Schroder Japan 08 December 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Schroder Japan. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Masaki Taketsume has managed the Schroder Japan Trust (SJG) since 2019. He employs a highly active, bottom-up strategy, with the aim of maximising long-term capital growth for investors through superior stock selection (see Portfolio section). The Japanese equity market contains a very diverse set of businesses, featuring globally known companies, as well as lesser-known companies with the potential to become household names of tomorrow. However, the market is under-researched particularly further down the market-cap scale, so Masaki leverages the support of the seasoned roster of Tokyo-based investment professionals at Schroders, which in his view, helps him identify and build a diversified portfolio of best-in-class Japanese companies.
Masaki targets stocks that are trading below their fair value, meaning the investment approach has a strong valuation sensitivity and value tilt, something that’s quite different from most peers in the sector. Having this style tilt was one of the driving factors that helped SJG outperform both the index and sector over the last 12 months (see Performance section). However, it’s not a typical ‘old Japan’ style value strategy. Masaki won’t invest in a company purely because it’s cheap. While he wants to target undervalued companies that hold good recovery potential, he also wants to ensure each investment is of high quality, boasting strong growth characteristics. Given that Masaki feels the more growth-orientated stocks are expensive, potentially even overvalued at the minute, he is likely to continue tilting the portfolio towards value stocks, including a bias towards domestic-focussed mid and small caps with robust pricing power and strong corporate governance, but won’t sacrifice his requirement for quality as well as price.
SJG trades on a Discount of 10.2%, at the time of writing, compared to a 6.6% average for the AIC Japan sector.
The Japanese market has continued its strong run of performance this year and looks to remain an appealing place to invest moving forward. A mixture of low valuations, long-term structural changes, such as corporate governance reform and the welcome return of modest inflation, paints an encouraging outlook for the economy and a potentially exciting environment to invest in. We think SJG offers investors an attractive way to access the market given Masaki’s stock-driven and valuation-sensitive stock-picking strategy, as well as offering investors a potential source of differentiated returns to the index and peers.
One of SJG’s key differentiators is Masaki’s tilt towards value, something quite different to most peers in the sector. He targets undervalued companies where the long-term growth prospects are not fully priced in and where there is potential for a turnaround. However, he doesn’t want to invest simply because a company is cheap, and a focus on quality is also paramount. We think that Masaki’s preference for investing in undervalued stocks, and his ability to identify those of higher quality sitting at attractive prices, could offer a good form of stock or sector diversification against value strategies, as well as growth. In our view, SJG provides exposure to a well-diversified portfolio of Japanese companies and if the manager’s positive outlook proves right, its discount may offer investors an attractive entry point, providing an extra kicker to returns if it narrows.
- Deep resources and an on-the-ground research team are an advantage with stock selection
- Current discount may present an attractive long-term entry point for investors
- Contrarian approach is in contrast with the average trust in the sector, offering differentiated source of return potential
- Gearing can magnify the losses in a market downturn
- Trust may underperform during growth-stock rallies
- While offering a greater return potential, having a bias towards mid and small caps can increase risk