JPMorgan Japan Small Cap Growth & Income (JSGI) has announced its annual results for the year ending 31 March 2023.
- Over the 12 month period JSGI reported a NAV total return of -5.7% and share price total return of -7.8%. This is compared to the positive 5.0% return of its benchmark, the MSCI Japan Small Cap Index.
- This underperformance can be primarily attributed to the wider underperformance of growth stocks over the sampled period, with JSGI having a clear bias to Japanese quality-growth stocks – the catalyst for this underperformance being continued concerns over inflation and rising interest rates in major economies.
- Positive performance contributors included Capcom, the videogame publisher, Yamayo Kogyo, the electric arc furnace steelmaker, and Medley, the healthcare staffing provider; the largest negative contributors were Tosho, a gym operator, MEC, a specialist adhesion manufacturer, and Benefit One, a job benefit outsourcer.
- JSGI finished its year on a 9.8% discount, having traded on an average discount of 8.2%. JSGI currently trades on a 11.0% discount. The board did not repurchase shares during its financial year.
- In accordance with JSGI’s dividend policy of paying a regular dividend equal to 1% of the company’s NAV each quarter, JSGI paid dividends totalling 14.2p per share for its financial year, down from the 20.3p it paid in the prior year.
JSGI’s investment managers commented:
“Regardless of these external and domestic events, we remain optimistic about the long-term outlook for Japanese small cap companies, and your Company, for several reasons. The average valuations of Japanese companies remain reasonable, and lower than both historical averages and valuations in most other major markets. Furthermore, Japanese equity markets will draw near-term support from Japan’s belated lifting of COVID-19 restrictions. Japan reopened its borders in October 2022, much later than most other developed nations, and just before China’s surprise decision to abandon its zero COVID-19 policies. So inbound tourism and a general reopening of the Japanese economy have only just gained traction in recent months. China’s reopening is also supportive for many Japanese companies.
“However, in our view, the most important structural support for Japan’s equity market over the medium to longer term will be the ongoing improvement in corporate governance. The past few years have seen clear progress on this front, in large part thanks to the Corporate Governance Code introduced in 2015. We have seen notable improvement in areas such as board independence, and we expect more positive developments ahead, especially increased shareholder returns. Half of Japan’s listed non-financial companies still have net cash positions, so there is significant scope for this cash to be returned to shareholders over the longer term.
“The pandemic has given added impetus to some other positive structural changes underway in Japan, especially the application of technology and digitalisation in many areas of economic activity. These trends will underpin growth, productivity and corporate earnings for years to come. In sharp contrast to other developed economies, Japan’s smaller companies are at the forefront of this innovation and change making them ideally positioned to prosper over the long term. However, the sell side coverage for such exciting mid- and small-cap companies tends to be thin, so many investors overlook the compelling opportunities available in this sector of the market.”