How to buy local knowledge in Warren Buffett's favourite foreign market

Telegraph

27-02-2025

Questor is The Telegraph's stockpicking column, helping you decode the markets and offering insights on where to invest.
Japan is back – just ask Warren Buffett.
Much like the nation, many investment trusts focused on Japan have been through periods of difficulty, although few lasted as long as the troubles of its stock market. One such, the largest focused on the region, is JPMorgan Japanese.
While it suffered between 2021-2022 due to its growth focus, the trust is now firmly one of the best performers thanks precisely to that investment style. Its net asset value (Nav) is recovering nicely, and last year the trust was able to expand by absorbing £144m of assets from JPMorgan Japan Small Cap Growth and Income.
Nicholas Weindling has managed JPMorgan Japanese since August 2010 and worked with the trust for even longer than that. He has established a remarkable track record over the past 14.5 years – shareholders in the trust made a return of 377pc between August 2010 and end January 2025, which compares to 207pc from the MSCI Japan Index.
For the last five years, Mr Weindling has worked alongside Miyako Urabe. She was also one of the named managers on the small cap trust before its combination with JPMorgan Japanese. The two managers are based in JPMorgan's Tokyo office, where they are also supported by a large team of 15 analysts. Mr Weindling says that being based in the country gives an advantage when it comes to researching and evaluating stocks – the value of this was most obvious during the Covid period, when it was impossible for investors based outside the country to visit.
Japan's demographics and the painful bursting of an asset valuation bubble in the early 1990s contributed to a multi-decade slump. Easy money policies, including negative interest rates, failed to stimulate growth and deflation was the norm. For very many years, the stock market made no real progress.
In the face of this, the management team chose to adopt a stock picking approach focused on a small subset of companies that could generate decent organic growth, by exploiting new technology, for example and seeking cash generative businesses with strong balance sheets. JPMorgan Japanese operates with a modest amount of gearing, much of which is long-term and fixed-rate. As the performance figures show, the approach has worked well.
However, as US inflation and interest rates started to climb in 2021/22, JPMorgan Japanese was hit by a savage swing in sentiment that triggered a near halving of the trust's Nav. More recently, relative to index benchmarks the portfolio has also been held back by an underweight exposure to the big exporters that Japan is best known for, however, a weak yen has flattered their earnings. The managers feel that many of these companies are too cyclical to merit inclusion in JPMorgan Japanese's portfolio.
On the plus side, a major transformation has been underway in recent years as government-imposed measures to improve corporate governance standards are bearing fruit. Shareholder-friendly policies are contributing to the recovery in the Japanese stock market as balance sheets become more efficient. Dividends are growing, so, too, is the pace of share buybacks.
In addition, Japan's inflation and interest rates have picked up a little. Wage growth is finally coming through after years of stagnation. Hoarding cash no longer looks quite as sensible as it did. There are winners and losers from this, but the economy is becoming a bit more 'normal'.
Positive interest rates are great news for the financial sector, and JPMorgan Japanese has upped its exposure to the sector. Insurer Tokio Marine is a big position that has done well for the trust, helped by efforts to streamline its balance sheet. Rakuten Bank is another top 10 position in the portfolio. It is a play on the digitalisation of the Japanese banking sector. Ironically, despite its image as a leader in all things technology related, in areas such as electronic payments, ecommerce and mobile banking, Japan lags by a wide margin.
Given the state of geopolitics, it is perhaps not surprising that Japan is upping its defence spending. JPMorgan Japanese has benefitted from this by taking a stake in IHI, a diversified industrial group with a strong presence in aerospace and defence.
The core of the portfolio is long-term growth businesses that the trust has held for many years, such as Keyence, one of the world's leading manufacturers of sensors used in factory automation and robotics. It has been in the portfolio since 2011 and its share price has risen more than 13-fold over that time.
The Japanese market looks attractively valued relative to peers and the managers are optimistic about the prospects for earnings growth, aided by the corporate governance improvements referred to earlier. JPMorgan Japanese's stocks are, on average, more expensive but, in keeping with the managers' style, boast far higher forecast earnings growth. Questor is happy to back this trust for a long-term allocation to Japan.