Over five years, FJV has outperformed UK markets, UK-listed competition, UK open-ended peers and Japanese benchmarks. The main driver has been FJV’s investment process, flexible mandate and active management. FJV gives investors access to Japan’s globally competitive companies, structural reforms, improving corporate governance and under-researched mid-/small-caps. These features attracted new investors like Berkshire Hathaway to the country. FJV’s main risks are rising inflation (and sentiment to it), a sharp market appetite-style change, and COVID-19. The share price is at a 6% discount to NAV (98% of assets are listed).
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- Other Japanese positives: Strong 2021 growth in Japan’s leading trading partners (US/China) bodes well. Japanese company balance sheets are strong, allowing returns to investors/increased corporate activity. Japan’s population is relatively affluent, with plenty of catch-up potential as the economy reopens, and its market valuations are undemanding.
- Other considerations: The shares have good liquidity and all of the closed-ended vehicle benefits. FJV has positive ESG credentials. It uses derivative gearing to enhance returns (with higher volatility). FJV’s fees have fallen and are in line with peers. Around 40% of portfolio company revenue is global.
- Valuation: 98% of investments are valued using quoted prices in active markets. While some may have a degree of illiquidity, the NAV is “real”. The discount of 6% is below low-run averages, but it is above that of peers, whom FJV has outperformed. FJV is run for capital growth and pays no dividend.
- Risks: FJV has seen periods of short-term underperformance when its investment style is out of favour; typically, when the market undergoes a sharp factor rotation. Usually, recovery has been swift. COVID-19 remains an uncertainty. There are some Japan sentiment issues.
- Investment summary: FJV has outperformed its peers, benchmarks and UK indices with a distinctive, active investment approach. Its companies show faster-than-average revenue and EBITDA growth (ca.2x and 3x market, respectively), and have higher ROE and ROIC (around one third above market). It invests for “growth at a reasonable price” (GARP) – so company valuations can be higher. With an active approach, investors are buying FJV’s investment process, not its portfolio, on any day. Japan offers tech-enabled growth and structural reforms, and is levered to global trade. FJV’s approach can be out of favour but, under the manager’s tenure, underperformance periods have been short.