Manager Chisako Hardie said a core theme in the £100m fund was the changing nature of some Japanese markets, which were previously fragmented but are now experiencing a period of greater consolidation.
Last week the Bank of Japan (BoJ) rocked markets by declining to expand its stimulus programme, but Ms Hardie remains more interested in structural changes that may emerge across the corporate sector.
The fund holds AIN Holdings, one of the largest pharmacy store chains in Japan, but which only has a 2 to 3 per cent market share due to the fragmented nature of the market.
The manager said: “There are lots of small players and family businesses and the next generation don’t want to take on the businesses, so the founders are thinking to sell the firms to the bigger players. These companies are well organised and can grow steadily in a mature market.”
On AIN specifically, she said the firm was making good inroads into the prescriptions market by buying up smaller firms.
Along with purchasing family businesses, the company can offer more training to newly qualified pharmacists, whereas smaller operators cannot and thus are struggling to attract new talent.
As part of the consolidation theme, the fund also holds 1 per cent in the Nihon M&A Centre, which organises small M&A by acting as a brokerage.
Axa Framlington Japan fund’s small-cap weighting
AIN Holdings share price increase in the past 12 months
The Japan fund has retained a small-cap bias following a 2013 merger that combined the manager’s small- and all-cap vehicles. It holds around 55 per cent in smaller firms, with 20 per cent in large caps, while many of the mid-cap holdings began as small-cap investments.
Ms Hardie said smaller firms were best placed to take advantage of the growth areas in Japan, despite these becoming harder to find.
The country’s economy has experienced three years of quantitative easing, which has attempted to boost aggregate demand and push up inflation. But annual inflation still hovers around zero per cent, leading to the concern over the BoJ’s inaction last week.
The Japan fund’s pharmaceuticals position also feeds into a second theme attempting to take advantage of the country’s demographic changes.
Ms Hardie said the country would need innovative solutions to fix its ageing population crisis, and her fund has been positioned accordingly.
A similar 1 per cent holding is held in Pigeon, which provides nurseries and products for infants. Ms Hardie said the company’s branding needed work, but she was attracted by its nursery business.