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Questor: our Japan pick is topping the charts, so why the 10pc discount on its shares?

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·4-min read
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Japan's highest peak Mount Fuji is visible through Tokyo's Shinjuku skyscrapers - KIMIMASA MAYAMA/EPA-EFE/REX
Japan's highest peak Mount Fuji is visible through Tokyo's Shinjuku skyscrapers - KIMIMASA MAYAMA/EPA-EFE/REX

Japan’s stock market has come alive over the past month, lifting shares in one of this column’s most successful trust picks.

Having lagged other major global markets for the bulk of this year, Japanese stocks were ignited by the shock resignation of prime minister Yoshihide Suga earlier this month.

The Topix, a barometer for the country’s stock market, has now returned 10pc in pound terms this year, with virtually all of that gain having come in the past four weeks.

Investors are focusing on the prospect of a large stimulus package to support Japan’s economy from whichever candidate emerges as Suga’s successor in a vote to be held next week.

But as Suga steps down, veterans of investing in Japan will be wary of another false dawn – the country’s stock market, a perennial underperformer, has delivered more than most.

Which perhaps explains why it took this column two years into its relaunch to recommend an investment trust focused on Japanese shares.

Thankfully, Fidelity Japan Trust, tipped by Questor in April 2018, has delivered strong returns even as the market in which it invests has flattered to deceive.

The shares have risen 74pc since then, comfortably more than any other trust investing in Japan. That gain is also more than double the 31pc delivered by the country’s market, which has lagged the 62pc from global stocks.

Since manager Nicholas Price’s appointment in September 2015, the shares have delivered 209pc, the highest return of all Japan trusts over that period. However, this track record is yet to be reflected in the shares’ rating. Their 13.5pc discount to the value of the trust’s assets when we tipped the trust three years ago has narrowed to 9.6pc, but that still strikes this column as wide. Particularly when that discount is compared to those on the shares of rival trusts.

Shares in Baillie Gifford Japan, which this column tipped last year, trade on a narrower 2.5pc discount, despite lagging the performance of Fidelity Japan. The same can be said of Baillie Gifford Shin Nippon, which focuses on smaller companies, and whose shares trade close to the value of its assets.

Likewise JP Morgan Japanese, on an 8.9pc discount. Nippon Active Value and AVI Japan Opportunity are relative newcomers, yet their shares trade on 8.9pc and 0.4pc discounts, despite lagging Fidelity Japan since their respective launches in 2020 and 2018.

Anthony Stern, analyst at Stifel, a broker, says the discount on shares in the Fidelity trust is unwarranted and should narrow.

“Despite having a long track record of delivering the best returns in its sector, the trust remains on a wide discount compared to its peers,” he says. “We believe that, in time, this anomaly will correct.” Stern highlights a particularly impressive aspect of the trust’s performance, that it has remained strong even as the stock market has apparently moved against it.

He cites the first half of this year, when Japan’s stock market leaders were “value” and large companies, which Price largely avoids in favour of smaller and medium-sized “growth” firms. Despite this, the trust’s return beat that from Japan’s Topix index.

“We believe that one of the characteristics of a strong manager is whether they can outperform even when the direction of the stock market is at odds with the fund’s investment philosophy,” he says.

Questor agrees. We tipped shares in Fidelity Japan in 2018 on the basis of Price’s excellent performance since taking on the trust, coupled with an attractive share price discount.

Three years on, those reasons for investing remain: the manager has built on his strong track record, yet the shares’ sizeable discount to his trust’s assets persists.

The trust remains a strong pick for any investor looking to add an allocation of Japan’s shares to their portfolio. Even if the Japanese stock market’s time in the sun does prove fleeting, Price has shown his ability to deliver returns whatever the weather. Keep buying.

Questor says: buy

Ticker: FJV

Share price at close: 254p

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