Fidelity Japan Trust plc (LON:FJV) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent report on Fidelity Japan Trust, FJV: fund of the rising returns. What can you tell us about it?
A1: Over five years, FJV has outperformed UK markets, UK-listed competition, UK open-ended peers and Japanese benchmarks. The main driver has been FJV’s investment process, flexible mandate, and active management. FJV gives investors access to Japan’s globally competitive companies, structural reforms, improving corporate governance and under-researched mid-/small-caps. These features attracted new investors like Berkshire Hathaway to the country. FJV’s main risks are rising inflation (and sentiment to it), a sharp market appetite-style change, and COVID-19. The share price is at a 6% discount to NAV (98% of assets are listed).
Q2: The trust is massively ahead of its benchmark. I see, from the latest monthly factsheet, that its NAV growth has been more than double the index on a 1-, 3- and 5-year view. How has it delivered that?
A2: The manager identifies where the market has mis-judged the growth outlook through detailed, fundamental analysis. Origination of new ideas flows from this analytical model, company meetings, the analyst and fund manager networks, and the company’s scale and global research. Compared with local investors, FJV has a competitive advantage in that their global presence makes it able to identify winners from a global perspective, which may not be visible from looking at the local market in isolation. Compared with international investors, it has been on the ground, with a local team, speaking Japanese for a long time (since 1969). To really understand the businesses, the manager will meet up to 400 companies a year, and the team, as a whole, will meet more than 3,000 a year (under current remote working practices).
FJV’s approach is GARP, favouring sectors like energy efficiency, medical technology, Asian consumption, and digital transformation. It likes “efficiency enablers”, which will benefit from the way people work, shop, and play in the post-pandemic world. This does not exclude opportunistically looking at sectors where market sentiment is mis-pricing growth (for example, in travel and leisure in 2020). FJV’s companies show faster-than-average revenue and EBITDA growth (ca.2x and 3x the market, respectively), higher ROE and ROIC (both around one third above the market), and higher P/E and P/BV ratings. The portfolio is actively managed and market cap-agnostic, with portfolio risk then managed through position size and top-level characteristics. FJV benefits from all the advantages of a closed-ended structure in terms of being able to take and hold conviction ideas, optimising its balance sheet and the associated good corporate governance.
Q3: Sounds good but what about the Japanese market as a whole?
A3: Japan’s future growth is about tech-enablement – it is second only to the US and China in terms of patents filed. Structural reforms by the government include labour laws, new trade deals and corporate governance. Operating margins are rising, and balance sheets are being restructured. The US and China (ca.40% of Japan’s exports) are both likely to show strong growth in 2021. Global trade is important. Actions are being taken to offset the adverse effect of an old and ageing population by developing a digitalised, tech-enabled, green economy, and these are creating opportunities for FJV. While some remember Japan’s lost decade, it is worth also remembering that, over the past five years, the Japanese market, hedged back to sterling, has materially outperformed UK markets.
Q4: And what about the risks?
A4: FJV has seen periods of short-term underperformance when its investment style is out of favour – typically, when the market undergoes a sharp factor rotation. FJV is an active manager, and its NAV has shown, and is likely to continue to show, volatility. Usually, recovery has been swift. By way of example, in 2020, FJV’s NAV total return fell by 36% between January and March, while the index fell 25%. FJV went on to see a sharper recovery, outperforming over the year. Looking at the Japanese market, COVID-19, as elsewhere, remains an uncertainty, and, while Japan is ranked ca.130th in terms of cases per million, the future cannot be predicted with certainty. There are some sentiment issues in Japan around its historically below-average growth rates, ageing population and level of debt. In our note, we examine what the Japanese government has done to address these issues.
Q5: And a few words on Fidelity Japan Trust’s valuation
A5: Investors can find the latest discounts for FJV and its peers on the AIC website. Despite being the best-performing trust in the Japanese sector over five years, FJV’s discount is wider than the average. It is worth noting that 98% of its assets are listed, and so the NAV is a real one. The 5.5% discount appears anomalous, both relative to peers and in absolute terms.