JPMorgan Japanese 18 June 2024

JPMorgan Japanese (JFJ), led by Nicholas Weindling and Miyako Urabe, is one of the largest and oldest closed-end funds focused on Japanese equities. The managers target innovative, high-quality growth Japanese companies, boasting strong balance sheets and competitive positions in their respective industries.

Nicholas argues this is the most exciting time in Japanese markets over the last two decades, as rising consumer spending, corporate governance changes, inflation and transformative growth trends are strengthening the economy and widening the pool of opportunities in the equity market. The managers have taken advantage of this and added a number of new businesses to the portfolio. For instance, Japan Material was added as it stands to gain from the de-globalisation trend intended to diversify and secure supply chains by relocating manufacturing within Japan (see Portfolio). Furthermore, ongoing improvements deriving from Japan’s corporate governance push have resulted in Secom being added to the portfolio, given its announced buy-backs for the first time in many years and has been able to hike prices.

Stylistically speaking, JFJ is the most growth-oriented trust in the AIC Japan sector, a strategy that’s led to strong performance when growth investing has been in vogue but underperformance when the lower quality and/or more cyclically sensitive stocks are driving the market. The latter has been the case over the last three years, denting JFJ’s longer-term performance numbers. However, since the last quarter of 2023 performance has picked up, with stock like ASICS, Tokyo Electron and Shin-Etsu Chemical driving returns (see Performance).

This difficult run of performance has seen JFJ’s discount widen, at times, to double digits, although it has come in slightly over the past 12 months. At the time of writing, its Discount is 9.2%, wider than both its five-year average and the sector average.

In our view, JFJ benefits from the managers ability to leverage the experience of a large, on-the-ground team of Japanese analysts to help with research and stock selection. The locally based team can provide valuable insight to markets, including the lesser researched parts, and can often see first-hand a lot of the new ideas and business models that are emerging, such as Osaka Soda (see Portfolio). We think the experience backing JFJ makes it a compelling option for investors looking to access the market via a differentiated portfolio of high-quality growth stocks.

JFJ’s Discount of 9.2%, wider than its own five-year average, may also support the case that this is an attractive entry point for long-term investors. However, we’d point to the fact that this is a high-growth strategy, so investors should consider JFJ’s susceptibility to short-term volatility, something we’ve seen in recent years as growth investing as fallen out of favour (see Performance). Despite the recent challenges, the managers remain optimistic about Japan’s economy, citing the improvements from the corporate governance reforms, attractive valuations and developments in key transformative growth areas, as factors underpinning their optimism. We think that a combination of these factors paints an encouraging economic outlook for Japan and could positively impact JFJ’s portfolio and discount.