JPMorgan Japanese (JFJ) invests across the entire market-cap space, focussing on Japanese companies which are best able to capitalise on the secular growth trends underpinning the domestic economy. JFJ is run by lead portfolio manager Nicholas Weindling and co-portfolio manager Miyako Urabe, who are in turn supported by a substantial roster of analysts, all of whom are based on the ground in Tokyo.
JFJ has been able to generate an attractive long-term return profile, not only handily beating both its benchmark, the TOPIX Index, and its peers over the last five years, but also offering investors historical diversification despite having an attractive upside/downside capture ratio. However, given the headwinds which growth stocks have faced, the last 12 months have been slightly more difficult (as we describe in the Performance section). Yet JFJ has been able to keep up with the TOPIX during this period, having rebounded strongly in the last few months thanks to the strong earnings of its holdings.
2020 and 2021 saw a period of low turnover for the strategy, and the managers are feeling increasingly confident in the long-term trends underpinning the growth of their companies. There have been a handful of purchases of new small-cap companies, as we outline in the Portfolio section.
JFJ has also received the highest possible rating for sustainability from Morningstar. JFJ is not a dedicated ESG strategy, but the team place great weight on ESG risks in their analysis, with their investment process naturally avoiding the worst ESG offenders, given their low quality.
We think JFJ is an attractive strategy for a growth-focussed investor. This is not just because of its impressive track record, but because of how its managers are focussed on capitalising on the secular trends driving Japan. These trends often have long runways of growth, given the amount of time it takes for them to be realised. Two examples of multi-year trends are corporate governance reforms and Japan’s ageing population, with major progress still being made to resolve these issues.
We do not believe that 2021 to date has fully reflected the long-term potential of JFJ, given the decline in its relative performance over the last 12 months. Like JFJ’s managers, we believe that this is a reflection of the strong rebound in value stocks from their pandemic lows, rather than a deterioration in the long-term potential of Japanese growth stocks. This makes JFJ’s current discount a potential entry point, given its recent widening as a result of the headwinds which growth investing has faced, offering investors the opportunity to ‘buy the dip’.
We note that JFJ has a more aggressive risk–return profile than its benchmark, albeit one which is justified by its higher metrics, such as a superior Sharpe ratio and higher alpha. However, cautious investors may wish to ensure they are able to tolerate the trust’s more volatile return profile. JFJ does also provide investors with one of the most sustainable Japanese equity strategies available, which may make JFJ attractive to ESG-conscious investors.
|Strong secular tailwinds underpinning the strategy
||Can underperform during a value-led stock market, as we saw earlier in the year
|Sector-leading ESG credentials
||Gearing can enhance losses on the downside
|Discount may offer attractive entry point
||Has high volatility relative to peers and benchmark