Liontrust Japan Equity Fund

Q4 2020 review

The Liontrust Japan Equity Fund returned 10.0% over the fourth quarter, versus the TOPIX’s 7.5% gain and the IA Japan sector average of 9.1%*.

For a change, the largest 30 firms on average did much better than the broad market, with the Small, Mid 400 and Mother’s Market all lagging, the latter speculative market actually falling by -2.5%, the only index to do so, mainly in response to its 21% gain across the previous quarter.


TOPIX began the new financial half year, or full financial year for the financial sectors, at around the 1,650 level. The Tokyo Stock Exchange got the quarter of to a good start with a total system failure, including the fail-safe back-up equipment, and so on the 1st October no stocks were traded.


The initial recovery from this outage saw the market slide on Covid infection related jitters to hit its low of 1,580 at the end of October. From early November, TOPIX began to appreciate, firstly on Joe Biden’s election as the new US President, then the signing by 15 countries of the RCEP free trade agreement, and helped all along by Wall St’s continued gains right the way through to the end of the calendar year. Optimism was sufficient by the 29th December to propel the Nikkei 225 Index over the 27,000 mark, a level not breached since Q1 1991, over 30 years ago.


To date, Japanese earnings results have come in ahead of their initial overtly pessimistic forecasts, 50% at the net aggregate all-sector profit level with also new guidance issued since the end of September predicting a similar result.  As ever, share prices should be strongly supported by their cash rich, low/no debt balance sheets, with Japan set to disproportionately benefit from the resurgence of economic activity particularly outside of the OECD. This has seen the overwhelming majority of Japanese firms maintain their dividends, supported by their strong business prospects and generous financial reserves. Over 60% of the largest 500 companies are in a net cash position ie. more interest-bearing assets than borrowings.


In a continuation of the previous quarter’s market trading patterns, 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, industrials, materials and information technology sectors. By contrast, the Fund’s holdings in the financial and real estate spaces again detracted from its overall returns, as did its lack of exposure to the healthcare and telecoms sectors. The Fund was also helped by having almost no representation in the sectors that actually fell across the quarter, namely utilities, energy (1 holding) and consumer staples.


At the sector/stock level, the major weak point was the construction sub-sector, where the stocks held fell on average as did one or two other materials firms’ share prices. That said within subsectors individual stocks showed a great diversity in performance, Kansai Paint up almost 22% whilst Nippon Paint (recently sold) gained only 4.8%. Similarly, in financials ORIX rose over 21% whilst SBI dropped almost 10%.


This quarter, the major contributors were the semiconductor silicon suppliers that leapt on the news of further consolidation within the sector as well as booming IT equipment sales relating to Covid’s boosting of remote working, so Sumco and Shin-Etsu rose by 53% and 32% respectively. Likewise, our machine tool and factory automation holdings all appreciated by between 15%+ for Amada and then up to 26% for Fanuc. In addition, isolated heavy engineering/cyclical firms rose substantially including NTN (bearings) and MHI (capital equipment), which both climbed by around 35%.


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.


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:








Liontrust Japan Equity C Acc GBP












IA Japan













*Source: FE Analytics as at 31.12.20


**Source: FE Analytics as at 31.12.20


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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.


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Monday, January 25, 2021, 3:54 PM