Latest manager commentary

April 2021

Hisashi Arakawa, Investment Manager, Aberdeen Japan Investment Trust PLC

Here follow some observations from investment manager Hisashi Arakawa on the current investment landscape in Japan and how the Aberdeen Japan Investment Trust portfolio is evolving to take advantage of current trends.

Market commentary

Japanese equities continued to rise in March, as approval of the US fiscal stimulus package and progress of Covid-19 vaccinations induced investor optimism about economic recovery. The Japanese yen weakened against the US dollar following a rise in interest rate differential between the two currencies.

With the lifting of the state of emergency in Tokyo and its surrounding prefectures, the domestic economy’s outlook is improving. This was reflected in Japan’s business survey index, with large companies’ businesses conditions for the April-June quarter in the positive territory at plus 2.5. There are, however, resurgences in infections, leading to a stop-start progress in the full resumption of economic activity across the country. The government lifted the state of emergency in Tokyo and its surrounding prefectures on 21 March amidst reduced hospital occupancy for Covid-19 patients, after it was earlier lifted in seven other prefectures in February. It now plans to begin vaccinations for the elderly citizens from mid-April in certain municipalities, after a delay due to domestic clinical trials and a cautious approval process. 

The Bank of Japan introduced slightly more flexibility to its policy to allow for sustainability of its asset purchase programme. Long-term interest rates are now allowed to move in a range of +/- 0.25% as opposed to 0.2%. The central bank also announced abolishing its 6 trillion yen annual target for purchasing exchange-traded funds, and its intention to purchase TOPIX-linked ETFs only going forward. The latter announcement was followed by a weakness in the Nikkei 225 index, but it is worth noting that Bank of Japan’s purchase of Nikkei-linked ETFs had already been relatively small.

The reversal of winners and losers from the pandemic continued in the month of March, but to a lesser extent compared to the previous two months. The recent beneficiaries of rising inflationary expectations, amid a broader resumption of economic activity, continued to outperform. But companies that have seen a pullback in valuations have also continued to post favourable earnings and newsflow. These include machinery components provider Misumi Group, which upgraded its full-year forecasts on the back of revenue growth in China and efficiency gains from IT, automation and selective investments. In healthcare, Daiichi Sankyo started clinical trials for its newly-developed Covid-19 vaccine, the first messenger RNA vaccine developed by a Japanese company. It was also encouraging to see our holdings continuing to make investments for the future, such as surgical equipment maker Asahi Intecc, which consolidated a company that develops low-cost surgery support robots. 

The Japan FSA’s draft version of revisions to the Corporate Governance Code was a disappointment; investors however are pushing back against weak governance. The proposed revisions to Japan’s Corporate Governance Code, released during the month, suggested that independent directors make up a third of a corporate’s board of directors – and that this would apply only for the so-called blue chips of the Japanese market. This was a poor outcome: we recognize that majority independent boards are not foolproof against egregious corporate behaviour, but Japan is a market with a still-sizeable amount of cross shareholdings. In addition, a notable number of corporate subsidiaries are listed on the market, for which transactions have oftentimes gone against minority shareholders. But separately, in a significant step forward for corporate governance, shareholders sided with activist investors in voting for a shareholder-proposed resolution to investigate voting irregularities at Toshiba Corp.’s shareholder meeting last year. Toshiba, a stalwart of Japan Inc. that has had a majority independent board for years, has undergone a series of missteps, including an accounting scandal and significant write-downs of its acquisitions. Japan is not alone in having cases of weak governance, but shareholders’ actions to hold corporates accountable have been lacking. To mitigate such governance risks, we have always advocated for active ownership, proxy voting and firm engagement with corporates, alongside investing in well-run companies with good governance.

Governance aside, our discussions with corporates often address broader risks and are consultative in approach, with encouragement to embrace best practice. Examples during the month include the continuation of a dialogue with a baby products company to improve disclosure, including its initiatives and targets in carbon emissions and sustainable sourcing, where the company has made good progress but has yet to be widely recognized by the public owing to sparse disclosure. We are also working with a hair products manufacturer to disclose its stringent processes for selection of raw material, which we believe can be an excellent selling point for its products. The proposed revisions to Japan’s Corporate Governance Code suggest that companies will be encouraged to disclose business risk related to future climate change.

Updates on Aberdeen Japan Investment Trust holdings

Furniture retailer Nitori Holdings reported full-year results that were in-line with expectations. We were encouraged to hear that the company plans to grow profits year-on-year in the new financial year despite benefiting from the work-from-home demand in the previous financial year. The company plans to streamline its operations, while sustaining strong growth in its online and brick-and-mortar stores. The company will also embark on the consolidation and restructuring of its acquired stores from Shimachu, which could lead to improved profitability in the medium term. Dispensing pharmacy Ain Holdings reported in-line results for the January-end quarter but with signs of recovery as dispensing sales grew quarter-on-quarter. Elsewhere, Heiwa Real Estate revised up its full-year earnings and dividend forecast on the back of a milder-than-expected impact from the pandemic and cost reduction.

Toyota Motor agreed on a new partnership with Isuzu Motors and Hino Motors to jointly work on the development of next-generation cars and trucks. Toyota will take a 5% stake in Isuzu as part of this partnership. Toyota will separately form a JV with China-based SynoHytec to develop commercial vehicles using Toyota’s fuel cell technology. Toyota is a global leader in fuel cell as well as hybrid technology, introducing the first mass-produced fuel cell vehicle Mirai in 2014.  Elsewhere, electronics company Sony showcased its electric vehicle prototype in Japan for the first time. Sony has been strategically utilizing its cashflows to invest in new businesses such as automotive while strengthening existing businesses through capital expenditure and M&A.

Z Holdings’ subsidiary Line came under public scrutiny after it was revealed that Chinese contractors were able to access personal information of its users and that some of the data were stored in data centers in South Korea. While the company has subsequently set up a special committee of external experts on global data governance to take the necessary measures – our assessment of this incident suggests the impact is limited –  we have spoken to the company about enhancing its data privacy policy. We also reached out to Tokio Marine after it was reported in media that the insurance group’s Australian subsidiary has an exposure to specialty finance firm Greensill Capital that filed for insolvency. Upon our encouragement, Tokio Marine’s management team released a statement suggesting that numbers for this year and next year will not be significantly impacted by this incident. We continue to engage with the company over the appropriateness of its oversight of its subsidiaries.

How has the portfolio changed recently?

During March, we exited control equipment provider Azbil in view of better opportunities elsewhere - valuations were no longer attractive following a significant re-rating last year. 

Using the proceeds, we participated in the initial public offerings of Coconala and Appier to initiate positions at relatively attractive valuations against the longer-term growth outlook. Coconala provides an online-based matching platform for knowledge, skills and services. In our view, the company is entering a virtuous cycle whereby more transactions lead to more reviews, leading to clearer visualisation of sellers’ skills and buyers’ demand. 

Appier is an artificial intelligence (AI)-based marketing support tool provider, helping users make better data-driven decisions. Its proprietary and differentiated algorithms help identify more valuable customers, enabling targeted ads and coupons to improve customer conversion rates.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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