Liontrust Japan Equity Fund

The Liontrust Japan Equity Fund returned 4.5% over the first quarter, versus the TOPIX’s 1.0% gain and the IA Japan sector average of 0.3% (both comparator benchmarks)*. This performance places the Fund in the top quartile for the period under review.

This quarter, whilst the larger stocks held up well, it was the mid-sized category along with the Second Section that led the performance tables with JASDAQ and Mother’s Market all lagging. The market largely gained impetus from the clear indication that the world was growing again with an ever-stronger pick-up in the US, all of which favours Japanese firms given many have a significant exposure to the US.

TOPIX began 2021 at approximately the 1,800 mark, then proceeded to trade steadily higher breaching the 2,000 level on the 18^th March for the first time since early May 1991 – almost 40 years! However, over the same period, the MSCI World Index had risen from 507 to 2,811 for a gain of around 450%, illustrating the degree to which an investor in just Japan would have missed out as well as the potential ground that is to be made up. This quarter also saw the return of foreign investors as they began to appreciate Japan’s combination of strong earnings recovery and a lowly valuation level whilst also NOT having cancelled their dividends which occurred with many other firms in the US/UK/EU.

Over the next quarter, we expect Japanese equities to do relatively well based on their balance sheets and balance of operations tilted towards the non-OECD and the more cyclical sectors. This still leaves open the when, how strong and how long is the eventual recovery. Once conditions stabilise, we expect the attractive and undervalued fundamentals of Japanese firms to reassert themselves and attract back overseas investors, given the US markets’ valuation levels and likely corporate tax increases down the road to cover the Democrats likely spending binge.

For the third quarter in succession the Fund’s underlying equity portfolio collectively outperformed due principally to the Fund’s exposure to the previously hard hit more cyclical areas such as the consumer discretionary, industrial, and materials sectors. However, for this quarter, the Fund’s holdings in the financial and real estate shares contributed, rather than detracted, from its overall returns as well as its solo energy sector holding. The Fund was also helped by having almost no representation to the sectors that had done well out of the Covid pandemic, particularly the healthcare and consumer staples sectors.

Across the portfolio, the primary determinant of absolute performance seemed to be the absolute share price value, those priced in 10,000s of Yen each mostly declining whilst those denominated in mere 100s or 1,000s all gained. This reflects largely the bias against stock splits held by much of Japan’s corporate management. The higher the absolute share price, the more successful the company is deemed to be. It also accounts for the difference in performance between the Nikkei 225 (a share price weighted index) vs. the TOPIX (market capitalization weighted). So, this meant that Daikin (¥23,000), Keyence (¥53,000) and Nintendo (¥63,000) all scored negative returns. The only exceptions to this “rule” were Fanuc (¥28,000) that rose almost 10% and Kansai Paint (¥3,000) and Bandai Namco (¥8,000) which fell approximately -6% and -9% respectively. The latter two were in sectors which showed widely spread falls in their participant companies.

This quarter, the major contributors were the materials and construction holdings which all gained more than 15% with Mitsubishi Chemicals, JFE steel and Haseko returning over 30%. Likewise, our financials did well, scoring a minimum of 17% by ORIX and Mitsui Fudosan, up to the 35% turned in by JAFCO.

It appears that sterling’s position as the long-term “whipping boy” of the foreign exchange markets is finally over thanks to a relatively benign Brexit settlement, the success of the vaccination program and the subsequent more likely return of economic growth accompanied by higher interest rates have all contributed. At the same time, the yen’s recent safe haven status-based appreciation should reverse, as we expect this feature will help underwrite a multi-year recovery in Japanese corporate profits. As such, the Fund will remain overweight in large, well-financed, industry dominant Japanese multinationals that are set to benefit most from the currency’s likely weakening.

Discrete years' performance (%)**, to previous quarter-end:

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartiles generated on 13.04.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

DISCLAIMER

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.