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Aberdeen Japan held back by yen hedge

Aberdeen Japan’s share price total return was almost 14% during the six months ended 30 September 2016, helped by both a slight tightening of the discount and the slide in sterling following the Brexit referendum result, including the effect of the hedge which, as expected, reduced the sterling related gain.

The underlying portfolio outperformed the benchmark by 0.6% over the six month period. In contrast to this positive portfolio performance, the sterling hedge produced a substantial loss of 9.3% during the period as a result of the 16% sterling devaluation vs the yen following the EU referendum in the UK in June.  This unexpectedly sharp depreciation of sterling has turned the cumulative result of the hedge from virtually neutral at the end of the previous period to a reduction of about 2.7% p.a., although since the end of the period the yen has weakened. The Board, in consultation with the Manager, keeps the appropriate level of the sterling hedge under review in the light of the underlying yen exposure in the portfolio.

A final dividend of 4.2p per ordinary share in respect of the year ended 31 March 2016 (2015 – 2.6p) was paid to shareholders on 8 July 2016.

The Trust’s NAV total return per share rose by 13.0% in sterling terms over the period, compared to the benchmark index’s total return of 21.8%. The equities holdings for the Trust returned 24.3% on a gross basis (before expenses), whilst the sterling hedge cost the Trust 9.3% as the Yen strengthened against sterling. While the hedge worked against the Trust in the period under review, it has been beneficial in mitigating the yen’s weakness in prior years. Meanwhile, the equities holdings’ outperformance was largely driven by positive stock selection. In a challenging period for the Japanese equity market, share prices of corporates with solid balance sheets, established management teams and resilient profit generation have broadly outperformed the market.

Among the notable contributors to the outperformance were the Trust’s holdings in basic materials. Shin-Etsu Chemical, a specialty chemicals manufacturer, was buoyed on expectations of price increases in the PVC and silicon wafer businesses. This was reflected in its decent quarterly results, which were underpinned by improving margins. Meanwhile, Kansai Paint and Nippon Paint both lifted returns, as they posted robust earnings, driven by lower input costs and brisk demand for products from emerging markets.

Holdings in the industrials sector also lifted performance, as sensor manufacturer Keyence reported better-than-expected full-year results, with good sales across all regions on the back of strong demand for factory automation. Elsewhere, diversified industrials parts maker Nabtesco gained on rising orders at its construction equipment and robotics businesses. In the health care sector, Chugai Pharmaceutical continued to show progress with its development pipeline.

Among the holdings that detracted from performance were shares of Aeon Financial Service which fell on the issue of Yen34 billion in new shares and Yen30 billion in convertible bonds, cash which was used to repay existing debt and improve its capital ratios. The raising of funds, which will dilute the stake of existing shareholders by 13%, is also in anticipation of the company’s IT investments in the near term, and may impact its ability to replenish its capital requirements.

Meanwhile, Japan Tobacco’s share price lagged the benchmark’s rise on concerns of a loss in market share to competitor Philip Morris, which launched new electronic cigarette products. Japan Tobacco had introduced a similar product, but initial limited supply could not keep up with strong demand for the product. The company intends to ramp up its manufacturing and marketing efforts in the near term.

Also impacting performance was domestic resort developer Resorttrust, as resort membership sales this year waned in comparison to last year’s better sales that were fuelled by the launch of an urban resort in Kobe. Higher depreciation at its newly-opened health check-up facility also weighed on profits. However, they think that Resorttrust’s growth outlook remains favourable, with a healthy development pipeline for resorts in Japan, coupled with steady demand for such facilities.

AJIT : Aberdeen Japan held back by yen hedge

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