Fund Review: JPM Japan Smaller Companies Trust

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Fund Review: Japanese Smaller Companies

The £127.4m JPMorgan Japan Smaller Companies Trust is managed by the trio of Shoichi Mizusawa, Nicholas Weindling and Naohiro Ozawa, and it seeks long-term capital growth through investment in small- and medium-sized Japanese companies.

The investment trust launched in 2000 and significantly outperformed the AIC IT Japanese Smaller Companies sector in 2014, as the team focuses on bottom-up stock picking and long-term mega trends.

Mr Weindling notes the portfolio’s exposure to small- and mid-cap companies is obtained by investing in “Japan-quoted companies other than the largest 200 measured by market capitalisation, Japan-domiciled or unquoted companies, Japan-domiciled companies quoted on a non-Japanese exchange and non-Japan-domiciled companies that have at least 75 per cent of their revenues derived from Japan”.

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The investment process itself is a bottom-up approach based on fundamental research, with macroeconomic factors considered only as they impact at a company level.

The manager explains: “We are more focused on a move towards corporate governance reform in Japan backed by prime minister Shinzo Abe’s policy support, including the introduction of a new index using return on equity as one of the selection criteria [the JPX-Nikkei 400 index] and the stewardship code. Corporate Japan has responded positively and we have recently seen a dramatic increase in dividends and share buy-backs by several cash-rich companies. In addition, quite a few Japanese firms have announced dividend hikes and/or share buy-backs.”

The management team also has a focus on “long-term mega trends based on intensive fundamental research, including more than 2,500 company meetings by the on-the-ground portfolio management team”. As a result, key investment themes pursued by the team include: the use of the internet and online content in Japan; the increasing global trend towards automation in the manufacturing sector; and the growth of foreign visitors – especially from Asian countries – and their increased spending.

The investment trust, which is benchmarked against the S&P/Citigroup Japan Extended Market index, has delivered a steady 52.28 per cent for the five years to January 6 2015, although this has lagged the AIC IT Japanese Smaller Companies sector average of 81.49 per cent in the same period, according to FE Analytics. However, in 2014 the trust delivered a strong 3.54 per cent, compared with the AIC sector average of 0.15 per cent, while its three-year performance is in line with its peers with a return of 53.96 per cent.

Mr Weindling points out the trust’s overweight positions in insurance and real estate have contributed positively to performance, while stock selection in the portfolio – particularly in the healthcare equipment and services sector through names such as medical products maker Asahi Intecc – has also worked well. Other specific stocks that have added to performance include robotics and technology company Cyberdyne and pharmaceutical firm Nippon Shinyaku.

On the flip side the manager acknowledges: “Recently, the trust’s overweight position in consumer services and underweight position in transportation detracted. Stock selection in sectors such as materials and real estate also contributed negatively.” Examples include manufacturing firm Teikoku Electric and car park operator Park24.