Baillie Gifford Shin Nippon reports high market volatility risks

LONDON - Baillie Gifford Shin Nippon PLC (LSE:BGS) has released its annual financial report for the year ended January 31, 2025, outlining a series of risks and the strategies to manage them. The report, which was made available to shareholders and submitted to the National Storage Mechanism, details the company’s financial position and the directors’ assessment of its principal and emerging risks.

The directors have confirmed that the financial statements present a true and fair view of the company’s assets, liabilities, financial position, and net return. They also stated that the report is fair, balanced, and understandable, providing necessary information for shareholders to assess the company’s status and strategy.

Market volatility, exacerbated by macroeconomic and geopolitical concerns, is highlighted as a high-risk factor, particularly affecting smaller companies sensitive to market sentiment and economic shocks. The company has responded by closely monitoring portfolio metrics and exchange rates, especially the yen/sterling rate, which impacts the value of the company’s investment portfolio.

Another area of increased risk is the investment in private companies. With a challenging fundraising environment and IPO conditions, the company maintains a cautious approach, limiting such investments to 10% of total assets and frequently updating valuations.

The report also notes a high risk associated with the company’s performance and investment strategy. The market’s reduced appetite for growth stocks has prompted the appointment of a deputy portfolio manager and a non-material change to the investment policy.

Regarding climate and governance, the company maintains moderate risk levels, employing strong ESG stewardship and engagement policies, which are integrated into the investment process.

The discount risk, which concerns the company’s share trading relative to its net asset value, has increased. To address this, the company has authority to buy back shares and has committed to a one-off tender offer if the NAV total return per share underperforms the MSCI Japan Small Cap index over a three-year period.

Regulatory, custody and depositary, and operational risks are considered low and stable, with effective control procedures in place. However, cyber security risk is on the rise due to geopolitical tensions and changes in working patterns, necessitating vigilant information security controls.

Leverage risk is moderate but increasing, as borrowing can magnify losses if investments fall in value. The company has reduced its gearing level from 18% to 16% and refinanced its credit facilities to manage this risk.

Political and associated financial risk is high and increasing, with the Board closely monitoring political developments and their potential financial impact on the company.

The report also discusses emerging risks, such as the societal and financial implications of escalating geopolitical tensions and cyber security threats, including developing AI and quantum computing capabilities.

This article is based on a press release statement from Baillie Gifford Shin Nippon PLC.

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