Liontrust Japan Equity Fund

Q3 2021 review

The Liontrust Japan Equity Fund returned 2.9% over the third quarter, versus the TOPIX’s 7.2% gain and the IA Japan sector average of 7.1% (both comparator benchmarks)*.

Again this quarter, while the larger stocks held up well, it was the mid-sized category and JASDAQ that were lagging. TOPIX kicked off the quarter at just under the 1,950 level and then traded between here and 1,900 up until the end of August. Then a sharp rally to over 2,100 occurred on the back of Suga’s likely replacement as leader of the LDP and therefore the country’s Prime Minister, which was taken to mean the country would sooner emerge from its current economic doldrums. The 2,100 mark is a value last seen on the TOPIX index on the 6th August 1990, over 31 years ago. Investors’ nerves then got the better of them based on US debt ceiling negotiations so took profits, selling the market down to a quarter closing level of 2,030.

As in the previous quarter, the Fund’s equity portfolio underperformed due its overweight exposure to the previously strongly cyclical areas such as the energy, industrial, and materials sectors as well as the real estate holdings which hardly registered a positive return. In addition, the Fund’s overall return was hindered by being underweight in the information sector though its financial stocks and the absence of utility and telecoms did offset that to a certain degree.

As usual, individual stocks showed disparate performance often strongly contrary to the underlying sector’s returns. For instance, JFE, a steel firm, saw its price gain over 30% on the resurgence of demand for steel and the ability to raise their product prices. Similar relative outperformance was shown by Daikin +18.2% (air conditioning/industrial), Keyence (machine tool/industrial) and ORIX (diverse financial/financial).

At the other end of the spectrum were Sumco, NSK and Nintendo which fell by -17.4%, -19.0% and -15.9% respectively. The first announced a c.17% new share issue to fund capital expansion to meet the impending demand for its silicon billets from the semiconductor producers, for example Samsung. That was taken badly despite having raised its silicon prices substantially earlier this year and its current forward production sold out until 2026.

NSK dropped on its slightly disappointing FY Q1 results (end June quarter), again despite favourable background demand. The share price fall may instead have reflected Goldman Sachs sale of the stock, only revealed once its price had stabilized at the 760 Yen pre share level.

Likewise, Nintendo’s decline was due to a negative perception of its new version of the Switch console. Nintendo’s woes were also backed up by Cathy Wood’s Innovation ETF fund unloading its shareholding of 5 million ADRs, the equivalent of 8 underlying Nintendo ordinary shares (40 million) and against an average daily Tokyo Stock Market turnover of less than 1 million Nintendo shares during the third quarter.                                               

As previously stated, our investment thesis remains that 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. In the short term, over the last two quarters have seen away from this outcome assuming inflation to be more benign and therefore limit interest/discount rate rises so favouring growth stocks. However, we expect this to reverse as inflation’s stickiness becomes more apparent and force central banks to raise rates further and faster than generally expected. Under such circumstances, and given the generally no/low debt condition of most Japanese firms, as well as increasing tax burdens being imposed on US firms, should encourage investment into the Japanese stock market.

With little direct boost remaining to the domestic economy from the Olympics and yet more stimuli from the government, running up an even bigger debt burden, it suggests Yen’s safe haven status remains vulnerable. 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:

 

Sep-21

Sep-20

Sep-19

Sep-18

Sep-17

Liontrust Japan Equity C Acc GBP

16.2

3.8

1.8

5.1

17.7

Topix

15.3

2.0

-0.7

12.6

12.2

IA Japan

16.6

5.6

-1.1

12.6

13.3

Quartile

3

2

1

4

1

 

*Source: FE Analytics as at 30.09.21

 

**Source: FE Analytics as at 30.09.21. Quartiles generated on 06.10.21

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

 

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. 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.

 

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

 

This information 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.  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. Always research your own investments and 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.

Friday, October 22, 2021, 2:03 PM