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FSSA Japan Focus Fund: May 2021 update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Sophia Li has been lead manager since 2015 and is supported by experienced co-manager Martin Lau
  • The fund’s performed well since launch, boosted by the managers’ stock picking ability
  • The managers took advantage of the market drops last year, investing in some high-quality companies at lower share prices
  • The fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits into a portfolio

The managers of the FSSA Japan Focus Fund aim to grow your investment over the long term by investing in high-quality Japanese companies that are dominant in their industry. They believe the strength and quality of these companies will drive returns but also help provide some shelter in periods where the market doesn’t do so well.

We think this could be a good option for exposure to Japan within a global investment portfolio. Its focus on quality growth companies means it could also work well alongside a fund focusing on Japanese companies going through a rough patch but with the potential to recover, also known as value investing.

Manager

Sophia Li started her career at First Sentier in 2009, where she initially worked as a China company analyst, but has covered Japan since 2011. She’s been the fund’s lead manager since launch in 2015 and runs another similarly managed Japan equity fund alongside it. She’s also co-manager of the FSSA Asia Pacific All Cap Fund. We think this is a reasonable workload given the funds share a similar investment process.

Li benefits from the support of First Sentier’s well-resourced and experienced team, including co-manager Martin Lau. They help with idea generation and provide challenge.

Process

Li and her team focus on companies that are capable of sustainable, above-average earnings growth, otherwise known as growth investing. They’ll target high quality companies that are dominant in their industry and prefer those that have a competitive advantage that others struggle to replicate. They should also be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains.

Importantly, companies must also consider environmental, social and governance (ESG) factors. They should cause little, if any, harm to the environment or the labour they employ, for example. If Li and her team don't think a business meets these standards or is doing enough to address a particular problem, they won't invest.

Following the impact of the coronavirus last year the team took advantage of some market weakness by investing more in several companies at a lower and more attractive price. Some examples include electronics company Sony Corp and semiconductor equipment manufacturer Tokyo Electron. Both are high-quality companies in strong financial positions and leaders in their industries.

They also invested in companies that have the potential to see more demand following the coronavirus. For example, HR firm Recruit Holdings was added to the fund as it could see increased demand for recruitment services as Japan emerges from the pandemic.

The team tends to invest in relatively few companies, meaning each one can contribute significantly to returns, although it's a higher-risk approach.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier Investments group). Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

Companies must also consider ESG factors, and the team won’t invest in tobacco, gambling, or weapons manufacturers. Over time ESG has become an increasingly important part of the team's investment process.

FSSA also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy. At the same time, their individual personalities are allowed to shine, and they're encouraged to bring their own ideas to the table. Fund managers are also incentivised in a way that aligns their interests with long-term investors.

First Sentier Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively FSSA remains an independent investment team. That said, we will continue to look out for potential further change.

Cost

The standard annual ongoing charge for this fund is 0.83%, which we think is reasonable for an actively managed Japan fund. The HL platform fee of up to 0.45% per year also applies.

Performance

Since launch in October 2015, the fund’s returned 155.9%, while the average fund in the IA Japan sector rose 73.8%*. The managers’ growth-focused investment style largely remained in favour over the period, which helped performance. Our analysis suggests the managers’ ability to select outstanding companies, regardless of their size or what sector they’re in, provided a further boost. Remember past performance isn't a guide to the future.

When we take a look at the past 12 months, it’s clear it has been a challenging year. The coronavirus continued to impact businesses globally and Japanese companies were no exception. Cosmetics company Kao Corp witnessed the closure of some of its physical stores in Japan and was hit hard by the fall in demand for their products as people were forced to stay at home.

The fund’s performance also slowed towards the end of 2020 and continued into 2021. Li’s growth-focused investment style fell out of favour as investors preferred companies whose share prices don’t reflect their actual worth (otherwise known as ‘value’ stocks). This a short period to judge performance though and we think the fund can still perform well over the long term.

Despite these challenges, the fund still managed to return 7.0% over the past 12 months, to the end of May, compared to the index’s gain of 11.3%. Online medical services provider M3 Inc was one of the best performers. It helps deliver information online to healthcare professionals and provides the platform for marketing and tele-health services. Demand for these services accelerated due to the coronavirus pandemic which confined people to their homes. Semiconductor manufacturers Lasertec Corporation and Tokyo Electron were also among the top performers.

Like all investments, the fund can fall as well as rise in value so you could get back less than you invest.

Annual percentage growth
May 16 -
May 17
May 17 -
May 18
May 18 -
May 19
May 19 -
May 20
May 20 -
May 21
FSSA Japan Focus 28.8% 28.4% -8.8% 33.2% 7.0%
IA Japan 31.7% 12.8% -7.8% 10.9% 11.3%

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2021.

Find out more on FSSA Japan Focus, including charges

FSSA Japan Focus Key Investor Information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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