Schroder Japan Growth: well-placed to benefit from the rotation to value

The rotation in favour of value stocks is not just a UK or US phenomena, but applies everywhere – including Japan, where a cyclical recovery would ensure that the trend becomes firmly established. 

One investment trust that is well-placed to benefit is the £290m Schroder Japan Growth Fund (LON:SJG), which for the last couple of years has been managed by Masaki Taketsume. Its value-oriented approach has left it out-of-favour with the shares trading on a 12% discount to NAV, yet there are signs that the performance is just starting to pick up. 

Taketsume has several core strategies, one of which is to target companies with the potential to improve their Return on Equity (RoE). His research suggests that a meaningful upward revaluation often occurs once the RoE grows to exceed eight percent, so if he can identify these stocks in advance, they can generate significant outperformance.

Another core strategy is to invest in small and mid-cap companies, as the manager believes this part of the market is persistently undervalued. The allocation to these stocks has been increased in recent months and the fund is now meaningfully overweight compared with the benchmark. 

Time to shine? 

It has been a difficult decade or so for value investors, which helps to explain why SJG has lagged behind its larger, growth-oriented peers like Baillie Gifford Japan (LON:BGFD) and JPMorgan Japanese (LON:JFJ), yet there are signs that things could be about to change. There has been a real shift in market leadership since the approval of the first coronavirus vaccine last November, with cyclical value stocks charging ahead. 

The fund has significantly underperformed its peer group over the last three and five years because of the dominance of momentum and growth styles, but it looks like this situation is beginning to reverse. In the last three months it has outperformed by more than eight percent and there could be much further to go. 

It is also worth noting the two percent dividend yield, which, although not massive, is significantly higher than most other investment trusts operating in the country. 

Improving outlook 

The in-house team at Schroders has recently increased their GDP growth projections for Japan to 3.6% for 2021. As the global recovery gathers pace, especially in Asia, it should enable the local stock market to benefit. 

This is particularly relevant given that the country is home to a number of major competitive brands in transportation and machinery, which are highly sensitive to the level of global demand. There is also some evidence of elevated private equity interest in Japanese companies that could result in more M&A activity. 

The analysts at Winterflood believe that Schroder Japan Growth would be a natural beneficiary of any further rotation in favour of value and if the manager’s expectation of increased M&A comes to pass, it could be a further catalyst. SJG’s discount is one of the widest in the peer group and could tighten following a period of outperformance.