FJV: 10 questions for the AGM on 17 May 2022

In this note, we ask the 10 questions we would ask the FJV board at the forthcoming AGM on 17 May 2022. To offer a perspective, we also give the answers that we would give, if we were asked the same questions. We believe they fall into four key categories: i) What are the likely impacts on the trust of the Russian invasion of Ukraine? ii) Having outperformed for many years, why has the trust’s performance dipped recently, and what will see it return to outperformance? iii) How will the investments perform in a higher-inflation environment? iv) What is the macro outlook for Japanese equities, given the economic, market and ESG perspectives?

• Long-term outlook: It has been a challenging year for the trust on multiple fronts, in terms of both the macro situation and investor appetite for the trust style. Despite that, the long-term track record is of a share price total return performance around twice the benchmarks, and we explore the factors driving this performance in detail below.
• Opportunities: FJV is about identifying mis-priced companies with good growth prospects. In periods of market volatility, uncertainty and fear can trample fundamentals, and such opportunities can increase in the short term. As Warren Buffett said: “be greedy when others are fearful”.
• Valuation: 96% of investments are listed in active markets. While some may have a degree of illiquidity, the NAV is “real”. The discount of 3% is above the average of recent levels, but it is slightly above that of its peers, whom FJV has materially outperformed over five years. FJV is run for capital growth.
• Risks: FJV has seen periods of short-term underperformance, when its investment style has been out of favour – typically, when the market has undergone a sharp factor rotation. Recovery has usually been swift. COVID-19 is uncertain, with rising cases from a low base. There are also some Japan sentiment issues.
• Investment summary: FJV has outperformed its peers, benchmarks and UK indices, with a distinctive and active investment approach. Its companies show faster-than-average revenue and EBITDA growth (ca.2x and 3x the market, respectively), and have higher ROEs and ROICs (both around one third above the market). It invests for “growth at a reasonable price” (GARP) – so company valuations can be higher. With an active approach, investors are buying FJV’s investment process, not its portfolio on a given day. Japan offers tech-enabled growth and structural reforms, and is levered to global trade. Its approach can be out of favour, but, under the manager’s tenure, underperformance periods have been short.