Behind the trust: Schroder Japan Trust plc
Schroders depth of resources on-the-ground in Japan and in smaller companies allows Schroder Japan Trust (formerly the Schroder Japan Growth Fund) to invest with conviction in the best that the country offers.
The world’s third largest economy, Japan is home to globally recognised leaders in areas such as automobiles and electronic components. It is also a hotbed of many smaller, lesser known companies that possess key enabling technologies in structural growth areas such as robotics and factory automation.
Schroders’ Japan team is in a strong position to form an independent view of these companies and back that conviction for the longer term.
“I invest in individual Japanese companies, not simply in the broad Japanese economy,”says Masaki Taketsume, manager of the Schroder Japan Trust. “That means I only invest where I see strong company-specific drivers for future performance, while avoiding the impact from the well-known structural issues that Japan faces.”
In many cases, positive company views are supported by significant improvements in corporate governance seen in Japan in recent years. This has led the management at many companies to improve their business models, especially through better capital allocation, which has resulted in sustainable improvements in return-on-equity.
These changes are already directly benefiting investors in the Schroder Japan Growth Fund, particularly as Japanese companies have begun to improve returns to shareholders in the form of increasing dividends and share buybacks.
Shareholder activism is on the rise in Japan too, creating a powerful force for accelerating change. Over time, this will provide an additional route through which the hidden value in many Japanese companies can be realised for investors in the investment trust.
The current economic outlook for Japan is also broadly positive. The political environment is expected to remain stable for the foreseeable future, with Prime Minister Kishida continuing to pursue policies aimed at reinforcing ongoing recovery in the domestic economy.
Very accommodative monetary and fiscal policy is expected to continue for at least the next couple of years, underpinning an economy that is growing well above its usual rate. Growth in Japan will accelerate to 2.4% in 2022, the fastest in 12 years, and should maintain close to same pace next year, according to the International Monetary Fund’s latest economic projections . While Japan should avoid the kind of spike in inflation being seen elsewhere, global pressure on energy and food has helped Japan to reach a headline inflation rate of around 2% after decades of deflation.
What does the trust do?
The trust is a portfolio of the best ideas. The companies cover the complete spectrum of Japanese equities, across different sizes and sectors. But they have two common factors: firstly, they are well-managed, high-quality companies, and secondly, their current share prices do not yet reflect their potential.
Research on these companies by Schroders’ in-house research analysts gives the fund manager the conviction he needs to invest in just 60-70 stocks from among more than 3,000 available to the trust in the Japanese equity market.
How does Schroder Japan Trust do it?
Schroders boasts a wealth of experience in investing in Japan. In managing the trust, Masaki draws on the extensive global resources of Schroders, including the data insights unit, sustainable investment team and independent risk management team.
The strongest contribution to the trust, however, comes from a team of dedicated analysts working on the ground in Japan. They have in-depth knowledge of the market and gather great insight into the companies operating there.
Masaki’s investment strategy typically identifies performance drivers from three broad categories:
Market misperception: companies with improving growth prospects through management effort, which are underestimated by other investors.
Market oversight: undervalued companies with strong and defendable business franchises in niche product areas, especially among small and mid-caps, that are often overlooked due to a lack of sell-side research coverage.
Short-term overreactions: ideas arising from abrupt but transitory events that push valuations of quality companies to unsustainably low levels. These are more opportunistic positions.
Conversely, Masaki seeks to avoid stocks that lack company-specific drivers for future performance, such as those affected primarily by macroeconomic or cyclical factors, and those that could become casualties of structural headwinds.
There are many compelling reasons to invest in the Schroder Japan Trust. Here are the trust’s six central selling points:
1. Unconstrained approach
The manager has the flexibility to invest in the complete spectrum of Japanese companies, across different sizes and sectors. The trust provides a balance between large-cap companies where there are signs of management-driven improvement and mid- and small-cap companies that may not yet be on many investors’ radar screens but have strong business franchises in niche product areas.
2. Focus on quality
The team focuses on quality companies with strong management teams and defendable market positions. With Japan potentially heading into a period of moderate but sustainably positive inflation, the team is particularly focused on the ability of Japanese companies to re-establish pricing power to protect margins after such a long deflationary period.
3. Focus on valuation
Schroders’ research process has a strong valuation focus. Together with the manager’s naturally contrarian investment style, this typically results in the trust having a modest style tilt towards ‘value’ stocks. These are companies deemed to be trading at prices below their intrinsic value.
4. Experience and resources
Schroders’ Japanese equity team is highly experienced. Masaki has 28 years’ experience investing in Japanese equities. He is backed by Schroders’ 12-strong team of Tokyo-based equity analysts, including three small-cap specialists. This team has strong links with the management of each company the trust invests in.
5. ESG integration/ Active ownership
Environmental, social and governance (ESG) factors are integrated throughout Schroders’ Japanese equity research, drawing on Schroders’ proprietary sustainability tools. The team also conducts an active engagement programme with a focused list of Japanese companies. Collectively, it undertakes around 2,500 contacts with Japanese companies each year.
6. Geared returns
The investment trust structure allows the use of gearing – borrowing money to invest alongside shareholders’ capital with the objective of augmenting investment returns. Given the team’s expectations for long-term revaluation of the Japanese equity market, the trust typically maintains a positive gearing level of 10% through the market cycle. Masaki has flexibility to increase gearing by an additional 7.5% on a more tactical basis to take advantage of idea flow in small-cap companies. This ability to gear can provide a powerful kicker to returns.
 - Japan: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan, IMF, April 2022
Past performance is not a guide to future performance and may not be repeated.
The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.
The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so
This information is a marketing communication.
This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder Japan Growth Fund plc (the “Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.
Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.
Past performance is not a guide to future performance and may not be repeated.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Schroder Japan Growth Fund plc have expressed their own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy.
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Issued in November 2022 by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU.
Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority