Japanese Equity Fund

Risk Considerations

The Fund is actively managed and invests mainly in a widely diversified portfolio of shares of companies in Japan.
Investment in the Fund involves risks, including general investment risk, equity market risk, risks associated with depositary receipts, geographic concentration risk, small and mid-capitalisation shares risk, exclusion criteria risk, currency risk and hedging risk which may result in loss of a part or the entire amount of your investment.
The Fund may use derivatives for hedging and efficient portfolio management and is subject to derivatives risk. Exposure to derivatives may lead to a risk of significant loss by the Fund.
The value of the Fund can be volatile and could go down substantially.
Investors should not invest in the Fund solely based on this website.

Investment involves 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.

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-Nov-2023 - Archibald Ciganer, Portfolio Manager,

Japanese equities rallied in November as expectations that US interest rates had peaked pushed riskier assets higher. A strong corporate earnings season and continued weakness in the yen also lent support. Within the portfolio, our choice of securities in electric appliances and precision instruments dragged. An electronic and media conglomerate’s second-quarter operating profit missed consensus, due primarily to technical reasons in the financial services segment. Stock picks in machinery also detracted. Shares of a commercial kitchen equipment producer were subject to profit taking after the company reported new historical-high quarterly profits, driven by its overseas operations. Conversely, security selection in information technology and services added value. Shares of an e-commerce firm rose on strong results showing solid demand for online payment services across a broad range of sectors. Commercial and wholesale trade was a further area of strength. A leading trading company raised its profit forecast on the weaker yen and stronger expectations for its machinery business.

30-Nov-2023 - Archibald Ciganer, Portfolio Manager,

We are positioned overweight the construction and materials sector, where we are finding investment opportunities among leading makers of silicon wafers, for example. This is in an environment of an anticipated recovery in wafer demand over a longer time horizon alongside improving industry discipline. Among the month’s trading activity, we took some profits in banks, following their strong share price performance this year within the context of the Bank of Japan's monetary policy tweaks and anticipation of further normalisation.

30-Sep-2022 - Archibald Ciganer, Investment Analyst,

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, Investment Analyst,

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.

Risks

Typical Investor