Opportunities from the mother of invention

Necessity, as they say, is the mother of invention. In this note, we explore how a long-term core FJV investment thesis has been identifying the opportunities arising as Japan innovates, inter alia addressing the global necessities of digitalisation and de-carbonisation, as well as the domestic demands from delayed domestic reopening. Japan’s record on innovation is market-leading, which, when combined with FJV’s unique competitive advantages in bottom-up stock selection and a flexible mandate allowing unlisted investments, has contributed to long-term outperformance. Short-term style rotation has led to weakness, but five-year NAV growth is 1.4x the index.

• FJV’s unique value add: FJV’s approach is “growth at a reasonable price”. Companies growing because of innovation have a natural fit to the first element. FJV’s long local presence gives it advantages over global investors, while its deep, global analytical reach is a competitive advantage over smaller, national ones.
• Recent performance: After material long-term outperformance, as outlined in our note, FJV: 10 questions for the AGM on 17 May 2022, style headwinds have seen material 2022 underperformance. Historically, after such periods, outperformance has been sharp. The three-month NAV outperformance is 2.5%.
• Valuation: 94% of investments are listed in active markets. While some may have a degree of illiquidity, the NAV is “real”. The discount of 9% 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, but recovery has usually been swift. Early 2022 performance may affect sentiment for a while. 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 EBITDA growth (2023E ca.1.3x and 2024E 1.8x 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 are usually 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 it is levered to global trade. Its approach can be out of favour, but, under the manager’s tenure, underperformance periods have been short.