Schroder Japan Trust plc (SJGL.XC) Earnings Call Transcript & Summary

[Audio Gap] of Schroder Japan Trust plc. It's now just after 1:00 p.m., and I declare the meeting open. I'm Philip Kay and I will be Chairing today proceedings. Also present are the other directors of the Trust, Angus McPherson, Helena Coles, Samantha Wren, and Merryn Somerset Webb. And as detailed in the report, Angus has informed us that he's intending to step down in July next year. So as this will be Angus' last AGM, I would like to take the opportunity to thank him very much for his significant contributions to the company since joining in February 2020. Thank you, Angus. So to begin with, the Portfolio Manager, Masaki Taketsume, will give a presentation on the prospects for the Japanese market and the company's investment strategy. And we will then provide the opportunity for shareholders to ask questions of the Board and the managers. So we'll adjourn the meeting now. We'll probably go and sit down there so we can watch the presentation and we'll resume following it.

Hello, can you hear me?

We can hear you but we can't see you.

Right. Okay. Let's get started. So hello again. This is Masaki Taketsume, Fund Manager of the Schroder Japan Trust. For the next 20 to 25 minutes, I'm going to talk about the key feature of the fund, performance, portfolio strategy and the macro outlook. Okay. In terms of the key feature of the fund, our approach is the bottom-up driven by in-house fundamental research. We have a long-term investment horizon and to own 60 to 70 names with a relatively low turnover. As a result of the bottom-up stock selection, portfolio typically has a style bias towards value and mid- to small cap. And other investment trust, we are using the gearing, typical range is 10% to 17.5%. So if we think of the performance driver of the Schroder Japan Trust, it in the order of the importance, it is alpha generation from the stock selection, style bias toward the value and the mid- to small cap and the gearing. Moving to the next slide. So when we talk about the alpha generation from the stock selection, we typically look for the 3 to 4 characteristic of the stock, which we call it as an opportunity set. Among the 3 to 4 opportunity set, first opportunity set are the most important driver of the alpha generation. First one, we called it as a market misperception. So simply put, we are looking for the company with internal changes, new management, new strategy, which going to structurally improve the return on equity or earnings prospect and which leads to the devaluation of the share price. Second opportunity set we see, we call it as a market oversight, which typically found in the mid- to small cap space. We are looking for the company with a strong and defendable business franchise in the mid [indiscernible]. So basically, we are looking for the niche top company in the mid- to small cap segment, which are at this moment, underappreciated by the market and [indiscernible] it's going to lead to the fair revaluation, most important source of alpha generation of the fund. So that's a key feature of the fund. Moving to the performance. As a result of this investment philosophy, Trust had a strong track record of the performance over the short and mid- to long term. We have a strong outperformance over the 1 year, 3 years and 5 years' time frame. Even for the discrete year basis, we had 4 consecutive years of strong outperformance since 2021. This chart illustrates the long-term outperformance of the Schroder Japan Trust. Looking to the decent performance driver, this table on the top shows the top 5 contributor and the bottom table shows the top 5 detractor. If you can see the top 5 contractor or contributor, you can see a lot of unfamiliar names like Fujikura, Sanki Engineering and JX Advanced Metal. These are mid to small cap company, and that illustrates our alpha generation potential by stock bottom-up stock picking. I'd like to talk about one stock example, Sanki Engineering because that stock illustrates the potential power of the alpha generation through our bottom-up stock selection. Sanki Engineering is a small sub construction company specialized in HVAC, I mean, air conditioning and electric wiring in the commercial building and the factory. And Sanki has a strong business franchise in their market. So basically, this is a market oversight type of company, niche top franchise company in the mid [indiscernible]. Thanks to the inflationary environment in Japan, because this industry has a tight supply-demand balance, Sanki realizing a strong pricing power that leads to the strong gross margin -- gross profit margin expansion as shown in the blue line on the left side of the chart and reflecting the strong gross profit margin improvement leading to the strong profit growth and thanks to the corporate governance improvement trend, Sanki Engineering significantly improved the shareholder return. So as shown in the bar chart on the left side of the chart, Sanki's dividend payment and the share buyback that almost doubled in the last 2 years. So thanks to the inflationary environment and the corporate governance improvement, Sanki Engineering realized a significant profit improvement as well as shareholder return. So that leading to the top right-hand side chart, significant share price outperformance and contributes outperformance of the Trust. So this stock example illustrates the potential alpha generation through our bottom-up stock picking and receiving a tailwind from the underlying Japanese macro environment, which are inflation and the corporate governance improvement. Moving to the portfolio strategy. Right side of the slide, so overall our portfolio strategy remains same. So we maintain the value buyer style. Also, we maintain the overweighting the mid to small cap company. And also, we are focusing on the company with a specific catalyst for the revaluation, especially led by the governance improvement. Talking about the value by style, looking at the left side of the chart, this is a relative valuation of the value stock against the growth stock over the long period of time. Even after the several years of the recovery of the value stock from the long-term viewpoint, valuation of the value stock remain discount against the growth stock and there's still lots of room for the further devaluation. So that's why we maintain the value bias style. Moving to the small cap. So left-hand side chart shows that the relative valuation of the small cap against the large cap. As you can see, small cap valuation discount is one of the biggest in the history against a large cap. On the other hand, looking at the earnings prospect on the right-hand side, blue bar shows that the earnings outlook for the small cap and the green bar is a large cap. As you can see, for the next couple of years, small cap is expected to maintain the strong earnings growth against the large cap. So on the relative variation as well as the relative earnings prospect, small cap remains attractive compared to the large cap. So that's why we maintain the small cap bias. Just talking a little bit touch upon the recent portfolio activity. So in terms of market background, for the last -- for the year-to-date, we saw the relatively high level of market concentration in the large cap stock thematic stock in the market. On the left-hand side, this chart shows that the indicator of the relative level of the concentration of the Japanese equity market. As you can see, we had a relatively high level of market concentration led by the thematic stock like a defense stock or AI stock. For example, on the right-hand side, that shows the relative variation of the large cap thematic stock for the AI game, defense all the large-cap thematic stock variation has been revalued significantly. For example, on the defense thematic stock, Mitsubishi Heavy Industry has shown the dark blue line, their derivative variation that almost doubled in the last 1 year. So it's a little bit tough environment for us because we are aiming to generate alpha from the stock selection and have a bias towards mid- to small cap. Under such market environment, we don't chase such a large-cap defense stock with a high valuation but we are looking for the better alternative in the large mid-cap space. For example, in the case of the defense area, we initiated a position in the Mitsubishi Electric instead of the Mitsubishi Heavy. Why? Left side of the table shows that sort of the league table of the Japanese defense contract in the last year. As you can see, obviously, Mitsubishi Heavy Industry, proxy type of stock is a top contractor for the Japanese defense spending. But at the same time, on the very right part of the table, next year PER is 50x quite expensive. Instead, Mitsubishi Electronics, actually, it's a #3 contractor in the Japanese Department of Defense but their valuation is almost half of the Mitsubishi Heavy Industry. And also Mitsubishi Electric itself as a company-specific driver for the portfolio restructuring to improve the ROE and the ROIC. So that's a typical market misperception type of stock company with internal changes and had a good exposure to the global growth, I mean, increase in defense spending but half of the variation of the proxy type of stock. So that's the reason why we initiated the position in Mitsubishi Electric, not the Mitsubishi Heavy Industry. So that's the kind of thing we are doing through to generate alpha from the stock selection. So this is the sector positioning followed by the stock positioning. And this table shows the top 10 holding by absolute weight. So that's our overall portfolio strategy. So last but not least, in terms of the Japanese macro background. So 3 points. In the short term, we think that the earnings growth will be the major driver for the market movement, and we expect limited upside in the variation in the short term. But in terms of the earnings outlook, it should be quite solid into the next year. Second topic, new government. So we had a new Prime Minister, Ms. Sanae Takaichi, first female Prime Minister in the constitutional history. Because Ms. Takaichi is seen as the successor of Mr. Abe. So, Ms. Sanae Takaichi's economic policy, I mean, Sanaenomics is a new branch of the Abenomics, some people think but we don't necessarily think in that way, and it doesn't necessarily to be that way. But at the same time, Sanaenomics is a quite good policy mix for the Japanese equity market, we believe. Last but not least, long-term structural theme in Japan, inflation and the corporate governance remain alive underway and evolving in a quite positive way. So first, in terms of the short-term market performance, on the right-hand side, market valuation, it is now sitting top end of the historical range. So as a result, we think that in the short term, the valuation opportunity for the Japanese equity market is relatively limited. So it should be earnings growth that's going to drive the overall market performance. In terms of market earnings outlook for the next year, we expect a relatively solid earnings growth for the Japanese equity market as a whole on the -- shown on the left side of the table, so roughly 10% growth supported by the wide range of the sector, something from the exporter to financial to domestic cyclical. And we believe that each heavy tech subsector has a strong supporting factor to realize a solid earnings growth. In terms of the exporter on the left-hand side, that chart shows that world export growth, I mean, world trade volume. So on the green bar, it's a year-over-year growth despite the U.S. tariff, actually world trade volume growth maintains a solid growth over the 10%. So that's going to support the earnings for the exporter into the next year. And as we shift into the next year, tariff impact going to be significantly reduced. On the right-hand side, in this year, I mean, 2025, tariff itself has a minus 30% earnings impact on the major automaker or minus 4% of the total corporate earnings. So that negative year-over-year hurdle for the tariff is going to significantly reduce into the next year. So that should also support the exporter earnings into the next year. So that's the exporter. Moving to the domestic side on the left-hand side, dark blue line is the real wage growth. So finally, we are starting to see that positive real wage growth that should support the consumer spending growth, along with the economic policy support, which I will explain later. So that is a positive for the domestic cyclical. And in terms of the financial, on the right-hand side, the market is expecting another 1 or 2x rate hike by Bank of Japan that should support the interest income of the bank or insurance company and supporting the earnings growth for the financial. So overall, export, domestic cyclical financial, most of the subsector has a solid tailwind to support the earnings growth into the next year. So we maintain a positive view on the next year earnings growth so as the short-term market performance. Moving to the topics about the politics, economic policy. In terms of the new economic policy, so-called, Sanaenomics. so it is not -- it shouldn't be the return of the Abenomics. Abenomics was a very broad range of economic stimulus, fiscal expansion and the loose monetary policy. So left-hand side of the chart shows that the progress of each GDP component since the start of the Abenomics. So right now, most of the GDP component, export, private nonresidential investment, public demand are already in a pretty good shape. But only one area of the weakness is the private consumption shown on the green line. So in terms of Sanaenomics, need to address one specific component of the GDP rather than a broad-based economic stimulus, I mean, private consumption. And Sanaenomics is addressing the support for the private consumption by providing the subsidy or tax cut to the household. So that's a good policy mix. In addition to that, on the left-hand side of the chart, green line is the unemployment rate and the blue line is the CPI inflation. On the left-hand side, 2013 to 2014, CPI was artificially inflated by the [indiscernible] increase. But actually, during the Abenomics period, I mean, left part of this chart, unemployment rate is 3% to 4%, which is higher in the Japanese standard and the CPI was negative so deflation. So basically, under the Abenomics era, we had economic -- our economic problem is the shortage of the demand. So that's why Abenomics needs to have a wide range of the fiscal expansion and the monetary policy to stimulate the overall demand. But compared to that, current time, CPI is already 2% to 3%, unemployment rate is 2.5%, almost full employment. So in other words, current issue of the Japanese economy is a shortage of the supply capacity to support to sustain the growth. So in Sanaenomics, in addition to support household their economic policy is encouraging or providing the incentive for the Japanese company to make an investment inside Japan to expand the capacity through the subsidy or tax benefit. So that's another policy mix. So overall, we don't necessarily think that Abenomics -- Sanaenomics as return of Abenomics but the current policy mix supporting the household and enhancing the supply capacity of the Japan is a good policy mix and allows to sustain the Japanese economic growth towards the corporate earnings. So that's the policy side. Last but not least, Japanese update on the 2 Japanese structural driver, corporate governance and inflation. So in terms of corporate governance, improvement of the shareholder remuneration are progressing quite well. We continue to have a record high level of dividend and a record high level of share buyback. In addition to that, we are now start seeing that market-wide improvement in the capital allocation. So on the right-hand side, bar chart shows that the number of the M&A activity, which has been increasing. And the listed companies through the M&A tend to have a below average ROE than the overall market. So in other words, low ROE company has been taken out by M&A, by competitor or activist or private equity fund. So that's leading to the overall improvement in the return on equity in the overall market. So that's the improvement in the capital allocation for the overall market. So that's another step for the corporate governance improvement as indicated by the reduction in the number of the listed company in the Japanese equity market for the last 2 years shown on the left-hand side of the chart. So that's an important progression of the corporate governance improvement. Lastly, in terms of inflation, so inflation is a positive because the corporate earnings is a nominal number. That's why, as shown on the right-hand side, Japanese market performance is highly correlated with nominal GDP than the real GDP. And now because of the inflation on the right-hand side, nominal GDP clearly outperforming the real GDP that's going to support the equity market performance. So some people think there is there any risk that we may back to the deflationary environment. We think that the risk is quite low simply because people's mindset being set. So these 2 charts show that the consumer on the left and the corporate expectation for the inflation outlook. Just talk about the right-hand side, corporate. So blue line is at the time of 2020. At that time, average inflation outlook by enterprise is 0%. But now because after the 3 years of inflation, as shown the green line, it is September 2025, most recent, average inflation outlook of the corporate is now sitting around 2%. So basically, people's mindset has been already adjusted towards the inflationary environment. So under that environment, there is a low risk to -- for the Japanese economy to back to the deflationary environment. So overall, 2 strong structural driver operate governance improvement and the inflation is alive and well and continue to support the Japanese equity market. So that concludes my presentation, and I'm happy to take any questions you may have. Thank you.

Good. Any questions from the audience here?

I've got 4 questions. I see your third largest investment is in Toyota Motor. It's generally accepted that the motor industry in Japan is one of the largest industries but that the people like Nissan, Mazda, Mitsubishi, et cetera, are having serious issues at the moment with liquidity, et cetera. And they don't seem to be in the same ballpark as the Chinese companies producing electric vehicles. What's your view of that particular industry, which must be a large employer in Japan?

Okay. In terms of Toyota Motor, it is only one automotive company. We also own Suzuki but it's a little bit specialty because it's they generate most of the profit from India. But in anyway, so Toyota is the only major auto OEM we own in our portfolio. Why? Because Toyota probably only one global auto company, which can satisfy any type of the consumer demand. So while EV is increasing penetration, we still think that the consumer demand is quite diverse. Some people like the EV, some people like a plug-in hybrid, some people like ICE gasoline sports car or some people like diesel, SUV, et cetera. So consumer demand is still quite diverse. And we don't think that the consumer demand is just concentrated in one particular type of the car. So in that environment, Toyota is the only car company which can satisfy any type of the car for any type of the consumer. And that's the major reason why Toyota has been gaining market share for the -- in almost all regions for the last few years. So I think that the issue for the Honda or Nissan or Mitsubishi if they just focus in one particular car type like EV or one particular business area like U.S. and Southeast Asia, that make it difficult to think that strategy doesn't work. So only I think that Toyota is the only survivor for them major car OEM because of their diverse product portfolio and their size to support such a diverse product portfolio. So only risk for the Toyota is that everyone becomes EV. Everyone in the world on the EV type of the car. In that environment, competitive pressure or competitive environment gets much tougher for the Toyota but we don't think that situation is going to be realized anytime in the near future. Yes.

My second question is Japan is generally accepted to be one of the most indefinite countries in the world with something like running at 230% of GDP but that this is alleviated by the fact that most of the government debt is owned by Japanese companies and institutions. Now if that should change, what's going to happen? And coming on to my next question is demographics. In the same way, your ratio of older people to younger people is getting worse. Again, that's a negative. And my view is that, obviously, with those 2 particular issues, maybe we're okay today, but what's going to be like in 5 years, 10 years' time, if that -- if those trends continue.

Yes. Okay. That's a very important question. So in the very short term, I mean, 2 to 3 years' time frame or maybe 5 years' time frame, I don't worry very much about the public debt burden against for the Japanese economy simply because currently, nominal economic growth rate of Japan is higher than the nominal interest rate. So money to -- cost to borrow the money is lower than the return from the money by investing it. So under that environment in the economic textbook, public debt burden going to stabilize or somewhat improve. So in the short term, as long as the Japanese nominal economic growth is higher than the nominal interest rate, that's okay. But the key issue is that just as we pointed out, it's a demographic or in other words, shrinking the supply capacity of the domestic economy. So if we see -- if we continue to see the shrinkage of the supply capacity in Japan through the aging population, it naturally reduce the size of the economy over the long term. So that make it more and more difficult to pay down the public debt or anything. So over the midterm, Japanese economy has to expand the supply capacity to, a; improve the labor productivity by corporate investment; b, inviting more immigrant to expand the population. So in the most recent government economy economic policy, first one, a; enhancing the labor productivity or enhance the supply capacity is well addressed because now new government provides more incentive subsidy or tax break to make Japanese company or overseas company to investing inside Japan by building up the semiconductor factory or data center or power grid. So that could lead to the improvement of the labor productivity and expand the supply capacity of the Japan. So that should support the payment of the public debt burden. In terms of immigrant, it's still very slow, I have to say. So in the midterm, this new economic policy supporting the corporate investment inside the Japan could alleviate the risk of the growth of the public debt burden program. But very longer term, we need to see that more proactive immigrant policy in Japan. So long answer to your question. So short term is okay. Mid-term, Japanese government is addressing that issue. Long term, it's still in the -- up in the air.

And my final question, more of an observation really, is that your new Prime Minister is making some aggressive words with China. It'd be catastrophic for the whole of the world, I think, not just Asia, but -- and in particular, Japan, if you were to get into a spat with China. I know it's probably too early to look at what the long-term issues are but Japan is considerably increasing its defense budget, and it's a worry.

Yes, I tend to agree with your view, but I'd like to point out 3 things. First one is the economic impact. Second one is so why Ms. Sanae Takaichi took such a tough stance against China. And the third one is probably economic reality between the China and Japan. So first one, in terms of the real GDP impact on Japan, probably mainly through the reduction of the inbound tourists from China. So our economic assumption is that even if we assume that 50% reduction of the Chinese traveler into the Japan, short-term GDP impact is 0.3% or 0.4%. So it's not so significant to delay the overall economic growth. So -- and also compared to the past, now most of the Chinese tourist is individual tourists rather than a package tour. So it is much more difficult for Chinese government to control the individual tourists to go to Japan than package tour. In the case of the package tour, they just say they just forced the travel agent to create a package tour. But in the case of the individual tourists, they took a flight in the hotel by themselves. So it may be a little bit more harder for the Chinese government to control the inbound tourists to Japan. So in terms of the second point, so why Ms. Takaichi took such a tough stance against China? So it's a little bit domestic political reason because the leading party -- leading coalition party lost lots of seat in the upper and the lower house election recently because they lost the support from a little bit lighting conservative group of the people. So in that sense, because Ms. Takaichi is seen as a successor of Mr. Abe, who was also a bit of right wing and the conservative people, conservative and the lighting side of the people now supporting the Ms. Takaichi. So in order to maintain the support from that group of the people to maintain the high level of the approval rate, Ms. Takaichi might need to take a little bit tougher stance against China. So in that sense, geopolitically, it may be difficult to find the point of compromisation between China and Japan. But the third point, in the economic reality, China is doing the war against the U.S., right? So that China cannot import any high-technology equipment or material from U.S. So that China has to find somewhere else. So it's only Japan. So economically, China and Japan codependent on each other. So from the economic viewpoint, there is a certain level point of compromisation there will be. So in that sense, geopolitically, there could be a lot of the news flow, maybe continuing. But in the economic reality, we don't expect a very huge escalation of the relationship between the China and the Japan, yes.

Any other questions, please? Yes.

There's been a significant increase in the yield of Japanese bonds for some months now. I just wonder what your thoughts on that were and what are the implications on the portfolio of the Trust.

Okay. So to answer your question. So in the 2 parts, the first part in terms of the impact on the Japanese economy from the higher bond yield and the second part is the impact on the portfolio. In terms of first part impact on the Japanese economy, we still think it is still manageable, I have to say. Yes, currently, 10-year bond yield is something like 1.8% but still underlying inflation is above 2%, so which means that the real interest rate remains negative. So that implies still accommodative monetary environment. So that's the first point in terms of economy. In terms of the portfolio, because we are seeing that increase in interest rate, especially in the mid- to long end, I mean, a steepening of the yield curve. So that naturally implies a better business environment for the financial sector like banks and insurance company. So we have been overweighting the financial industry, bank and the insurance company. And so far, earnings from the bank and the major bank and the insurance company has been on the positive side. So that illustrates the power -- that illustrates the power -- the earnings power under the positive interest rate -- nominal positive interest rate environment after the long year of 0 or negative interest rate. So in that sense, we are happy to maintain the overweight stance in the financial sector. Yes.

I took the decision earlier this year to invest in this Trust across my pension, ISA and my general account. And I'd like to know if there's a commitment to the dividend. And if so, what can I look forward to in the coming years?

Yes. So we recently changed our dividend policy of the trust to commit the payout of 4% of the net asset value, I mean, 4% of the net asset value annually, which means that we commit to pay the -- commit to the 4% dividend yield for the Trust. Yes.

I confirm that. As the Chairman, I would confirm that we are committed to that. Any other questions here? Kat, are there any questions? Nothing online. Good. Okay. Thank you very much for your questions. We'll continue with the formal part of the meeting now. Masaki, thank you very much indeed. Very late to...

Philip, thank you so much.

Thank you very much for a very interesting presentation. Good. So I have been advised by the registrar that the meeting is quorate on the basis of proxies that have been received. Formal notice of the meeting is contained on Page 81 of the company's accounts dated 7th of October 2025, and I shall take the notice as read. To more accurately reflect the views of shareholders of the company, voting today will be done by way of a poll on each of the resolutions put to the meeting. And if there are no questions, I shall proceed with the poll. Before we proceed to the resolutions as set out in the notice of meeting, would any shareholders like to ask any questions about the annual report for the resolutions? No one online. So resolutions 1 to 10 are all proposed as ordinary resolutions and require a majority of those shareholders. I read that again, require a majority of those shareholders voting either in person or by proxy to vote in favor in order for them to be passed. Resolutions 11 to 13 will be proposed as special resolutions and will require at least 75% of those shareholders voting either in person or by proxy to vote in favor in order to be passed. I'm assuming that you don't need me to read the full text of all the resolutions. And the results of the poll, including the proxy votes already received in respect of each resolution can be seen behind me. And this will be announced through our regulatory information service and posted on the company's website as soon as practicable. So that concludes the formal business of the Annual General Meeting. Thank you very much for attending. And I'd like to invite all shareholders to join us, I think, at the back of the room for -- or outside for some Japanese snacks and some sake. Thank you very much.