Fidelity Japan Trust: Opportunities from the mother of invention

Hardman & Co

Necessity, as they say, is the mother of invention. In this note, we explore how a long-term core Fidelity Japan Trust plc (LON:FJV) investment thesis has been identifying the opportunities arising as Japan innovates, inter alia addressing the global necessities of digitalisation and de-carbonisation, as well as the domestic demands from delayed domestic reopening. Japan’s record on innovation is market-leading, which, when combined with FJV’s unique competitive advantages in bottom-up stock selection and a flexible mandate allowing unlisted investments, has contributed to long-term outperformance. Short-term style rotation has led to weakness, but five-year NAV growth is 1.4x the index.

  • FJV’s unique value add: Fidelity Japan Trust’s approach is “growth at a reasonable price”. Companies growing because of innovation have a natural fit to the first element. FJV’s long local presence gives it advantages over global investors, while its deep, global analytical reach is a competitive advantage over smaller, national ones.
  • Recent performance: After material long-term outperformance, as outlined in our note, FJV: 10 questions for the AGM on 17 May 2022, style headwinds have seen material 2022 underperformance. Historically, after such periods, outperformance has been sharp. The three-month NAV outperformance is 2.5%.
  • Valuation: 94% of investments are listed in active markets. While some may have a degree of illiquidity, the NAV is “real”. The discount of 9% is above the average of recent levels, but it is slightly above that of its peers, whom FJV has materially outperformed over five years. FJV is run for capital growth.
  • Risks: FJV has seen periods of short-term underperformance, when its investment style has been out of favour – typically, when the market has undergone a sharp factor rotation, but recovery has usually been swift. Early 2022 performance may affect sentiment for a while. There are also some Japan sentiment issues.
  • Investment summary: Fidelity Japan Trust has outperformed its peers, benchmarks and UK indices, with a distinctive and active investment approach. Its companies show faster-than-average EBITDA growth (2023E ca.1.3x and 2024E 1.8x the market, respectively), and have higher ROEs and ROICs (both around one third above the market). It invests for “growth at a reasonable price” (GARP) – so company valuations are usually higher. With an active approach, investors are buying FJV’s investment process, not its portfolio on a given day. Japan offers tech-enabled growth and structural reforms, and it is levered to global trade. Its approach can be out of favour, but, under the manager’s tenure, underperformance periods have been short.
You might also enjoy reading  Fidelity Japan Trust unique competitive advantages in bottom-up stock selection (LON:FJV)

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