TIDMSJG
Schroder Japan Trust PLC
02 October 2023
Schroder Japan Trust (SJG)
02/10/2023
Results analysis from Kepler Trust Intelligence
Schroder Japan Trust (SJG) has reported strong absolute and
relative returns for the year ending 31/07/2023, with a NAV total
return of 11.7%, well ahead of the 9.4% total return of the
benchmark. The share price total return was 18.7%, as the discount
narrowed. It was the third consecutive year the trust has
outperformed the Topix Index benchmark.
The trust is therefore substantially ahead of its tender
performance target. This is to outperform the index by 2% a year
over the four years from 01/08/2020. With one year left, the
manager has delivered c. 4% of annualised outperformance so
far.
During the year, the trust's name was changed, with the board
dropping 'Growth' in order to 'reflect more accurately the
investment approach of the manager'.
Manager Masaki Taketsume's investment strategy sees him place
importance on valuation, and this was helpful during the year as
value outperformed growth in Japan. There were strong returns from
financials and some idiosyncratic stories where the manager
identified short-term over-reaction in strong companies. Gearing
also contributed positively to returns during the year.
In order to lower the costs of gearing, the board is asking for
shareholder approval to allow the manager to use contracts for
difference in addition to bank borrowings.
Revenue during the year increased from 4.97p to 5.41p per share,
allowing the board to declare a final dividend for the year of
5.40p per share, representing an increase of 10% over the final
dividend paid in 2022. At the time of writing, this would amount to
a yield of 2.3% on the current share price.
Chairman of the board Philip Kay said: "My fellow directors and
I continue to be excited about the company's prospects, because we
see two major developments which should continue to drive equity
performance over the medium to long term. Firstly, corporate
governance and stock market reforms in recent years have stimulated
a tectonic shift in the attitude of many Japanese companies towards
improving returns for shareholders. Secondly, the reappearance of
inflation could signal the end of the deflationary spiral which
has, for example, constrained consumer spending in Japan over the
last two decades. ... Against this macroeconomic background, there
remain significant opportunities for our high conviction, bottom-up
strategy to identify and exploit market opportunities and drive
positive relative performance."
Kepler View
These are excellent results from Schroder Japan Trust (SJG)
which show shareholders have been rewarded for remaining invested
while sentiment towards the global economy has been negative. To
some extent the trust's sturdy total returns reflect that Japan has
been at a different point in the cycle from its developed world
peers. It only lifted its last pandemic-era restrictions in Q4
2022, and so there has been a rise in domestic economic activity
and tourism in 2023, with the end of China's zero-COVID policy late
last year also providing visitors and demand for goods and
services. This is one of the reasons for growing investor interest
in the country this year.
However, we think the more important, and potentially
longer-term, reason is the one highlighted by the chairman in his
comments: corporate governance reform is only gathering pace and
momentum, and encouraging more efficient use of cash in Japanese
businesses, either to generate growth or to distribute to
shareholders. We think this could lead to the valuation gap
Japanese equities trade on versus their international peers to
close, which means opportunity at the index level. Crucially, it is
also creating great opportunity at the stock-specific level,
rewarding investors with a local presence (like Schroders) who can
identify those company management teams committed to significant
change that can lead to individual stock re-ratings.
Masaki's strategy is to find high quality companies whose value
is not reflected in the current share price. Returns over the last
year show how this can generate returns from multiple sources.
Financial positions performed well as Japan inched towards
tightening monetary policy, raising the possibility it would escape
the deflationary environment which has limited economic growth over
many years. More interesting are the idiosyncratic positions such
as Ibiden. Ibiden is a small cap electronic component manufacturer
whose products are critical for CPUs and GPUs. Masaki built a
position last year on weakness and was rewarded this year when
AI-linked stocks rallied sharply. Similarly Disco Corporation has a
strong market share in providing equipment for integrated circuit
packaging, used in the semi-conductor industry. It also contributed
strongly to returns over the period. We think these examples
illustrate Japan has many interesting technology companies flying
under the radar of most global investors.
We think it is intriguing to note that Japanese equities remain
cheaper than many international peers while there are many
companies trading below book value, even though the Topix hit
all-time highs over the year in question. An example of the latter
is mid-cap Mitsui Chemicals, which Masaki bought for Schroder Japan
Trust in the 2023 financial year. Management have a plan to
transform the company operationally which has seen it deliver
resilient earnings even as demand slows, Masaki arguing that this
indicates the transformation is already bearing fruit and this has
not been reflected in the share price.
All told, low valuations, a cyclical boost from the reopening
and the long-term trend of improved corporate governance create an
exciting environment to be investing in Japan, and in our view
Schroder Japan Trust has shown its valuation-sensitive
stock-picking strategy has the potential to add value in such an
environment.
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October 02, 2023 07:43 ET (11:43 GMT)
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