JPMorgan Japan Small Cap Growth and Income outpaced by value and large cap rally

JPMorgan Japan Small Cap Growth and Income (JSGI) reported annual results for the 12 months ending 31 March 2024.  

• JSGI reported a NAV total return of 5.0% and share price total return of 2.3% for the year, underperforming its benchmark MSCI Japan Small Cap Net Return Index which returned +12.0%. 

• The managers’ focus on quality growth stocks in the small cap space underperformed as value stocks and larger caps were favoured.  

• The top three contributors were Nippon Sanso, Japan’s number one supplier of industrial gas ; Sanwa Holdings, the number one shutter maker in Japan; and OSAKA SODA, a chemical company. 

• The three major detractors were Milbon, a manufacturer of salon exclusive hair care products; Taiyo Yuden, an electronic components manufacturer; and Square Enix, a video game developer.  

• Key new purchases during the reporting period included Azbil, LIFEDRINK and Sohgo Security Services. 

• With effect from 1st April 2024, the manager agreed to reduce its investment management fee. The investment management fee will be charged at the rate of 0.85% (previously 1%) per annum on NAV up to £150m, and at the rate of 0.75% thereafter. 

• Naohiro Ozawa, one of the JSGI’s portfolio managers, stepped down as manager from 1 April 2024 

• Total dividends of 14.2p per share were paid for the year, unchanged from 2023. JSGI operates a policy of paying out 1% of NAV as a dividend each quarter. 

• JSGI’s discount widened to 12.5% at year-end, up from 9.8% the previous year. As a result the board resumedshare buybacks, repurchasing 166,117 shares (0.3% of shares) during the year. 

Alex Henderson, JSGI’s chair, commented 

“The Board is positive about the Company’s prospects for several reasons. Foremost signs that the Japanese economy is emerging from its long period of deflation are most welcome. Rising wages should also encourage consumer spending, while exporters are enjoying the competitive benefits of the weak yen. Other structural trends, including digitalisation, de-carbonisation, changing demographics and technological innovation all augur well for productivity and profits over the medium term. As well, ongoing reforms to Japan’s corporate governance also promise to drive increases in shareholder returns for years to come. Despite these positives, equity valuations are still relatively low compared to other markets or relative to the market’s own history. After years of disinterest, it is gratifying to see that recent developments in the Japanese equity market seem to be finally capturing the attention of investors, including international investors. 

“In short, Japan’s investment environment is more congenial than it has been for some time, especially for innovative smaller companies with exposure to the structural changes underway across the economy. The Board believes that the Portfolio Managers’ focus on quality and growth, supported by JPMorgan’s extensive, global and Tokyo-based research resources, mean that the Company is ideally placed to identify and capitalise on the many interesting opportunities this environment is generating for smaller cap businesses. We therefore share the Portfolio Managers’ confidence in the Company’s ability to deliver attractive levels of capital growth, combined with a regular income, to shareholders over the long term.”