Fidelity Japanese Values has published results for the year ended 31 December 2014. Over the year the fund’s net asset value rose by 3.1%, underperforming the Russell Nomura Mid/Small Cap Index which rose by 5.1% but beating the TOPIX which rose by 0.7% and the fund’s peer group which delivered a 0.5% increase in NAV on average.
The discount widened from 8.9% to 11.6% over the course of the year and so the share price was flat over the period.
The manager’s report is fairly comprehensive, we have reproduced the performance attribution section here.
“Over the year, stock selection in the technology sector supported returns, with niche global manufacturers adding value. A combination of a weaker yen and robust global demand contributed to margin expansion. Major contributors included Japan Aviation Electronics, Hamamatsu Photonics and Rohm. In the wholesale sector, used car auctioneer Gulliver International, which struggled in 2013, recovered lost ground.
Conversely, holdings in the retail trade sector performed poorly, as an impending consumption tax hike led to increased uncertainty. An overweight position in Seria accounted for a large part of the underperformance. Holdings in the information & communication sector also struggled; the position in WirelessGate was one of the largest detractors.
Elsewhere, stock selection in the service sector was mixed. Internet-related stocks were generally weak, relinquishing a portion of last year’s solid gains. Strong contributions from M3, Tosho, Resorttrust and N. Field were more than offset by losses from key holdings in Livesense, Round One, Sanix and Kakaku.com.
Principal Contributors
M3 operates medical portal sites dedicated to health care professionals in Japan, USA, South Korea and Europe. Strong earnings growth is driven by overseas expansion, particularly in China. It also provides large-scale clinical trial services for pharmaceutical companies, which are expected to give additional impetus to M3’s mid to long term growth. M3 has consistently added value over time since the position was initiated in 2007.
Japan Aviation Electronics is another good performer in the portfolio. It is a niche manufacturer of connectors used for smartphones and automobiles. It is benefiting from secular growth in electronic parts used for automobiles and has successfully maintained a large market share in connectors used for mobile devices. Strong sales growth and a weaker yen fuelled expectations for margin expansion throughout the year.
Tosho operates sports club facilities and hotels primarily in the Aichi prefecture. Strong earnings momentum is driven by new openings of sports clubs and hotels. Business expansion outside Aichi is expected to be the key earnings driver over the medium term.
Hamamatsu Photonics is the world’s leading supplier of ultrasensitive light sensors that have potential uses in a wide range of fields, including medical, dental and chemical analysis, scientific research and transportation. It has a competitive niche in the global diagnostic imaging equipment market, with exposure to the high-end and high-margin PET/CT, PET/MRI, and digital X-ray systems.
Rohm is another beneficiary of a weaker yen and increasing demand for power semiconductors for automotive use. Its products include driver integrated circuits (“IC”) for light-emitting diode (LED) headlights, semiconductors for infotainment systems, and driver ICs and silicon carbide inverters to produce high efficiency motors with built-in inverters.
Principal detractors
Livesense operates job placement and rental apartment search websites. It was the single largest detractor from returns. Although the company was well-positioned to benefit from increasing job offers, its profit was under pressure from a decline in successful job placements and rising advertisement costs. As no near term improvement in the company’s cost structure was seen, the position was sold in December 2014.
NuflareTechnology is a manufacturer of semiconductor production equipment with a dominant global market share in mask writers. Its share price fell on earnings disappointments and as a result of earnings downgrades, its valuations looked stretched. The position was sold in August 2014.
Seria operates a nationwide chain of 100-yen shops in Japan, an equivalent of a pound store in the UK. Despite weak consumption after the sales tax hike, Seria’s same store sales have continued to grow on a year-over-year basis. However, concerns about rising costs of imported goods due to the yen’s weakness weighed on its share price. The overweight position in the company is maintained, as Seria’s inventory management and demand forecast capabilities make it a long term winner in the retail sector.
Aeon Mall is another retailer that fared poorly amid weak consumption after the sales tax hike. It operates a chain of large-scale shopping malls in Japan. Rents received by Aeon Mall are highly sensitive to changes in sales at tenant stores, and rental income after the tax hike in April has been weak. The company also scaled back its domestic mall rollout plan in view of the current shortage of construction workers. Although the impact of weaker sales growth was within expectations, the change to its mall opening plans has negative implications for its mid term growth scenario. The position was sold in November 2014.
WirelessGate provides Wi-Fi services in public spaces in Japan. It was one of the major contributors to returns in the first half of 2014, but its share price dropped sharply in response to an unexpected senior management change. The former CEO was appointed only six months ago in order to drive the new Wi-Fi environment enabler service. However, the founder of the company took over the position to accelerate an expansion of the existing MVNO (Mobile Virtual Network Operations) business. Although its profit margins are currently under pressure given the start-up costs of a new high-speed connection service, its long term growth scenario remains intact. Therefore, it remains in the portfolio. ”
FJV : Fidelity Japanese beats peers but lags index