WEBVTT 00:00:00.000 --> 00:00:03.437 align:middle line:90% [MUSIC PLAYING] 00:00:03.437 --> 00:00:19.160 align:middle line:90% 00:00:19.160 --> 00:00:23.270 align:middle line:84% My name is Miyako Urabe, and I'm portfolio manager of JPMorgan-- 00:00:23.270 --> 00:00:25.460 align:middle line:84% Japan's small cap growth and income. 00:00:25.460 --> 00:00:28.340 align:middle line:84% I have 15 years of industry experience, 00:00:28.340 --> 00:00:31.400 align:middle line:84% of which 10 years have been spent at JP Morgan Asset 00:00:31.400 --> 00:00:34.790 align:middle line:84% Management, focusing on Japan equities. 00:00:34.790 --> 00:00:37.190 align:middle line:84% I've been a named manager on JSGI 00:00:37.190 --> 00:00:40.760 align:middle line:84% from first quarter of last year 2022. 00:00:40.760 --> 00:00:43.850 align:middle line:84% I worked together with my colleagues Naohiro Osawa 00:00:43.850 --> 00:00:46.130 align:middle line:90% and Zou Mengtao on JSGI. 00:00:46.130 --> 00:00:50.510 align:middle line:84% We have a very large team of over 20 portfolio managers 00:00:50.510 --> 00:00:53.600 align:middle line:84% and analysts located on the grounds in Tokyo. 00:00:53.600 --> 00:00:56.900 align:middle line:84% And we believe that this is very important. 00:00:56.900 --> 00:01:00.500 align:middle line:84% Now, this is because the Japan equity market is very poorly 00:01:00.500 --> 00:01:02.150 align:middle line:90% covered by the sell side. 00:01:02.150 --> 00:01:05.209 align:middle line:84% And the coverage particularly tends to fall off 00:01:05.209 --> 00:01:07.410 align:middle line:90% in the mid and small cap space. 00:01:07.410 --> 00:01:11.570 align:middle line:84% We believe that it is crucial to have a large local presence 00:01:11.570 --> 00:01:15.140 align:middle line:84% and be able to conduct thorough research on our own 00:01:15.140 --> 00:01:17.060 align:middle line:84% without depending on the sell side. 00:01:17.060 --> 00:01:20.880 align:middle line:84% And, as a team, we conduct over 4,000 company meetings 00:01:20.880 --> 00:01:22.220 align:middle line:90% per year. 00:01:22.220 --> 00:01:23.630 align:middle line:90% [MUSIC PLAYING] 00:01:23.630 --> 00:01:26.450 align:middle line:90% 00:01:26.450 --> 00:01:31.340 align:middle line:84% The Trust started in 1984 as JPMorgan Japan's Smaller 00:01:31.340 --> 00:01:35.150 align:middle line:84% Companies Trust, focusing on mid and small-sized companies 00:01:35.150 --> 00:01:37.430 align:middle line:84% within the Japan equity market, which 00:01:37.430 --> 00:01:39.980 align:middle line:84% is an under-researched, underexploited part 00:01:39.980 --> 00:01:41.190 align:middle line:90% of the market. 00:01:41.190 --> 00:01:44.840 align:middle line:84% The Trust changed its name to JP Morgan Japan Small Cap 00:01:44.840 --> 00:01:47.840 align:middle line:84% Growth and Income in December 2020 00:01:47.840 --> 00:01:51.080 align:middle line:84% to better reflect the current investment objective 00:01:51.080 --> 00:01:53.510 align:middle line:90% and the dividend policy. 00:01:53.510 --> 00:01:57.690 align:middle line:84% JSGI focuses on growth and quality companies. 00:01:57.690 --> 00:02:01.760 align:middle line:84% We take long-term views, and we are bottom-up stock pickers. 00:02:01.760 --> 00:02:05.450 align:middle line:84% There is also a dividend of 4% annualized 00:02:05.450 --> 00:02:06.980 align:middle line:90% return for investors. 00:02:06.980 --> 00:02:10.466 align:middle line:90% [MUSIC PLAYING] 00:02:10.466 --> 00:02:12.460 align:middle line:90% 00:02:12.460 --> 00:02:15.570 align:middle line:84% We believe that the first and most important 00:02:15.570 --> 00:02:17.850 align:middle line:84% positive development we're seeing in Japan 00:02:17.850 --> 00:02:20.560 align:middle line:84% is the improvement in corporate governance. 00:02:20.560 --> 00:02:23.340 align:middle line:84% Now, this isn't something that just started today. 00:02:23.340 --> 00:02:26.740 align:middle line:84% The momentum has been building over the past few years. 00:02:26.740 --> 00:02:30.120 align:middle line:84% Ever since former Prime Minister Abe came into position, 00:02:30.120 --> 00:02:32.760 align:middle line:84% he pushed forward the corporate governance code, 00:02:32.760 --> 00:02:35.700 align:middle line:84% the stewardship code, and over time we 00:02:35.700 --> 00:02:37.890 align:middle line:84% have seen a consistent improvement, 00:02:37.890 --> 00:02:42.180 align:middle line:84% be it the ratio of independent outside directors on boards 00:02:42.180 --> 00:02:45.270 align:middle line:84% or the improvement in disclosures from corporates. 00:02:45.270 --> 00:02:48.120 align:middle line:84% And on top of this building momentum, 00:02:48.120 --> 00:02:51.030 align:middle line:84% earlier this year, the Tokyo Stock Exchange 00:02:51.030 --> 00:02:54.210 align:middle line:84% came out with an initiative, telling companies 00:02:54.210 --> 00:02:56.040 align:middle line:84% where their share price is consistently 00:02:56.040 --> 00:02:59.130 align:middle line:84% trading below price to book ratio of one times, 00:02:59.130 --> 00:03:03.180 align:middle line:84% that they should announce specific initiatives to address 00:03:03.180 --> 00:03:04.020 align:middle line:90% this. 00:03:04.020 --> 00:03:06.930 align:middle line:84% Now, this is a big deal, domestic pressure 00:03:06.930 --> 00:03:08.400 align:middle line:90% on domestic companies. 00:03:08.400 --> 00:03:10.830 align:middle line:90% And we did not have that before. 00:03:10.830 --> 00:03:14.350 align:middle line:84% Now, just to think about the significance of this, 00:03:14.350 --> 00:03:19.150 align:middle line:84% Japan has a much higher ratio of companies trading below book 00:03:19.150 --> 00:03:22.340 align:middle line:90% value compared to US or Europe. 00:03:22.340 --> 00:03:26.230 align:middle line:84% And on the other hand, a high ratio of Japanese companies 00:03:26.230 --> 00:03:28.760 align:middle line:90% have net cash positions. 00:03:28.760 --> 00:03:30.940 align:middle line:84% So if this starts to change, there 00:03:30.940 --> 00:03:33.550 align:middle line:90% can be a significant impact. 00:03:33.550 --> 00:03:36.970 align:middle line:84% And despite these positive developments that we see, 00:03:36.970 --> 00:03:40.270 align:middle line:84% when you look at valuations the Japanese equity market 00:03:40.270 --> 00:03:41.830 align:middle line:90% is not at all demanding. 00:03:41.830 --> 00:03:44.410 align:middle line:84% And the current valuations of the market 00:03:44.410 --> 00:03:47.080 align:middle line:84% are cheap, both relative to history 00:03:47.080 --> 00:03:49.600 align:middle line:84% and also compared to other major markets. 00:03:49.600 --> 00:03:53.770 align:middle line:84% And it is also a market that is relatively under-owned. 00:03:53.770 --> 00:03:57.730 align:middle line:84% I think most global investors are still underweight Japan. 00:03:57.730 --> 00:04:00.280 align:middle line:84% And many people haven't looked at the Japan 00:04:00.280 --> 00:04:02.748 align:middle line:90% market for a very long time. 00:04:02.748 --> 00:04:04.122 align:middle line:90% [MUSIC PLAYING] 00:04:04.122 --> 00:04:06.870 align:middle line:90% 00:04:06.870 --> 00:04:09.270 align:middle line:84% Now, within the Japan market, I want 00:04:09.270 --> 00:04:13.230 align:middle line:84% to talk about the attractiveness of the mid and small cap space. 00:04:13.230 --> 00:04:16.500 align:middle line:84% Now, the key point here is that the Japan equity 00:04:16.500 --> 00:04:19.680 align:middle line:84% market is very poorly covered by the sell side. 00:04:19.680 --> 00:04:23.010 align:middle line:84% And that coverage particularly tends to fall off 00:04:23.010 --> 00:04:24.870 align:middle line:90% in the mid and small cap space. 00:04:24.870 --> 00:04:27.540 align:middle line:84% So that can create an excellent opportunity 00:04:27.540 --> 00:04:29.080 align:middle line:90% for active managers. 00:04:29.080 --> 00:04:31.290 align:middle line:84% And we believe that it's important to have 00:04:31.290 --> 00:04:34.200 align:middle line:84% a large local presence and identify 00:04:34.200 --> 00:04:37.300 align:middle line:84% the hidden gems with strong competitive positions. 00:04:37.300 --> 00:04:39.480 align:middle line:84% Another differentiation of the Trust 00:04:39.480 --> 00:04:42.360 align:middle line:84% is the 4% dividend yield paid out. 00:04:42.360 --> 00:04:45.600 align:middle line:84% Another important positive development in Japan 00:04:45.600 --> 00:04:48.280 align:middle line:84% is that we see signs of inflation. 00:04:48.280 --> 00:04:50.790 align:middle line:84% Now, I think it's very important to understand 00:04:50.790 --> 00:04:53.700 align:middle line:84% that Japan is at a very different stage when 00:04:53.700 --> 00:04:55.390 align:middle line:90% we talk about inflation. 00:04:55.390 --> 00:04:57.990 align:middle line:84% We are a country that suffered from deflation 00:04:57.990 --> 00:04:59.800 align:middle line:90% for a number of decades. 00:04:59.800 --> 00:05:02.340 align:middle line:84% And the inflation levels that we're seeing 00:05:02.340 --> 00:05:05.070 align:middle line:84% are the highest levels in the past few decades, 00:05:05.070 --> 00:05:07.510 align:middle line:84% but it's nowhere near the levels that you're 00:05:07.510 --> 00:05:10.100 align:middle line:90% seeing in US or Europe. 00:05:10.100 --> 00:05:11.770 align:middle line:84% And at the levels that we are at, 00:05:11.770 --> 00:05:13.960 align:middle line:84% we believe that this kind of inflation 00:05:13.960 --> 00:05:16.540 align:middle line:84% can be very supportive for the domestic economy 00:05:16.540 --> 00:05:17.520 align:middle line:90% and consumption. 00:05:17.520 --> 00:05:18.856 align:middle line:90% [MUSIC PLAYING] 00:05:18.856 --> 00:05:22.720 align:middle line:90% 00:05:22.720 --> 00:05:25.670 align:middle line:84% There's a number of areas that we're focusing in the market. 00:05:25.670 --> 00:05:28.290 align:middle line:84% So I'd like to give a few examples. 00:05:28.290 --> 00:05:30.700 align:middle line:90% So firstly, demographic change. 00:05:30.700 --> 00:05:33.910 align:middle line:84% Now, it's no secret that Japan's population 00:05:33.910 --> 00:05:35.200 align:middle line:90% is aging and falling. 00:05:35.200 --> 00:05:38.620 align:middle line:84% And that can be negative for the economy overall. 00:05:38.620 --> 00:05:42.100 align:middle line:84% But there can actually be trends that emerge as an effect. 00:05:42.100 --> 00:05:44.650 align:middle line:84% And that can create a very good opportunity 00:05:44.650 --> 00:05:46.210 align:middle line:90% for active managers. 00:05:46.210 --> 00:05:49.900 align:middle line:84% For example, a structurally tight labor market 00:05:49.900 --> 00:05:53.830 align:middle line:84% can mean that areas such as staffing companies or HR 00:05:53.830 --> 00:05:56.920 align:middle line:84% technology companies can be well-positioned. 00:05:56.920 --> 00:06:00.610 align:middle line:84% For example, we own a company called Benefit One, which 00:06:00.610 --> 00:06:04.060 align:middle line:84% is the domestic number one provider of corporate fringe 00:06:04.060 --> 00:06:05.020 align:middle line:90% benefits. 00:06:05.020 --> 00:06:07.390 align:middle line:84% Now, the demand for fringe benefits 00:06:07.390 --> 00:06:09.820 align:middle line:84% are increasing as corporates want 00:06:09.820 --> 00:06:12.490 align:middle line:84% to provide more incentives to staffs as it's 00:06:12.490 --> 00:06:16.250 align:middle line:84% becoming more difficult to hire and retain people. 00:06:16.250 --> 00:06:20.710 align:middle line:84% Another example of a theme that we focus on is digitalization. 00:06:20.710 --> 00:06:24.260 align:middle line:84% Now, Japan is good at and advanced in many things, 00:06:24.260 --> 00:06:27.180 align:middle line:84% but actually digitalization is not one of them. 00:06:27.180 --> 00:06:30.020 align:middle line:84% And we are a number of years behind the West 00:06:30.020 --> 00:06:34.190 align:middle line:84% when it comes to things like e-commerce penetration, cloud 00:06:34.190 --> 00:06:37.370 align:middle line:84% software services, cashless payments. 00:06:37.370 --> 00:06:39.650 align:middle line:84% But we're traveling in the same direction, 00:06:39.650 --> 00:06:41.240 align:middle line:90% just with a time lag. 00:06:41.240 --> 00:06:43.760 align:middle line:84% So, in fact, we can look at the trends that 00:06:43.760 --> 00:06:47.300 align:middle line:84% are occurring globally and think about potential beneficiaries 00:06:47.300 --> 00:06:49.400 align:middle line:90% in Japan in future. 00:06:49.400 --> 00:06:53.810 align:middle line:84% For example, we own a company called Info Mart, which 00:06:53.810 --> 00:06:56.810 align:middle line:84% is the number one provider of cloud ordering 00:06:56.810 --> 00:06:59.040 align:middle line:90% system for restaurant industry. 00:06:59.040 --> 00:07:01.430 align:middle line:84% So that is connecting restaurants 00:07:01.430 --> 00:07:02.990 align:middle line:90% with their wholesalers. 00:07:02.990 --> 00:07:05.600 align:middle line:84% Now, the ordering used to traditionally 00:07:05.600 --> 00:07:08.510 align:middle line:84% be done all by telephone or facsimile, 00:07:08.510 --> 00:07:10.910 align:middle line:84% and Info Mart is the de facto standard 00:07:10.910 --> 00:07:12.660 align:middle line:90% of bringing that online. 00:07:12.660 --> 00:07:15.170 align:middle line:84% And finally, a world class brands. 00:07:15.170 --> 00:07:20.210 align:middle line:84% So we invest in a number of world class consumer brands. 00:07:20.210 --> 00:07:23.930 align:middle line:84% For example, we invest in gaming companies 00:07:23.930 --> 00:07:26.480 align:middle line:90% such as Square Enix and Capcom. 00:07:26.480 --> 00:07:29.630 align:middle line:84% These are two companies with very strong, globally 00:07:29.630 --> 00:07:31.530 align:middle line:90% popular video games. 00:07:31.530 --> 00:07:36.170 align:middle line:84% We also invest in a number of B2B niche top companies. 00:07:36.170 --> 00:07:40.070 align:middle line:84% For example, Nakanishi is the global number one provider 00:07:40.070 --> 00:07:41.780 align:middle line:90% of dental handpieces. 00:07:41.780 --> 00:07:43.211 align:middle line:90% [MUSIC PLAYING] 00:07:43.211 --> 00:07:46.550 align:middle line:90% 00:07:46.550 --> 00:07:49.190 align:middle line:84% JSGI invests in growth and quality 00:07:49.190 --> 00:07:51.620 align:middle line:84% names, companies that can compound growth 00:07:51.620 --> 00:07:52.880 align:middle line:90% over the long term. 00:07:52.880 --> 00:07:55.580 align:middle line:84% If you look at the portfolio characteristics, 00:07:55.580 --> 00:07:59.360 align:middle line:84% the portfolio has a higher return on equity, higher 00:07:59.360 --> 00:08:01.940 align:middle line:84% earnings growth rate compared to the benchmark, 00:08:01.940 --> 00:08:04.370 align:middle line:84% balance sheets are also stronger. 00:08:04.370 --> 00:08:08.510 align:middle line:84% Looking back at 2022, it was a very difficult period for us 00:08:08.510 --> 00:08:12.380 align:middle line:84% as the market started to focus more on inflation and rate 00:08:12.380 --> 00:08:13.640 align:middle line:90% hikes globally. 00:08:13.640 --> 00:08:17.120 align:middle line:84% And you saw a very strong reversal into value names. 00:08:17.120 --> 00:08:21.260 align:middle line:84% And the growth in quality names that we invest in struggled. 00:08:21.260 --> 00:08:23.940 align:middle line:84% Now, despite the short-term volatility, 00:08:23.940 --> 00:08:26.300 align:middle line:84% we believe that it's very important to think 00:08:26.300 --> 00:08:28.130 align:middle line:90% about the long-term outlook. 00:08:28.130 --> 00:08:31.670 align:middle line:84% And we continue to focus on growth and quality names 00:08:31.670 --> 00:08:34.309 align:middle line:84% that we believe can continue to grow earnings 00:08:34.309 --> 00:08:36.470 align:middle line:90% over the long term. 00:08:36.470 --> 00:08:39.830 align:middle line:84% The Trust also has the ability to borrow. 00:08:39.830 --> 00:08:46.140 align:middle line:84% And we can position from 5% net cash to 15% year-end. 00:08:46.140 --> 00:08:48.540 align:middle line:84% We do take advantage of this, as we 00:08:48.540 --> 00:08:50.820 align:middle line:84% are positive on the mid and long-term outlook 00:08:50.820 --> 00:08:52.325 align:middle line:90% of the market. 00:08:52.325 --> 00:08:53.690 align:middle line:90% [MUSIC PLAYING] 00:08:53.690 --> 00:08:56.420 align:middle line:90% 00:08:56.420 --> 00:08:59.960 align:middle line:84% Following short-term volatility and difficult performance 00:08:59.960 --> 00:09:04.850 align:middle line:84% in 2022, the current forward price-to-earnings ratio 00:09:04.850 --> 00:09:07.640 align:middle line:84% of the portfolio is the lowest levels 00:09:07.640 --> 00:09:09.740 align:middle line:84% that it's been over the past decade. 00:09:09.740 --> 00:09:12.050 align:middle line:84% And we believe that the current valuations 00:09:12.050 --> 00:09:14.990 align:middle line:84% are attractive considering the quality of the companies 00:09:14.990 --> 00:09:17.410 align:middle line:90% that we're investing in. 00:09:17.410 --> 00:09:42.000 align:middle line:90%