Results analysis: Schroder Japan

• Schroder Japan Trust (SJG) has released its financial results for the year ending 31/07/2024, reporting NAV total returns of 21.0% and a share price total return of 16.1%, outperforming the TOPIX’s 16.4% return.
• A supportive backdrop for Masaki Taketsume’s value-tilted strategy, alongside a strengthening domestic economy, improving corporate governance and strong stock selection, were key drivers of this outperformance.
• Additionally, over three years, SJG has performed strongly, delivering annualised NAV total returns of 10.9% (in sterling), outperforming the TOPIX’s 7.7% annualised return.
• In June 2024, the board unveiled a new enhanced dividend policy, which sees it pay out 4% of the average NAV in each financial year. The board intends to declare dividends quarterly, and, in calculating the NAV in relation to quarterly dividends, the average NAV of the 12 months trailing the quarter will be used.
• As such, for the year ending 31/07/2024, the board was able to declare an enhanced final dividend of 10.81p, up 100.2% from the prior year.
• The board also announced a conditional tender offer, citing that if the trust fails to deliver performance at least in line with the benchmark over a five-year period from 31/07/2024, it will put to shareholders a proposal for a tender offer of 25% of the issued share capital at NAV, less costs.
• Chairman Philip Kay commented, “Despite the Japanese stock market having finally exceeded the bubble-era high seen in December 1989, Japanese equities remain a compelling investment opportunity, underpinned by a confluence of favourable macroeconomic conditions. … As well as attractive valuations, there has been growing momentum in Japan’s corporate governance revolution, there has also been a change in the guidelines for M&A activity which make it more difficult for Japanese managements to ignore unsolicited bids.”

Kepler View

The past 12 months have been very positive for Schroder Japan (SJG), as reflected in the strength of its latest financial results. Lead manager Masaki Taketsume has continued to add value through his high-conviction, bottom-up stock selection approach, resulting in the trust outperforming the TOPIX by 4.6 percentage points. Masaki attributes the outperformance not only to stock selection but also to a market backdrop that’s been more conducive to his value-tilted strategy – targeting high-quality, undervalued companies across the market-cap spectrum, which have attractive growth characteristics that could catalyse a sharp recovery.

Two other key developments have further supported performance over the period. First, the Bank of Japan raised rates for the first time in 17 years, meaning a now somewhat normalised monetary policy has benefitted a number of sectors, notably financials, an area in which the trust is well-represented. Masaki has long built a diversified allocation to financials, notably through banking stocks like Sumitomo Mitsui Financial, insurance stocks like Tokio Marine and security investments like Nomura Research Institute, all of which have contributed well to performance thanks to rising rates.

Secondly, growing demand for semiconductors and increasing enthusiasm around artificial intelligence has significantly boosted the trust’s tech-related holdings. Companies like Fujikura, a fibre cable manufacturer, performed strongly as the market began to recognise the critical role its advanced fibre optics and connectivity solutions could play in the development of AI infrastructure.

The SJG board have also been active. Whilst the trust had seen its dividend grow by 12.7% annually on average over the last decade, the board decided to unveil an enhanced dividend policy, outlining plans to pay out 4% of the average NAV each financial year, calculated quarterly. SJG has therefore become an attractive way for income seekers to diversify their portfolio and get access to the exciting reform story in Japan, in our view, although we note this approach means the dividend might not be as progressive moving forward because if the NAV falls, the dividend will be lower. This also makes SJG the highest yielding trust in the AIC Japan sector.

The board also announced a new conditional tender offer, following on from the previous one introduced in August 2020. Given the trust’s sustained outperformance of the benchmark over the four-year period to 31/07/2024, the previous tender offer was not triggered. If the trust continues to outperform in this manner, then the new tender offer is also unlikely to be triggered. Nevertheless, we think a 25% tender offer is meaningful, as some trusts offer 15%, whilst others offer none and we argue it affords shareholders some version of protection if the trust underperforms. It allows them to exit a portion of their investment at NAV, whilst also acting as a performance incentive for the manager to continue delivering outperformance.

Japan’s stock market has long frustrated investors, showing signs of a recovery only to fall short before things have truly taken off. However, over the past 12-18 months, there have been a confluence of macro-economic factors supporting its stock markets record-high ascension earlier this year. Key drivers include a significant shift in the Japan’s corporate governance, positive inflation, rising wages and an alternative haven for investors given geopolitical issues with countries like China, who are still looking for Asia exposure. We think the outlook continues to look positive and SJG is well-positioned to capture the potential growth Japan has to offer. It stands out in the AIC Japan sector, offering investors a differentiated exposure to Japanese equities through a portfolio of undervalued businesses with strong growth prospects, which have significant latent recovery potential, as well as exposure to under-researched opportunities further down the market cap scale. We think this combination makes it an appealing proposition for investors looking to play Japan in a differentiated way.

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