Aberdeen Japan owns a concentrated portfolio of Japanese equities, aiming to generate long-term capital growth by buying high quality businesses with the ability to compound their earnings growth steadily over the cycle.
The trust is managed by the Aberdeen Standard Asian Equities Team, who look for stocks with high quality management and good or improving corporate governance as well as strong financial characteristics which suggest they should be able to generate above-market growth over the long run.
The trust’s style has been out of favour in recent years, and this has resulted in it sinking to a discount of 12.4%, significantly wider than the peer group average.
However, performance has been strong in 2019, with the trust ahead of the index by 330 basis points over the calendar year to date. This follows a rather more difficult 2018 in which some of the trust’s holdings suffered due to exposure to the US / China trade war and Chinese deleveraging.
Key themes in the portfolio are automation and robotics as well as medical innovation, areas in which Japanese companies are among the world’s leaders. The trust is also benefitting from increasing evidence of corporate governance reform in Japan, supported by a drive by the government, which is hoping to boost economic productivity and growth.
The trust will also offer a more substantial income than it has in the past this year, with the board expecting a minimum distribution of 15p next year compared to 2019’s 5.4p (this would amount to a 2.6% yield on today’s share price). The trust will pay out all the income, 3p from revenue reserve and an amount from capital reserves. The trust will also switch to a semi-annual dividend.
Aberdeen Japan’s quality style has been out of favour in recent years, as investors have preferred to go all out for growth. However, the trust has many of the features shown to be typical of a successful actively managed fund: it is concentrated, tends to operate with a low turnover and is highly active relative to its benchmark. We would also note that with the US federal reserve making more dovish noises, and global growth metrics looking weak, we could well see more troubled markets over the coming years in which a more defensive portfolio might do better and win favour relative to the more aggressive growth trusts.
The current discount of 12.4% is wide relative to the peer group, although we note that the one income mandate in the AIC Japan sector (CC Japan Income & Growth), is trading on a discount of just 1.3% and pays a 2.6% yield. The new income policy could therefore see a re-rating of this trust once it is absorbed by the market, although CC Japan income & growth does not pay out of capital.
|A highly active, concentrated portfolio which has alpha-generating potential
||Unhedged, and the Yen often weakens when Japanese equities perform strongly
|The government is pushing to improve corporate governance, supporting one of the trust’s key themes
||Japan could suffer from a global trade war given the openness of its economy
|The style has been out of favour and therefore could be due a rebound
||As the portfolio is highly active, periods of under and outperformance are both possible