These are just Charts of Japanese ITs

BGS (BAILL.G.SHIN.) Blue and RSI
JFJ (JPMORG FL.JAP. ORD ) Red
MCJ (MARTIN C.J.) Green (now closed)
IJD (Invesco Jap Discount) Black


Anyone else into Japanese Investment Trusts?

http://www.trustnet.co.uk/it/funds/perf.asp?sort=2&page=0&ss=0&txtS=&txtSS=&columns=&class=conv&booAITC=0®=2&sec=all&aitc=all&submitbutton=Go

I held on to mine - slightly higher than at the beginning of the year. 5% correction is potentially on the cards to flush out the froth (see yesterday's fall) but long-term upward trend remains intact. See today's DT for a further article on why Nikkei will end up higher this year.

Worth a read

Market Insight: Broker advises against Tokyo equities
By David Ibison in Tokyo
Published: February 9 2006 18:39 | Last updated: February 9 2006 18:39

Morgan Stanley, one of the worlds leading investment banks, declared this week that a three-year Japanese equity market rally had come to an end and advised clients to reduce weightings by a third and invest more in the US. Partly as a consequence, the Nikkei 225 benchmark dropped 450 points the next day.

The banks decision goes against the asset allocation strategies of virtually every other leading investment bank, most of which believe a combination of corporate restructuring and the sustained revival of Japans economy means its markets are poised for a much longer bull run.

Morgan Stanley said its decision did not reflect the fundamentals underlying Japans recovery, but was based on the fact that the Japanese market had risen 15 per cent since the end of November, making US valuations relatively more attractive, in its view.

We recognise this is a strongly counter-consensus shift and goes against powerful portfolio flows out of the US and into emerging markets and Japan over the past few weeks [but] in our view these flows are approaching the point of pushing Japanese equities beyond fair values, it said.

The US bank said it would now be 10 per cent weighted in Japan compared with 15 per cent before, 55 per cent in the US compared with 45 per cent, 25 per cent in Europe, 5 per cent in developed Asia ex-Japan and 5 per cent in emerging markets, down 5 per cent.

It added that it was only prepared to rebuild positions in Japan if there was a meaningful market correction, indicating it believes the market has peaked.

The Nikkei 225 benchmark closed on Thursday at 16,439 points, having more than doubled since its low in April 2003. In this environment, Morgan Stanleys call is brave. But is it correct?

It is significant that even one of Asias best-known bears, Marc Faber, nicknamed Dr Doom and managing director of his own investment company in Hong Kong, offers only guarded support for Morgan Stanley.

The Japan market has done well and I agree with Morgan Stanley that it is possible there could be a big correction, with the Nikkei down to 13,000 points for example, he said. But selling Japan for the US I am not convinced. There have been major improvements in the corporate sector. I think this bull market will last more than three years.

The rally in Japan has been driven by foreign investors, who have invested Y26,600bn in Japanese equities since their low in April 2003 and in the past two months have invested a further Y1,500bn.

More than 500 global fund managers, those responsible for asset allocation, were in Tokyo this week for a conference on Japan organised by CLSA, the investment bank. According to Gary Coull, CLSA chairman, a straw poll of attendees revealed Morgan Stanleys views were very much in the minority.

Change is now mainstream in Japan. Asset price inflation leads to consumer confidence. Corporate earnings growth is being underestimated, Mr Coull said. He added that a wholesale shift of savings from non-risk assets to risk assets such as equities could only push the market higher.

In contrast to Morgan Stanleys, fellow US investment bank Lehman Brothers has abandoned its long-held bearish stance on Japan and started arguing that its markets are poised for a strong rally a widely-held position among other houses.

Paul Sheard, Lehmans chief economist for Asia, said it was not a valuation story but a call on whether you think Japan is coming out of deflation. Lehman is 15 per cent weighted in Japan compared with a FTSE benchmark of 10 per cent. He said most economic indicators pointed to a coming period of reflation. As the potential turns to reality, equity markets stand to go higher, he said.

Another bullish sign is that local institutional investors have so far shunned Japans market rally, but there are signs that net buying by individuals and investment trusts is picking up a long awaited development.

If the economy were indeed to reflate, domestic investors eventually would have to recognise that reality and start repositioning defensively-slanted portfolios, with positive consequences for stock market momentum, Mr Sheard said.

Thanks Brianboru, interesting reading. I got out of my Japanese ITs (FJV&IJD) about 5 weeks ago before the last peak and am waiting (hoping) I can get back in again when the Nikkei is around 14,000. The ITs may be even at a discount to net asset value then. I still think medium term the Nikkei is a good bet.

Reports are saying that foreigners have been net sellers of the market for every day of the last 8 days

FT - "The fall was led by real estate stocks, which plummeted as foreigners big buyers within the sector - continued to exit the Japanese market."

"The ITs may be even at a discount to net asset value then. I still think medium term the Nikkei is a good bet. "

Yes, I do wonder whether IT's are the best vehicle at the moment - they seem to be selling at around 1 to 5% above NAV when normally there would be a discount of typically 10%. If there's a reversion to norm even a modest rise in the index could see a fall in IT values? Perhaps?

IT's tend to go to a premium on NAV when component stocks are rising, to a discount of 5-10% (sweeping generalisation) when flat and often to a bigger discount when falling. This tends to exaggerate the swings compared to the index or i-share. This suits swing trading but not necessarily a buy and hold strategy. I think(hope) Japanese ITs will soon be at a discount to NAV. H

Looking at the charts for FJV, IJD and others (see post 1 above) I am considering dipping my toe in the water again despite what I said in my previous post. The reasons are all seem to be finding support on a line joining the 0% point in Nov in the charts above and 20% now. Also the Nikkei is down around 7-8% from it's highs, whilst the ITs are down around 18-20%. So I guess instead of a 5% premium to NAV, these ITs are probably on a 5% discount. Apreciate any views of chartists or other comments, thanks H

Discounts to NAV starting to return to more normal levels and compounding falls as overseas money takes some profits I suspect?
Still sitting back and watching though!

Got out of my Japanese ITs last week for a 7% loss once the uptrend was clearly breacked. Looking at the charts in post 1 above, I could see another 20% drop or so. I will wait for more consolidation in the Nikkei before I get back in again and discounts to NAV are somewhat higher. Still believe in the medium term that Japan will be a fruitful investment area. H

Dipped my toe back in with some IJD @ 124.8 and looking fro 141p.

P.S. Anyone know why trades through TDWaterhouse can take hours to show up whilst IMI are immediate?

Decided to get back into FJV again @73.5p, as the Nikkei is rallying and FJV seems to be lagging the index plus the falls in the Japanese ITs seems to have bottomed (see post 1 above) Still positive for Japan in the medium term, H

Thought I'd reinvigorate this thread. Despite the fall this month and the wobble last August, going great guns here. With Japan cutting rates into negative territory and perhaps more QE coming, BGS is a good place to be. Good performance last few years.

A big recommendation for BGS in this weeks' I.C.


The best stocks you've never heard of

How do you generate a return of more than 200 per cent from Japanese small-caps when the index is barely making 60 per cent and the main market is tumbling? By investing in the most important companies you’ve never heard of, says Praveen Kumar, manager of Baillie Gifford Shin Nippon(BGS). He is investing in Japan’s best-kept secret – a new generation of entrepreneurs poised to take business from the nation’s biggest companies.

Mr Kumar took over management of IC Top 100 Fund Baillie Gifford Shin Nippon in December 2015, which under previous manager John MacDougall chalked up some very strong numbers: over 10 years it has returned 81.6 per cent against 31.8 per cent for MSCI Japan Small Cap Index, and over five years 212.7 per cent against 61.1 per cent for its benchmark.

Mr Kumar plans to ensure the trust continues to soar above its index and rivals by investing in small and under-researched stocks that play a crucial part in some of the most exciting areas of the global market. Headlines about Japan conjure images of a slowing, lumbering giant of an economy struggling to turn itself around despite best fiscal efforts, but he says that further down the market scale something more exciting is happening – and he has the proof.

“In Japan there are a number of industries that remain quite traditional, where vast profit pools are still controlled by really big, sleepy, slow-moving incumbents, and there are also a lot of inefficiencies across a number of sectors because the country has traditionally had a lot of layers of distribution and supply,” he says. That is what I refer to as the ‘old Japan’.

“But we are seeing a number of young companies developing creative and destructive business models, most of them using the internet as a tool to create disruption, and these young companies are attacking the more established businesses quite aggressively,” he says.

Baillie Gifford Shin Nippon invests in companies under a market cap or sales threshold of ¥150bn (£973.39m). These stocks offer the potential for enormous growth and, crucially, are also under-researched by the market, making them a key area for the manager.

“Typically in Japan the number of analysts covering these smaller companies is quite low. For 40-60 per cent of stocks listed on the Tokyo Stock Exchange the average number of analysts is 1.5 and further down the market-cap scale it is nearer zero,” he says.

Mr Kumar is looking for a new wave of disrupting companies with the power to dislodge the major, well researched players with no growth prospects. New holding Nippon Ceramic (TOK:6929) is a key example. You may never have heard of it, but the small Japanese company has 50-60 per cent of the global market in crash avoidance sensors used in one of the most-talked about industries of the future – driverless cars– and has a 90 per cent market share of this in Japan. The stock accounts for 1 per cent of Baillie Gifford Shin Nippon’s assets.

New holding Bengo4.com (TOK:6027), an online legal services company, and ecommerce industrial supplier MonotaRO (TOK:3064) - the trust's largest holding - have a risk-taking, entrepreneurial culture which is a direct contradiction to ‘old Japan’, he says.

“Risk taking and entrepreneurship in Japan has traditionally been looked down upon because of an embedded culture of jobs for life, but now we are seeing the initial signs of that culture slowly shifting,” explains Mr Kumar. “Risk taking and entrepreneurship is becoming more and more accepted, and a number of young dynamic entrepreneurs are emerging.”

The biggest challenge of investing in smaller companies might turn out to be holding on to them. Since investing in MonotaRO in 2009 the stock has gone up 50 times in sterling terms, while pharmaceutical stock M3 (2413:TYO), which has been in the portfolio for 10-11 years, has gone up 18 times.

Making strong returns is good, but is this trust still a genuine small-cap fund? Over 20 per cent of the trust is now invested in Topix Mid 400 stocks, and Mr Kumar’s sell discipline is not based on stock size but growth potential, meaning it could feasibly hold on to stocks far beyond the market cap they started out at in the portfolio.

“Our sell discipline is just a case of how much conviction we have remaining in terms of the growth opportunity,” he says. “If I believe that a company has maxed out its opportunity and from here on is likely to grow at a more mature pace, there might be a case for rethinking the position of that company in the portfolio. But for a stock like MonotaRO, although in market cap terms it is big, in sales terms it is still below ¥150bn and continuing to grow rapidly, so I’ve got no problem holding on to it.”

Mr Kumar refuses to be drawn on how the (admittedly major) macro headwinds facing Japan will affect his stocks, claiming that he deliberately chooses stocks that are fundamentally strong enough to survive volatile periods. But he says the Japanese stocks to back will not be the well-known incumbents.

“These national champions that had previously been a big asset for Japan are now almost becoming a bit of a liability in that they are preventing creative destruction and entrepreneurialism emerging much further than it has.”

So for double-digit returns smallers might be the way forward