Schroder Japan Growth 11 September 2019
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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.
Schroder Japan Growth (SJG) invests in Japanese equities with a bottom-up process, aiming to generate long term capital growth. The trust typically has a bias towards value and currently has the highest exposure to this style of any trust in the AIC Japan sector.
The process centres on the identification of under-valued companies through superior fundamental research carried out by a team of 11 analysts on the ground in Tokyo, including three specialising in the under-researched Japanese small-cap market. The manager, Masaki Taketsume, is based in London, having taken over from Andrew Rose in July 2019. However, he had been co-manager since 2017 and previously worked in the analyst team in Tokyo from 2007, so there is total continuity of approach.
Although the process centres on valuation, a key differentiator from its peers, quality and growth characteristics are considered when the team build Fair Value Models for each stock. The trust also has a structural overweight to small and mid caps. Masaki believes that this exploits the advantage of the deep in-house analyst team at Schroders, which is a particular benefit in Japanese small caps given the low levels of sell-side analyst coverage.
The value bias has not helped the fund in recent years, and it has underperformed as growth and momentum-focussed trusts have done better. The portfolio has tended to be overweight in more cyclical areas of the market which have been out of favour relative to the steadier growth sectors, although Masaki has moderated the cyclical tilt in recent months.
In recent years the discount has been wider than the sector average, which we would attribute to the value approach being out of favour and, more recently, to the announcement of the change of manager. The discount has widened to 15.2% this year compared to a sector average of 6.2%.
The value tilt means the trust has a reasonable yield for Japan, which has traditionally been a low-yielding market. On the current share price the yield is 2.2%, with the trust having grown its dividend by 20% a year over the last five years. Dividend growth in Japan is being supported by improving corporate governance thanks to government-led reforms.
The company has structural gearing maturing in 2022 worth 12% of NAV at current levels. This increases the share price’s sensitivity to market movements.
SJG has a clearly defined approach, with a bias towards value, which has worked to its advantage over the long run. The current period of underperformance is the second significant one in the life of the portfolio, the first being between 2004 and 2008, when the value style was again out of favour for a prolonged time. Although changes in the market dynamics are hard to predict, with this Trust being on a discount of 15.2%, we think this could be an attractive long-term entry point.
| Bull | Bear |
| The discount is attractive relative to history and peers |
The departure of a long-standing manager |
| The fund is biased towards out of favour value stocks, which could attract contrarians |
Structural gearing could magnify losses in down markets |
| The locally-based analyst team give a stock-picking advantage |
The low interest rate environment globally could reduce the chance of a rebound in value stocks |
Fund History
