JPMorgan Japanese 05 November 2020
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Japanese. 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 Japanese Investment Trust (JFJ) seeks to maximise total returns through a portfolio of quality, high-growth Japanese companies. Led by Nicholas Weindling, working with the support of an experienced team of local analysts, the team invest across the entire market-cap space. This includes a small- to mid-cap allocation, using a bottom-up process to identify companies which they consider the best ‘premium’ or ‘quality’ opportunities.
As we note under portfolio, much of Nicholas and his team’s stock selection is driven by their understanding of the thematic issues driving the Japanese economy, many of which have accelerated during the COVID-19 pandemic. Their holdings are well positioned to benefit from changes in demographics, automation, corporate governance and the growth in online and internet services; these are discussed in depth in the Portfolio section.
The trust’s long-term performance continues to remain strong versus the benchmark, with JFJ further outperforming during the current pandemic. As we discuss in the Performance section, this was in part due to the team’s identification of structural growth opportunities, with many of the holdings beneficiaries of the COVID-19 economy. JFJ is also ranked amongst the best strategies in its sector for ESG, as we discuss under the ESG section.
JFJ is c. 16% net geared, reflecting the managers’ current positive sentiment. The fund trades at a c. 7.2% discount, which is in line with the peer group average, despite its recent outperformance and having the lowest OCF in the AIC sector. As we discuss under the Discount section, the board has undertaken selective buybacks in the most recent financial year to seek to address this.
We believe the JFJ team have demonstrated a clear and deep understanding of the broader Japanese economy and the trends underpinning equity markets. Investing in a wide range of companies gives them the opportunity to generate alpha through stock selection, and is reflected by their high active share.
Since the emergence of COVID-19, and thanks to the outperformance of quality and growth factors during this period, they have been further vindicated in their identification of the sectoral themes that have contributed to their stock selection. The concern now is that a potential resolution to the COVID-19 crisis may result in a shift towards value and cyclical stocks and lead to underperformance. However, the JFJ team are confident in the continuation of the secular growth story, believing that COVID-19 has rapidly advanced many existing trends and improved the outlook of the companies they hold.
JFJ is relatively highly geared, reflecting the depth of opportunities the managers are observing. That said, if there is a shift towards value, this gearing will exacerbate any portfolio underperformance. We maintain the view that given JFJ’s long-term superior performance, low cost and exceptional ESG credentials, the current discount relative to peers could be unwarranted. In some ways an investor's conviction could be enhanced given its performance during the current pandemic.
bull | bear |
Strong performance post the COVID-19 crash | Possible cyclical recovery after COVID-19 could lead to underperformance |
Large and experienced team, all on the ground in Japan | A failure of one sectoral factor to materialise will impact multiple holdings |
Lowest OCF in sector | Gearing can accelerate losses in falling markets |