JPMorgan Japanese 23 December 2024

The combination of JPMorgan Japanese (JFJ) and JPMorgan Japan Small Cap Growth & Income (JSGI), completed in October 2024, has solidified JFJ as the largest and lowest-cost trust in the AIC Japan sector, with over £1bn in net assets. This strategic move aims to further capitalise on the compelling opportunities in Japanese equities, underpinned by improving economic fundamentals and governance reforms, whilst maintaining the trusted and experienced management duo, Nicholas Weindling and Miyako Urabe.

Despite the combination’s scale, there’s very little change occurring from a bottom-up perspective. The managers remain focussed on investing in high-quality growth businesses with strong balance sheets, competitive advantages others may struggle to replicate, good pricing power, and resilience against macroeconomic challenges.

However, one of the changes from the combination is the introduction of seven new small-cap holdings to the Portfolio. Each addition, according to the managers, brings a unique dimension previously absent in the portfolio. Among them is Maruwa, a ceramics and electronic parts producer whose components are benefitting from AI-driven demand.

JFJ’s Performance over the past 12 months has been strong, with stock selection driving returns, reflected by a variety of portfolio holdings performing well. Standout contributors include ASICS Corporation, a footwear brand, and IT service provider Hitachi Limited, both of which have benefitted from ongoing structural developments in Japan and management restructuring that has enhanced profitability, cash flow, and earnings. Over the 12 months to 18/12/2024, JFJ has delivered a NAV total return of 24.8%, outperforming the TOPIX’s total return by 13.4 percentage points.

Despite strong relative performance, JFJ trades at a 12.8% Discount, at the time of writing, wider than both its five-year average of 7.4% and the Morningstar Investment Trust Japan sector's five-year weighted average of 7.4%.

We see two key factors that make JFJ a compelling option for investors. The first is the impact of its recent combination with JSGI, which has positioned JFJ as a heavyweight in the AIC Japan sector, with over £1bn in net assets. Combinations often bring increased secondary market liquidity, a stronger marketing presence, and greater appeal to a broader range of investors. Over time, these advantages could help narrow its wider-than-historic average Discount, which we believe is driven more by external market pressures—yen fluctuations, BoJ policy speculation, and US election fallout—rather than being any reflection on the success of the strategy.

The second factor is Japan’s evolving economic landscape. Japanese companies are benefitting strongly from the ongoing improvements deriving from the corporate governance reforms. Additionally, two relatively recent developments have created further opportunities in the market, with the BoJ raising rates for the first time in 17 years and Japan’s ever-evolving role in the semiconductor market. We think that if Japan’s economic story continues to strengthen and market sentiment subsequently improves, JFJ’s focus on high-quality growth businesses—a strategy that has historically supported strong relative returns when sentiment is strong—positions it well to capture the growth on offer.

That said, it is important to acknowledge that JFJ remains a high-growth strategy, meaning investors should consider its susceptibility to short-term volatility. Nonetheless, the combination of its enhanced scale and current market backdrop paints an encouraging outlook for the new, larger JFJ entity, making its wider-than-average discount a potentially attractive entry point for long-term investors seeking alpha generation.