie Gifford Japan Trust PLC, Sarah Whitley – since 2011. The team, which includes six fund managers and two investment analysts, meets formally every week to weigh up ideas but often has more informal discussions. Kumar says he likes the “very open, debate-oriented culture and team-based ethos”.

With a degree in computer science from Bangalore University and an MBA from the University of Cambridge, Kumar began his career in software development, spending six years at Caritor Solutions, Orange and FKI Logistex in India and the UK. After moving permanently to the UK in 2004, he joined Baillie Gifford in September 2008.

 

A SLEEPING GIANT

Some economists question whether ‘Abenomics’ – the three-pronged economic stimulus programme introduced by prime minister Shinzo Abe in 2012 – has what it takes to resuscitate the world’s third largest economy. But Kumar believes the reforms are delivering the goods, and acting as a catalyst for dynamic start-ups and sustainable fast-growth firms.

“It’s happening at a gradual pace,” he says, “but in 2016 we’re going to see some significant changes coming out of the deregulatory measures that are being passed.”

Kumar highlights opportunities in the energy sector. In Japan, electricity companies currently have regional monopolies, as was the case in Britain until the early 1990s. However, as one of the key policies of Abenomics the electricity market is being deregulated in 2016, which will enable consumers to shop around for the first time. As Kumar says: “That’s going to present some exciting opportunities – for example among companies providing smart meters.”

Another structural change is the return of inflation. The Bank of Japan is targeting inflation of 2 per cent by March 2017, which Kumar says should close the chapter on two lost decades haunted by deflation. He believes this will make equity investment more attractive to Japanese consumers, potentially transforming the savings and investment market.

He points to stocks recently added to the trust’s portfolio as examples of what is to come. One, which Kumar brought to the table earlier as a member of Baillie Gifford’s Japanese Equities team, is Tokyo-based software firm Broadleaf. The company has developed an online platform that enables garages to buy car parts more efficiently than in Japan’s archaic car parts after-market – which is still dominated by the use of faxes and phone calls. Kumar says Broadleaf, which floated on the Tokyo stock exchange in 2013, has developed a “comprehensive online database of over 300 million auto parts” and supplies garage owners with tablets that come linked to its online parts database, giving it first-mover advantage while simultaneously building high barriers to entry for would-be rivals.

Another company is Cookpad, which was added to the portfolio in 2014. Launched in 1997, Cookpad runs Japan’s largest user-generated recipe site. It went public in July 2009 and has more than 50 million unique monthly users and over two million registered recipes.

Kumar’s vision for the trust’s future is exactly the same as that of his predecessor, John MacDougall, namely to seek out and invest in high-growth, entrepreneurial and dynamic small companies in Japan: “The philosophy, style of investing and the nature of companies in which it invests are not going to change.”

Kumar adds that, even if the small cap sector falls out of favour, the trust will persevere with its “bottom-up, team-based research ethos with a view to generating long-term outperformance”.

 

Author: Ian Fraser

Ian writes about business and finance. His book Shredded: Inside RBS, The Bank That Broke Britain, was longlisted for the FT and McKinsey Business Book of the Year award.”

 

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