JPMorgan Japan Small Cap Growth & Income 07 June 2022

JPMorgan Japan Small Cap Growth and Income (JSGI) uses some of the key advantages of the investment trust structure to offer the seldom found combination of a high dividend with exposure to exciting small-cap growth opportunities in Japan.

In early 2022, the trust’s management team changed and it is now run by Miyako Urabe alongside existing co-manager Naohiro Ozawa and, new to the trust, Xuming Tao. The refreshed team continues to follow the same bottom-up approach to quality growth investing, with JSGI’s portfolio reflecting the highest quality companies within Japan’s small cap market. The team select companies which they believe demonstrate strong growth potential thanks to structural tailwinds underpinning their business models. These tailwinds, as we point out in the Portfolio section, mean companies' growth trajectories should be economically unsensitive despite small cap investing traditionally being associated with greater economic sensitivity.

JSGI’s clear quality-growth style has recently fallen out of favour, which has led the trust to underperform over the last 12 months, though it has outperformed its benchmark over a five-year period. Despite the headwinds facing JSGI, its discount has not widened substantially, and is currently 9.0% and wider than that of its peer group average.

The most unique aspect of JSGI is its Dividend profile. The trust pays out 1% of its NAV each quarter as a dividend, which means that despite investing in a style seldom associated with high dividend companies, JSGI offers an effective annualised yield of 4% on NAV.

We believe there may be an opportunity to ‘buy the dip’ in JSGI, as while the NAV suffered in recent months, the quality and growth potential of its portfolio arguably has not. The team believe that thanks to structural trends underpinning JSGI’s holdings, the trust’s growth trajectory is not linked to economic growth, but rather to the natural evolution of Japan’s society and business practices. If this is the case, the market may have mispriced the impact of rising inflation and interest rates on the trust’s long-term potential.

Additionally, because of JSGI’s dividend profile, it will likely remain an attractive option for income investors regardless of the prevailing market environment. JSGI is a seldom found opportunity to tap into Japanese growth stocks while still receiving an attractive level of income. This means that not only do income investors gain access to potentially attractive long-term returns, they also gain access to the diversification benefits JSGI’s quality-growth bias provides.

While manager turnover is an unavoidable reality of any fund, we are confident that the new JSGI team will continue to offer investors access to the same long-term structural growth opportunities within Japan’s small cap space. We are particularly encouraged by the appointment of Miyako Urabe, given her success as co-manager of JPMorgan Japanese (JFJ), as her transferable experience makes her one of the most qualified individuals to take over as lead manager.