JPMorgan Japan Small Cap Growth & Income 17 April 2024
Disclaimer
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.
JPMorgan Japan Small Cap Growth & Income (JSGI) offers access to exciting growth opportunities in Japanese small- and mid-cap companies, owning a portfolio full of technology hardware, specialist industrial chemicals, and other niche businesses with long growth runways ahead of them. Many of the companies have leading positions in niches connected to the growth in semiconductors, renewable energy, and other global developments, while others are distinctly Japanese, helping resolve issues stemming from the country’s declining demographics and slow shift online.
The portfolio is managed by a locally based team of native Japanese speakers, Miyako Urabe and Xuming Tao. Being based in Japan means they can visit companies in person, and they are able to research the majority of small-cap companies which don’t publish results in English and fall under the radar of most international investors. They benefit from the deep resources of JPMorgan who have over 20 investors focussed on Japanese equities. The managers focus on identifying the best high-quality growth companies, with the board paying a quarterly Dividend equivalent to 1% of the NAV per share at the end of each quarter.
Growth investing has been out of favour since the start of 2021 for a number of reasons discussed under Performance. As a result, JSGI’s portfolio is now trading on a relatively modest valuation premium versus the market, despite its much higher expected earnings growth, which suggests long-term return potential could be even higher. Another potential source of returns would be the closure of the Discount, which is 12.1% at the time of writing. The board has recently implemented a buyback programme to provide additional support.
There are many reasons to be bullish about Japan. The chief one is the ongoing revolution in corporate governance which is at the heart of government attempts to free the economy from deflation. These reforms are seeing companies releasing cash to shareholders or reinvesting in their businesses, overhauling balance sheets and practices to create more efficient operations, and encouraging overseas investors to engage with management to unlock value. Miyako and Xuming argue that these reforms should create a tide that sees all boats rise, even if so far most of the benefits have flowed to the large caps and the cheapest companies. Even in their growth-heavy portfolio, they are seeing an increasing number of buybacks, and the balance sheets of their high-quality companies are cash-rich, meaning there is scope for lots of this to be released either directly to shareholders or into businesses.
JSGI has a strong track record of delivering alpha when its style is in favour. We think this is based on a number of stable and attractive features: the well-resourced local team, the well-defined investment approach, and the long-time horizon for investment decisions. The portfolio is full of companies that seem to have strong growth ahead of them, and we think this should be rewarded with good share price returns over time. With JSGI trading on a double-digit discount, this could be a good time to get access to a historically successful strategy before it recovers, even if it is hard to predict when any recovery would come.
Bull
- Well-resourced management team with a track record of adding alpha
- Attractive yield coupled with capital growth potential
- Discount may provide an attractive entry point
Bear
- Not best suited to environments in which rates stay high or go higher
- Gearing brings sensitivity to falling markets as well as rising markets
- Investors take a single-country economic and political risk