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Outperformance driven by skilled stock selection

Fidelity Japan Trust 3 March 2021 Review
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Fidelity Japan Trust

Outperformance driven by skilled stock selection

Investment trusts
Japanese equities

3 March 2021

Price

219.0p

Market cap

£285.6m

AUM

£350.2m

NAV*

234.5p

Discount to NAV

6.6%

*Including income. At 2 March 2021.

Yield

0.0%

Ordinary shares in issue

130.4m

Code

FJV

Primary exchange

LSE

AIC sector

Japan

52-week high/low

238.0p

107.0p

NAV* high/low

251.6p

127.8p

*Including income

Gross gearing*

25.3%

Net gearing*

25.3%

*At 31 January 2021

Fund objective

Fidelity Japan Trust (formerly Fidelity Japanese Values) aims to achieve long-term capital growth by investing predominantly in equities and related securities of Japanese companies. Since May 2018 it has used the TOPIX as its reference index, and it is a member of the AIC Japan sector.

Bull points

An experienced and proven manager, on the ground in Japan, which makes him well-placed to spot opportunities ahead of other managers, without a physical presence.

Structural reform is generating investment opportunities in several areas.

The trust’s shares are trading at a discount.

Bear points

The Japanese equity market is perceived by many international investors as stagnant and dominated by domestic market participants.

The Japanese economy is set to lag the performance of other advanced economies.

There is a risk that the government’s reform

agenda will lose momentum in a post-pandemic environment.

Analysts

Joanne Collins

+44 (0)20 3077 5700

Sarah Godfrey

+44 (0)20 3681 2519

Fidelity Japan Trust is a research client of Edison Investment Research Limited

Fidelity Japan Trust (FJV) targets long-term capital growth, via investment in Japanese companies. Manager Nicholas Price adopts a bottom-up stock -picking approach aimed at identifying, ahead of other investors, the next generation of great growth companies in Japan. He believes the Japanese market offers many investment opportunities, especially among mid- and small-cap companies that are often not covered by other analysts. The trust has performed strongly in absolute and relative terms since the Q120 sell-off and has outperformed its index, the TOPIX, and the average of its peers, over one, three, five and 10 years.

FJV’s trend of NAV outperformance accelerates after Q120 sell-off

Source: Refinitiv, Edison Investment Research. Total returns in sterling.

Why invest in Japan now?

Japan is a cyclical market, highly geared to global growth and well-positioned to perform as the virus-related negatives fade and the global recovery takes hold. Furthermore, the Japanese government is implementing reforms to digitalise the economy, further improve corporate governance and transition to a net zero carbon economy. Despite recent market gains, Japanese equities continue to trade at a discount to global markets (Exhibit 1, right-hand side). Assuming Japan’s structural reforms support productivity gains and growth, the current relatively low valuations suggest Japanese equities remain attractively priced versus other markets.

The analyst’s view

This fund will appeal to investors seeking exposure to the Japanese market, especially those interested in taking advantage of investment opportunities among less well-covered, mid- and smaller-cap stocks with decent runways of growth. Japan’s relatively low valuations and structural changes may also appeal to UK investors seeking to diversify away from their home market.

Discount on a long-term narrowing trend

FJV’s share price discount to cum-income NAV narrowed in late 2020, supported by the board’s active management. This extended a long-term trend of reduction. The trust is presently trading at a discount of 6.6% and the discount has scope to continue narrowing if performance remains strong and/or investor interest in the Japanese market increases.

Market outlook: Reforms improve medium-term outlook

When Prime Minster Yoshihide Suga took over from his predecessor, Shinzo Abe, in September 2020, he was welcomed as a leader who would continue Abe’s macroeconomic and foreign policies. However, Suga’s focus on domestic structural issues has raised the possibility of accelerated reform and deregulation in certain areas. His drive to modernise the apparatus of government by digitalising the public sector is setting an example for private companies to enhance their digital capabilities after years of underinvestment in IT infrastructure. Suga is also implementing reforms to Japan’s corporate governance system, to reduce cross-shareholdings and increase the independence of boards, and he has inspired a greater focus on environmental issues, by recently committing Japan to carbon neutrality by 2050. The Japanese government has also implemented aggressive fiscal stimulus to support the economy, and several of the initiatives included in the latest stimulus package are intended to support the government’s reform agenda - the third supplementary budget announced in December 2020 included ¥40tn of initiatives to encourage the adoption of digital technology and reduce carbon emissions via the development of alternative, low-carbon energy options.

Equity markets around the world have performed strongly in recent months, supported by the arrival of several viable COVID-19 vaccines and an associated improvement in the global economic outlook. However, Japanese equities appeared to have been given extra momentum thanks to Suga’s reform agenda. Since the beginning of 2021, the Nikkei 225 index has risen 10%, outpacing gains in US and European markets, and in mid-February, the Nikkei breached 30,000 for the first time in 30 years. Yet despite these recent gains, Japanese equities continue to trade at a discount to global markets (Exhibit 1, right-hand side). Assuming Japan’s structural reforms deliver the productivity gains and growth they promise, the current relatively low valuations suggest the Japanese market remains attractively priced compared to the world market.

Exhibit 1: Market performance and valuation

Total return performance of TOPIX and UK equities over 10 years (£)

Valuation metrics of Datastream indices

Source: Refinitiv, Edison Investment Research. Note: Valuation data at 2 March 2021, based on Datastream indices.

The fund manager: Nicholas Price

The manager’s view: Structural changes creating opportunities

FJV’s manager, Nicholas Price, believes that the structural reforms being ushered in by Prime Minister Suga are creating additional tailwinds to changes underway in the private sector. Foremost among these reforms is the drive to digitalise. Corporations are rapidly increasing their spending on digital transformation initiatives and Price expects that businesses will continue to prioritise these areas as profits recover from the effects of the pandemic. To capitalise on this trend, Price is focused on technology and software companies, including those in the mid- and small-cap spaces, that he believes have great growth potential, but that are not owned by other investors. Many of these stocks, especially smaller-cap software-as-a-service (SAAS) firms were oversold in the early stages of the pandemic, providing Price with a rare buying opportunity at the time.

Prime Minister Suga’s zero carbon commitment is also creating new markets in areas such as renewable and clean energy and environmental efficiency. Price believes Japan has some very competitive companies in this sphere, that have scope to supply solutions to companies around the world looking to meet regulatory requirements and make productivity gains. In addition, in Price’s view, the Japanese government’s push to improve corporate governance will provide additional opportunities for the trust to invest in companies, particularly conglomerates and industrials, where business reorganisation and consolidation could drive a re-rating, or at least act as a share price catalyst. Market reforms by the Tokyo Stock Exchange should drive further consolidation in 2021.

In general, Price looks for under-researched companies that have a long runway for growth and competitive advantages in new or growing markets over three to five years, including those at the pre-IPO stage, and he is enthusiastic about the size and diversity of the opportunity set on offer in Japan. As he points out, only a fraction of the c 3,800 listed Japanese companies are well-covered by sell-side analysts, especially in the mid- to small-cap space. This represents a great opening for bottom-up managers like Price, who are willing to do the legwork and identify the most attractive business cases. Being on the ground in Japan is key for Price because, he says, it allows him and his team ‘to see first-hand a lot of the new ideas and business models that are coming to the market’. With a global economic recovery gathering momentum, Price says he is also ‘widening the net a bit further’, looking for companies with recovery potential in areas such as leisure and travel. ‘As we start to see better earnings announcements in fiscal 2021, there will be an opportunity to pick up companies that are changing into or returning as growth names’ he says.

In summary, the manager is ‘cautiously optimistic’ on the investment outlook this year, and ‘very positive’ on the medium-term outlook for Japanese growth stocks. ‘In an uncertain world, Japan, with its structural reform agenda and a wealth of under-researched companies, represents a significant source of potential alpha (excess return relative to the benchmark) for long term investors’ he concludes.

Asset allocation

Current portfolio positioning

Exhibit 2: Top 10 holdings (at 31 January 2021)

Company

Country

Sector

Portfolio weight %

Benchmark
weight**

Active weight vs benchmark

31 Jan 2021

31 Jan 2020*

Misumi Group

Japan

Wholesale trade

5.5

4.5

0.2

5.3

Z Holdings

Japan

Information & communication

5.0

N/A

0.4

4.6

Koito Manufacturing Co

Japan

Electric appliances

4.9

N/A

0.2

4.7

Murata Manufacturing

Japan

Electric appliances

4.6

8.1

1.2

3.4

Recruit Holdings

Japan

Services

4.0

N/A

1.3

2.7

JustSystems

Japan

Information & communication

4.0

5.5

0.0

4.0

Orix Corporation

Japan

Other financing business

3.9

N/A

0.4

3.5

Keyence Corporation

Japan

Electric appliances

3.4

4.9

2.2

1.2

Ryohin Keikaku

Japan

Retail trade

3.4

N/A

0.1

3.3

Shimano

Japan

Transportation equipment

3.3

3.9

0.4

2.9

Top 10 (% of holdings)

42.0

50.8

Source: Fidelity Japan Trust, Edison Investment Research. Note: *N/A where not in end-January 2020 top 10. **TOPIX Total Return Index.

Consistent with Japan’s global competitiveness in key electronic components, the drive to digitalise and the growth opportunities he sees in related areas, FJV’s manager has maintained the portfolio’s relatively large tilt towards technology companies, which fall within the electric appliances, information and communications and wholesale trade categories of the index (Exhibit 3). Key holdings in these sectors include top 10 positions in factory automation specialists Misumi Group and Keyence, Z Holdings, a leading internet company, JustSystems, an educational software company, and component maker, Murata Manufacturing, which is benefiting from 5G content growth and automobile electrification. Examples driven by this theme include efficiency enablers and companies supplying services to facilitate corporate digital transformation, for example through the use of online and cloud computing. The manager holds positions in Sansan, which provides business-to-business and business-to-consumer contact management services and Hennge, an SAAS provider.

Exhibit 3: Portfolio sector exposure versus TOPIX (% unless stated)

Portfolio end- Jan 2021

Portfolio end- Jan 2020

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Electric appliances

26.5

29.8

(3.3)

18.1

8.4

1.5

Info & communication

20.0

12.5

7.4

9.3

10.7

2.1

Services

10.5

8.2

2.2

5.6

4.9

1.9

Retail trade

5.9

3.1

2.8

4.8

1.1

1.2

Wholesale trade

5.3

4.9

0.5

4.5

0.8

1.2

Machinery

4.4

4.8

(0.4)

5.8

(1.4)

0.8

Other Financing Business

4.2

N/S

N/A

1.1

3.1

3.8

Chemicals

3.8

2.7

1.0

7.7

(3.9)

0.5

Precision Instruments

3.4

9.2

(5.9)

2.7

0.7

1.2

Transport Equipment

3.1

6.8

(3.7)

6.8

(3.7)

0.5

Other sectors

11.7

16.7

(5.0)

33.7

(22.0)

0.3

Other index/unclassified

1.4

1.2

0.2

0.0

1.4

N/A

100.0

100.0

100.0

Source: Fidelity Japan Trust, Edison Investment Research. Note: Adjusted for gearing. N/S =not separately stated; may be included in other sectors.

The trust also holds names in the ecommerce sphere, including Giftee, an online gifting platform, along with an interesting unlisted company that offers an online consumer-to-consumer platform to buy knowledge, skills and experience from those willing to sell these services for a fee. This company has seen enormous growth as people have sought second jobs and alternative means of working remotely and the manager expects this trend to continue in the medium term. At the end of December 2020, this was one of three unlisted positions in the portfolio. The manager has scope to invest up to 10% of the portfolio in unlisted companies and he continues to look for similar, unlisted and fast-growing services and internet-based companies, as well as innovative meditech names.

Price’s search for stocks that are well positioned for recovery and growth has seen him increase the portfolio’s position in Koito Manufacturing Company, an auto parts supplier whose subsequent good share price performance has seen it move into the ranks of the portfolio’s top three holdings (Exhibit 2).

Exhibit 4: Portfolio market cap exposure versus TOPIX (% unless stated)

Portfolio end- Jan 2021

Portfolio end- Jan 2020

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

>£10bn

35.9

41.7

(5.8)

61.0

(25.1)

0.6

£5–10bn

19.6

17.0

2.5

13.7

5.9

1.4

£1–5bn

21.9

19.6

2.4

17.2

4.7

1.3

£0–1bn

21.1

20.5

0.7

8.1

13.0

2.6

Other index/unclassified

1.4

1.2

0.2

0.0

1.4

N/A

100.0

100.0

100.0

Source: Fidelity Japan Trust, Edison Investment Research. Note: Adjusted for gearing.

As the Japanese market recovery gained traction towards the end of 2020, the manager selectively took some profits in strong performers such as Shimano and Z Holdings, although these companies are both still top 10 holdings, and Olympus, which slipped out of FJV’s top 10 holdings as a result. This profit taking has seen the portfolio’s holdings in large-cap companies decline over the last year, as the proceeds have been recycled into mid- and smaller-cap names (Exhibit 4).

Performance: Stock selection driving outperformance

Exhibit 5: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Blended

Index (%)

TOPIX TR (%)

R/Nomura Mid & Small Cap Japan (%)

CBOE UK All Cos (%)

28/02/17

28.2

29.5

36.3

36.7

36.3

23.7

28/02/18

45.9

34.6

13.0

11.3

13.0

4.4

28/02/19

(9.8)

(11.2)

(7.1)

(7.7)

(8.6)

1.6

29/02/20

6.5

7.7

3.6

3.6

(1.8)

(2.1)

28/02/21

46.1

41.6

16.9

16.9

16.3

2.8

Source: Refinitiv. Note: All % on a total return basis in pounds sterling. *Blended benchmark is a mid- and small-cap Japan index until 22 May 2018 and TOPIX index thereafter.

FJV’s performance has continued to improve over recent months, after a period of negative returns in Q120. In the six months to end-February 2021, the trust returned 18.2% in share price terms and 16.4% on an NAV basis, outperforming its index, the TOPIX index, which returned 11.0%. It has also made positive absolute returns and outperformed the index over one, three, five and 10 years (Exhibit 6). FJV has also outperformed Japanese mid- and small-cap companies in both share price and NAV terms over six months and over one, three, five and 10 years (Exhibit 7). Its outperformance of the broad UK market over all periods shown beyond three months has been even more significant.

Exhibit 6: Investment trust performance to 28 February 2021

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised. Blended benchmark is the R/Nomura Mid & Small cap Japan Index (£) until 22 May 2018 and TOPIX (£) thereafter.

FJV’s holding in Olympus, a global leader in endoscopes, was the standout contributor to returns in 2020. The company’s share price climbed to a record high after it announced plans to sell its loss-making camera business. Although the manager has taken some profits, he has retained an overweight position in this stock, as he believes the company’s investment thesis remains strong, underpinned by the strength of its endoscope business, a new product cycle and management’s commitment to improving both governance and profitability, and he expects its valuation discount to global peers to continue to shrink. The trust’s overweight position in bicycle component maker Shimano was another top contributor to performance. The stock surged on strong global demand for its products, as more people turned to bikes to avoid congested public transport. Other overweight positions in ecommerce and software/online services companies, including Demae-can, Hennge and Z Holdings, added value, as demand for their specific offerings increased due to the unique circumstances created by the pandemic and/or a heightened focus on digitalisation.

The positive contribution to returns from these and other positions more than offset the poor performance of confectionary supplier Kotobuki Spirits and funeral services operator Kamakura Shinsho. Modest overweights to these two companies were the most significant detractors from returns over the year to end-December 2020. These domestic-oriented companies experienced a deep but temporary hit to earnings as the COVID-19 pandemic limited economic and social activity. However, both companies have strong balance sheets and command leading market positions and remain in the portfolio, as the manager expects them to rebound strongly as conditions gradually normalise. Elsewhere, positions in speciality retailer Ryohin Keikaku and pharmaceuticals company Eisai detracted due to stock-specific factors.

On a sector basis, the trust’s overweight to technology stocks in the information and communications and electric appliance sectors and an overweight to precision instruments all made significant contributions to relative performance, as did underweights to laggard banks and low growth domestic sectors such as land transportation. Conversely, overweights to services and other products, and underweights to pharmaceuticals and foods had a more modest adverse effect on relative returns.

Exhibit 7: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to TOPIX TR

(2.3)

(4.0)

6.5

25.0

25.6

54.4

63.0

NAV relative to TOPIX TR

(1.4)

(1.1)

4.9

21.2

21.2

38.9

51.6

Price relative to R/Nomura Mid & Small Cap Japan

(1.1)

(2.5)

9.2

25.6

34.4

63.3

57.8

NAV relative to R/Nomura Mid & Small Cap Japan

(0.2)

0.4

7.5

21.8

29.8

46.9

46.8

Price relative to CBOE UK All Companies

(4.7)

(8.8)

5.6

42.1

37.3

99.0

109.1

NAV relative to CBOE UK All Companies

(3.9)

(6.0)

3.9

37.8

32.5

79.0

94.6

Source: Refinitiv, Edison Investment Research. Note: Data to end-February 2021. Geometric calculation.

Exhibit 8: NAV performance versus benchmark over three years

Source: Refinitiv, Edison Investment Research

Peer group comparison

FJV has been a member of the Association of Investment Companies’ Japan peer group since May 2018. Before then, it was a member of the Japanese Smaller Companies sector. As the trust retains a bias towards mid-and smaller sized growth companies, Exhibit 9 provides a comparison of the trust’s performance against both these sectors. FJV’s performance ranks second among its current peers in the Japan sector over one and three years, and first over the five years of Price’s tenure as manager. It ranks third over 10 years. It has also outperformed the average of the AIC Japanese Smaller Companies sector over one, three and five years, although the longer-term average is skewed by a strong historical performance from the Baillie Gifford Shin Nippon Trust. FJV’s ongoing charge is slightly above the average of its current peers, but slightly lower than the average of smaller companies funds. None of the funds charges a performance fee, although there is a performance component to FJV’s variable management fee, as discussed below. Its current discount of 6.6% is wider than the average of its current and former peers. All the funds shown use gearing but FJV’s net market gearing is the highest. It is the only trust in its sector not to pay a dividend, although two of its former peers also have zero yields.

Exhibit 9: AIC Japan and Japanese Smaller Companies sectors at 2 March 2021*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing charge (%)

Perf

fee

Discount (ex par)

Net
gearing

Dividend
yield

AIC Japan

Fidelity Japan Trust

285.5

44.4

41.1

145.8

243.3

1.0

No

(6.6)

125

0.0

Aberdeen Japan

97.4

29.8

24.2

75.6

163.7

1.0

No

(9.2)

112

1.5

Baillie Gifford Japan

993.5

42.5

30.9

143.6

354.3

0.7

No

4.4

108

0.4

CC Japan Income & Growth

176.5

15.4

7.7

73.1

1.0

No

(12.9)

121

3.5

JPMorgan Japanese

1,052.5

51.7

45.1

127.9

252.0

0.7

No

(2.5)

115

0.8

Schroder Japan Growth

243.4

17.3

5.3

63.4

135.0

0.9

No

(11.3)

112

2.5

Sector average (6 funds)

512.7

31.3

22.6

96.7

226.3

0.9

(6.3)

114

1.7

FJV rank in sector

3

2

2

1

3

3

3

1

6

AIC Japanese Smaller Companies

Atlantis Japan Growth

104.5

35.9

16.3

116.9

226.8

1.6

No

(13.1)

106

1.3

AVI Japan Opportunity

141.9

12.7

1.0

No

2.0

112

0.0

Baillie Gifford Shin Nippon

720.0

55.3

30.6

158.3

532.8

0.7

No

1.9

105

0.0

JPMorgan Japan Smaller Cos

275.8

36.5

23.3

108.8

240.0

1.1

No

(7.5)

106

3.8

Sector average

310.6

35.1

23.4

128.0

333.2

1.1

(4.2)

107

1.3

Source: Morningstar, Edison Investment Research. Note: *Performance to 1 March 2021 based on ex-par NAV. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Discount: Extending its long-term narrowing trend

After a volatile start to 2020, which saw FJV’s share price discount to cum-income NAV widen briefly to 22.1% and a subsequent period where the discount traded around 10%, FJV’s discount began to narrow in late 2020. This extended the discount’s long-term trend of narrowing. At 2 March 2021, FJV’s discount stood at 6.6%, compared to average discounts of 8.4% over one year, 9.3% over three years, 11.2% over five years and 12.0% over 10 years. The board actively manages the discount and the trust has been repurchasing shares intermittently in recent years (Exhibit 11). The discount has scope to continue its narrowing trend if FJV’s performance remains strong and/or investor interest in the Japanese market increases.

Exhibit 10: Discount over three years

Exhibit 11: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 10: Discount over three years

Source: Refinitiv, Edison Investment Research

Exhibit 11: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: Capital growth from overlooked stocks

FJV aims to achieve long-term capital growth by investing in reasonably priced Japanese companies across the market capitalisation spectrum. Launched in 1994, it has been managed since September 2015 by Nicholas Price, who has been a member of Fidelity’s Tokyo-based Japanese equities team since 1993. Price’s investment process (see below) leads him to invest more in under-researched small- and mid-cap companies. Since May 2018, the trust has measured its performance versus the broad Japanese index, the TOPIX (in sterling), and is a member of the Association of Investment Companies’ Japan sector. Before May 2018, it used a mid- and small-cap index and was in the AIC Japan Smaller Companies sector, but the new index and peer group are felt to represent the wider opportunity set more accurately. Given its focus on long-term capital growth and the low level of dividends historically on offer from Japanese companies (particularly in the small- and mid-cap space) compared with some other markets, FJV has not paid a dividend for more than 20 years. The trust does not use any currency hedging. As most of its investments and income are denominated in yen and its functioning currency is sterling, this means that the trust is exposed to exchange rate fluctuations between yen and sterling.

Investment process: Seeking under-researched names

FJV’s investment process is bottom-up and research intensive, drawing on the resources and ideas of Fidelity’s large Tokyo-based Japanese equities team, which includes 11 analysts. The manager’s approach focuses on companies where there is a difference of opinion on growth prospects and a clear disconnect between short-term sentiment and medium- to long-term fundamentals. This applies equally to buying and selling decisions. A combination of poor sentiment and good fundamentals is interpreted as signalling a possible entry point, while overoptimism coupled with declining fundamentals is likely to trigger an exit. The team looks for signs of change, whether in management, style, a new product cycle or a new strategy, that could alter the growth rate of a company.

The Japanese stock market is large, with c 3,800 listed companies, but a lack of sell-side coverage, particularly amongst smaller-cap companies gives Fidelity’s on-the-ground team a significant potential advantage in terms of uncovering opportunities. The manager also talks to Fidelity’s wider teams, for example about market dynamics in China, which could affect Japanese companies. Price personally meets c 350 companies a year, mainly with analysts, although typically c 20–30% of the FJV portfolio is held in companies that he has identified from his own research.

The manager describes FJV as ‘index agnostic’, although it is heavily focused on the small- and mid-cap segment (Exhibit 4) because of the large opportunity set in companies that may be overlooked by the wider market. Candidates for inclusion in the portfolio should offer good growth potential over a three- to five-year horizon, with reasonable valuations, shareholder-friendly management, and a return on equity above 10%. Portfolio turnover tends to be in the range of 70–100% pa as a result of the manager’s sell discipline, which he characterises as ‘selling what has gone up and recycling into new ideas’. Up to 10% of the portfolio may be held in pre-IPO or unlisted stocks; typically those expected to list within one to two years.

FJV’s approach to ESG

FJV’s manager is looking for companies with the capacity to grow sustainably over the medium term. For him, as for all of Fidelity’s analysts and managers, the consideration of environmental, social and governance (ESG) factors is an integral part of his in-depth fundamental research, as such considerations can help distinguish well-run companies with sustainable growth paths from potentially problematic ones. Price also engages with the management of FJV’s holdings, with the aim of continually improving the sustainability and governance of their businesses, and he believes that such improvements should enhance the investment returns of these holdings over time. Price cites Olympus as an example of a key portfolio holding with improving ESG credentials. In addition to the contribution the company makes to universal healthcare provision via its production of endoscopes, its new management team is focused on streamlining the business, conducting buybacks and exiting its loss-making camera business, while also demonstrating a strong commitment to governance reforms.

Gearing

In common with its Fidelity stablemates, FJV uses long contracts for difference (CFDs) rather than a borrowing facility to provide its gearing. Gearing is permitted up to 40% of net assets, although anything over 25% requires prior board approval. CFDs are derivative contracts that allow the manager to increase exposure to individual stocks at a fraction of the cost of buying them outright. Over the past year, FJV’s net gearing has ranged from 20.5% (the level at 31 January 2020) to a peak of 26.6% (at 31 August 2020). At end January 2021, net gearing was 25.3%.

The manager increased the level of gearing during the first half of 2020 as the market correction created opportunities to add or increase positions in high-conviction growth stocks across the communications, technology and healthcare sectors. However, the level of gearing has since declined slightly due to profit taking and the manager expects gearing to fall further as more stocks approach their target prices and are sold, although he points out the future level of gearing will also be dependent on the number of new ideas generated.

Fees and charges

FJV pays Fidelity a base management fee of 0.70% of net assets per year (charged to the revenue account). There is also a performance-related variable element to the fee, which may rise to a maximum of 0.90% if FJV outperforms the TOPIX index, or fall to a minimum of 0.50% if it underperforms. The variable element is charged or credited to the capital account. In H120, FJV paid management fees of £768k. There was no performance-related adjustment to this figure. Ongoing charges stood at 0.98% at end January 2021.

Capital structure

FJV is a conventional investment trust with one class of share. At 2 March 2021, there were 130.4m ordinary shares in issue, with a further 5.8m held in treasury. The trust regularly buys back shares (subject to an annual limit of 14.99% of shares in issue) to manage its discount to NAV (Exhibit 11). In the financial year ended 31 December 2020, 2.7m shares were repurchased and a further 0.2m have been repurchased so far in FY21. The board also has authority to allot shares up to 5% of the issued share capital each year to manage a premium to NAV.

The board

Exhibit 12: FJV’s board of directors

Board member

Date of appointment

Annual fee*

Shareholdings*

David Robins (chairman)

February 2011

£37,000

37,000

David Graham (audit committee chair)

May 2018

£30,000

38,394

Sarah MacAulay

May 2018

£26,000

92,350

Dominic Zeigler)

November 2014

£26,000

16,000

David Barron

October 2020

£26,000

N/A

Source: Fidelity Japan Trust. Note: *At end June 2020.

Board members Sir Laurence Magnus and Phillip Kay stepped down in May 2020 and December 2020 respectively.

General disclaimer and copyright

This report has been commissioned by Fidelity Japan Trust and prepared and issued by Edison, in consideration of a fee payable by Fidelity Japan Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Fidelity Japan Trust and prepared and issued by Edison, in consideration of a fee payable by Fidelity Japan Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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