Schroder Japan 10 February 2023
This is a non-independent marketing communication commissioned by Schroder Investment Management. 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.
The Japanese equity market is deep and often under-researched, with a diverse set of companies of potential interest to investors, from world-leading large caps to high-growth small and mid caps. Schroder Japan Growth (LON:SJG) leverages Schroders’ extensive resources to identify attractively-valued, growing companies in the market, with the overarching strategy being to add alpha by superior stock selection.
The trust has been managed by Masaki Taketsume since July 2019. Masaki draws on the work of a team of 12 analysts and portfolio managers to help him select stocks, looking for companies which are trading below their fair value. The contrarian, value tilt to the approach is in contrast to the average trust in the sector, which is very focussed on high-growth stocks. SJG has benefitted from this tilt over the past year, as we discuss under Performance. An additional helpful trend has been improving corporate governance in Japan, which has been a source of alpha at a number of companies and Masaki expects it to continue to be.
Masaki has an optimistic view on the outlook for Japan in 2023. He notes inflation is modest versus that of developed world peers, as are union wage demands. The country has only recently reopened after the pandemic, which should lead to a boost in consumer spending and corporate earnings. Masaki has been tilting the portfolio towards domestic-focussed mid and small caps as a result, always looking for those with pricing power and strong corporate governance (see Portfolio).
SJG trades at an 11.3% Discount at the time of writing, compared to an 8.8% average for the AIC Japan sector.
Japan looks like a potentially appealing place to invest in 2023. While the UK, US and Europe struggle to bring down inflation from double digits, in Japan it is in a far more manageable, and even welcome, range for policymakers who have been trying to generate positive inflation for many years. The currency remains cheap, with China’s reopening a potential boost to exports. If recession is avoided in the rest of the developed world, or just shallower than expected, this will also be positive for Japan which is highly geared to global trade. Additionally, there is the ongoing corporate governance reform movement, which Masaki tells us is gathering momentum and is a potential source of return not dependent on market direction. We note that, at the time of writing, we are increasingly seeing managers with a global mandate raising their weighting to the country.
Masaki’s bottom-up approach seems to us to be an attractive way to invest in the country at this juncture. Macro trends, largely in rates, have driven global equities in recent years, leading to extreme rotations in the relative performance of growth and value. We would not expect this to continue now that rates and inflation have settled at higher levels, with any declines likely to be slower and complicated by weaker economic environments. As such, a stock-picking approach with a strong quality focus seems appropriate to us and SJG’s wide discount versus its growth-dominated peer group, attractive.
- Stock-picking approach less dependent on macro for alpha than more stylistically-biased strategies
- Discount may offer attractive entry point
- Deep resources at Schroders are an advantage with stock selection
- May underperform during growth-stock rallies
- Japan’s economy is tied to the health of the world economy, so the market could disappoint if the latter is weak
- Gearing can extend losses on the downside