JPMorgan shuns ‘outdated’ Topix for modern Japan

Nicholas Weindling, manager of JPMorgan Japanese, looks past 'old Japan' as represented by the Topix index in search of tomorrow's genuine growth companies.

JPMorgan Japanese (JFJ) manager Nicholas Weindling has ditched ‘old Japan’ Topix stalwarts, which face structural and cyclical problems, in favour of undiscovered new Japan.

The manager of the £710 million trust said Japan’s main market wasn’t typical in that it was dominated by economically-exposed cyclical companies, such as car manufacturers, electronics suppliers, steel makers and banks, which make up 60% of the index.

This contrasts to cyclicals making up a third of European markets and a quarter in the US.

‘The Topix is very outdated and unrepresentative of the economy overall,’ said Weindling. ‘Japan’s economy is like any other mature economy in that it is dominated by services, but the index has old Japanese names on it.’

When investors are asked to name Japanese companies, they roll out these names, such as Toyota and Fujitsu. However, Weindling, who has run the trust for nearly 12 years, said these were not the companies he wanted to back.

‘These were great companies in the past but they may not be in the future and are at the forefront of a downturn as they have both cyclical and structural pressures facing them,’ said Weindling who has a Citywire AA-rating for the trust's open-ended sister fund JPM Japan.

Car companies make up 10% of the index, and the manager said they faced a ‘cyclical slowdown’ alongside the structural pressure of a decline in car ownership.

‘Young people in the West and Japan do not want to buy a car anymore,’ he said. ‘There is also the threat from Uber and car sharing, and that these companies need to invest in more clean emissions.’

There is a similar convergence of pressures in the steel industry, where Weindling argued that ‘Japan shouldn’t even have a steel industry’ as it has to import the raw materials, and also electronics where ‘Japan has lost its competitive advantage’.

‘From our point of view, there is a confluence between cyclical and structural problems and we do not invest in those types of companies,’ he said.

Instead, he looks for companies in ‘structurally growing areas’ he has ‘confidence in over a multi-year period’, including big Japanese brands that are growing overseas and tapping into online trends.

Cosmetics company Shiseido (4911.T), the trust’s biggest overweight compared to the index and its second largest position at 5.2% if assets, is one business making headway overseas.

Weindling said as the influx of Asian tourists, particularly from China, continues in Japa, they are discovering the country's brands.

‘Tourists are buying medicine and baby goods, skincare and make-up,’ he said. ‘They also want to buy them when they get back home and this has been a big driver for this company.’

He described the opportunity in China as ‘huge’. Whereas the average Japanese consumer buys 14 beauty products a year, in the rest of Asia it is three, so ‘there is a very long runway’.

Clothing retailer Uniqlo (9983.T) is also making waves overseas. Although it ventured outside Japan later rather than sooner, Weindling said being late to the party means it does not have the issue of legacy stores that companies like Zara and H&M has.

Tapping into online trends and themes is nothing new and if asked, investors would probably assume Japan is ‘efficient and technologically advanced’, said Weindling, but this isn’t always the case.

‘Japan is lagging trends in certain areas,’ he said, pointing out that just 18% of transactions made in Japan are cashless compared with 55% in the UK.

The country is also falling behind in the way it is monetising a new breed of YouTube stars and social media ‘influencers’ who make money from posting content about their lives.

To try and capitalise on the shift towards online stars, Weindling has bought UUUM (3990.T), which is a managing agent for eight out of the top 10 YouTube stars in Japan.

‘UUUM does not create content but it advises on legal, compliance, and tax, and how to merchandise content,’ he said.

He added that currently Japanese YouTube stars receive money from the adverts played on their videos but in the US and China influencers are making money through merchandise, such as launching their own make-up range.

‘Japan is starting to go that way but we are not even in the first innings of it,’ he said. ‘Like cashless payments, it is going towards the same point but with a time lag.

‘There are exciting opportunities and stock-specific drivers.’

Japanese trusts have had a good year as markets rebounded from their slump at the end of 2018. JPMorgan Japanese shares are up nearly 18%, extending its five-year total shareholder return to 115%, well ahead of the Topix 78.6%.

The performance would have been slightly better were it not for the shares trailing the underlying growth in the portfolio's net asset value, although the discount has narrowed from 13% to 9%.  

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