Updated 19 Oct 2021
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan Japan Small Cap Growth & Income. 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.


The tumult of the markets in the last two years has prompted many managers to reshuffle their portfolios. For some, this has involved adding new themes, while for others, it has meant moving away from old ones.

While there is some merit to responding to global events, for managers who claim to invest for the long term, sticking to their guns through such uncertain times can be a valuable reinforcement of their investment philosophy and approach.

So, what counts as truly long term? A portfolio that includes stocks first purchased over a decade ago would seem to fit the bill. One trust that embodies long-term investing (and yes, holds decade-long investments) is JPMorgan Japan Small Cap Growth & Income (JSGI).

Its Tokyo-based portfolio management team, led by Eiji Saito, assigns stocks a valuation based on expected returns over five years, which is roughly the portfolio’s average holding period. Key to successfully meeting this holding period are two factors: the first is that portfolio stocks tend to slot into long-term themes that the managers have identified within the Japanese market – and the longevity of these themes means that they have remained consistent or even grown in strength through the market cycle, including the pandemic-related turbulence of the last two years.

The second is that the managers consider governance core to their company analysis, making it one of three ‘pillars’ of their process. They believe a misalignment of objectives between management and shareholders, or a general poor quality of governance and corporate oversight, will ultimately be conducive to poor shareholder returns, regardless of how strong a company looks in terms of other factors. Of course, stresses like a global pandemic are an effective test of corporate governance.

Here, we discuss some of the portfolio’s themes, the long-term case for them, and some of the stocks that the managers have identified within them.

Business digitalisation

The great corporate migration online has been an ongoing trend in markets around the world for some time. Yet, in Japan, there is still significant progress to be made, which has prompted the team to invest in several names driving digital working practices over the last few years.

One such example from the JSGI portfolio is Money Forward, which supplies accounting software to Japanese businesses. This type of software has half the penetration in Japan that it has in the UK and US, showing how much room there is to run for the business’ growth. Over the last year (to 22/09/2021) alone, the company’s share price has risen 122.5%.

Of course, like their peers around the world, Japanese employees have been forced to work from home repeatedly through the last 18 months due to successive local lockdowns. This has helped drive adoption of some of the business digitalisation names even faster than anticipated. JSGI invested in Hennge, a digital identification and access management service, for the first time in 2020. Covid has highlighted how much Japanese companies need to invest in their software capabilities, so there is a tremendous growth runway and it is pleasing to see the number of new customer accounts rising.

Demographic shifts

For several decades now the challenges facing Japan in terms of its demographics have been widely known and discussed – with solutions slower to arrive. A rapidly ageing population is putting pressure on the health system, the economy and society itself. Now that similar challenges are emerging in other developed economies, Japanese solutions to these could become world-leading.

An example within the JSGI portfolio of such an innovative solution is LITALICO. The company has developed solutions that help people with disabilities into paid employment, adding a new segment of employees to the workforce. These solutions include employee training and workplace adaptability guidance. The Japanese Government has mandated the employment of workers with disabilities and therefore we see long-term structural support for LITALICO.

Sustainability

While sustainability has long been on the radar in the US and UK, this is another area where the Japanese economy has lagged its counterparts. However, according to portfolio manager Eiji Saito, increasing governmental and societal pressure means that the sustainability trend in Japan is gaining momentum. This is reflective of the team’s desire to spot new long-term trends in their market, alongside maintaining exposure to those they have long identified.

As a result, the team has added renewable energy provider Renova to the portfolio. The company’s share price has risen 364.7% in the year to 22 September 2021, reflecting the growing demand for renewables in Japan. We also invest in several companies which benefit from, and contribute to, the accelerating development of electric vehicles, such as Taiyo Yuden, IRISO Electronics, and Nittoku.

Long-term trends, long-term performance

While past performance is no guarantee of future outcomes, historically the team’s focus on longer-term trends has contributed to strong and consistent results from the trust. JSGI has outperformed its peers in four of the last five calendar years and over five years the trust has returned 112.8% in share price terms, against its S&P Japan Small Cap 250 Index benchmark return of 52.26% (to 22 September 2021).

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