Investment trust Atlantis Japan Growth Fund (AJG) provides exposure to a broad-based portfolio of mid and small cap Japanese equities.

It is a single-country fund offering a play on Japan’s improving economic backdrop and attractive corporate valuations.

The trust’s discount to net asset value (NAV) has narrowed from a 12-month average of 8.9% to 3% as investors warm to a sustained period of outperformance since the latter part of 2016.

BLOSSOMING PERFORMANCE

Since her appointment as lead portfolio adviser in May 2016, Taeko Setaishi has engineered an improvement in the trust’s fortunes. As Edison Investment Research points out, not only has the trust outperformed the TOPIX benchmark over one, three, five and 10 years, it is the best-performing fund over one year out of the four constituents of the AIC’s Japanese Smaller Companies sector.

Rather than income, Atlantis Japan Growth’s focus is on long-term capital growth. As at 31 January, risk was diversified across a portfolio of 70 holdings. Company meetings are a key part of the investment process for Setaishi, who seeks to buy undervalued, cash generative, well-managed growth companies that have clear competitive advantages.

Japanese equities have been particularly strong since September 2017, following the snap general election. Investors have renewed confidence that Prime Minister Abe’s supportive monetary and economic policies will be maintained until 2021.

But Japanese stocks are attractively valued relative to other developed markets, notably the US. Japan’s economic data continues to improve, which should drive company earnings and continue to power the equity market higher, while improving corporate governance is yet another plus point.

FUTURE-PROOFED PORTFOLIO

Edison says Setaishi is not only positive on the outlook for Japanese equities, she also ‘continues to find interesting growth opportunities across a variety of sectors.’

Shares likes the fact Atlantis Japan Growth, which is committed to buying back shares if its discount to NAV gets too wide, offers exposure to a number of exciting themes. These include factory automation through sensors specialist Keyence Corp and material handling systems maker Daifuku.

The fund offers a play on increasing levels of outsourcing through Benefit One, which administers welfare and employee benefit programmes for public and private companies.

Due to an ageing population, domestic demand for healthcare products and services is rising. This underpins a holding in medical devices firm Asahi Intecc.

Among the examples of a company that ticks all the boxes for Setaishi is Yamashin-Filter, a market leading producer of hydraulic filters for construction machines with operating margins of circa 10%, a return on equity of around 10% and annual earnings growth of more than 15%. (JC)

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