Schroder Japan Trust plc (SJG) Earnings Call Transcript & Summary

Well, good afternoon, ladies and gentlemen, and welcome to the Schroder Japan Trust plc Annual Results Webinar coming to you today from the Schroders headquarters in the heart of the city of London. I'm Roland Jones. I'm responsible for the investment to our sales here at Schroders. It's my great pleasure to be joined today by Masakazu your fund manager, who normally resides in Tokyo, but he's over in the U.K. this week, seeing a number of our U.K.-based clients. So welcome to Masaki. Now I mentioned to you that this was the annual results webinar. I'm very pleased to say that we announced some great set of results this morning. The net asset value, the NAV of the Japan Trust from -- to the 31st of July this year was up 41% with the share price up 49% and -- and this is against the reference index, which is the topics, the Japanese index up 29%. So another set of really good results from Asahi and the team in Tokyo. Important to stress that the dividend on the fund is hit 4%, which is the target that we set ourselves a couple of years ago. So for the first half of today's presentation, which should be around about 40 minutes, we're going to look at the positioning of the trust where we generated some of that performance. There will be a short pause for any questions which are pertinent to that part of the part of the presentation. And then over the second half, we're going to see whether the fantastic returns that we've generated from the Japanese stock market can be continued after such a really good run. So Masaki is going to talk about the outlook the ongoing benefits of corporate governance. We will be touching on the rising bond yields, which I know are a source of some concern to many of our investors and also how Japan is coping with inflation. So there've been lots of times -- sorry, lots of time for questions. Hopefully, we'll get through them more. Just tap them into the -- on the website, and they'll come through my iPad, and I will ask them as we're -- at each of the natural breaks. If you want today's presentation or indeed the report and accounts, you can download those on the website. And Finally, there is a feedback form on there. I will remind you this at the end of the presentation, but it's so important if you could please give us the feedback because it allows us to tailor these sorts of webinars to ensure that we're sort of hitting the mark for the future. So Masaki some great performance. Tell us how you did it.

Thank you, Loren. Okay. again, -- this is Masa Takuma fund the manager of the Surdeau. So for the next 20 minutes or so, I'm going to run through the -- quickly briefly down through the key feature of the ShotapanPlast, Levyperformance and the market outlook. Okay. Starting with the key feature of the Croda Japan Trust, our investment approach is a bottom-up driven by in-house fundamental research. We have a long-term investment horizon roughly 2 to 3 years and tend to own 60 to 70 names in our portfolio with a relatively low turnover. And as a result of the stock selection, portfolio, typically has a tie bias towards value and the overweighting mid- to small cap. And the last but not least, as a investment trust, we are using gearing typical range of the gearing is roughly 10% to 17.5%. So if we think of the performance driver of soda Japan for us, in the order of the importance, fast alfrgeneration from the stock selection, second, some tie bias towards a value on the mid- to small cap and the third year -- those 3 things are the key driver of the performance of the Soda Japan Trust. So while we talk about alpha generation from the stock selection -- we tend to look for the 3 to 4 characteristics of the stock we are looking for. We call it as an opportunity set. So among those 3 to 4 opportunity fit fast to opportunity fit are the most important driver for our stock selection towards the performance of the fund. -- fast opportunity set, we call it as a market misperception. So we are basically looking for the company with internal changes, which could structurally improve the ROE or earnings growth prospects, which are currently underestimated by the other investor. So on what's going on in the Japanese equity market, corporate covenance improvement is clearly working as a tailwind for us to identify the market mispaception type of opportunity. because he covered governance improvement is encouraging the more on the more Japanese company to initiate internal changes. Second, opportunity set, we call it as a market oversight. So we are basically looking for the undervalued company, especially among the small and mid-cap with a strong and defendable business franchise in a niche product area. So we are looking for the mid-top company in a small to mid-cap area. Because we have in-house strong in-house research capability based in Tokyo, we have an advantageous position to identify such a hidden in the Japanese equity market, -- so those are our key stock we are looking for to generate alpha from the stock selection. Moving to the performance. We have a very strong performance for both short term and the midterm. We outperformed the benchmark 3 months year-to-date, 1 year to 10 years. So in the last 1 year, -- we outperformed the benchmark by roughly 19.6 percentage points, which are largely driven by auto generation from the stock selection and some tailwind from the gearing because the Japanese equity market also has been performing strongly. To the end of the last year, Net gearing was 11.7%, and the portfolio has 66 name. So that's the overview of the performance -- we see in terms of performance or for generation from the stock selection contributes most to the outperformers. So over the last 1 year, probably similar to the other equity market, Japanese equity market performance has been dominated by the AI stock. So as a result, if we look at the top 5 contributor upper part of the table, top 5 contributor of the performance of the trust. First the EBITDA, Fujikura, JX, Autovance metal, those are AI-led stock. So yes, I Toliara also benefiting us. But I'd like to highlight the 2 points. First, frame generally talk about Japanese AI stock Advantest tends to be the proxy of the Japanese AI stock, which we don't own in our portfolio. So as a result, if you see the bottom part of the table, top 5 detractor, Atobantes not own the ones Autobarn test actually drugs to performance. And the other 1 test, yes, up by 192% for the last 12 months. But if we look at our AI stock, I mean, a contributor of the AI stock like EBITDA performance was much stronger, up by [ 380% ]. So first point, we'd like to highlight that yes, we got the benefit from the Trion but we made a right stock picking among the AI store. So that's the first point. Secondly, we also generated off from the non-AI stock One of the examples Decude,which is 1 of the top 10 contributors for the performa. The crude is an owner of the indeed. Indeed, either largest job matching website. The market has been concerned that indeed may be disrupted by the generic PI. But indeed has the data from the both jobs such as and the employer to which create very high barrier to entry and by using those data, indeed, -- it starts providing the more high, more value-added service by utilizing the AI. So as a result, if you look at the bottom left, chart on the paper, Pope line is kind of the ASP average selling price of their services. So as you can see, price of the services actually increased in 17% in the last year and expect to show another 30% increase in this year. So by utilizing the AI, the crude actually indeed is improving their value add and the increase in the earnings significantly. -- in fact, the crude is actually the beneficiary of the AI, not being disrupted by the AI. So once market realize as things the crude share price has been devaluated quite strongly and the contributes our performance. So second point here is that we also made a good offer by doing such a research and investing in non-AI area even under the AI-driven market. So that's a key performance driver for the last 12 months for the fund. So I'm going to skip some of the slides which you can see by downloading from our website and the straight go to the Japanese market outlook. So I'd like to touch up on 2 topics. First on the general market consasuch as included in bonded -- government bond yields and the fund physical risk in the Japanese government. So we believe both of which are somewhat overrated. And another second point we'd like to highlight -- there is a good chance for the further devaluation for the Japanese equity market on the back of the new government economic policy. So starting with the government bond yield -- so as you can see, first time in several decades, Japanese 10-year government bond yield is now exceeding the 3%. So which clearly, there is a concern about the pressure on the economy or some disk on the physical parents with the government. But -- this chart shows that the breakdown of the increase in the bond yield into the fee component. Fast is long-term inflation expectation which is shown light green. And the second win is a monetary policy expectation actioned by Banco Japan, which is shown light blue -- and the other 1 is a liter, which includes physical risk or ton premium to sort of the risk factor. So as you can see on the left-hand side, breakdown or via changes on the right-hand side. Most of the recent increase in Japanese government bond yield is a deflection of the Banco Japan monetary policy changes shown a light blue. So basically on the back of the strong economy and shifting from the deflation to the inflation, Bank of Japan, if on track to normalizing the monetary policy. Under that normalization of the monetary policy is the main driver for the recent bond government bond increase. It's not just a physical risk over those types of negative factor. So we think that Japanese government bond yield increase -- recent increase in the Japanese government bond is, is more of a reflection of the deep vitalization of the Japanese economy, accelerating the economic growth and shifting out from the deflation to the inflation. So that's our bond yield. So what about the government debt or physical balance -- so yes, on the top left on left-hand side of the chart, growth public debt percent of the GDP on a light blue line, yes, Japan has a very high level public gross public debt percent with the GDP. But as you can see, it has been improving for the last 4 or 5 years. And the 2 major physical health, there are some other indicator to see that in addition to the gross public percent of the GDP. For example, on the right-hand side, government primary balance pacing with the GDP. On the light blue line, actually primary balance is getting closer to the positive, 0% of GDP for which is the #2 or #3 positive among the major country. Also, interested burden, especially under the environment of the increase in the bond yield, and Japan is 1 of the lowest level of interest paid on the public debt passengeDP. Next to the Germany. So overall, if we look at Savaria's measure, Japanese physical balance or physical condition is not as bad as positive and actually improving. Under 3% bond yield, yes, it's 1 of the highest in fab decade, but still 1 of the lowest among the major countries. So we think that the recent market concern about the increase in the government bond yield and the physical balance is somewhat overrated. And I'd like to move to the next topic. It's a -- another positive development we are seeing in the Japanese economy and the Japanese equity market, Fitch improvement in the potential GDP growth rate. So if you look at this chart, light green line is potential GDP growth rate and which is loosely correlated with Bluline, it's a variation of the Japanese equity market. So faster the long-term GDP growth rate, higher than market variation. And we do see some chance to see acceleration of the long-term GDP growth rate in Japan, supported by the recent government economic policy. So as you may have had decently new government, I mean acadomistration, another long-term strategic investment plan. So combined with the public and the private investment on aggregate to make [ JYP 370 ] Torreon investment inside of Japan over the -- for the -- up to the -- so if that strategy being successfully executed, so on the left-hand side, so dark backline growth strategy realization case. So if being successfully executed, nominal GDP growth rate of the Japan is getting higher than 3%. Under that higher GDP growth rate helped to reduce government debt to burden. So on the right-hand side, based on growth strategy realization case on government debt burden percent normal GDP going to decline consistently. And as a result, -- so if that new growth strategy or new growth economic plan being successfully executed. Japan's potential GDP growth rate going to accelerate from the 0.6% right now to the 1.8%. So that, given the relationship with the market variation, price earning ratio that could lead to further devaluation of the Japanese equity market. So obviously, there is so many moving parts. -- but this is another potential positive catalyst for the Japanese equity market devaluation. And the other structural tailwind in the Japanese equity market, corporate carbonate and inflation, that remain alive and well. In the case of the corporate carbonate improvement, we continue to see the record level of the dividend payment and the share buyback -- under reflecting the corporate governance improvement, we are seeing this increase in M&A activity. And as a result, on the left-hand side, number of the listed company in the Japanese equity market has been declining as a result of picking up the M&A activity to further improve the return on equity. And the corporate governance improvement has been there for more than 10 years, but still there remain a lot of the investment opportunity, especially in mid- to small caterer. So on the right-hand side of the chart, -- as you can see still 23% of the mid-cap and 42% of the small cap company being traded below onetime price to book. So there is some potential for the devaluation in the mid- to small cap space through the corporate covenant improvement. And in the case of the inflation, we are clearly getting out from the deflation to the inflation. And because corporate earnings is nominal. I mean, reflective inflation Equity market performance on the left-hand side, on the blue line is highly correlated with nominal GDP growth rate, which take account of the inflation benefit. And after the several years of the inflation, consumer and the corporate mindset has clearly been set towards an inflationary environment -- so now both consumer and enterprise are now expecting the 2% -- 2% to 3% inflation going to be stay here for longer. So in that case, we believe that the true tailwind for the Japanese equity market, corporate componency improvement and inflation remain alive and well and continue to support the Japanese equity market. So overall, market is concerned about the increase in bond is and the physical balance it's been manageable. And we now see that another potential copay for the devaluation, I mean, improving the long-term GDP growth rate on top of the corporate covenance improvement. And shift from the deflation to the modest inflation. So we maintained the positive view on the Japanese equity market, and that we think that the Japanese equity market given reason the depth provided us a lot of the investment opportunity through our bottom-up approach.

Well, thank you, Masaki. -- very comprehensive update on both the positioning and the outlook for the Japanese equity market. We've had quite a few questions coming in already, which is great. We still have plenty of time for your questions, ladies and gentlemen. So you please send them to me, and we'll get asking. But we've had quite a few questions about the corporate governance theme. And I remember talking to our investors years ago about corporate governance improvements. And it seems to have been quite a time for it to really start to have an impact. Why was that? What is happening now in Japan, which is making Japanese boards pay more attention to the positives of improving their corporate governance.

Yes. For corporate governance has been a boring -- so initially, it's more like setting up our preparation stage like creating the structure to drive the corporate cabanas improvement. So initial stage of the corporate commence started from the 200 in has been decreased in the company to increase the number of independent outside director or separate functionality between supervision by director and management like CEO or CFO. And after fitting of the structure, -- now corporate covenant improvement, corporate governance code after the company to debut the overall efficiency of the lift, such as cash usage or balance sheet structure. -- that has been leading to the improvement in shareholder elimination. And after now, we're getting through that improvement in the balance sheet efficiency. Now corporate governance improvement. Moving to the next page, improving the overall business portfolio and making the investment to improve the growth overall growth for the company as well as the ROE. So corporate governance is on. But underneath of that, for the last more than 10 years, we -- we have been a booming that corporate covenant structure or corporate governance step to steadily enhanced return on equity or an growth prospect as the overall Japanese company. So in that sense, there are still some more room to go. -- and we believe that the corporate governance improvement remains a structural tailwind for the Japanese equity market.

So we when you're speaking to the Boards in Tokyo about improving their corporate governance, it's more of an open door and acceptance. This is something they need to do, and it's the benefit of all shareholders and obviously themselves.

Yes, exactly. So now corporate to come under the corporate covenance court of the Japanese company management is Netbil the business portfolio under the local chapter to enhance long-term growth with the company and the return in that earnings by generating improvement to the shareholder it's now how can I say building a system in the Japanese equity market.

Yes. Okay. there's another -- a few more questions around the inflation and specifically the energy oil import theme, which is not surprising. Is the -- I mean, we're talking about the 2% inflation. Is that -- how much of that has been driven by oil imports? And is Japan as an economy vulnerable to the price of oil and the cost of importing oil from -- at the current levels.

Yes, for short answer is that far increase in energy price doesn't -- hasn't had much of the negative impact on the Japanese economy because of the Tsing. First, Yes, Japan has a high reliance on oil imports from the Middle East, but Japan has been actively divesting source of the oil input out of the Middle East to U.S. or South America or Australia. And also deleasing the strategic ideas to maintain the supply. And in the case of the gases, Japan already has a very divested input source of the natural gas. So gas doesn't have much of an impact. And also, in the case of the price-wise, Japanese government currently providing a subsidy to control detailed price of the gasoline was some other thing. -- for that if -- what artificially controls price of the energy. So with that -- with all those efforts at this stage, there has not been much of the impact on Middle East conflict or energy price increase onto the Japanese equity market as well as the Japanese economy.

Isn't it fair to say that also you've got -- I think you touched it, you've got a very -- the Japanese nation has a strong reserve of energy, some larger than many other developed economies.

Yes, Yes. Japan has 1 of the largest strategic oil reserve among the Asian company. which provide them enough buffer to sustain the current stability of the economy. Yes.