Liontrust Japan Opportunities Fund

H1 2020 review

The Liontrust Japan Opportunities Fund returned -14.7% over the first half of the year, compared to the TOPIX Index’s -1.8% and the IA Japan sector average return of 0.3%*.

 

2020 got off to a poor start, with global markets dropping sharply as the COVID-19 pandemic spread from China across the rest of the world. This saw the TOPIX index in Japan hit almost 1,750 in late January before then dropping sharply away to bottom at 1,2000 on the 17th March before turning around to regain the 1,630 level early in June and end the month at nearly 1,560. The movements largely reflected developments relating to the pandemic induced lockdown and its potential ramifications, the measures taken to alleviate the latter and when economic life would return to normal. The second quarter also saw the release of corporate results for the full financial year that ended the 31st March 2020, which saw corporate management withdraw earnings guidance but at the same time saw almost no dividend cuts or eliminations. This was in sharp contrast to other markets particularly in the US and the UK where a swathe of major companies butchered their dividend payouts at short notice.

That said, the Japanese economy was already in a technical recession caused mainly by the fallout from last October’s rise in VAT from 8% to 10%, but saw off the worst of the COVID pandemic due to the appropriate measures taken by the government. Unfortunately, these were deemed insufficient and combined with the large influx of tourists and athletes for the Olympics meant these were delayed until 2021, COVID levels permitting.

 

The Fund’s underlying equity portfolio benefited from it containing mostly the shares of larger capitalized companies which in aggregate outperformed those of the other capitalization categories.

From that standpoint, the Fund also had a near zero exposure to the energy sector, but a similar level of exposure to the two sectors that managed to rise across the quarter, namely the healthcare and telecoms sector did not. The substantial overweights in the consumer discretionary, industrial and information technology sectors that all hindered performance.

That said even within relatively sedate sectors such as materials, individual stocks made quite substantial gains, such as Nippon Paint which achieved a total return of almost 40%, whilst Sumco, a silicon wafer supplier, dropped by just over -8%, and Toray, the world’s largest carbon fibre firm, tumbled -30.5%. Similarly, Fujitsu rose by around 24% whilst another such firm, Hitachi, fell by -25.5%

We expect the markets to have passed their low point although they remain vulnerable to investor sentiment swings driven by the potential resurgence in COVID cases, the US election and the trends in US-Sino relationships. Under such circumstances Japanese share prices should be strongly supported by their cash rich low/no debt balance sheets, meaning the vast majority of Japanese firms have both sufficiently strong business prospects and financial reserves to avoid having to cut or suspend their dividends. In addition, they will be able to resume their share buyback programs.

At the same time given we expect that sterling will benefit from Brexit’s resolution whilst Japan has done little to solve its underlying fiscal problems and the likely stimulus from the Olympics will now not occur means that should both weaken the Yen means our strategic hedge of the yen back into sterling will remain in place.

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Japan Opportunities C Acc GBP

-3.2

-12.4

6.6

42.3

-30.4

TOPIX

5.6

-2.5

9.1

23.8

9.1

IA Japan

7.8

-3.4

10.7

24.9

7.3

Quartile

4

4

4

1

4

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), primary class

 

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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.

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.

Thursday, July 16, 2020, 3:28 PM