JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI) has published their commentary for February 2022.
Month in review
- The Topix fell marginally in February 2022, returning -0.5%. While strong business results supported investor sentiment, geopolitical concerns over Ukraine and Russia weighed heavily on the market.
- The portfolio posted an underperformance over the month. Following the trend since December 2021, quality growth stocks continued to be sold, although the momentum in value style factors in January waned in February. All of the negative contribution came from stock selection, while the sector allocation effect was neutral.
- At the individual stock level, the largest detractors were our overweight positions in Benefit One, RAKSUL and IRISO Electronics. There were no changes to the companies’ fundamentals, but the stocks suffered from a quality sell-off as the market’s preference shifted.
- Benefit One is a fringe benefit services provider for mid-small companies. The business model is steady, based on recurring monthly charges. We believe the company’s positioning within the business sector is even stronger after the acquisition of the third-largest player last year.
- Raksul is the largest operator of the EC printing platform and a frontrunner of the emerging TV advertisement platform business in Japan. EC penetration of printing is 4% in Japan compared with 30% in Germany, hinting at tremendous growth potential over the long term.
- IRISO is a connector manufacturer focusing on auto customers. It has historically shown an impressive OPM of mid to high teens, although it is currently struggling on cost controls. While we believe this is mostly a cyclical problem under Covid and auto-industry supply chain issues, the near-term earnings volatility has been larger than expected, and we will monitor execution of the countermeasures. We still believe the company is a long-term beneficiary from auto-sector trends such as ADAS and EV penetration.
Looking ahead
As of 28/02/2022
- In Japan, while there are some concerns over cost/income pressures from global inflation trends and a weaker yen, so far there are few signs of wage inflation domestically. The fundamentals of Japanese companies are strong. While the number of Covid-19 cases is rising again in Japan from a low base, the rollout of booster jabs is progressing. Meanwhile, the country continues to be closed to visitors from overseas.
- On the ground in Japan, Covid-19 has been accelerating the structural changes that were already taking place, especially in the area of automation and information technologies. The trends have been providing many interesting investment opportunities for bottom-up investors benefiting from the structural changes taking place in the country. Digitalisation is one of the structural changes that we have been seeing as a positive development and growth area.
- We expect improvements in corporate governance to continue. The corporate governance story continues to develop, and this increasingly looks structural in nature.
Japan income fund, JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI / JSGI.L), targets Japan income without compromising on Japanese growth opportunities. This Japan fund is an income investing opportunity that gives investors access to a diverse and fast growing sector managed by local managers. The Investment Trust offers a regular quarterly income by paying a higher dividend funded part by capital reserves as well as revenue returns.
