JPMorgan Japanese (JFJ) has announced its interim results for the six months ended 31 March 2021, during which it underperformed its benchmark, which can be primarily attributed to the market rotation in favour of companies expected to benefit from a recovery in economic activity, facilitated by the vaccine rollout. During the period, JFJ provided a sterling adjusted NAV return of 0.5%, versus a return on its TOPIX index benchmark of 8.5%. However, JFJ’s longer-term numbers remain strong; it has outperformed its benchmark by a cumulative 24.8% over three years, 45.1% over five years and 135.3% over ten years.
Vaccine roll out resurgence may be short lived
JFJ’s managers say that many of the gains achieved by companies that have resurged on the back of the roll out may be short lived. For example, they comment that the share price of department store operators has benefited from an anticipated surge in custom as consumers seek to satisfy many months of unmet demand for household goods and personal items. However, they believe that a one-off increase in demand will not shift this sector from its path of long-term structural decline, as consumers embrace online shopping more wholeheartedly. Reflecting this, the managers continue to look to stocks that they believe tap into Japan’s economic transformation, offering the potential for long-term capital growth as a dynamic new generation of companies emerges.
Portfolio activity – market rotation created opportunities
JFJ’s managers say that the recent market rotation has generated many opportunities for them to invest in the companies they favour at more attractive levels. The surge in popularity of ecommerce has prompted the acquisition of Yappli (Investment Theme – Internet), a software company which builds ecommerce apps. They have have also purchased Minkabu the Infonoid (Investment Theme – Internet), a popular and rapidly growing website providing retail investors with stock market information. At the larger end of the market cap spectrum, the managers bought the consumer electronics giant Sony (Investment Theme – Japan Brand). They believe that, after years of restructuring, Sony now has world leading games and entertainment assets.
The managers have added to the position in Renova (Investment Theme – Environment), which they say is the only Japanese utility company focused solely on renewable energy sources (it owns wind, solar and biomass assets). JFJ also owns Canadian Solar Infrastructure (Investment Theme – Environment), a REIT specialising in solar power and renewable energy facilities, and the managers also bought Hitachi (Investment Theme – Environment), which, thanks to its acquisition of ABB Power Grid, is now the global leader in transmission lines. The managers say that the transmission lines are an increasingly valuable asset, as renewable sources require substantially more infrastructure for grid connection than thermal power.
Portfolio sales
The managers reduced the exposure to Kao (Investment Theme – Japan Brand), a leading producer of household goods, due to poor recent operational performance. They also trimmed JFJ’s positions in meditech company M3 (Investment Theme – Healthcare), theme park and hotel operator Oriental Land (Investment Theme – Japan Brand) and fashion retailer Fast Retailing (Investment Theme – Japan Brand). All of these reductions were on valuation grounds.
Outright sales included Z Holdings (Investment Theme – Internet), as the managers have been disappointed in the company’s efforts to integrate its recently purchased messaging app, Line, with its core internet search engine business, Yahoo, Japan. JFJ’s entire holding in TeamSpirit (Investment Theme – internet), was also sold, due to its repeated failure to meet performance targets. V-Cube (Investment Theme – Internet), was sold as its valuation increased sharply.
Key contributors and detractors to performance
The main contributors to performance during the period included Tokyo Electron (Investment Theme – Automation) and Lasertec (Investment Theme – Automation), which are global leaders in semiconductor equipment production. These companies both benefited as Taiwan Semiconductor Manufacturing Company (TSMC), Intel and Samsung announced major increases in capital expenditures to meet continued growth in demand for high performance computing and 5G and AI solutions. Staffing and employment services company Recruit Holdings (Investment Theme – Internet) also enhanced returns due to the strong performance of Indeed (a leading global online recruitment website), which has increased its share of the global market during the pandemic and is now benefiting from the improvement in labour markets. Renova, a recent purchase noted above, also added to performance – the company’s outlook improved materially following Prime Minister Suga’s commitment to net carbon neutrality by 2050.
In terms of performance detractors, a number of companies suffered recent pull-backs on profit-taking following strong performances during 2020. These included Bengo4.com (Investment Theme – Internet), Japan’s leading digital signature provider, which gained during 2020 as the government mandated a switch to digital signatures and the pandemic forced companies to adopt other long-overdue forms of digitalisation. Similarly, games companies such as Square Enix and Nintendo (Investment Themes – Japan Brand) performed well during the pandemic, as people were forced to entertain themselves at home, but suffered some profit-taking in the first quarter of 2021. JFJ’s managers believe that these two companies will benefit further as, during the pandemic, many gamers downloaded games for the first time, rather than purchasing them in-store, and are likely to continue accessing games in this manner in the future. This new form of purchase makes it easier for the gaming companies to sell additional features to on-line users.
Factory automation company Keyence (Investment Theme – Automation), the portfolio’s largest holding, was another company which performed poorly in Q1 2021 following a strong 2020. However, as with digitalisation and the popularity of on-line gaming, factory automation is a long-term trend, and the managers note that this company has a dominant and growing share of the international market. The managers continue to hold all of these stocks on the basis that their long-term prospects remain very positive, in their view.