Fidelity Japan 09 December 2024

Nicholas Price has been at the helm of the Fidelity Japan Trust (FJV) since September 2015, consistently applying a growth-at-a-reasonable-price (GARP) investment philosophy. His strategy focusses on identifying companies with solid growth potential that are undervalued relative to their projected earnings and capitalising on market inefficiencies in pricing future growth.

It’s been a busy 12 months, with market turbulence prompting Nicholas to make some adjustments to FJV’s portfolio. Several companies, despite maintaining strong fundamentals, have seen their valuations fall to more attractive levels – an opportunity Nicholas has seized. This is exemplified by his decision to increase the trust’s stake in Miura. More broadly, he has added opportunities in typical large-cap sectors, where companies are moving from value to growth. Nicholas has also taken profits from several of FJV’s strongest performers, including semiconductor equipment maker Tokyo Electron, reallocating the proceeds to more attractive opportunities elsewhere in the market.

Whilst Nicholas remains underweight in financials overall, he has selectively added to individual names in the sector over the last 12 months (see Portfolio), including increased allocations to mega bank Mizuho Financial Group and consumer finance company Credit Saison, and a new position in insurer Sompo Holdings. These moves are designed to capture the upside potential offered by a supportive backdrop for the sector and company-specific drivers, whilst also helping to mitigate some of the impact from value style headwinds.

Despite strong results from several stocks over the past 12 months, a combination of stock-specific detractors and a challenging market environment resulted in weaker relative Performance. One area under pressure has been FJV’s allocation to small- and mid-cap growth stocks, which have underperformed their value-oriented counterparts further up the market-cap scale. However, Nicholas maintains that they offer greater alpha potential, especially compared to larger firms, and could rebound quickly given the right catalysts.

Japanese equities had a strong start to the year, driven primarily by central bank policy expectations surrounding both the Bank of Japan (BoJ) and the Federal Reserve, along with strong gains in semiconductor-related stocks. However, as expectations of Fed rate cuts waned and geopolitical risks heightened, the upward momentum was capped, with key indices peaking in late March in sterling terms. Since then, markets have struggled to replicate the impressive returns seen earlier in 2024. Despite this, we continue to argue that a combination of low valuations, long-term structural changes – such as corporate governance reforms and the return of modest inflation – paints an encouraging outlook and a potentially exciting environment to invest in.

FJV has had a tough run over the past three years, which we attribute primarily to its positioning, stylistically speaking. Unlike other markets globally, Japan continues to see value-oriented businesses outperform their growth counterparts, a trend that has persisted for much of the last three years. Consequently, growth-focussed investment trusts in the sector have been hit hard. FJV, with its tilt toward small- and mid-cap growth opportunities, has been one of the most impacted. However, these types of companies have a proven track record of rebounding swiftly in favourable conditions, meaning FJV’s wider-than-average Discount could present a compelling entry point for investors seeking exposure to this part of the market.

Additionally, FJV’s small allocation to unlisted companies offers investors access to sources of differentiated returns compared to other trusts in the Japan sector. Overall, we believe FJV serves a specific role within a portfolio: it’s a higher-risk, higher-reward strategy providing balance to global portfolios more heavily weighted toward value-oriented strategies or those lacking exposure to high-growth Japanese businesses.