JPMorgan Japan Small Cap Growth & Income 24 May 2023
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 (LON:JSGI) invests in one of the most exciting and unique markets in the world. Japanese small caps offer numerous idiosyncratic growth opportunities, be they in specialised technological fields or in companies with business models that are unique to Japan. They are also typically ignored by research analysts, with little domestic or overseas coverage. This creates fertile ground for stock-picking managers to outperform.
JSGI is managed by Miyako Urabe, Xuming Tao and Naohiro Ozawa of the JPMorgan Japan Fundamental Growth team. The managers have a critical advantage in being able to draw on the extensive research resources of this team of over 20 investors and of the wider JPMorgan teams who cover international competitors, suppliers, and customers of their companies. Many investors don’t bother with locally-based analysts, but the JPMorgan team are based in Tokyo and mostly native speakers, critical for getting to know companies which often don’t publish results in English.
The trust has performed extremely well when its quality growth style has been in favour (see Performance). However, 2022 was a tough year for growth strategies such as JSGI. The NAV sold off and the shares have also fallen to a significant Discount to NAV of 12.9%.
JSGI pays a Dividend of 1% of NAV each quarter, with the board using capital reserves to meet the payment. As a result, the managers are free to focus on identifying growth opportunities but investors can still receive a healthy yield from the trust.
We think JSGI is well set up to profit from the exciting growth opportunities in the Japanese small-cap market. The approach taken by the managers is highly active, which brings with it greater potential for alpha generation. Meanwhile, the large, on-the-ground team of mostly native-speaking analysts give them a key advantage when it comes to identifying attractive investments. The strategy has a strong track record of doing well when the market is rewarding companies which can demonstrate growth potential.
Growth has been out of favour for 12 to 18 months as markets absorb the fastest rate hiking cycle in modern US history. However, there are signs this cycle has neared or reached its peak, which could lead to growth coming back into favour. Moreover, markets often over-shoot, and Miyako reports that the team have been finding attractive valuations in high-growth companies by historic standards. In our view, this is all increasingly implying a more favourable long-term outcome, particularly when coupled with the significant discount to NAV.
In our view, Japan looks like an attractive place to invest at this juncture. Its currency is still cheap, its markets are at low valuations versus peers, and economic activity is picking up after the ending of pandemic restrictions last autumn. Meanwhile, inflation is modest compared to the rest of the developed world. This creates a potentially favourable environment in which Japanese small caps can operate. It is no surprise to read in the press that Warren Buffet is looking to add to his holdings in Japan.
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