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This is a financial promotion for The First Sentier Japan Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back sigfsnificantly less than the original amount invested.
  • Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares. 
  • Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk. Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.

For details of the firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information.  

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund. 

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Maintaining conviction on Japan equities

The performance of the FSSA Japan Equity strategy has been under pressure year to date, driven by a violent style and sector rotation from quality growth to financials and cyclical companies. We have experienced similar rotations in the past and each time it was triggered by the same thing — sharply rising expectations of US interest rate hikes leading to a sell-off by foreign investors. However, the macro environment in Japan remains fundamentally different from the US and we believe the market concern is unwarranted. Economic growth has been anaemic and inflation is being driven largely by the cost-push from rising commodities prices, rather than improved wage growth and increased demand. The Bank of Japan (BOJ) has reiterated its accommodative monetary policy as it is more concerned with economic growth and the uncertainties related to geopolitical risks rather than inflation.

When factor analysis is the cause of market volatility, as we have seen recently, business fundamentals are disregarded and optically-high valuation, high-growth companies are often sold off arbitrarily. Over the first quarter, our Japan portfolios declined across the board, led by large holdings such as Recruit Holdings, GMO Payment Gateway and Benefit One — companies in which we have been invested for many years. Nonetheless, we continue to believe that the fundamentals of these businesses remain sound and the recent market correction has provided us with an attractive entry point to add to our existing holdings.

Looking through to the fundamentals

Thanks to the strong support from our existing client base, we have been able to take advantage of lower valuations in the Japan market to add to our high-conviction holdings. In particular, we have added to small- to mid-cap companies with purely domestic exposure and a defensive earnings outlook.

As a leading corporate fringe benefits service provider,

Benefit One has generated high returns on capital employed (ROCE) based on its highly scalable business model. The acquisition of JTB Benefit Service, the 3rd largest fringe benefits player in Japan, is expected to solidify Benefit One’s dominant market position and provide synergies with its new business pillars in healthcare and a digital human resources (HR) platform. As a result, Benefit One plans to upgrade its midterm plan after the announcement of its full-year financial results. It aspires to transform its business model in the next five years.

GMO Payment Gateway also declined as a result of the market rotation and we have taken the opportunity to add to the position. The company is the largest online payments service provider in Japan with 25-30% market share. It has an impeccable track record of delivering 25% compounded annual profit growth since listing and the CEO is highly confident that the company can sustain this trajectory in the next five years.

We also own Recruit Holdings, a leader in the global human resources (HR) industry. Recruit’s main growth driver is its HR technology business, primarily through Indeed, the largest online career search engine in the world. The business demonstrated its resilience through the Covid recessionary period, as revenue was virtually flat in fiscal year (FY) 2021, while EBITDA margin1 declined only slightly from 16.8% to 15.8%. Driven by labour shortages and strong pent-up demand, revenue subsequently more than doubled in the first half of FY2022 with 118% year-on year growth. Though the number of job postings continues to trend strongly across regions, the market is concerned about the growth slow-down — but we believe that the correction is overstated.

Well positioned for the uncertainties ahead

Given the global outlook and inflationary pressure, we believe that the FSSA Japan Equity portfolio is well positioned for the uncertainties ahead. Around half of the portfolio is invested in software and commercial services-related companies that generate high gross margins and should face limited pressure on cost inflation. Additionally, most of them have high recurring revenues, which provides greater visibility on future earnings. The remainder of the portfolio is invested in global leaders that have dominant market share and few competitors. They possess strong pricing power and operational efficiency, which should defend against cost inflation as well as supply chain shortages. Based on our meetings with management teams over the past six months, we believe the business fundamentals of our portfolio holdings are intact. Additionally, some companies have expressed an intention to protect shareholder returns via potential share buybacks, supported by their strong balance sheets and cash flow generation.

Despite the market volatility, our investment process remains unchanged. We continue to look for companies that are run by highly capable and risk-aware management teams, possess superior pricing power, and are positioned in secular growth industries. We believe the strategy owns high-quality businesses that can deliver sustainably-high ROCE and profit growth and are relatively uncorrelated to the macro environment. Considering these factors makes it easier to add to portfolio companies when they are sold off amid sector and style rotations — especially when there has been no change in their long-term fundamentals.

Meanwhile, our long-term investment philosophy provides us with the luxury of being able to ignore the short-term noise of the market. We invest on at least a three-to-five-year time horizon and consider ourselves owners of a part of a business rather than just a piece of paper. To us, short-term market volatility is not a “risk”, but an opportunity to add to high-quality company holdings at attractive valuations. While we cannot forecast macro movements or outsmart the market on a short-term basis, we are resolute in our belief that quality always pays off in the end.

Related insights

With global markets declining, led by rising inflation and interest rates, how has Japan fared? Whilst not immune to higher food and energy costs, core inflation in Japan actually remains anaemic.
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Source: Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 11 April 2022 or otherwise noted.

Important Information

This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.

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Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.

References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.

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This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore and the United States, and should not be relied upon by or be passed to other persons.

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About First Sentier Investors

References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group (MUFG). Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group.

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