Schroder Japan Growth 16 June 2022
This is a non-independent marketing communication commissioned by Schroder Investment Management. 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.
To achieve capital growth from an actively managed portfolio principally comprising securities listed on the Japanese stock markets.
Schroder Japan Growth
Schroder Investment Management
Association of Investment Companies (AIC) Sector
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Schroder Japan Growth (SJG) takes a fundamental, bottom-up approach to Japanese equity investing. SJG is managed by Masaki Taketsume, who is supported by a substantial roster of seasoned Tokyo-based investment professionals. His contrarian approach has led SJG to have more of a tilt to value stocks than its peers, while his desire to maximise SJG’s alpha potential has also led it to overweight small caps.
Masaki aims to uncover ‘undiscovered opportunities’: companies which can offer cutting-edge solutions or market-leading technologies but which also trade on cheap valuations through having flown under the market’s radar. We describe the investment process in greater detail in our Portfolio section.
SJG’s process has paid off over the last 12 months, over which time it ranks as one of the best-performing Japanese equity trusts. In a market where growth stocks have come under increasing pressure, Masaki’s valuation sensitivity has allowed SJG to avoid much of this sell-off, especially in comparison to many of its peers. Yet SJG’s performance remains predominantly stock-driven, and as we highlight in our Performance section, it has been able to demonstrate the benefits of successful stock selection over the longer ten-year time horizon.
SJG trades on a 13.5% Discount, which is wide compared to that of its peers. However, SJG’s discount has remained far more stable than that of its peers in recent months, thanks to the comparative lack of sell pressure that SJG has faced.
SJG’s contrarian, bottom-up approach has led it to retain a value bias, something increasingly rare amongst investment trusts (as we pointed out in a recent editorial). We think that in the current macroeconomic environment of high inflation and rising interest rates, SJG’s style may continue to do well and become in demand.
One of SJG’s key differentiators is that it’s the comparatively low valuation of its portfolio comes as the result of Masaki’s preference for cheap companies within growth sectors rather than the more conventional ‘old Japan’ stocks. This and the focus on identifying quality companies mean that SJG may offer a good form of stock or sector diversification against other value strategies while not being so exposed to the current macroeconomic environment. SJG may also be particularly attractive to investors who are looking to reduce their portfolio’s overall valuation sensitivity without having to hold the more conventional value sectors such as banks and commodity materials including energy, steels and metals.
SJG’s discount may offer investors an attractive entry point. While it has held up better than that of its peers in recent months, it has yet to show substantial narrowing. While this may be due to the increased near-term uncertainty, if SJG’s improved performance continues until the markets eventually stabilise then the discount could narrow, providing a kicker to returns.
- Contrarian, value tilt could do well in rising interest rate environment
- Discount may offer attractive entry point
- Offers exposure to lower valuations without the typical sector overweights
- May underperform during growth stock rallies
- Gearing can enhance losses on the downside
- Small-cap bias can enhance risk