In the year to 30th September 2016, JPMorgan Japanese’s total return on net assets was 36.0% in sterling terms, compared with the Tokyo Stock Exchange First Section (TOPIX) Index (the benchmark), which rose by 31.7%. The returns are calculated on a total return basis in sterling terms and were improved by the movement in the yen/sterling rate from Yen181.4 at the beginning of the year to Yen131.5 at its conclusion. They think this change largely reflects weakness in sterling following the EU referendum rather than strength in the yen. The total return to shareholders was 31.5% during the year, assuming the reinvestment of the dividend, as the discount to net asset value widened slightly over the year. The Board proposes, subject to shareholders’ approval at the Annual General Meeting, to pay a final dividend of 3.65p per share (2015: 2.80p).
The investment managers’ report says, at the asset allocation level the sector underweights in banks, which were hurt by the new negative interest rate policy, and utilities were particularly helpful. The main detractor was the gearing which detracted value as the market fell in yen terms.
Top contributing stocks included M3, Keyence, Ono Pharmaceutical, Lion and Cosmos Pharmaceutical.
- M3 operates websites used by doctors and helps pharmaceutical companies to reduce their marketing expenses. It is the number one site in Japan and the United Kingdom amongst other regions. It is a globally unique business with top class management.
- Keyence is a sensor company that is benefitting as more industries automate. It has expanded aggressively overseas in the last few years such that sales outside of Japan now account for over 50% of the total as compared to around 25% five years ago. It makes operating margins in excess of 50% which are some of the highest of any industrial company in the world. The trend towards more automation also benefits holdings in SMC and Fanuc which have margins of 31% and 35% respectively. Regardless of what happens in the global economy they believe companies will continue to automate to reduce costs and increase quality. They are aware of the threat of Asian competition but our bottom up research shows the gap between Japan and the rest of the world remains very wide.
- Ono Pharmaceutical’s Opdivo immunotherapy cancer treatment drug is licensed out to Bristol Myers Squibb in the United States and is a way of treating cancer. The stock performed very well over the year and we sold the position as expectations for future growth became lower.
- Lion Corporation is a manufacturer of consumer goods that changed management in 2012. Its margins have been far below those of domestic and global peers and the new CEO has decided to focus on profits ahead of sales. The company is also expanding rapidly in Asia, particularly China and Thailand where Japanese quality, safety and reliability are significant competitive advantages. It is already number one in online toothpaste sales in China. They have other stocks that play the same theme. Kewpie is the number one mayonnaise company in Shanghai and Beijing with 90% and 60% shares respectively in the consumer mayonnaise market. Consumption of mayonnaise and dressings is relatively new in China and the market has the potential to mimic the strong growth of the Japanese market between 1960 and 1990. Similarly, Pigeon is the number one maker of baby bottles and other baby goods across Asia and has a big opportunity for expansion in India.
- Cosmos Pharmaceutical is a discount drugstore based on the southern island of Kyushu. It is only just beginning to expand across Japan and they believe its business model will be successful elsewhere in the country where there is strong demand for the lowest priced items. This is similar to the success of disruptors Lidl and Aldi in European food retail and, in addition to Cosmos, our holdings in Don Quijote and Seria (Y100 stores) should benefit. These companies will also benefit from increasing industry consolidation. For example, the top ten drugstores in Japan still only have around 25% market share whereas the top two in the UK have over 50%. Consolidation will mean increasing economies of scale for the winner companies. The other major trend in Japanese retail is the increasing penetration of e-commerce which is the reason for our holding in Start Today, an online apparel retailer.
Stocks that contributed negatively to performance included Cookpad, Laox, Toyo Tire, Rakuten and Kaken Pharmaceutical.
- Cookpad operates a recipe website and they had owned it for many years due to the potential for it to monetise its user base of women aged 20-50. However, there was a sudden change in strategy and they sold the shares as a result.
- Laox is a retailer catering to Chinese tourists visiting Japan. It was hit by a slowdown in purchases as the yen strengthened. They sold the shares after reassessing the company’s competitive advantage.
- Toyo Tire was involved in a quality problem in one of its non-core businesses but they sold the shares due to concerns about oversupply in the global tyre industry.
- Rakuten is Japan’s number one e-commerce company. They reduced the position on concerns of increasing industry competition.
- Kaken Pharmaceuticals new drugs grew more slowly than expected and they sold the shares.
JFJ : JPMorgan Japanese soars on sterling weakness