Capture growth at a discount via Fidelity Japan Trust

“Japan is attractively valued, and we see more earnings momentum there than in many other countries, especially as the yen continues to weaken,” says Robin Black, investment manager at Kames Capital. “The discount was appropriate when Japan was less profitable, but now Japan’s return on equity is similar to Europe and profit margins are more than double what they were in the 1990s.”

Fidelity Japan Trust (FJV) looks like a good way to get exposure to Japanese companies that could grow their earnings strongly. It follows a growth at a reasonable price (GARP) investment approach, and its manager, Nicholas Price, aims to invest in companies whose growth prospects are currently underappreciated by the market. The trust has a bias to medium-sized and smaller companies, which tend to be less researched than large companies so offer more frequent mispriced growth opportunities. Nearly half of Japanese mid- and small-cap companies are not actively covered by analysts.

Mr Price started running the trust in September 2015, but has been investing in Japanese equities for more than 20 years. Over three years the fund has made a share price cumulative total return of 91 per cent, compared with 52 per cent for the Tokyo Stock Exchange 1st section Index and the Association of Investment Companies (AIC) Japan sector average of 64 per cent, making it one of the best-performing Japan trusts over that period.

Despite this good performance, Fidelity Japan Trust was trading on a discount to net asset value (NAV) of 9 per cent as of 22 October, according to Winterflood Securities. This is in contrast to some of its peers that also have a good performance record, such as Baillie Gifford Japan Trust (BGFD), which is trading on a premium to NAV of about 5 per cent. So if Fidelity Japan Trust continues to perform well, its discount to NAV could tighten significantly.

In May, as well as changing its name from Fidelity Japanese Values, Fidelity Japan Trust amended its investment remit so that it could invest in companies of all sizes rather than just small-caps, and changed its benchmark to the Tokyo Stock Exchange TOPIX Total Return Index to reflect this.

“Investors will now be able to compare [Fidelity Japan Trust and Baillie Gifford Japan Trust] and many will question why they are paying a premium for similar performance," says Anthony Stern, analyst at broker Stifel. "This is especially the case as the risk with Baillie Gifford Japan has increased due to a new manager taking the helm [following the retirement of long-standing manager Sarah Whitley in April].”

In May, Fidelity Japan Trust also changed its fee arrangements to a variable structure. Its base management fee is 0.7 per cent of net assets, but this could rise or fall by 0.2 per cent based on its performance against its benchmark. With this structure Stifel estimates that its ongoing charge, which was 1.31 per cent at the end of its last financial year, could fall to 0.95 per cent.

Fidelity Japan Trust's returns might not be as good going forward if there is a serious trade war or global slowdown in growth, as this would have a negative impact on Japanese companies. And investing in a single country fund is always riskier than investing in a more geographically diversified fund.

However, this is an active fund run by an experienced manager who should be able to steer it away from problem areas and pick companies in a better position from the trust's recently enlarged investment universe. And these macro considerations don't alter the positive corporate changes taking place in Japan.

So if you have a long-term investment horizon and want to buy into potential strong growth at a discount, Fidelity Japan Trust remains a good bet. Buy. EA