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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?
