Japanese Equity Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

Japanese equities are in the middle of the road at this stage; Japan is among the most open and cyclical markets. If the global economy, and particularly the U.S., has a hard landing or tips into recession, then that will be a headwind for Japanese equities. However, the TOPIX Index is on little over 12x forward earnings when it trades on average around 14x forward earnings. Therefore, much of that bad news and negative sentiment is already reflected in valuations.

The yen has also fallen precipitously in 2022, due to the significant divergence of Japan's inflation trends and central bank policy from other developed nations. This is important for two reasons: (1) the market is very attractive for foreign investors looking for cheap assets and (2) the weak currency is supportive for Japan's exporters, which represent a large part of the TOPIX and have become around 20% more competitive in 2022. These exporters are mainly the large-cap value names, while the sluggish currency has further compounded pressure on small-cap and growth investors.

The Japanese currency is at its lowest level in around 24 years versus the U.S. dollar?we believe that we are likely to see the yen strengthening from here at some point, particularly if inflation in the U.S. starts to roll over while remaining tepid and in line with the central bank's target in Japan. We also note that the currency can move sharply; in 1998, the yen rallied by about 22% in less than three months, with about a third of the gains in over just two trading days. The currency can rally sharply from its current lows and that would be supportive for the relative performance of small-cap and growth investors who have been under pressure. Small-caps are at their biggest discount relative to large-caps since the global financial crisis?that is excessive, in our view.

Despite the uncertainty in the global economy at the moment, Japan's corporates continue to buy back stock and return capital to shareholders at record levels. This is a very encouraging sign about the health of the corporates, as well as signaling the ongoing improvement in corporate governance at the company level in Japan. We believe the relentless pressure of late creates opportunity for long-term investors.

Strategy

Fund Summary

With close proximity to, and a deep understanding of, the companies in which they invest, our Tokyo-based investment team searches for companies with a focus on growth and improvement. We favour businesses with sustainable growth, a durable competitive advantage, robust fundamentals and a credible management team. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

Performance - Net of Fees

Past performance is not a reliable indicator of future performance.

30-Apr-2024 - Archibald Ciganer, Portfolio Manager,

As many market participants converged around the view that Japanese authorities had intervened around the turn of the month in the foreign exchange markets to prop up the yen, Japanese stocks fell in April. Changes in the Bank of Japan’s (BoJ’s) accounts suggested that such an intervention had taken place. Within the portfolio, our choice of securities and overweight holding in information technology and services held back relative performance. An operator of a digital platform matching professional jobseekers with employers and recruiters was a laggard. Its latest results showed a deceleration in the growth of its digital platform. Stock picks in machinery also dragged. A manufacturer of cutting, dicing and grinding tools and consumables for the semiconductor, industrial and construction segments detracted. It issued guidance that was below consensus. Conversely, security selection in raw materials and chemicals added value. Shares of a household and personal care company gained as an activist investor launched a campaign that is expected to accelerate the firm’s restructuring process. Stock choices in financials excluding banks benefitted relative returns further. A leading property and casualty insurer recently said that it could spend on overseas acquisitions and also began its share buyback, boosting the stock.

31-Jan-2024 - Archibald Ciganer, Portfolio Manager,

Within the information technology and services sector, we believe that gaming could be a top performing segment in Japan this year. Many gaming stocks struggled in 2023, on weak demand post COVID and Chinese regulatory headwinds. However, these trends appear to be reversing, with demand normalising, a good line-up of games and, recently, China’s approval of a slew of games. The share price performance of some gaming stocks has already started to improve, yet they still appear attractively valued, in our view.

30-Sep-2022 - Archibald Ciganer, Portfolio Manager,

We decided to close our position in Recruit Holdings, a leading human resources services company and major global player in temporary staffing. The business has exposure to the U.S. market through Indeed, and our conviction has lessened somewhat on concerns surrounding the risks to the U.S. jobs market.
We exited our holding in KDDI, a leading mobile carrier, after its strong share price performance this year. The stock has outperformed many of its peers over the year, but we believe the fundamentals look weaker relative to Nippon Telegraph and Telephone (NTT), which we hold. NTT is a high-quality telecommunications company with a solid balance sheet. It offers defensive earnings from dominant market share in Japan in both fixed-line and mobile amid rising macroeconomic uncertainty.
In contrast, we added to our holding in Visional, which we regard as one of the most attractive companies in the services sector currently. It operates BizReach, a digital platform matching professional job seekers with employers and recruiters. We expect the recruitment platform's growth to reaccelerate as Japan's economy normalizes.
Seven & I is a leading retail conglomerate. We believe the company's acquisition of U.S. convenience store chain Speedway solidifies its subsidiary 7-Eleven's leadership in the North American market and will transform the group by (1) sharply increasing the proportion of earnings from a high-return operation with real growth potential, (2) raising return on equity via leverage, and (3) incentivizing reform in Japan of underperforming assets.
We trimmed our position in leading drugstore chain MatsukiyoCocokara and discount retailer Pan Pacific International after the strong run in their share prices. Optimism about the reopening of the economy boosted both companies.
We added a position in Olympus, a Japanese medical technology company and leader of gastrointestinal endoscopes with significant global market share. We believe Olympus can deliver higher-than-consensus earnings as the market underappreciates its potential of core endoscope business sustainability and health care portfolio rationalization.
Shimadzu is a life science tool company. In our view, it is a long-term growth compounder with strong tailwinds from increased demands of health care spending and drug production in Asia. We took advantage of recent weakness in its share price to add to our holding.
In contrast, we sold out of our position in Tokyo Electron, a leading semiconductor company. We prefer to own this stock when we believe we have reached the bottom of the semiconductor cycle.
We initiated a position in East Japan Railway, which operates conventional and bullet train services as well as retail businesses in the Tokyo and northern Japan areas. We believe profits can recover from post-Covid normalization and increasing domestic and international travel.

30-Sep-2022 - Archibald Ciganer, Portfolio Manager,

Hikari Tsushin, an office automation and telecommunications business, was a key contributor. The company reported a strong earnings update in August and announced that it had fully hedged electricity price volatility and would be launching a new gas business; the stock price soared as a result.
Shares of Solasto, a leading player in the staffing and operational outsourcing market for medical institutions, rallied. It reported a yearly jump in the number of residents at its elderly care facilities, as well as a gain in its day-service users, in June.
Visional operates BizReach, a digital platform matching professional job seekers with employers and recruiters. Its shares rose after it delivered strong results and guidance, even after post-COVID compensations normalized. It has been direct recruiting rather than fees from recruiters that has been driving growth.
Shares of leading drugstore chain MatsukiyoCocokara and an operator of discount stores, Pan Pacific International, rose as the further easing of border controls and an expected recovery in domestic traffic boosted sentiment for both stocks. Both companies also reported positive first-quarter earnings results in August.
Casual clothing retailer Fast Retailing, which owns the UNIQLO brand, performed strongly. The company delivered a set of results that were well above consensus expectations and raised guidance by more than expected. Despite the impact of lockdowns in China, operating profits hit a record quarterly high for the third straight quarter.
Eisai was one of the top contributors within the overall portfolio. Shares of the company gained toward the end of September after it announced the successful phase three trial of its Alzheimer's drug, Lecanemab.
Shares of Daiichi Sankyo, a pharmaceutical company with global operations focused on oncology, gained following positive news surrounding the Food and Drug Administration's approval of its breast cancer treatment, Enhertu.
At the start of the review period, we had one position in foods, Ezaki Glico, one of Japan's largest listed confectionery manufacturers. It faced headwinds of China's lockdown and soaring prices of raw materials. We sold our position given management's seeming unwillingness to embrace reforms necessary to raise margins or to reduce exposure to structurally difficult categories such as dairy.
Shares of Kansai Paint rose over the review period. The company's latest earnings results demonstrated its ability to pass on higher costs in Japan and Europe.
Daio Paper lost ground and was a major detractor over the quarter. Earnings at the leading paper manufacturer continued to be hurt by rising commodity prices, in particular oil and coal. However, we expect operating profits to improve as input price pressures ease.

Indicative Benchmark Data Source: Tokyo Stock Exchange

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

Attribution Data: Analysis represents the total performance of the portfolio as calculated by the FactSet attribution model and is inclusive of other assets that that will not receive a classification assignment in the detailed structure shown. Returns will not match official T. Rowe Price performance because FactSet uses different exchange rate sources and does not capture intra-day trading. Performance for each security is obtained in the local currency and, if necessary, is converted to U.S. dollars using an exchange rate determined by an independent third party. Figures are shown with gross dividends reinvested.

Sources: Copyright © 2020 FactSet Research Systems Inc. All rights reserved. FT Interactive, IDC; Analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the TOPIX sectors and industries for sector and industry reporting for this product.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.

Risks

Typical Investor