Liontrust Japan Equity Fund

• Weaker global growth and a strong yen will weigh on earnings for major exporters, but the domestic story continues to play out.
• Japan’s economy is transitioning from deflation to a mildly inflationary environment and there is rising corporate return on equity and shareholder returns driven by the Tokyo Stock Exchange’s governance reforms.
• The outlook for Japanese equities remains strong with robust earnings and ongoing corporate governance reform.

The Liontrust Japan Equity Fund returned 4.9%* over the quarter, against the 4.8% return from the TSE TOPIX Index comparator benchmark and the 5.8% average return in the IA Japan sector, also a comparator benchmark.

The second quarter began with Donald Trump’s ‘Liberation Day’ announcement of reciprocal tariffs on imports from all trading partners. These were quickly postponed for 90 days in an effort to strike trade deals, although few have so far been agreed. The July 9^th deadline has been extended to August 1^st and it remains to be seen whether tariffs will be implemented in full or if further delays and exceptions are granted. Japan looks set to face 25% tariffs although trade negotiations are ongoing. Despite the sharp spike in policy uncertainty and accompanying volatility in global markets, Japanese equities managed a healthy +4.8% return in the second quarter, in line with developed markets and maintaining the outperformance over the year to date.

While external uncertainty is likely to remain high, most notably around the timing and magnitude of tariffs, the core domestic drivers of Japanese equities continue unabated. CPI has been above the Bank of Japan’s 2% target for more than three years now, printing 3.3% in June, and with that has come a new corporate capex cycle.

The Tokyo Stock Exchange’s governance reforms continue to deliver rising corporate ROE and shareholder returns – share buyback announcements in the April-May with full year results nearly doubled year over year. More companies are announcing plans to improve return on capital, and while balance sheet efficiency has been the most straightforward step, by reducing the complex web of cross-shareholdings and increasing shareholder returns through dividends and buybacks, we are also seeing companies focus on operational improvements that can sustainably raise the return on capital of corporate Japan.

The Liontrust Japan Fund returned 4.9% during the second quarter, in line with the Topix at 4.8%. Dispersion in returns across sectors was high, with communication services (+18%) and technology (+13%) leading the way, while energy (-7%), healthcare (-3%) and financials (-2%) all saw negative returns. Notable contributions came from Nintendo (+34%) with the release of its long-awaited Switch 2 console, Mitsubishi Heavy Industries (+39%) with its exposure to gas and nuclear turbines and defence, and semiconductor equipment supplier Tokyo Electron (+34%). Elsewhere, key contributions to the portfolio came from IT Services company NEC, Modec which builds FPSOs for the oil and gas industry, and Japan Steel Works which makes equipment for nuclear power plants, as well as Nintendo.

We continue to believe that the outlook for Japanese equities remains strong with robust earnings and ongoing corporate governance reform.

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

*Source: FE Analytics, as at 30.06.25, primary share class, total return, net of fees and income reinvested. 

KEY RISKS

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. Overseas investments 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 the Fund. The Fund 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. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund 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. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. ESG Risk: In reference to any component (where applicable) of a fund's investment process that uses external ESG data, there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG. There is no guarantee that an absolute return will be generated over a three year time period or within another time period.

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