Fidelity Japan’s results for 2024 show marked underperformance of its benchmark, with a NAV return of -1.8% and share price return of -5.7% against +10.0% for the TOPIX. The chair says “this now means that the three and five year returns for the company are disappointingly behind the Index and have also lagged competitor funds.” The discount widened from 9.5% to 13.1%.

The chair attributes recent underperformance to a bias to small and mid cap growth stocks and some “flaws in stockpicking”. The gap between growth and value – thanks largely to rising interest rates – is significant: the MSCI Japan Value Index has risen by 42.2% in sterling terms over the three years to 31 December while the MSCI Japan Growth Index has fallen by 3.7% over the same period.

Over the course of the year, 10,828,535 ordinary shares were repurchased for holding in Treasury, at a cost of £18,857,000. This represented 8.0% of the issued share capital of the company as at 31 December 2024 and added 1.3% to the NAV total return for the year. Subsequent to the year end and up to the latest practicable date of this report, the company has repurchased a further 1,532,679 shares at a cost of £2,676,000.

The chair feels that a sustained reduction in the discount is only likely if broad investor interest in Japan continues to increase and the investment performance recovers. Meanwhile, the board and the manager will continue their efforts to raise the company’s profile and promote the investment opportunities in the Japanese equity market.

Portfolio manager change, unconditional tender in 2027, and continuation vote

The board has recently been notified that its manager Nicholas Price, plans to retire at the end of this calendar year after a 30 year career with Fidelity in Japan. His assistant portfolio manager, Ying Lu, will step up with effect from 1 October 2025. Nicholas will continue to work with Ying until the end of the year. Ying has been working closely with Nicholas for the past three years and the board does not expect any change in the approach to the investment management of the company.

The board continues to believe that the Fidelity investment team in Japan is one of the best resourced in the industry. It also believes that we will see a reversion to a market environment where the investment style of the Fidelity team will once again generate the significant outperformance seen in the past and particularly the years ended 2019 and 2020. Illustrating how quickly things can change, it suggests that it is worth noting that in December 2024 alone, the NAV of the company rose by 5.2% and the share price by 5.8% against an index increase of 0.9%.

Notwithstanding its strong backing for Nicholas and the Fidelity team, the board recognises that continued underperformance would be unacceptable to shareholders. Accordingly, linked to the vote for the continuation of the company at the forthcoming AGM, it is proposing an unconditional tender offer of 100% of the issued share capital following the three years to 31 December 2027. The tender will be at a price close to NAV.

It says that shareholders may ask why the board is recommending continuation without an immediate cash exit after this period of underperformance. Its answer to this is that investment performance has an element of cyclicality, outcomes are unpredictable and investing requires an ability to withstand the gyrations of the markets and take a long-term view. It feels that the question for the board and shareholders is whether a well-resourced and experienced team with a strong historic track record should be dismissed based on the last three years, or whether there is a strong possibility that the current growth-oriented portfolio, highly differentiated from the benchmark, will emerge from its recent trough/doldrums and deliver the sorts of returns that the board and shareholders expect. The board has taken this view.

The tender offer will be in place for the company’s Annual General Meeting to be held in May 2028.

[The trust’s 12 month returns (to close of play last night) are the worst in its Japan large cap sector and would rank second-worst in the four-strong Japanese smaller companies sector too. The best-performing trust in its peer group is JPMorgan Japanese, which we recently published a note on. It also has a growth bias and is underweight large caps relative to TOPIX. I think this comes down to improving stock selection. Given that FJV is on a 13% discount and JFJ an 11% discount, I would just switch into JFJ now.]

FJV : 100% tender offer for Fidelity Japan in 2027