The fund aims to achieve long-term growth from a diversified portfolio of Japanese company shares, typically with a bias to medium and smaller sized companies. The managers, Scott McGlashan and Ruth Nash focus on finding attractively priced, ‘mis-valued’ and under-researched stocks where they believe they can identify a reason for the share price to appreciate meaningfully.
Overall, it has been a difficult few years for the fund. Not only has the Japanese market performed poorly but the cheaper, ‘value’ businesses the managers target have remained firmly out of favour. This is reflected in poor returns against the broader index, the TOPIX, over the past few years, and performance broadly in line with the MSCI Japan Mid Value, an index that better represents the subsection of the market the fund primarily operates in.
In the past year, the fund benefitted from its stock picking, but this was undone by negative sector allocation. For instance, no exposure to electric power and gas proved helpful, but this was offset by a lack of holdings in the strong-performing manufacturing sector.
We still believe the managers are highly experienced and capable. However, the lack of outperformance versus the part of the market the fund invests in has led to a loss of conviction among members or our Research Team. Accordingly, we have removed the fund from the Direct Investment Service Preferred List .
What about Japanese shares in general?
Although we are cautious in the short term, there are reasons to be positive on Japanese shares in the long run. The spread of the coronavirus threatens an economy that has been struggling to grow for years, and its export-led industries dominated by automotive and electronics are likely to be among the hardest hit by any global slowdown. Yet Japan has a key saving grace; the strength of company balance sheets.
Japanese corporate debt to GDP is less than 5%, compared to 40% in the US, and 55% of Japanese companies now have net cash – against just 13% in the US and 15% in the UK. As a result, dividends have been rising strongly and there could be further to go. On average, Japanese firms are still only paying out a third of profits to shareholders, which compares to 88% for companies in the FTSE 100.
This resilience is likely to be further tested by COVID-19, but for longer-term investors Japan could represent an interesting ‘corporate survival’ story. The vast majority of Japanese companies will likely weather the storm, and an increasing numbers of ‘activist’ global investors eyeing up cash-rich companies could further unlock corporate reform, as well as boost merger and acquisition activity. This could ultimately benefit shareholders.
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