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Schroder Japan Growth Fund (SJG) invests in Japanese equities with a bottom-up process, aiming to generate long-term capital growth. The analytical team look at a variety of quality and valuation considerations. The process centres on the identification of companies trading at a discount to fair value through fundamental research carried out by a team of 11 analysts on the ground in Tokyo, including three specialising in the Japanese small-cap market. The manager, Masaki Taketsume, is based in London, having taken over from Andrew Rose in July 2019. However, he had been co-manager since 2017 and previously worked in the analyst team in Tokyo from 2007, with continuity of the investment process maintained. As discussed under Portfolio, the process focusses on constructing a Fair Value Model for each stock the team covers, looking at a variety of characteristics on an absolute and relative basis to determine the competitive position of a company. Structurally SJG tends to overweight the small- and mid-cap markets, with the manager noting that their depth of analytical resource helps them benefit in these lesser-researched names. As we discuss in the Performance section, the relative fortunes of SJG to its peer group tend to fluctuate broadly in line with the absolute performance of the market (i.e. relative performance has tended to be better in periods where market returns were positive). At c. 15.1% (as at 01/06/2020), SJG currently has the widest discount within the AIC Japan sector. The dividend yield is also amongst the highest in the sector at c. 2.7%.
Schroder Japan Growth Fund
Since we last reviewed our portfolio of discount opportunities, an awful lot has happened. The period from October to December saw a new Brexit deal, followed by the UK government winning a parliamentary majority to implement it. Both were bullish for UK and European markets, and led to a sharp rally in markets and a rapid narrowing of investment trust discounts. Globally, the mood was pretty optimistic for 2020; with a growing number of managers and commentators forecasting a rally in cyclical assets and a good year for markets. Some of our picks saw their discounts narrow in, such that we were even tempted to try to find other opportunities. But since then two major shocks have changed the picture entirely. The first was the assassination of Iranian general Qassem Suleimani, which led to fears of a wider conflagration between the USA and Iran. The second has been the ongoing coronavirus pandemic, which has had a more severe impact on markets, and looks likely to be a long-lasting situation with further economic pain to come. The overall average sector discount has widened, but not excessively (yet), as share prices have fallen only slightly more than NAV. Nevertheless there are some interesting opportunities emerging. As of market close on 13 March, the average discount was just under 7%; still significantly narrower than the level of c. 10% reached after the 2016 EU referendum (see chart below). The situation is changing every day, however. Good news about the progress of the virus around the world could lead to markets rallying and trust investors staying the course, while further bad news could see the discounts widen further in the short term. Last week’s budget and Bank of England rate cuts both gave some fuel for recovery, even if a slowing of the progress of the virus in Europe and the USA is likely to be necessary before the eventual relief rally begins.
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Schroder Japan Growth (SJG) invests in Japanese equities with a bottom-up process, aiming to generate long term capital growth. The trust typically has a bias towards 'value' stocks and currently has the highest exposure to this style of any trust in the AIC Japan sector. The process centres on the identification of under-valued companies through superior fundamental research carried out by a team of 11 analysts on the ground in Tokyo, including three specialising in the under-researched Japanese small-cap market. The manager, Masaki Taketsume, is based in London, having taken over from Andrew Rose in July 2019. However, he had been co-manager since 2017 and previously worked in the analyst team in Tokyo from 2007, so there is total continuity of approach. Although the process centres on valuation, a key differentiator from its peers, quality and growth characteristics are considered when the team build Fair Value models for each stock. The trust also has a structural overweight to small and mid caps. Masaki believes that this exploits the advantage of the deep in-house analyst team at Schroders, which is a particular benefit in Japanese small caps given the low levels of sell-side analyst coverage in Japan. The value bias has not helped the fund in recent years, when 'growth' stocks have been dominant, and it has underperformed as growth and momentum-focused trusts have done better. The portfolio has tended to be overweight in more cyclical areas of the market which have been out of favour relative to the steadier growth sectors, although Masaki has moderated the cyclical tilt in recent months. In recent years the discount has been wider than the sector average, which we would attribute to the value approach being out of favour and, more recently, it widened after the announcement of the change of manager - though we understand there is very little change to the investment process or style. The discount has widened to 15.2% this year compared to a sector average of 6.2%. The value tilt means the trust has a reasonable yield for Japan, which has traditionally been a low-yielding market. On the current share price the yield is 2.2%, with the trust having grown its dividend by 20% a year over the last five years. Dividend growth in Japan is being supported by improving corporate governance thanks to government-led reforms. The company has structural gearing maturing in 2022 worth 12% of NAV at current levels. This increases the share price’s sensitivity to market movements.
Schroder Japan Growth, despite its name, is the most value-exposed trust in the AIC Japan peer group. The managers Andrew Rose (retiring at the end of June) and Masaki Taketsume are based in London but rely substantially on the work of a team of 11 analysts based in Tokyo, covering both large and small companies. The on-the-ground research team do fundamental analysis and company meetings to pick what they think are the best opportunities in the market, and the managers then build their portfolios from their work. The value style has been out of favour in recent years, which has led to the trust’s returns being behind the peer group (but in line with the market). The portfolio is overweight the cyclical areas of the market, which have been less in favour than the steady growth areas. On a sector level, this means overweights to retail, machinery and electrical appliances as well as financials. The value tilt means the trust has a reasonable yield for Japan, traditionally a low-yielding market. On the current share price the yield is 2.2%, with the trust having grown its dividend by 20% a year over the last five years. Dividend growth in Japan is being supported by improving corporate governance thanks to the government’s reforms. In recent years the discount has been wider than the sector average, which we would attribute to the value approach being out of favour. However, the announcement of Andrew’s retirement has seen the discount move even wider. It stands at 11.2% relative to a sector average of 5.8%. The company has structural gearing maturing in 2022 worth 8% of NAV at current levels. This increases the share price’s sensitivity to market movements.
Research due to be published in the CFA’s Financial Analysts Journal claims to demystify Warren Buffett’s astonishing long-term success, and shows how he has achieved his incredible run of returns. In a nutshell, the Buffett “secret sauce” is leveraging up low beta, cheap, high quality stocks. This approach has allowed Buffett to generate a high information ratio - a ratio used by analysts to show risk-adjusted returns relative to a benchmark - over a multi-decade career, and returns which have generated significant value over a passive investment strategy. Using the same analytical ratio as a starting point - albeit over a shorter time period - we identify investment trust managers in the UK who have generated returns with similar characteristics, and then examine their investment style. We then consider whether Buffett’s “secret sauce” is past its sell by date; could it be that the approach which worked so well for him in the past is dated now, in a world where innovative disruption is occurring at an ever-faster pace?
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