To provide long-term capital growth through investing in a concentrated portfolio of Japanese stocks, with a bias towards the small and mid-cap areas of the Japanese stock market.

Please note that for capacity reasons the Fund is 'soft-closed' to new direct investors.

The Topix Total Return index fell in July, affected by concerns about the growing tensions between the US and China and a resurgence of Covid-19 cases in Japan.

Having been praised for its low number of cases in the first wave of the pandemic, it was disappointing that Japan suffered a surge in cases in July. Up to the end of June, Japanese cases were less than 18,600. In the course of July, that total almost doubled. However, the evidence so far is that these new cases appear relatively mild and Japan’s death toll is still just over 1000.

Towards the end of the month, companies started to report their first quarter earnings numbers. The first quarter numbers usually have little informational value. This time, however, they have taken on greater significance as we get a first glimpse of trading conditions during Japan’s state of emergency. One early observation is that the earnings numbers are deviating significantly (both to the upside and the downside) from the analyst forecasts.

It was another month of significant outperformance by momentum stocks and the Fund lagged the benchmark again. It has been clear for some time that investors are prepared to pay a premium for earnings visibility. The problem is that the price they are paying is very high and that visibility can be illusory.

For the companies we own which have reported thus far, there have been more positive than negative surprises. Hitachi, Mitsubishi Electric and TDK all announced numbers which were significantly above analyst forecasts. Daibiru, one of our real estate companies, reported zero vacancies at its office buildings in central Osaka. Shin-etsu, the manufacturer of semiconductor silicon and PVC, saw a modest 15% decline in operating profits in the first quarter. Some companies are actually benefiting from the pandemic: Tokyotokeiba, our horse racing play, reported a 43% increase in sales during the quarter and its operating profit margin was over 50%.

At times of uncertainty, there is a certain level of comfort in buying the stocks everyone else is buying. For us, however, the starting point is always valuation. This is not to suggest that our portfolio is simply a selection of cheap cyclical names; companies such as Tokyotokeiba, Technopro (engineer dispatch) and Fukui Computer Systems (CAD design systems) could be described as growth names. We own a number of electronics companies, which are leaders in their fields and yet (as in the case of Hitachi), trade on single digit PE multiples. Whilst price insensitive buyers continue to dominate the market, these stocks receive limited attention. For investors prepared to take a longer-term view, this is an unprecedented opportunity.

JOHCM/Bloomberg/Tokyo Stock Exchange/Lipper.

Data shown net of fees, net income reinvested. Please note that all fund performance is shown against the TOPIX TR adjusted. Performance of other share classes may vary and is available on request. Where shown, monthly returns table shows compounded discrete monthly performance.

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The Funds investment include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile. We recommend that you read the Prospectus and Key Investor Information available from the address overleaf or from our website.