JPMorgan Japanese 28 February 2023

JPMorgan Japanese (LON:JFJ) takes a highly-active approach to investing in Japan, with the managers, Nicholas Weindling and Miyako Urabe, looking for companies which can deliver exceptional returns over the long run. The search for high-quality, sustainable earnings has led the managers to build a portfolio tilted towards technology, the internet and consumer areas. These sectors fell out of favour in 2022, but Nicholas and Miyako believe that, for the most part, the long-term outlook for their portfolio companies is the same or better.

The managers’ active, concentrated approach is a source of volatility, as is generally significant structural gearing and holdings in the small and mid-cap sectors. These features also increase return potential and JFJ has a strong track record of doing very well when Japanese markets rally (see Performance). Nicholas and Miyako note that Japan is, currently, looking very cheap in comparison to its international peers and its own history, which adds to the attraction of a long-term investment at this time.

The focus on quality growth means that JFJ’s portfolio typically trades at a premium to the market, with investors paying more for higher-growth prospects. This premium has significantly eroded over 2022, as we discuss under Portfolio, which we think could represent an opportunity.

The focus on quality brings with it a keen eye for sustainability and ESG, these considerations being reflected in the quality ascribed to a company and the valuation required for investment. JFJ has the highest rating from Morningstar for sustainability in its Japan peer group.

JFJ’s shares trade at a discount to NAV of 6.8%, at the time of writing, which compares to a five-year average of 7.4% and a sector average of 7.9%.

We think Japan could do well in 2023. The country has only recently dropped the last coronavirus restrictions, which means we expect a boost to consumer spending and economic activity. The yen is cheap, which benefits the economy as a net exporter, and China’s reopening could see an increase in demand from one of Japan’s key customers. Inflation is more modest than it is in Europe, which should increase the ability of Japanese companies to pass on higher prices. Additionally, we note that if global growth does surprise on the upside, Japan could do doubly well, given the sensitivity of its markets to the global economy.

Nicholas and Miyako are more focussed on the long term, but they do note the low valuations of Japanese equities, as well as the erosion of the historic premium at which their portfolio trades above the market. We think structural growth is on sale in Japan and this looks like a potentially attractive long-term entry point. JFJ is not for the faint-hearted though. The focus is unabashedly on the long-term, and the portfolio is highly active. As a result, in the short term, the performance trend of the portfolio can be volatile. However, for investors with a long-term time horizon, we think JFJ is an attractive way to benefit from the exciting growth potential in Japanese companies.