Fidelity Japan Trust (LON:FJV) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent report on Fidelity Japan Trust’ Opportunities from the mother of invention’. What can you tell us about it?
A1: Necessity, as they say, is the mother of invention. In this note, we explored how a long-term core FJV investment thesis has been identifying the opportunities arising as Japan innovates, inter alia addressing the global necessities of digitalisation and de-carbonisation, as well as the demands from the delayed domestic reopening.
Japan’s record on innovation is market-leading, which, when combined with FJV’s unique competitive advantages in bottom-up stock selection and a flexible mandate allowing unlisted investments, has contributed to long-term outperformance. Short-term style rotation has led to weakness, but five-year NAV growth is 1.4x the index.
Q2: So tell us a bit about Japanese innovation addressing global trends?
A2: As the manager, Nick Price, identified in his 9 September review, Why Japan is a bright spot in a gloomy global outlook, Japan has always been successful globally in sectors such as automobiles and electronics.
We believe that, from where it starts today, Japan has further opportunities in some of the other key global trends, most notably increasing uptake of online services. The uptake of government online services is below 10% in Japan, the lowest level among OECD countries. The current government’s digital reform agenda has identified more than 40,000 analogue-era regulations and is reviewing them in one fell swoop over a three-year period. To be compatible with the new digital systems used by the government, private firms will be compelled to improve their legacy systems. That creates huge opportunities in the change.
With regard to climate change, Japan is aiming for green growth, with aggressive environment targets set, but has combined this with economic growth objectives. This is likely to require smart new ways of doing things, creating opportunities for innovative new businesses.
Q3: What about Japan’s domestic needs?
A3: In our initiation, we noted that Japan faces some specific issues. With a shrinking working age population (nearly 40% of the population is aged over 65, against just 20% in 2000), Japan has to deliver productivity improvements if it is to see GDP growth. Improving efficiency is a necessity, not an option. If no mitigating action were taken, this would reduce Japan’s real GDP by 25% over 40 years, according to IMF estimates. The Japanese government’s stated policy is that it is “committed to being the very first country to prove that it is possible to grow through innovation even when its population declines…. all things will be connected through technology and all technologies will be integrated, dramatically improving the quality of life”.
Q4: Don’t all countries claim to be innovative? What evidence do you have that Japan is more innovative than most?
A4: Japan has a disproportionately large share of international patents, filed with the World Intellectual Property Organisation (WIPO) in 2020, being ahead of Germany, France and the UK combined. With an 18% market share, it is just behind the US, at 21%, and China, at 25%.
In the 2022 WIPO Global Innovation Index, Japan was ranked 13th out of 132 countries for innovation, with the top single-performing science and technology localised “cluster” being Tokyo-Yokohama.
Q5: So how does Fidelity Japan Trust access this opportunity?
A5: Firstly, it has identified this as a core theme for investment for the manager since he took over the fund. It has been an investment opportunity set on which he has been focusing for many years.
Second, it is capturing the full value opportunity by investing in late-stage, pre-IPO, unlisted companies, as well as listed ones. Fidelity Japan is a supportive investor, not a private equity investor. With more companies staying private for longer, there is significant value to be found in this stage of a company’s life.
Finally, there are the competitive advantages of the Fidelity platform – notably, a large, local presence gives an advantage over global players, access to Fidelity’s global network gives an advantage over national investors, and research gives an advantage in the under-researched market. FJV’s approach is “growth at a reasonable price”. Companies growing because of innovation have a natural fit to the first element, and we believe they are a material factor in FJV delivering superior long-term performance.
