Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

March showed further strength in the Japanese market with the Nikkei reaching new highs, passing the 40,000 mark for the first time in history. Top performing sectors in March were Real Estate, Energy, Utilities, and Insurance whilst Consumer Services, Health Care, Transportation, and Household & Personal Products lagged. Global markets continued to act positively with semiconductors and the AI related theme again leading the charge in US and Asian markets. Central bank activity over the month largely followed consensus expectations with the Fed leaving the guidance rate of 5.25%-5.5% untouched in the US where the economy remains resilient; expectations for easing continue to be delayed reflecting strong employment, sticky inflation and consumption statistics. In Japan the BOJ made the expected move to finally end the negative interest rate policy which started in 2016, the policy rate target range is now 0.0%-0.1%. The BOJ also officially decided to terminate their yield curve control policy and the purchase of risk assets (such as stock market ETFs). After a brief rally on the back of hopes of a more aggressive move from the BOJ in response to strong wage hike negotiations, the Yen continued its decline against the dollar, ending the month at Y/$151.4 vs Y/$150.0 at the start of the month and Y140.9 at the start of the year. Net foreign flows to the market were negligible in March but through Q1 foreigners were net buyers to the tune of Y3tn. Topix Value continued to modestly outperform Topix Growth during March and has continued last year’s trend through the first quarter, up 7.7% on a relative basis. One other market trend worth commenting on through Q1 was the strong performance of the largest stocks which led the market; the Topix Core30 outperformed the wider market by 4% though in March, market performance was broader.

March and April are key months for Japanese wage negotiations, a focal point for the BOJ and wider market participants. In mid-March, Rengo published the first set of shunto (spring wage negotiations) results which showed an average wage hike of 5.3%, this is notably higher than 3.8% achieved in 2023. Further negotiations are ongoing, and several large blue-chip companies have announced even higher wage hikes than this. This was the backdrop to the change in policy made by the BOJ, however the tone from the BOJ remains dovish with the bank noting that “accommodative financial conditions will be maintained for the time being”. Current consensus expects one further hike to the target rate from 10bps to 25bps and nationwide core inflation (ex-fresh food and energy) is currently holding steady at +2.5%. On balance economic conditions appear reasonably healthy; current conditions in the Economy Watchers Survey came in at a positive 52.4, its highest reading this year and the outlook also positive at 51.9, whilst the consumer confidence index continued its recent gradual rise, to 39.1 in March. The industrial sector is less encouraging however, February Industrial production came in below consensus at -0.1% MoM with the manufacturing PMI remaining slightly negative at 48.2 for March. The wider corporate sector though does seem to look in good health, early in March capital spending data was released showing strong growth of +16.4% YoY in the last quarter of 2023 (+11.7% excluding software) and bank lending has continued to grow, rising +3.2% in March.

We continue to run a portfolio that we judge has neither a clear pro-cyclical nor contra-cyclical bias and with average valuations close to that of the wider market. Stock specific risk continues to be the key driver of active risk, style and industry bets are modest. The portfolio has an ex-ante beta of 1.03 and in terms of style factors is underweight momentum, overweight growth, underweight value, underweight size and is overweight exposure to the US$ and Euro. In order of scale, the fund’s top sector overweight positions are Financial Services, Commercial & Professional Services, Consumer Staples and Food, Beverage & Tobacco. The top underweight sectors are Capital Goods, Telecommunication Services, Automobiles & Components, and Materials. The Topix is trading at a prospective PER of 16.1x, a PBR of 1.42x and a dividend yield of 2.26%. While valuations have risen with the market, we believe they still look reasonable in an international context. The trend towards improving corporate governance remains in place and is accelerating. With activist investor activity a clear catalyst, we expect further growth in dividends and share buybacks across the corporate sector to be made in fiscal 2024.

Fund

The Fund rose by 4.34% (JPY share class) in March, outperforming the Topix which rose by 3.76% (dividends reinvested).

Stock selection was the major driver of relative fund performance in March, while sector allocation was a slight positive. Overweight positions in Energy, Real Estate, and Financial Services and the underweight in Telecommunication Services added value; these more than offset the drag from underweights in Capital Goods and Utilities, and overweight positions in Consumer Staples, Distribution and Household & Personal Products. The top performers in the fund were the position in industrial conglomerate Mitsubishi Heavy Industries which continued its strong run on the back of thematic drivers of defence and the energy transition, sports shoemaker Asics, electronic component manufacturer Taiyo Yuden, and Fujifilm. Transaction service provider GMO Payment Gateway was a laggard in March and other mid cap names in the fund such as engineer staffing agency Open Up Group, waste management company Daiei Kankyo, and Peptidream also hurt fund performance.

After muted trading in February, we were active in March. We bought a position in the department store Takashimaya after underperformance to peers left it looking attractively priced; we expect robust sales growth to continue driven by inbound demand and domestic high-end consumption. We bought shares in drugstore operator Sugi Holdings where we expect solid growth driven by the expansion of its retail pharmacy coupled with the benefit of its recent purchase of a dispensing pharmacy chain. We repurchased shares in medical data company JMDC after having met again with the management team in Tokyo. Valuations are now much more supportive, and we expect strong growth to continue in both the institutional and medical divisions helped by synergies from recent M&A. We purchased a position in Misumi, the factory automation supplier. After the dramatic underperformance of the stock over the past couple of years we believe the shares offer good value; fundamentals have now stabilised after several quarters of negative sales growth and long-term prospects look positive in all regions led by their innovative Meeviy and Vona strategies. We bought shares in Nippon Express in their secondary public offering. We believe management efforts to restructure the domestic operations to become more profitable and their plan to grow the overseas business are credible, and the stock is very cheaply rated. We bought a position in component maker Taiyo Yuden; the company saw its orders bottom in Q4 FY3’23 and should show good margin recovery through 2024 and into 2025. Longer-term, auto electrification, data centres, mobile infrastructure, and industrial applications should drive demand for MLCC, metal inductors and hybrid aluminium capacitors. Lastly, we bought shares in semiconductor production equipment maker Tokyo Electron. We like the company’s global competitive position and the growth that can be expected in areas such as etch and cleaning where they look set to gain market share.

We sold the position in medical internet company M3 which is being negatively impacted by the severe pharma marketing budget environment and this provided a natural source of funding for the JMDC position. We sold our position in Nippon Steel reflecting a duller outlook for earnings in the coming fiscal year and the potential financial strain on their balance sheet should the deal to purchase US Steel go through. We sold construction company Taisei as despite the strong improvement in overall market pricing, we now expect the company to book additional lower-priced unprofitable orders which were effectively negotiated over the last few years, this will dampen the improvement in the company’s gross margin. The net result of the above trades is that the fund is running a slightly higher number of positions than is usual, this does not represent a change in strategy however and we plan to manage the portfolio to closer to 30 names over time.