“The single biggest reason to be interested in Japanese equities”
“It’s a battle for corporate control in Japan,” declared Nicholas Weindling, co-lead portfolio manager of the JPMorgan Japanese Investment Trust plc (JFJ), referring to the recent flurry of announcements for buyouts and takeovers. “We have never seen this before.”
The portfolio’s position in Seven & I—the owner of 7-Eleven, one of the largest convenience store franchise in the world—is a good example of this emerging trend. A large Canadian retailer made a preliminary bid for the company, which was then countered by a buyout bid from Seven & I management.
Weindling and Miyako Urabe, JFJ’s other co-lead portfolio manager, believe that the rise in corporate transaction announcements suggests that Japanese companies are starting to be recognised for years of corporate governance improvements—and their relatively low valuations. The PMs also think that more Japanese companies may be potential targets, given the continued momentum in corporate governance and actions that benefit shareholders.
Indeed, the pace of share buybacks has accelerated sharply in 2024 and domestic asset managers have been voting more aggressively for changes. In addition, further unwinding of Japanese companies’ cross shareholdings—when companies own shares in each other—could free up more cash for buybacks that could meaningfully boost returns on equity.
In Weindling’s view, the improvement in corporate governance and capital efficiency that could play out over next five to 10 years in Japan “is the single biggest reason to be interested in Japanese equities.”
Recent strong returns reflect several themes
The portfolio managers believe that the JFJ portfolio is well exposed to the trend of companies being rewarded for improving corporate governance and capital efficiency, given their focus on investing in quality companies of all sizes that have leading franchises and strong business models. Recent contributors to the portfolio’s strong returns suggest this is already happening.
Over the past one year through 30 September 2024 JFJ’s NAV increased 24.18% vs. the 10.27% net return for the TOPIX benchmark over the same period1.
The portfolio’s large position in Hitachi, the global conglomerate, was one of the biggest contributors to returns. Shareholder enthusiasm for the company’s restructuring plan almost doubled Hitachi’s share price over the 12-month period. Global insurance group Tokio Marine Holdings, another significant position in JFJ, scrapped its cross shareholdings and returned 47% over the past 12 months2.
The top contributor the portfolio’s recent performance was sportswear manufacturer Asics. This long-term position returned 120% over the past 12 months and has increased 10x in value since it was initiated in the portfolio2. The company has matured from a loss-making franchise to a global brand with market-leading operating margins of 15%.
Asics is a good example of the world-class consumer brands that are key holdings in the portfolio. Another one is Sanrio, an entertainment company that has multiple major licensing rights, including Hello Kitty. A new young CEO has diversified the company away from some of the lower profitability businesses, like theme parks, and dependence on the Hello Kitty franchise. The new portfolio approach with more characters is already showing signs of more stable and sustainable earnings growth.
The portfolio also holds several companies related to automation and technology hardware. Advantest is a leading global semiconductor testing manufacturer. As part of a global duopoly, the company is well positioned to benefit from the current demand for longer, more intense testing. Following positive analyst feedback from the J.P. Morgan Asset Management global tech tour this year, the JFJ portfolio managers increased their internal rating of the company and the position size in the portfolio, making Advantest one of the top holdings in JFJ.
Other themes emerging from JFJ’s bottom-up stock selection process include digital innovation, demographic change, medical technology and the environment.
How much will macro matter?
Many investors are carefully monitoring China’s efforts to boost its economy and the JFJ portfolio managers see China’s acknowledgement of the need for stimulus as positive. However, they believe the more important focus for investors in Japanese equities is not China’s growth rate but the competitive landscape within China—and they think Chinese companies are likely to win in China. This view has led the portfolio managers to significantly reduce JFJ’s exposure to China over the last five years.
Following the US election, the topic of tariffs on Chinese goods—or on goods from other nations—is also top of mind. The JFJ portfolio managers see some possibility that Japan, as an important ally of the US in Asia, could benefit if China is hit with high tariffs. With regards to companies in the portfolio, many have production operations in the US and would be less impacted by any tariffs that might be placed on Japanese goods. The yen has been weakening vs. the US dollar as higher tariffs may be inflationary but the portfolio managers do not typically express a currency view in the portfolio.
The impact of Japan’s election result is likely to be minimal. The ruling party is now in a coalition government but all of the parties have relatively similar policies—even the opposition—in contrast to the US or Europe.
JFJ and JSGI merger
With a number of mergers potentially on the horizon in Japan, an important one has already taken place. The JPMorgan Japan Small Cap Growth & Income plc (JSGI) has merged with the JPMorgan Japanese Investment Trust to form the largest Japan equity investment trust*. The investment strategy and Tokyo-based portfolio management team remain the same. The resulting JFJ portfolio has an expanded all-capitalisation universe while maintaining its quality and growth bias.
