JPMorgan Japanese 31 March 2021

JPMorgan Japanese (JFJ) continues to offer investors a portfolio of Japanese equities picked through bottom-up stock picking. Run by Nicholas Weindling and Miyako Urabe, with Nicholas recently passing his ten-year anniversary as manager, the portfolio is made up of quality growth stocks across the market capitalisation spectrum, leveraging heavily on the managers’ understanding of Japan’s secular trends. Portfolio companies are often at the forefront of the solutions to Japan’s demographic issues and environment challenges, or simply offer some of the fastest growing prospects amongst Japan’s major brands or in the digitisation and automation sectors.

Thanks to its quality growth bias, JFJ has been able to generate very strong performance over 2020, capitalising on the momentum behind the COVID-19 ‘winners’ like ecommerce and online services. However, 2021 so far has seen a wider rotation out of quality growth and into recovery and value stocks, companies which often lack the long-term structural growth opportunities of JFJ’s holdings. Despite a brief period of underperformance from the start of 2021, JFJ has outperformed the AIC Japan peer group average and its benchmark over the longer term.

JFJ continues to have exceptionally strong ESG credentials, having been rated as high by Morningstar (placing it in the top 10% of its peers). This rating can be attributed in part to the team’s understanding of the governance issues plaguing many Japanese companies, as well as their recent investments in a renewable energy provider, a new ‘environmental’ thematic allocation for JFJ. JFJ has the lowest OCF in the sector, at 0.65%.

In our view JFJ continues to offer one of the best ways to tap into the domestic Japanese market, investing at the heart of Japan’s new growth opportunities. The team have a strong track record of successfully identifying the major secular trends driving the economy, which has translated to five years of outperformance of both the AIC Japan peer group and benchmark. While it has underperformed in the near term, this is probably an unavoidable consequence of quality growth investing and JFJ’s managers remain confident that their long-term view to secular growth investing will return to outperformance, an opinion also held by us.

Over the years JFJ has largely remained consistent in the sectoral trends which underpin its portfolio, though we are excited by its recent addition of an environmental theme. Not only does it further enhance JFJ’s already strong ESG credentials, but it also is evidence of the flexibility of the team and their awareness of the changing market environment in both Japan and abroad, especially important as we enter a post COVID-19 economy.

Investors should be conscious that the combination of a high level of gearing, exposure to small cap stocks, and a clear quality growth bias can enhance JFJ’s volatility. This has played out recently with the market’s rotation into value and cyclical stocks at the expense of quality growth as it begins to price in a post-pandemic recovery, enhancing the downside volatility for JFJ. However we believe JFJ’s returns more than compensate for its risk, with JFJ having the highest Sharpe ratio of its peers over the last three years and below average beta.