A Baillie Gifford fund manager picks hidden gems in the Japanese market to beat his benchmark. He's broken down 3 stocks worth buying right now and how to manage risk in high growth investing

  • A Baillie Gifford portfolio manager outlined for Business Insider his 3-part stock picking strategy for finding high growth stocks in Japan and some of the misconceptions investors have about putting money into the world's third largest economy. 
  • Here's Kumar's three Asia-focused stock picks that align with his 3-part strategy and growth-investor mentality.
  • "Some of our most successful investments, [it's] also been a very common theme, where they start off with one business line, do very well in that, but they're not satisfied with having success, in just that, and they're always looking at adjacent areas," Kumar said.
  • Visit Business Insider's homepage for more stories.

Last week, Business Insider spoke with Baillie Gifford portfolio manager, Praveen Kumar, who is crushing his benchmarks in both the Baillie Gifford Shin Nippon Trust, which he manages, and the Baillie Gifford Japan Trust, which he deputy manages.

The Morningstar rising talent nominee outlined for Business Insider his very "simple" stock picking strategy for finding high growth stocks in Japan and common misconceptions investors have about Japan.

Baillie Gifford's Shin Nippon Trust has  trailing 1-year Net Asset Value returns of 39.51%, compared with just 4.21% for the MSCI Japan Small Cap index, according to data from Morningstar on October 15.

This week, Business Insider highlights 3 stock picks recommended by Kumar that align with his 3-part stock picking strategy and his recommendations on managing risk with high growth stocks.

Stocks picks

1) Bengo4.com

Bengo4.com stock on October 14Business Insider Markets

Ticker: TYO:6027

Bengo4, a company that matches lawyers and people seeking legal advice, is one of the first stocks Kumar invested in when he joined the Shin Nippon trust. Since then the company's stock has gone up 11 to 12 times, he estimates.

Bengo4  recently expanded into the space of digital contracts, similar to DocuSign in the US, securing around 80% of the market share in Japan, Kumar said. He looks out for companies that can branch into different business areas, similar to Amazon.

"Some of our most successful investments, [it's] also been a very common theme, where they start off with one business line, do very well in that, but they're not satisfied with having success, in just that, and they're always looking at adjacent areas," Kumar said.

2) M3

M3 stock on October 14Business Insider Markets

 

Ticker: TYO: 2413

M3 is an online platform offering services to physicians and other healthcare professionals. One service M3 provides is enabling pharmaceutical companies to launch their drugs on the platform and have a panel of doctors who opt in to accept targeted marketing. This became a simple, quick and transparent way to market a drug and cut out the middleman, Kumar said. Other services include clinical trials and market research.

M3 has been in the portfolio since Kumar joined the trust and he has continued to hold it as it transformed into a nearly $40 billion company, he said.

"I think Baillie Gifford owns more stock in the company than the founder himself," Kumar said.

3) Sea Limited

SEA Limited stock on October 14Business Insider Markets

 

Ticker: SE

Sea is a leading e-commerce site in South-East Asia. The company started out in online gaming company in 2009 and then moved into e-commerce in 2015 launching the Shopee marketplace. Sea is held in some of Baillie Gifford's emerging markets funds. 

"It's exactly the same story, a very visionary dynamic founder starting off, small ecommerce business, scaling it up successfully expanding to other regions within Southeast Asia," Kumar said.

Risk management and selling a stock

Kumar's portfolio for Baillie Gifford remains fairly diversified with around 80 stocks. However, he says, inevitably some stocks won't work out.

But if you can pick one or two Bengo4.com's or M3's and stick with them for five to 10 years then the long-term returns will make up for the stocks that don't work out, Kumar said.

"Mathematically, a very simple way of putting that is you can only lose hundred percent of your money, but the upside is not capped," Kumar said. "So you get two or three Bengo4s in your portfolio, they go up 12 to 15 times, you already made a fantastic return for clients, even if the vast majority of the remainder of the portfolio does an average performance or even if some of them underperform."

When deciding to sell a stock, Kumar looks at individual company risk, bankruptcy risk and also spends a lot of time speaking to competitors and trying to understand whether a competitor could eat this "company's lunch". 

Just as speaking to management is important in his stock-picking strategy, it is also something that plays a big role in his decision to sell a company. Speaking to management and competitors is something you can't do through a Bloomberg terminal, Kumar said.

"One of the most common reasons we end up selling stocks is because we lose faith in management," Kumar said.

Kumar also emphasises that his portfolio is only 40% high growth internet companies. The other 60% is high growth companies in other industries such as robotics or consumer goods.

"So you do have different flavours of growth in the portfolio, it's not just one type of growth, and that's it," Kumar said. "But as I mentioned my bias, slight bias, would be towards these kind of internet type of stocks really rapid growing stocks."

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