High inflation’s impact on growth stocks may have scuppered the performance of JPMorgan Japanese (JFJ ) last year but manager Nicholas Weindling believes the correction may have ‘run its course’.

The £694m portfolio took a hit from its quality growth bias in the year to 30 September as climbing inflation and interest rates took a chunk out of growth equities. The net asset value (NAV) of the fund dropped 34.8% in the period, vastly underperforming the Topix, which declined 13.9% over the year, in what Weindling described as a ‘disappointing’ result.

However, he is confident that a recovery is already on the way, and in the Japanese market ‘there have already been signs that this correction may have run its course’, with fund performance picking up in recent months.

Weindling said in the trust’s annual report he was not about to change his investment style as quality growth businesses ‘have demonstrated pricing power over many years and we believes they are well positioned to continue to prosper’.

There are also certain themes that Weindling (pictured) is backing for recovery, including ‘tech-based trends’ that have been accelerated by Covid-19 which strengthened the appeal of online shopping, gaming, and cloud-computing.

‘However, Japan remains well behind most other advanced economies in these and many other areas, leaving plenty of scope for such trends to continue developing over the coming years,’ he said.

This includes increased penetration of e-commerce in the Japanese retail market, where it makes up just 10% currently. Weindling hopes to take advantage of the growth in e-commerce with holdings in Japan’s number one online retailer Zozo and business-to-business e-commerce group Monotaro, as well as digital strategy consultant Nomura Research Institute.

A move to ‘standardised cloud-based software’ in Japanese business is also a theme the fund plans to benefit from.

‘Historically, many Japanese companies have used internal software solutions, but now that the first generation of software engineers is reaching retirement age, there is an imperative for businesses to switch to standardised software solutions,’ said Weindling.

He said poor demographics in Japan will ‘add impetus’ to the shift, and he has invested in business admin systems supplier OBIC to take advantage of this.

The energy transition is another important theme with Weindling holding Japan’s leading solar energy investment company Canadian Solar Infrastructure as well as Daikin, which produces ultra-efficient air conditioners, and Shimano which is dominant in bicycle and e-bicycle components.

‘Japan is only at the beginning of its journey toward digitalisation and renewable energy, but these trends are already spawning many exciting new businesses, especially in the small and mid-cap space. Such growth-orientated companies are set to gather momentum over time and provide resilient, long-term sources of returns for investors,’ said Weindling.

The manager also added household and personal goods retailer Paltac, conglomerate Itochu, which owns among other things a chain of convenience stores.

‘We particularly appreciate Itochu’s focus on steady profit growth and return on equity, and its determination to improve shareholder returns,’ he said.

Prioritisation of shareholders also led the manager to acquire Nippon Telegraph and Telephone, a leading telecoms company, over the period.

He used the sale of companies whose ‘potential growth rates have been undermined by increased competition’ to fund the new purchases. Financial and business information providers Uzabase and Minkabu were both ejected from the portfolio for this reason, as was software developer Yappli and online legal consultation services Bengo4.

Alan Brierley, analyst at Investec, the trust’s corporate broker, believed JFJ should be a ‘core holding for investors looking for a well-managed and low-cost exposure to Japan’ as well as a portfolio with strong growth prospects derived from ‘the heart of Japan’s new growth’.

While he noted the tough 12 months, he said investors should look at the longer-term track record and pointed out the company had not let the share price drift to too wide a discount.

The investment trust’s shares currently trade 7% below net asset value and have delivered a total return of 197% over 10 years under Weindling and co-manager Miyako Urabe. That beats the Topix’s 133% but trails rivals Baillie Gifford Japan (BGFD ) and Fidelity Japan (FJV ).