JPMorgan Japanese (JFJ) and Japan Small Cap Growth & Income (JSGI) have announced that the two companies have agreed to a combination where JSGI’s assets will be rolled into JFJ. JSGI shareholders will be entitled to realise up to 25% of their investment in JSGI for cash. 

The current investment manager of both companies, JPMorgan Asset Management and JFJ’s lead portfolio managers, Nicholas Weindling and Miyako Urabe, will continue to manage the enlarged JFJ, investing in accordance with JFJ’s existing investment objective and policy. Pending completion of the transaction, Miyako Urabe will remain lead portfolio manager, alongside Xuming Tao, of JSGI. The respective boards and JPMorgan believe that the outlook for Japanese equities remains compelling with a combination of improving economic fundamentals, structural transformation and corporate governance reforms. The transaction would result in a company with net assets of up to approximately £1.0bn, depending on the uptake of the cash exit opportunity, and an estimated ongoing charges ratio of 0.63%.

QD comment: The combination of the two JPMorgan funds, JFJ and JSGI, makes clear sense given the similarities in investment mandates and the diminishing scale of JSGI with a market cap of around £160m. From a practical perspective it appears that little will change for JFJ investors outside of the usual scale and management fee benefits, with JPMorgan also covering the transaction costs of the deal. JSGI investors will benefit from an economic uplift given the divergence in discounts, and will benefit from the solid trajectory of the JFJ trust. 

The announced benefits of the transaction our outlined in full below:

• Broad All-Cap strategy to capture a compelling investment opportunity: the JPMorgan portfolio managers have an unconstrained approach. This means that they can and do invest anywhere in the market cap spectrum, depending on where they see the best opportunities. The investment opportunity in Japan stretches across the full market capitalisation spectrum, and JPMorgan anticipates that a blend of investments in large, mid, and small-cap Japanese companies should enable investors to fully capture the revitalisation of the Japanese equity growth story through the corporate governance revolution.
• Continued access to the market-leading resources of JPMorgan: the investment manager of both companies is JPMorgan, an institutional asset manager with $2.9 trillion of AUM, including $15.5 billion in Japanese equities as of 30 June 2024. JFJ will continue to benefit from the expertise of its portfolio managers, Nicholas Weindling and Miyako Urabe, with Miyako providing continuity from her other role as lead portfolio manager of JSGI.
• Increased scale: JFJ is a constituent of the FTSE 250 Index, with a market capitalisation of £773.0 million and net assets of £847.6 million as of 29 July 2024. It is the largest Japanese equity investment trust. The transaction will increase the net assets of JFJ to approximately £1.0 billion, depending on the uptake of the cash exit opportunity. The expected benefits should include increased secondary market liquidity, a larger marketing presence, and greater relevance to larger investors as a direct consequence of size.
• Reduced management fees: subject to the successful completion of the transaction, the board of JFJ has agreed to a new and reduced investment management fee with JPMorgan Funds Limited (“JPMF”) for the enlarged JFJ that is expected to reduce the blended annual management fee from 0.58% on net assets to 0.49% on net assets, depending on the uptake of the cash exit opportunity. The marginal fee rate will be 0.35% on net assets in excess of £750 million. For JSGI shareholders rolling into JFJ, this represents a significant reduction in headline management fees from 0.83%.
• Lower ongoing charges: JFJ’s expected ongoing charges ratio (OCR), pro forma for the transaction (and excluding the costs and cost contribution in relation to the transaction), is expected to be 0.63% in the 12 months following the transaction. This compares to JFJ’s OCR of 0.75% in the half-year to 31 March 2024 and JSGI’s OCR of 1.20% in its financial year ending 31 March 2024.
• Active approach to discount management: the JFJ board takes an active approach to managing the discount and has done so since early 2022. The JFJ board believes that this approach has dampened share price volatility and moderated the discount. This has contributed to JFJ consistently trading at a narrower discount than its immediate direct peer group. Over the 12 months to 29 July 2024, JFJ has repurchased 7.83 million shares, representing 5.15% of the opening number of shares.
• Direct cost neutrality: JPMF has agreed to cover the direct costs of the transaction such that there is no NAV dilution for either JFJ or JSGI shareholders receiving new JFJ shares pursuant to the transaction from these costs.
• Economic uplift for JSGI shareholders: JFJ is currently trading at a c.8.8% discount to NAV – its 12-month average is 8.7%. This compares to a current discount of c.13.8% for JSGI, with a 12-month average of 12.5%. JSGI’s shareholders are therefore expected to receive an uplift in the value of their holding following the completion of the transaction. In addition, JSGI shareholders may elect for the cash option, up to an aggregate limit of 25% of JSGI’s outstanding shares, at a 2% discount to the JSGI Residual FAV (as defined below) less the costs of realising the assets required to create the cash pool.

Stephen Cohen, chair of JPMorgan Japanese, commented:

“The JFJ Board is pleased to have agreed heads of terms for a combination with JSGI which will result in a larger, more liquid investment trust with net assets approaching £1 billion and a highly competitive ongoing fee structure. JFJ will continue to benefit from the expertise of its Tokyo-based portfolio managers, Nicholas Weindling and Miyako Urabe. JFJ offers a broad all-cap strategy and is ideally positioned to capture Japan’s compelling investment opportunity.”

Alexa Henderson, chair of JPMorgan Japan Small Cap, commented:

“Over recent months, the board of JSGI, together with its advisers, have considered a number of possible alternatives for the Company. Following the conclusion of this process, the board is delighted to propose the combination of JPMorgan Japan Small Cap Growth & Income and JPMorgan Japanese Investment Trust. The board believes that the proposed combination will provide continuity of investment process and philosophy within a broader market opportunity. The proposed combination will provide a much larger investment trust with significantly lower costs for shareholders.“

JFJ : Japan Small Cap Growth & Income to be merged into JPMorgan Japanese