Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Japan is the world’s third largest economy, and the world’s second largest developed economy. Nevertheless, the country’s extensive growth-potential remains broadly overlooked by fund managers. Around 90% of Japanese small to mid-sized companies receive little to no coverage from analysts1. This means that countless opportunities further down the cap scale continually evade most investors’ clutches.

Nick Price, manager of the Fidelity Japan Trust investment trust, is a firm believer that the best way to uncover the country’s untapped potential is through local, hands-on knowledge. Price can draw on over 26 years’ experience in Japanese equity markets and an extensive on-the-ground research team to seek out optimum performance for investors desiring long-term exposure to Japanese markets.

Price looks for growth opportunities across the entire Japanese market-cap spectrum. However, his GARP investment style (growth at a reasonable price) often draws him to smaller and mid-sized companies where minimal analyst coverage can lead the market to underappreciate those companies’ true worth. He also looks for change - be that in a company’s management, significant shifts in its operations, or interesting turnaround stories - as an indicator of where opportunities may lie.

A key driver of the fund’s performance over recent years has been reliable returns from some of its top holdings. The manager will hope Olympus, a global leader in endoscopes, will continue to build on its strong performance over 2019, with the company launching a new product cycle this year headed under a fresh management team aiming to focus more on shareholders’ mid-term returns. Price also feels optimistic about another strong performing asset, Murata, which comprises 4.8% of the fund’s total holdings. A world leading electric components provider, the company is well poised to profit from the shift towards 5G smartphones.

Amid global market uncertainty, Price now looks for opportunities to capitalise on disparities between the actual worth of some firms and the near-historical lows at which many are now valued. Fortunately for the manager, he is afforded licence to do so by a combination of the fund’s strong defensive position, and the extra security lent by its investment trust structure.

The portfolio is heavily weighted towards technology-related sectors (57.3% of holdings are spread across Electric Appliances and Information & Communication companies). As such, the portfolio was already geared towards businesses which are, for the most part, poised to withstand or even benefit from lockdown.

Furthermore, due to the fund’s closed-ended structure, Price has a constant pool of capital to draw upon which means he need not abandon the fund’s long-term outlook in order to match immediate investor outflows. In addition, the trust allows him to invest up to 10% of total assets in unlisted holdings. Price has also recently made use of a process known as ‘gearing’, where the fund manager can borrow money in order to buy investments. Gearing can magnify a trust’s gains if it is performing well, but at the same time risks amplifying losses if it underperforms.

Amid current unrest, the fund is now trading at a 9% discount to its NAV - an enticing prospect to investors who could benefit simply from it closing this gap.

Price is a manager who sees change as a key driver for investment. For him, a world which now seems like a distant relation to the reality we knew only a few months ago poses not just challenges, it also presents opportunities.

More on Fidelity Japan Trust PLC

Source:

Fidelity Japan Trust PLC Annual Report 2019

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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