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Unlisted name is Fidelity Japan’s ‘standout contributor to performance’

JPMorgan Japan AGM 2018

Unlisted name is Fidelity Japan’s ‘standout contributor to performance’ – Fidelity Japan (FJV) has released its interim results for the six months to 30 June 2021, during which time its NAV rose by 2.3% and its share price was up 2.5%. The company said this reflects the fact that the discount narrowed marginally to 6.6% from 6.8% at the start of the period.

One of the company’s newest unlisted securities, Coconala, was a significant contributor to performance and an upswing in global growth alongside rising inflation expectations and a weaker yen is a favourable combination for corporate profits in Japan.

Meanwhile, manager Nicholas Price, said he reduced exposure to technology-related companies in the electric appliances sector, taking profits in strong performers as we progress through the cycle and where relative valuations had become extended. Positions in FA-related names Yaskawa Electric and Fanuc were sold, while holdings in component makers TDK and Murata Manufacturing were reduced. The funds from these trades were recycled into new names across the services, chemicals, and pharmaceuticals sectors.

The level of gearing increased marginally over the review period, to 24.6% from 23.5%.

Extract from the manager’s report:

In the internet space, Coconala, a unique online consumer-to-consumer freelancing platform that enables users to trade knowledge, skills and experience, was the standout contributor to performance. I first invested in the company as an unlisted security in 2019, recognising it as a beneficiary of the many structural changes occurring in Japan’s labour market, and attracted by its high and sustainable growth rates, as well as the high operating leverage of its business. Coconala had a strong debut on the Tokyo Stock Exchange in March 2021 and the value of the fund’s holding increased more than threefold. The success of this investment highlights the benefits of our on-the-ground research and our continued efforts to unearth the most attractive opportunities across corporate Japan.

Outlook

The virus situation in Japan is improving, albeit with differences in approach to tackling the problem on a regional basis. It is encouraging that the vaccine rollout has accelerated sharply in recent months. While the country is clearly moving in the right direction, the proliferation of new COVID-19 variants and the potential for renewed restrictions are near-term risk factors that we continue to monitor.

Manufacturing companies in Japan remain highly geared to a cyclical recovery in global trade and production, and COVID-19-sensitive services sectors are poised for a sharp rebound as the domestic economy normalises in the second half of the year. An upswing in global growth alongside rising inflation expectations and a weaker yen is a favourable combination for corporate profits in Japan. Against this backdrop, the market is entering a transitional phase, during which earnings growth and individual company fundamentals take over from multiple expansion and growth-at-any-cost as we saw last year.

As I start to see better earnings announcements in fiscal 2021, there will be an opportunity to pick up companies that are changing into or returning as growth names. A number of themes present themselves. Certainly, clean energy and environmental efficiency are areas where Japan has some very competitive companies that can supply solutions to meet the regulatory and productivity needs of customers globally. COVID-19 has also accelerated trends in e-commerce and digital transformation. As profits recover, companies will prioritise those areas. I am also looking to cast the net further and find companies with recovery potential in areas such as leisure and travel as the vaccination rollout in Japan accelerates.

Japan continues to offer a wealth of under-researched mid/small-cap growth companies, where I typically find better business models and higher returns on equity, and management is more incentivised in terms of shareholder returns. Active managers like me, based here in Japan, have the opportunity not only to invest in established global leaders, but also to unearth less well-known companies (including pre-IPO), where lower levels of analyst coverage can often create some great mispriced opportunities. In an uncertain environment, our in-depth research and on-the-ground knowledge is invaluable when looking at the micro level and speaking to company management to fully understand the current dynamics.

FJV : Unlisted name is Fidelity Japan’s ‘standout contributor to performance’

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