Schroder Japan Growth

As the most value-exposed trust in its sector, SJG has been a clear beneficiary of the reflationary rally…

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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Schroder Japan Growth

Schroder Japan Growth (SJG) offers investors a portfolio of Japanese equities with the objective of maximising capital growth. Its manager Masaki Taketsume follows a bottom-up process of stock selection, whereby he aims to identify high-quality companies which trade below their intrinsic value yet have a clear path to a positive re-rating by the market, typically by improving their return on equity. As a result of Masaki’s process SJG has a moderate bias to value, especially when compared to its peers.

Though Masaki only took over management of the trust in 2019, he has remained consistent in following the same value-oriented approach as his predecessor, as we outline in the Portfolio section. Recently he has been able to deliver 12-month returns that exceed those of both SJG’s peers and benchmark, bucking the trend of the last five years and reflective of the rebound in more cyclical companies, as we discuss in greater detail under Performance.

Despite its recent strong performance, SJG currently trades on a 12.8% discount, the widest in its sector. Though Masaki has generated good recent returns, prevailing negative sentiment around value strategies, as well as aversion to new managers, may explain SJG’s wide discount (as discussed in the Discount section).

Thanks to SJG’s focus on improving corporate governance and bias to value, it offers investors one of the highest yields in the Japanese equity sector, despite having an objective of capital growth. SJG’s dividend yield of 2.4% is more than twice the peer group weighted average.

Kepler View

SJG continues to be the most, and arguably only, value-biased strategy within the AIC Japan sector. We believe this alone will be attractive to certain investors who are looking to diversify their broader portfolio, especially given the increasing prevalence of growth stocks over the last few years. SJG could do well if the markets ‘normalise’ and return to an environment not solely driven by growth stocks. However, in any case it stands to benefit from improving shareholder governance in Japanese equities, thanks to the ongoing corporate governance reforms.

Masaki’s style is consistent with that of his predecessor, which means we think the trust’s performance should be broadly consistent too – at least when it comes to style. However, we note that Masaki has increased the weighting to small- and mid-cap stocks. As well as increasing the potential returns, this has also increased the active share, and so could lead to greater out- or underperformance than in the past.

We think persistent outperformance – in line with Masaki’s early success – could see SJG’s discount narrow in future. Any decrease in the global aversion to value could also benefit the rating.

bull bear
Reflation trade may continue to support Japanese value stocks
Could underperform in growth-driven markets
Wide discount may offer attractive entry point
Structural gearing can amplify losses on the downside
Remains consistent in its approach to value investing, despite the change in manager and thematic headwinds
Many investment cases are reliant on the continuation of governance reforms in Japan
David Johnson
David is an investment trust analyst and joined Kepler in September 2020. Prior to this he ran multi-asset model portfolios at a discretionary fund manager, and has worked in both asset management and investment banking during his career. He holds a Masters in Finance from the University of Warwick and is a CFA charterholder.

Fund History

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