Updated 14 Apr 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.

Technology has become a byword for investment success over the last decade. A handful of ‘unicorn’ technology companies have driven global markets higher, with the majority being the Silicon Valley-based FAANGs.

There has been good reason for this phenomenon. Technology now encompasses much of our day-to-day lives and a staggering range of technologies are now employed to solve an array of economic, societal and individual problems in every corner of the world. As these trends are set to only grow over the next few decades, the opportunity in place is significant.

However, while Silicon Valley has dominated the commercial and investment landscape for some time now, many of its incumbent business’ technologies are rapidly reaching maturity, particularly in relation to non-US markets. Instead, investors may need to shift their attention elsewhere to find the businesses building the technologies that will solve our global challenges in the coming half decade or longer.

A growing opportunity

One market that is facing unique challenges – and which potentially provides a model for other countries in this respect –is Japan. Years of demographic decline (i.e. a dramatically ageing population) and bottomed out growth have led to developments in the economy and society which may end up anticipating the route the developed world goes down post-COVID. For example, Japan has some of the world’s leading companies in robotics which offer solutions to companies suffering from the decline in the working age population in that country, but which also offer ways to increase margins for international peers.

The companies that meet some of these needs are often referred to as ‘New Japan’ companies. The sectors that dominate this category include healthcare and internet services, sectors that saw their commercial activity boosted by the COVID-19 pandemic.

Arguably one of the biggest beneficiaries of COVID-19 in Japan is Bengo4.com. Bengo4.com has a c. 80% share of registered Japanese companies as users and provides digital certification services as part of its product suite, offering a solution to Japan’s previously engrained practice of physically providing a personal stamp, a hanko, rather than a signature to each document.

Another example is HENNGE, a market-leading digital security provider. The company has benefitted from the shift to home working and the shift to remote operations in a range of industries.

Identifying Japan’s unicorns

Both Bengo4.com and HENNGE are held by the high performing JPMorgan Japan Small Cap Growth and Income (JSGI). The trust offered the second-highest returns of the trusts in the AIC Japanese Smaller Companies sector over the year to 29/03/2021, achieving a 54.4% share price total return. This also compared favourably to its benchmark, the S&P Japan SmallCap 250, which returned 40.64% in the same timeframe.

This success can be attributed in at least some part to the depth of the resources the trust’s management is able to tap into. In particular, JSGI’s three named managers are all based in Tokyo, as part of the broader JPMorgan Japan equity team. This enables them to meet with company management as standard, access which is enhanced by JP Morgan’s global reputation. This local presence differentiates them from many of their peers, who often rely on third-party research on the notoriously under-covered Japanese market.

They also aim to capture the bulk of a company’s growth by strictly defining their small and mid-cap universe. Their investable universe incorporates all of Japan’s listed equities, bar its largest 200 companies. If an investment moves into the top 200, they will let it run if they consider the growth trajectory to remain strong; however, once a stock crosses the top 100 barrier, the team always sell.

Room to grow

The Japanese market has undergone something of a transformation in the last few years, fuelled in part by the catalyst of Shinzo Abe’s ‘Abenomics’ and by the pressing need to solve Japanese society’s ongoing challenges. The solutions that Japanese companies have established for these challenges are providing real value in their home economy and could do the same in other markets too. With this in mind, trusts like JSGI could be at the forefront of a technology revolution, with the local knowledge and experience to select the companies best placed to take advantage of this opportunity.

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