JPMorgan Japan Smaller Companies has announced results for the six months ended 30 September 2015. In the half year ended 30th September 2015 the total return on the Company’s net assets, net of fees and expenses, was -4.5% compared with -5.7% for the Company’s benchmark, the S&P/Citigroup Japan Extended Market Index (Total Return Net) in sterling terms. The total return for ordinary shareholders was -7.9%, reflecting a widening of the discount at which the shares were trading to the cum-income Net Asset Value at the period end.
The manager’s report says their attribution analysis shows that sector allocation was a modest detractor to the performance relative to the benchmark. The largest negative contributors with respect to the sector allocation were banks (underweight), telecommunication services (overweight) and food, beverage & tobacco (underweight). The fund owns Okinawa Cellular in the telecommunication sector. The company commands some 50% share of the mobile telephony market in Okinawa, which is one of the few prefectures enjoying a growing population plus a strong economy. The company, along with other mobile telephony operators, faced a setback caused by political pressure on the pricing of services.
The portfolio’s top contributors to performance were software and services (overweight) and insurance (overweight). The constituents of software and services are mostly domestic economy oriented and are therefore somewhat insulated from the negative impact of any slowdown in emerging countries. There are a number of internet companies which have continued to deliver strong earnings growth and as a result have seen their shares perform well. They own Anicom in the insurance sector. It is dominant in the pet insurance market in Japan, which is still at an early stage of growth. Anicom continued to deliver strong growth in terms of both the number of insurance policies in force and also of earnings, and it was rewarded with a rising share price.
While the sector allocation detracted from the relative performance, this was offset by the positive contribution of stock selection. The stocks which contributed most positively include Sohgo Security Services (commercial & professional services), Anicom (insurance), Yonex (consumer durables & apparel) and Kaken Pharmaceutical (pharmaceuticals, biotechnology & life sciences). Sohgo Security Services is the second largest operator of home and office security services in Japan after Secom. The company has grown strongly over the last few years under the new management team that took charge in 2012 following many years of stagnation. Its profit margin still lags that of Secom and they believe there is further scope for the company to expand its margin and therefore profit. Yonex is a new holding. The company has a strong global brand in badminton equipment from which it generates over 50% of its revenue. The majority of badminton equipment sales come from Asia where the sport is very popular and the market is growing strongly. The company started to place greater emphasis on this core business in 2013, and allocated resources away from less important businesses such as golf equipment. This change is resulting in stronger top-line growth and higher profitability, and investors have taken note. Kaken Pharmaceutical is another new holding. The investment case for Kaken Pharmaceutical rests largely with a drug called Jublia/Clenafin (which treats toenail fungus), launched in 2014. We believe the drug has potential peak sales of over US$1 billion. At the time of the purchase, the market capitalisation of Kaken was only US$3 billion and they believed the risk/reward equation was compelling.
On the other hand, Iriso Electrics (technology hardware & equipment) and Aida Engineering (capital goods) underperformed and detracted most from the performance. Iriso Electrics manufactures connectors for electric components and has one of the leading positions in automobile components. They believe automobiles will be equipped with an increasing number of electric components as the advanced driver assistance system proliferates. The shares reacted badly when the company announced poor quarterly results. They believe this is a temporary setback and continue to own the shares. Aida Engineering manufactures press machines for the auto industry. It has enjoyed strong order growth, reflecting the increasing complexity of materials that form the bodies of automobiles, and there is also volume growth in emerging markets. The stock’s poor performance reflects concerns about the emerging economies in general, poor auto sales in particular in China, and the potential negative implication for automobile capex. They see no immediate change in the outlook for Aida but continue to own the stock given its medium and longer term growth potential.
JPS : JPMorgan Japan Smaller outperforms a falling market