abrdn Japan 06 June 2022

abrdn Japan (AJIT) has an overwhelming focus on investing in the highest-quality companies within Japan. AJIT’s managers Kwok Chern-Yeh and Hisashi Arakawa believe that high-quality companies (as determined by their own framework) will allow them to avoid tail risks, benefit from less volatile and more resilient earnings, and have confidence that their companies’ management teams can navigate painful market environments. Given the current surging inflation and global market downturn, the team believe that these factors have become all the more relevant.

As we point out in the Portfolio section, the quality of AJIT’s underlying portfolio has not deteriorated over the past year despite the market drawdowns, with Chern and Hisashi already being able to demonstrate how their holdings have been passing on increased prices. In fact, the market drawdown has offered the team an opportunity to purchase companies at reduced valuations despite their quality metrics not having deteriorated. We also note that the team follow a flexible approach to investing and are able to invest across the entire market-cap spectrum, with AJIT having an overweight to both small- and mid-cap companies.

AJIT has unfortunately underperformed its peers and benchmark over the last five years, though a large degree of this underperformance is attributable to the market rotation since the start of 2022. AJIT’s quality bias meant that it came into the drawdown with higher valuations than the market, leading it to be more sensitive to a rising global interest rate environment. We note that AJIT trades on a wide Discount which is currently 9.9%, one of the widest discounts within the two AIC Japan sectors.

AJIT may offer an interesting opportunity to ‘buy the dip’, as while it is not a typical growth-focussed strategy like those that have been caught up in the sell-off, its premium rating has meant that the trust has been impacted despite the fundamental strength of its holdings. The recent drawdown may be an opportune time to invest in quality companies whose business practices are less likely to be materially impacted by rising inflation but whose share prices have still been caught up in a wider sell-off.

Thanks to AJIT’s widening discount, investors are faced with the potentially powerful combination of a reversal in NAV performance and a narrowing discount. We believe that if the market stabilises then AJIT’s discount could narrow, particularly if quality companies start to outperform thanks to their business models remaining largely unimpaired.

Regardless of the short-term opportunity, the AJIT team have demonstrated a clear long-term commitment to their investment style, having retained the same stylistic agnosticism and quality stock bias despite the hugely fluctuating market environment of the last few years. This means that AJIT may be an attractive opportunity for investors who prize high-quality companies given its wide discount and lack of style drift, with the AJIT team unlikely to sacrifice their portfolio’s overall quality even during periods of strong headwinds.