JPMorgan Japan Smaller Companies Trust (JPS) looks to deliver capital growth through investment in small- and mid-cap Japanese companies, excluding the largest 200 Japanese companies by market capitalisation. The investment managers, Eiji Saito, Naohiro Ozawa and Michiko Sakai, seek to identify the best growth opportunities in high-quality companies within the Japanese market.
The board has adopted a policy since April 2018 of distributing dividends totalling 1% of NAV (as measured at the end of the quarter) on a quarterly basis. Unsurprisingly, JPS offers the highest level of yield within the peer group at this time. As we discuss under Dividend, this distribution policy is undertaken fully in the expectation that dividends will be paid from capital, and the investment managers retain full investment freedom to allocate as they deem appropriate without having to ‘chase’ yield to fund these distributions.
As we discuss under Portfolio, this investment strategy follows the broader stock analysis within the wider JPMorgan Japanese-equity team, allying thematic considerations to bottom-up stock analysis conducted by a well-resourced and deep pool of analysts and portfolio managers based in Japan.
Returns have been strong in recent months and, indeed, in recent years, with JPS providing significant outperformance. As we discuss in the Portfolio section and Performance section, we think there is some tentative evidence that this is a result of the market reassessing the economic and market outlook and becoming more aligned with the long-standing views of the management team.
Despite strong returns in recent months, JPS remains on a discount to NAV of c. 12.8% as at 28/07/2020.
JPS continues to offer access to compelling long-term thematic opportunities in the Japanese market, with significant analytical resources dedicated to a marketplace where it is common for companies to have little or no publicly available broker research. At a stock level, this depth of resource should continue to give the managers the opportunity to identify companies where the long-term prospects are misunderstood by the wider market. Coupled with the strong returns seen in recent years, we are somewhat surprised the discount has proven so intractable.
The managers note that their discussions with company managements indicate that a sea change in outlook has occurred following the COVID-19 pandemic and related economic shutdown. They believe previous trends towards, for example, digitalisation have been significantly accelerated by the need to work from home, etc. We would note that this qualitatively makes sense, and is line with much of what we see across the globe. Furthermore, it appears the Japanese market has largely concurred too when we look at JPS’s NAV performance in recent months, a view strengthened when we look at the performance trends of similarly aligned strategies (including the all-cap JPMorgan Japanese Investment Trust). We think there is a possibility of a short-term pause or pullback in the outperformance of companies playing this theme, given how strong recent moves have been. However, we think that the longer-term thematic framework is sound, and that the digitalisation and consolidation themes have further to go.
|Long-term thematic drivers remain intact and, indeed, seem even more tangible||The portfolio tends to struggle in periods when reversal and mean reversion are dominant factors|
|Extensive analytical resources are dedicated to Japanese small caps, a thinly researched market||Dividends are based on NAV, and so may be volatile|
|Highest dividend yield of trusts in Japan, and persistent discount relative to that of peers||Gearing can exacerbate downside as well as adding to upside|