JPMorgan Japanese (JFJ) aims to maximise capital growth through investment in a portfolio of high-quality Japanese companies. Managed by Nicholas Weindling, who enjoys extensive analytical support from a locally based team, the investment portfolio tends to tilt towards high-growth small- and mid-cap companies, in a market the team believe is fertile ground for active managers to generate outperformance. As we discuss in the Portfolio section, the team believe there are many high-quality companies with little broker coverage that are well placed to benefit from structural changes to the Japanese economy and society.
Whilst stock selection is driven by bottom-up observations, the team also identify thematic drivers which underpin long-term growth. Accordingly, they are exposed to companies positioned to benefit from Japanese demographic trends, corporate governance reform and the growth of online economic activity, as well as increasing automation in manufacturing.
With an extensive analytical team, JPMorgan are able to conduct over 4,000 company meetings a year in Japan, looking to understand operational models and developments. A focus on long-term winners, which are able to generate consistent growth both in Japan and overseas, lends itself to what is a low-turnover approach.
Long-term performance has been strong relative to the benchmark, with stock section a positive contributor. The focus on identifying companies with the greatest operational growth potential means JFJ has a significant growth tilt relative to most of the rest of its peer group.
JFJ is c. 12% net geared (as of 07/02/2020), reflecting a positive outlook from the manager. Despite the good long-term performance and lowest OCF in the AIC Japan sector, the discount remains wider than that of its peer group, at c. 10%.
JFJ operates in a market with a plethora of companies and a dearth of broker research. With a deep pool of analytical resource based locally, this should give rise to excellent opportunities to identify and benefit from market inefficiencies and potential for stock selection to positively boost portfolio performance on a consistent basis.
The trust offers exposure to structural growth opportunities which have significant long-term potential. Gearing is usually employed, reflecting the managers’ view that the cost of borrowing is significantly outweighed by the returns potential from the companies they invest in. On the other hand, in the short term this can exacerbate the downside in periods of market drawdown. The Japanese market is often perceived to carry greater exposure to the global economic cycle than most peers, and a downturn in the global economy could prove negative for the relative performance of JFJ, given the relatively high beta.
Strong outperformance relative to the benchmark has been seen in recent months. This is a continuation of a trend that JFJ tends to outperform strong positive markets where growth and quality factors outperform.
In our view, given the fact that JFJ has generated superior returns over the longer term and is the lowest-cost trust in the sector, the discount to peers is unwarranted.
|Positioned to benefit from structural growth trends||Low level of broker research generally can exacerbate volatility in the wider market|
|Extensive analytical resources based in Japan, in a thinly researched market||Japanese foreign exchange movements can have significant impact upon returns in the short term|
|Lowest OCF in the sector||Gearing can exacerbate the existing tendency to underperform in falling markets|