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A postcard from Japan: enabling the sustainable transition

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Simon Clements and Chris Foster travelled to Japan for a week-long trip, meeting 21 Japanese companies from across the economy. Japanese companies play an important role in the transition to a more sustainable global economy and, by extension, in the global and managed funds for the Sustainable Future process.

Japanese companies have long led the world in technological advancements, driving the shift to a more resource efficient global economy. Unlike many other countries, it has never been able to rely on abundant natural resources to power its economy. However, its reliance on imported fossil fuels and nuclear energy has incentivised the efficient use of energy. The Japanese prowess in engineering and industrial technology, combined with their focus on investing for the long term, has delivered important technological breakthroughs.

Japanese corporate culture has traditionally been mired in secrecy, poor governance and a lack of openness to more advanced western corporate norms. Much of this has changed, as corporate Japan is in the midst of a push to make the stock market more open in order to encourage western investors. This really began in 2013, under the now late prime minister Shinzo Abe, but the desire to change and improve from both an investor perspective through good governance and improved returns on capital has continued.

We experienced this first hand, as we were interested to find 11 of the 21 meetings were conducted in English. The first time I went to Japan in 2007, we were lucky if any meetings were conducted in English. From a gender perspective, more than half of the corporate representatives were female, again an important step forward for Japan and Japanese corporate culture. There were references made throughout the meeting to “modern Japan”, as opposed to “traditional Japan”. After nearly 20 years of visiting, you could feel the change that’s underway.

Amid the jet lag and oppressive heat, we met some really interesting companies. A big area of interest currently is, of course, AI. Japan plays an important role in the semi-conductor industry’s supply chain, and it is clear AI is a beneficiary to the entire supply chain. We met Tokyo Electron, a company that helps prepare the chip before it is put through a lithography machine. We also met Advantest, a global leader that helps test semi-conductor chips for faults, improving yields and reducing defective products. These are examples of companies that are benefiting from both an upturn in the semi-conductor cycle and the super cycle related to AI investment in the industry.

We also visited a number of companies with exposure to electric vehicles (EVs) and industrial automation, both of which have been areas of weakness globally. EV manufacturers have disappointed investors, as weak demand in Europe and the US has combined with substantial supply from manufacturers across the world. Nidec is a company that partners with a European original equipment manufacturer (OEM) and has been experiencing both demand issues and also issues around profitability, and its EV division has been an area of disappointment. We also met Rohm, a semi-conductor manufacturer which sells into both the EV market and the industrial automation end market. Both companies had experienced significant cyclical weakness, and the message was clear – longer term they remain confident in the end demand, but the exact timing of the cyclical upturn is not clear. It has been a difficult period for these sectors, but patience is required from investors as the structural tailwinds will eventually drive growth.

We visited Keyence, which has been a core holding in the Sustainable Future Global and Managed strategies for over a decade. Keyence dominates the global market for machine vision and sensor technologies, and its technology is crucial for detecting faulty products in cutting-edge manufacturing processes used in end markets such as smart phones and EVs. We have been engaging with Keyence over the full decade we have invested in the business, and we again pushed the management team on issues. Specifically, we have asked for improved disclosure around its product impact, requesting metrics related to the number of faulty products it helps to detect. We also requested further improvements on governance structure, as well as pushing the company on what it plans to do with the huge pile of cash it has on its balance sheet.

Our final meeting in Osaka was with another long-term holding: Daikin. We sold the world’s leading manufacturer of energy efficient air conditioners out of the global and managed strategies in December, after an engagement which failed to lead to the divestment of its contract with the Japanese Ministry of Defence (MoD). While the products the company produces for the MoD are purely smoke bombs which are used for training purposes, and the business is very small, we decided in consultation with our advisory committee to sell the position. On meeting Daikin management, we were told (post our sale of the stock), that it had decided in January to exit the business it had with the Japanese MoD. We had been a shareholder for more than 10 years, and we were pleased that our decision to exit the position had influenced management to exit this business and focus on the core air conditioner business.

We left Osaka and returned on the impressive bullet train, or Shinkasen, back to Tokyo, where we met a host of impressive technology companies focused on the application of technology across the Japanese economy. These included GMO Payments, which is driving the adoption of payments in a country far behind its western counterparts in the shift from cash to digital payments. We also met the founder of Rakus, a Software-as-a-Service (SAAS) platform that helps Japanese SMEs become more efficient.

Overall, we left with the sense that Japanese companies are determined to make themselves more open to overseas investors. The era of mistrust of foreign investment and ownership is fast being replaced with a need to improve disclosure, governance and importantly target improvements in quality metrics such as return on equity and return on capital.

Understand common financial words and terms See our glossary

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Sustainable Future Team: 

Are expected to conform to our social and environmental criteria. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. Hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.  Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income.

The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.


This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

Simon Clements
Simon Clements
Simon Clements is a fund manager who joined Liontrust in April 2017 as part of the acquisition of Alliance Trust Investments (ATI), where he had managed funds for five years. Prior to this, Simon spent 12 years at Aviva Investors (previously Morley Fund Management) where, most recently, he was Head of Global Equities. In his early career, Simon worked as a Portfolio Accountant and Risk and Performance Analyst before joining Aviva Investors in 2000 to help develop its global equity and SRI propositions. Simon holds a Bachelor of Economics from the University of Newcastle, Australia, and a graduate diploma in Applied Finance & Investment from Securities Institute of Australia. Simon is a CFA Charterholder.
Chris Foster
Chris Foster
Chris Foster is a fund manager who joined Liontrust in April 2017 as part of the acquisition of Alliance Trust Investments (ATI). Previously, Chris joined ATI through the management training programme after graduating with a First Class Honours degree in Economics and Mathematics from the University of Edinburgh. Chris is a CFA Charterholder.

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