JPMorgan Japan Small Cap Growth and Income (JSGI) offers exposure to the high growth potential in small and mid-cap Japanese equities as well as a significant income pay-out, in part from capital. The JSGI team is composed of three experienced managers based locally in Tokyo, with the broader Japan team making over 4,000 company visits a year.
The JSGI team uses a multi-faceted investment process to identify what the team believe are the highest quality companies within Japan’s mid and small-cap space, with a distinct focus placed on companies which can best capitalise on the sectoral trends driving Japanese equity markets. We outline this further in our portfolio section.
JSGI has generated enviable performance over the last five years, with a NAV total return of 129.1% and a share price return of 140.0% over the last five years, compared to the 76.6% return of its benchmark. We note that a large part of this return can be attributed to the impact of COVID-19 on the Japanese economy, with the resulting change in consumer patterns disproportionately benefitting many of the names in JSGI’s portfolio.
JSGI has recently changed its name, to better reflect its income generating potential. Since April 2018, JSGI pays a dividend each quarter equal to 1% of the NAV at the end of the previous quarter, meaning it can offer an income despite the relatively low yield of the small-cap growth sector. The historic yield is currently 3.7% (as at 10/02/2021). While JSGI trades at an 8.7% discount, this has been narrowing over recent years thanks, we think, to its superior performance and the introduction of a competitive dividend.
JSGI offers a powerful combination of exposure to a high growth market with an illiquidity premium attached and a high regular income, using the flexibility of the closed-ended structure to the full – indeed its strategy would be impossible in an open-ended fund. Thanks to the change of dividend policy in April 2018, JSGI is now one of the few ways investment trust investors can simultaneously access the Japanese small and mid-cap market without having to sacrifice an income.
JSGI’s portfolio is a clear beneficiary of many of the trends underpinning ‘New Japan' , while also being a beneficiary of the COVID-19 pandemic as the sudden change in consumer behaviour further accelerates many of the trends underpinning its holdings. Yet its outperformance is more than a short-term occurrence, with JSGI having outperformed over the majority of recent calendar years, evidencing the success of the team’s investment process.
We believe that the recent narrowing of JSGI’s discount is a reflection of its total return and income potential. While the broader Japanese equity market is seeing renewed interest from foreign investors, JSGI’s income generation is relatively rare in the sector. We think so long as it continues to deliver outperformance (and strong income potential as a result) we could see a further narrowing of the discount.
|Ability to provide competitive income despite its small-cap quality focus
||Gearing can amplify losses during downturn
|Strong performance track record, reinforced by its outperformance during the recent pandemic
||Quality and growth focus may underperform during strong cyclical rallies
|Well-resourced and locally based team, able to directly access the volume of companies needed for a smaller-cap strategy
||Dividend pay-outs from NAV cannot be guaranteed to be progressive