(Bloomberg) — JP Morgan Asset Management’s outperforming Japan equity fund sees growth opportunities in the information and communications sector as the country lags in adopting key tools like e-commerce and digital payment.
The firm’s $6.6 billion Japan Equity Fund is up 39% so far this year, beating almost all of its peers, according to data compiled by Bloomberg. The Topix index rose 3.1% over the same period. The fund’s success has stemmed from its investments in stocks related to e-commerce and other areas that benefited from pandemic-induced demand, according to Alexander Treves, an investment specialist at the asset manager.
“Although people have an image of Japan as a high-tech society, the penetration rate of internet, e-commerce and digital payment is quite low compared to other countries,” Treves said. “We find lots of businesses in this place which aren’t cyclically attractive, but have multi-year growth prospects.”
The fund’s strategy is to focus on bottom-up stock picking based on individual business models, selecting “high quality, high growth earning compounders” and capitalizing on structural transformation within the country, Treves said. Although political stability is a positive, this strategy will continue regardless of changes in government policy, he said.
While the fund focuses on active stock picking over macro-politics, structural transformation in the country could pick up pace with Japanese Prime Minster Yoshihide Suga’s push for digitalization and use of technology in the public sector to boost efficiency. His policies have already created a series of winners and losers, with data infrastructure providers gaining when he took office in September.
Read more on digitalization’s potential impact on Japan’s economy
There has been growing interest among foreign investors in Japanese equities, which have been “broadly unloved for quite some time,” Treves said. Stronger economic growth and continued improvement in corporate governance may help advance the trend further, he added.
The Japan Equity Fund had 53 stocks in its portfolio as of end-September. The information and communications sector made up 23% of its allocation as of October, followed by 19% in services and 12% in electric appliances. The fund was “soft closed” to new investors in June 2018.
Other comments from JP Morgan Asset:
“Factory automation will be on a generational growth path from here on” as Japan’s labor population ages and as it becomes less competitive to produce goods in China.
Shares such as M3, Obic and the fund’s other top 10 holdings are “in line” with digitalization, though the rationale for owning each stock is based on unique factors.
Says MonotaRO, which had a weight of 4.8% in the fund, “is a beneficiary of a shift to online commerce.”The fund has a 3.4% weighting in Nihon M&A Center Inc. The advisory service to small and mid-sized firms has a “niche model with low penetration in a big market” as Japan continues to see a larger number of people wanting to retire and cash out of their business.Markets could be in an “early growth phase” for next year, which has proven to be positive for risk assets historically.As vaccines against Covid-19 become available, rotation from growth to value stocks could lead to sharp share moves, which may drive further interest in Japanese equities.
(Updates Topix’s performance in second paragraph.)
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