Register Log-in Investor Type

Research

JPMorgan Japanese Investment Trust – Medium-term outlook undimmed

Medium-term outlook undimmed

JPMorgan Japanese Investment Trust (JFJ) performed exceptionally well last year. However, as our last update note warned, in periods of market exuberance, JFJ’s performance may lag its benchmark.

Over the past couple of quarters, investors have become more excited about the prospects of post-COVID economic recovery in Japan and globally. As lower quality stocks have bounced, JFJ has given up some of its considerable outperformance relative to TOPIX in recent months. Nevertheless, the managers remain enthused about the medium-term prospects for JFJ’s portfolio and are committed to their stance of backing the ‘new Japan’.

Capital growth from Japanese equities

JFJ aims to produce capital growth from a portfolio of Japanese equities and can use borrowing to gear the portfolio within the range of 5% net cash to 20% geared in normal market conditions.

Results for the six months ended 31 March 2021

Over the six-month period ended 31 March 2021, JFJ provided a sterling adjusted NAV return of 0.5%, versus a return on its TOPIX index benchmark of 8.5%. However, JFJ’s longer-term numbers remain strong; it has outperformed its benchmark by a cumulative 24.8% over three years, 45.1% over five years and 135.3% over ten years. Since 31 March 2021, the NAV has decreased by 6.5% (as
at 18th May 2021), compared -3.6% for the benchmark and -6.4% for the share price.

JFJ’s absolute performance over the period was driven in part by sterling strengthening against the yen by 12.1%. The policy remains not to hedge the currency.

As usual, no interim dividend is planned.

The managers believe that market sentiment has been shifting in favour of companies that might be expected to benefit from a recovery in economic activity facilitated by the rollout of vaccination programmes. However, in Japan’s case, there is much more work to do on this front.

Lagging the world on vaccinations

While case numbers and deaths have been accelerating recently, relative to many other countries, Japan has fared fairly well on these scores, with a cumulative 11,900 deaths since the start of the crisis (19 May 2021).

Where the government has fallen down, however, is in the rate of vaccination within the country. As Figure 2 shows, Japan is lagging a long way behind on this measure.

One upshot of this is to put the Tokyo Olympics in doubt, creating the potential for a public relations disaster for the government if they are cancelled at a late date.

The managers are not unduly worried about the potential political fallout from this. First, the LDP retains its stranglehold on Japanese politics and, as the recent transition from Prime Minister Abe to Suga illustrated, any new leader would be unlikely to have much impact on policy. Second, JFJ’s portfolio has a long-term focus and the potential short term fillips, for example from increased tourism, around the games are of limited consequence.

Low-quality surge is likely to be temporary

JFJ’s managers say that many of the gains achieved by the relatively low-quality companies that have resurged recently may be short lived. For example, they comment that the share prices of  department store operators have benefited from an anticipated surge in custom, as consumers seek to satisfy many months of unmet demand for household goods and personal items. However, the trend for these businesses is still one of long-term structural decline. Japan’s adoption of online shopping may be behind that of comparable countries, but consumers are expected to embrace this.

Maintain focus on the new Japan

The managers continue to position the portfolio to take advantage of a number of themes that should benefit from the modernisation of Japan’s economy. These include companies that can take advantage of the country’s belated adoption of digital technology. Examples cited are companies supporting cashless payments, digital signatures, remote healthcare services, remote working, automation, and cloud data storage.

In addition, in October 2020, Prime Minister Suga committed Japan to achieving net zero emissions and carbon neutrality by 2050. To achieve this, Japan must decarbonise its power generation sector away from coal and gas. Renewable energy is an emergent theme within the portfolio but an increasingly important one.

Japan’s aging population is supportive of increasing mergers and acquisitions activity within the country, as business owners reach and pass normal retirement dates. The managers say that the trend towards improving corporate governance, of which this is just one driver, is real and making progress. Strong balance sheets were beneficial in the face of COVID but are also supporting growing dividends and rising share buybacks. In fact, the trend towards improving corporate governance is now so ubiquitous that the managers decided to remove this as an investment theme, adding the environment in its place.

Asset allocation

Sector weights are driven by stock selection, but they reflect the portfolio’s bias to the ‘new’ Japan and the absence of exposure to sectors such as pharmaceuticals, transportation equipment and banks. The distribution of the portfolio by sector is much as it was six months ago, except that the exposure to information & communication by about five percentage points has reduced in favour of electric appliances.

Top 10 holdings

The gyrations in markets over the past six months have altered the makeup of the list of 10-largest holdings. Since we last published, M3, Nihon M&A Center, Bengo4.com and Hikari Tsushin have dropped out of the list and have been replaced by Recruit Holdings, Tokyo Electron, Shin-etsu Chemical and Sony.

Investment activity

JFJ’s managers say that the recent market rotation has generated many opportunities for them to invest in the companies they favour at more attractive levels. Within the internet theme, the surge in popularity of ecommerce has prompted the acquisition of Yappli, a software company which builds ecommerce apps. They have also purchased Minkabu the Infonoid, a popular and rapidly growing website providing retail investors with stock market information.

At the larger end of the market cap spectrum, the managers bought the consumer electronics giant Sony (theme: Japan brand). They believe that, after years of restructuring, Sony now has world leading games and entertainment assets.

Within the environmental theme, the managers have added to Renova, which they say is the only Japanese utility company focused solely on renewable energy sources (it owns wind, solar and biomass assets). JFJ also owns Canadian Solar Infrastructure – a REIT specialising in solar power and renewable energy facilities – and Hitachi, which, thanks to its acquisition of ABB Power Grid, is now the global leader in transmission lines. The managers say that the transmission lines are an increasingly valuable asset, as renewable sources require substantially more infrastructure for grid connections than traditional thermal power.

Sales

The managers reduced the exposure to Kao (theme: Japan brand), a leading producer of household goods, due to poor recent operational performance. They also trimmed JFJ’s positions in meditech company M3 (theme: healthcare), theme park and hotel operator Oriental Land (theme: Japan brand) and fashion retailer Fast Retailing (theme: Japan brand). All of these reductions were on valuation
grounds.

Outright sales included Z Holdings (theme: internet), as the managers have been disappointed in the company’s efforts to integrate its recently purchased messaging app, Line, with its core internet search engine business, Yahoo, Japan. JFJ’s entire holding in TeamSpirit (theme: internet), was also sold, due to its repeated failure to meet performance targets. V-Cube (theme: internet), was sold as its valuation increased sharply.

Performance

Figures 7 and 8 reflect the short-term pullback in JFJ’s relative performance as lower quality, old economy stocks, bounced.

Positive contributions

The main contributors to the trust’s performance during the period included Tokyo Electron (theme – automation) and Lasertec (theme – automation), which are global leaders in semiconductor equipment production. These companies both benefited as Taiwan Semiconductor Manufacturing Company (TSMC), Intel and Samsung announced major increases in capital expenditures to meet continued growth in demand for high performance computing and 5G and AI solutions.

Staffing and employment services company Recruit Holdings (theme – internet) also enhanced returns due to the strong performance of Indeed (a leading global online recruitment website), which has increased its share of the global market during the pandemic and is now benefitting from the improvement in labour markets as economies continue to re-open. Renova, a recent purchase noted above, also added to performance – the company’s outlook improved materially following Prime Minister Suga’s commitment to net carbon neutrality by 2050.

Negative contributions

In terms of performance detractors, a number of companies suffered recent pullbacks on profit-taking following strong performances during 2020. These included Bengo4.com (theme: internet), Japan’s leading digital signature provider, which gained during 2020 as the government mandated a switch to digital signatures and the pandemic forced companies to adopt other long-overdue forms of digitalisation.

Similarly, games companies such as Square Enix and Nintendo (theme: Japan brand) performed well during the pandemic, as people were forced to entertain themselves at home, but suffered some profit-taking in the first quarter of 2021. JFJ’s managers believe that these two companies will benefit further as, during the pandemic, many gamers downloaded games for the first time, rather than
purchasing them in-store, and are likely to continue accessing games in this manner in the future. This new form of purchase makes it easier for the gaming companies to sell additional features to on-line users.

Factory automation company Keyence (theme: automation), the portfolio’s largest holding, was another company which performed poorly in Q1 2021 following a strong 2020. However, as with digitalisation and the popularity of on-line gaming, factory automation is a long-term trend, and the managers note that this company has a dominant and growing share of the international market. The managers continue to hold all of these stocks on the basis that their long-term prospects remain very positive, in their view.

Peer group

For the purposes of this note we have used the constituents of the AIC Japan sector as a peer group. The trusts listed here have roughly similar objectives except for CC Japan Income & Growth, which – as its name implies – places more emphasis on income generation and consequently has the highest yield. By contrast, JFJ’s growth focus puts its yield towards the bottom end of the peer group.

JFJ’s discount has tightened and is one of the lowest in the sector. Aided by its size, it can also boast the lowest ongoing charges ratio of any company in its peer group.

As discussed in the results section on page 3, JFJ’s returns over the last six months have pulled down its longer term figures. As we have stated elsewhere in this note, the managers are confident that this is a temporary situation.

Discount

Over the 12 months ended 30 April 2021, JFJ’s discount moved within a range of 14.4% and a 1.5% premium and averaged 5.9%. At 21 May 2021, the discount was 3.6%.

The board monitors the discount closely and has stepped up efforts to market the trust and has authorised share buy backs when necessary. Last year’s strong absolute and relative performance has also helped drive a narrowing of this discount. All of this is visible in Figure 11, where it can be seen that JFJ is now trading at a markedly narrower discount than it was prior to the emergence of
COVID.

Each year at the AGM, the board puts forward resolutions that permit the company to issue new shares, reissue shares from treasury and repurchase shares for cancellation or to be held in treasury. The board has stated that shares held in treasury would only be reissued at a premium to NAV.

Fund profile

JPMorgan Japanese Investment Trust (JFJ or the trust) aims to achieve capital growth from investments in Japanese companies. For performance monitoring purposes, the trust is benchmarked against the returns of the Tokyo Stock Exchange First Section Index (commonly known as TOPIX) in sterling. The trust makes use of both long- and short-term borrowings to increase returns.

Day-to-day investment management activity is the responsibility of JPMorgan Asset Management (Japan) Limited in Tokyo. The co-investment managers are Nicholas Weindling, who has had responsibility for JFJ’s portfolio for more than a decade, and Miyako Urabe, who was appointed co-manager in May 2019. They are supported by a well-resourced team.

The investment emphasis is on identifying high-quality companies that are capable of compounding their earnings sustainably over the long term. That means investing in companies in growing industries that have strong balance sheets and are resilient in the face of macro-economic issues.

The managers recognise that JFJ’s performance may lag its benchmark in periods of market exuberance, triggered by an uptick in growth prospects, for example. Q4 2018 and H2 2016 were periods of underperformance for this reason. However, the managers prefer to focus on identifying attractive stocks rather than attempting to time markets. Similarly, the trust’s gearing level is driven by availability of attractively priced stocks, not by macroeconomic considerations.

Benefitting from local knowledge

The investment team is based in Tokyo, where JPMorgan has had an office since 1969. Nicholas says that it is now relatively unusual for non-domestic asset managers to have a physical presence in Japan. Visiting companies is an integral part of the team’s investment process.

The team is 25-strong and is a mix of fund managers and analysts – roughly half and half. In addition, one of the strengths of the business is that the managers can also draw on the expertise of JPMorgan’s analytical teams around the world. This helps with competitive analysis, for example – it can also help identify trends on which Japan is behind the curve.

Previous publications

Readers may wish to read our initiation note – Number one for a good reason – published in September 2020 or our update note – Strength to strength – published in December 2020.

Legal

This marketing communication has been prepared for JPMorgan Japanese Investment Trust Plc by Marten & Co (which is authorised and regulated by the Financial Conduct Authority) and is non-independent research as defined under Article 36 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing the Markets in Financial Instruments Directive (MIFID). It is intended for use by investment professionals as defined in article 19 (5) of the Financial Services Act 2000 (Financial Promotion) Order 2005. Marten & Co is not authorised to give advice to retail clients and, if you are not a professional investor, or in any other way are prohibited or restricted from receiving this information, you should disregard it. The note does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.

The note has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. The analysts who prepared this note are not constrained from dealing ahead of it but, in practice, and in accordance with our internal code of good conduct, will refrain from doing so for the period from which they first obtained the information necessary to prepare the note until one month after the note’s publication. Nevertheless, they may have an interest in any of the securities mentioned within this note.

This note has been compiled from publicly available information. This note is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this note is prohibited.

Accuracy of Content: Whilst Marten & Co uses reasonable efforts to obtain information from sources which we believe to be reliable and to ensure that the information in this note is up to date and accurate, we make no representation or warranty that the information contained in this note is accurate, reliable or complete. The information contained in this note is provided by Marten & Co for personal use and information purposes generally. You are solely liable for any use you may make of this information. The information is inherently subject to change without notice and may become outdated. You, therefore, should verify any information obtained from this note before you use it.

No Advice: Nothing contained in this note constitutes or should be construed to constitute investment, legal, tax or other advice.

No Representation or Warranty: No representation, warranty or guarantee of any kind, express or implied is given by Marten & Co in respect of any information contained on this note.

Exclusion of Liability: To the fullest extent allowed by law, Marten & Co shall not be liable for any direct or indirect losses, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note. In no circumstance shall Marten & Co and its employees have any liability for consequential or special damages.

Governing Law and Jurisdiction: These terms and conditions and all matters connected with them, are governed by the laws of England and Wales and shall be subject to the exclusive jurisdiction of the English courts. If you access this note from outside the UK, you are responsible for ensuring compliance with any local laws relating to access.

No information contained in this note shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction.

Investment Performance Information: Please remember that past performance is not necessarily a guide to the future and that the value of shares and the income from them can go down as well as up. Exchange rates may also cause the value of underlying overseas investments to go down as well as up. Marten & Co may write on companies that use gearing in a number of forms that can increase volatility and, in some cases, to a complete loss of an investment.

210524 JFJ update MC

Click below to open the
full research notes
Read Research Note

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…