Aberdeen Japan Investment Trust (AJIT) offers investors a portfolio of high-quality Japanese equities, currently split 61%/39% respectively between large caps and mid/small caps. AJIT is run by the abrdn Tokyo-based team led by Kwok Chern-Yeh and Hisashi Arakawa. The critical characteristic of the team’s process is their focus on a company’s ‘quality’ above all other factors. This means the team look for companies which demonstrate superior management, balance sheet strength and industry structures conducive to long-term growth, which in the managers’ view lead them to have greater earnings sustainability. AJIT’s ability to invest across the market-cap space allows it to capture a wide range of holdings. For example AJIT holds both Toyota, the global car manufacturer, and Takuma, a small-cap bioenergy boiler company. We cover AJIT’s investment process and holdings in more detail in the Portfolio section.
Earnings sustainability has been a key factor behind AJIT’s performance since the start of 2020, with AJIT’s NAV total return outperforming both its benchmark and peers since then, during which period high-quality holdings were still able to demonstrate strong earnings despite the impact of the pandemic. Yet as we highlight in the Performance section, the team have also been able to generate outperformance of the benchmark over the longer term as well.
Despite AJIT’s strong performance it remains at a 7.9% discount, one of the widest in the sector. AJIT is part of a cohort of non-growth strategies which currently trade at a wider discount than their growth-focussed peers. We also note that 2021 was the second financial year under AJIT’s new dividend policy, and saw a substantial increase in its payout.
AJIT offers investors a diversified approach to Japanese equities, with a flexible approach to market cap and a mix of thematic and sector exposures. This includes companies which would be considered ‘new Japan’ themes like JEOL, the cutting-edge semiconductor manufacturing equipment maker, and older Japan names like Toyota, AJIT’s largest holding . AJIT’s key characteristic is its quality style. While this style has lagged pure growth in Japan in recent years, AJIT’s recent performance has demonstrated the benefits of quality companies. The ability of AJIT’s holdings to demonstrate stable earnings during periods of economic uncertainty such as the pandemic is a clear benefit, and one which helps support the notion of AJIT being a viable option for investors’ broad exposure to Japan because the holdings’ earnings are less sensitive to economic activity.
AJIT continues to trade on a discount. We believe this may reflect investors’ preference for growth strategies over non-growth, and so renewed economic activity within Japan may be the catalyst for a narrowing. With expectations of post-election stimulus in Japan, combined with an increasingly effective vaccine programme, we think the country may also see a positive upgrade in its growth expectations, and therefore also improving investor sentiment. We also believe that as we slowly begin to see the end of pandemic-driven markets, we will see earnings and company-specific factors increasingly being drivers of market returns which may disproportionately favour quality stocks.
|Dedicated approach to quality investing within Japanese equities
||Can underperform in growth- or value-driven markets
|Invests across the entire market-cap spectrum
||Gearing can amplify losses during down markets
|Has shown resilient performance during the pandemic
||Small-cap allocation can amplify volatility