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My name is Miyako Urabe, and I'm portfolio manager of JPMorgan--
Japan's small cap growth and income.
I have 15 years of industry experience,
of which 10 years have been spent at JP Morgan Asset
Management, focusing on Japan equities.
I've been a named manager on JSGI
from first quarter of last year 2022.
I worked together with my colleagues Naohiro Osawa
and Zou Mengtao on JSGI.
We have a very large team of over 20 portfolio managers
and analysts located on the grounds in Tokyo.
And we believe that this is very important.
Now, this is because the Japan equity market is very poorly
covered by the sell side.
And the coverage particularly tends to fall off
in the mid and small cap space.
We believe that it is crucial to have a large local presence
and be able to conduct thorough research on our own
without depending on the sell side.
And, as a team, we conduct over 4,000 company meetings
per year.
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The Trust started in 1984 as JPMorgan Japan's Smaller
Companies Trust, focusing on mid and small-sized companies
within the Japan equity market, which
is an under-researched, underexploited part
of the market.
The Trust changed its name to JP Morgan Japan Small Cap
Growth and Income in December 2020
to better reflect the current investment objective
and the dividend policy.
JSGI focuses on growth and quality companies.
We take long-term views, and we are bottom-up stock pickers.
There is also a dividend of 4% annualized
return for investors.
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We believe that the first and most important
positive development we're seeing in Japan
is the improvement in corporate governance.
Now, this isn't something that just started today.
The momentum has been building over the past few years.
Ever since former Prime Minister Abe came into position,
he pushed forward the corporate governance code,
the stewardship code, and over time we
have seen a consistent improvement,
be it the ratio of independent outside directors on boards
or the improvement in disclosures from corporates.
And on top of this building momentum,
earlier this year, the Tokyo Stock Exchange
came out with an initiative, telling companies
where their share price is consistently
trading below price to book ratio of one times,
that they should announce specific initiatives to address
this.
Now, this is a big deal, domestic pressure
on domestic companies.
And we did not have that before.
Now, just to think about the significance of this,
Japan has a much higher ratio of companies trading below book
value compared to US or Europe.
And on the other hand, a high ratio of Japanese companies
have net cash positions.
So if this starts to change, there
can be a significant impact.
And despite these positive developments that we see,
when you look at valuations the Japanese equity market
is not at all demanding.
And the current valuations of the market
are cheap, both relative to history
and also compared to other major markets.
And it is also a market that is relatively under-owned.
I think most global investors are still underweight Japan.
And many people haven't looked at the Japan
market for a very long time.
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Now, within the Japan market, I want
to talk about the attractiveness of the mid and small cap space.
Now, the key point here is that the Japan equity
market is very poorly covered by the sell side.
And that coverage particularly tends to fall off
in the mid and small cap space.
So that can create an excellent opportunity
for active managers.
And we believe that it's important to have
a large local presence and identify
the hidden gems with strong competitive positions.
Another differentiation of the Trust
is the 4% dividend yield paid out.
Another important positive development in Japan
is that we see signs of inflation.
Now, I think it's very important to understand
that Japan is at a very different stage when
we talk about inflation.
We are a country that suffered from deflation
for a number of decades.
And the inflation levels that we're seeing
are the highest levels in the past few decades,
but it's nowhere near the levels that you're
seeing in US or Europe.
And at the levels that we are at,
we believe that this kind of inflation
can be very supportive for the domestic economy
and consumption.
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There's a number of areas that we're focusing in the market.
So I'd like to give a few examples.
So firstly, demographic change.
Now, it's no secret that Japan's population
is aging and falling.
And that can be negative for the economy overall.
But there can actually be trends that emerge as an effect.
And that can create a very good opportunity
for active managers.
For example, a structurally tight labor market
can mean that areas such as staffing companies or HR
technology companies can be well-positioned.
For example, we own a company called Benefit One, which
is the domestic number one provider of corporate fringe
benefits.
Now, the demand for fringe benefits
are increasing as corporates want
to provide more incentives to staffs as it's
becoming more difficult to hire and retain people.
Another example of a theme that we focus on is digitalization.
Now, Japan is good at and advanced in many things,
but actually digitalization is not one of them.
And we are a number of years behind the West
when it comes to things like e-commerce penetration, cloud
software services, cashless payments.
But we're traveling in the same direction,
just with a time lag.
So, in fact, we can look at the trends that
are occurring globally and think about potential beneficiaries
in Japan in future.
For example, we own a company called Info Mart, which
is the number one provider of cloud ordering
system for restaurant industry.
So that is connecting restaurants
with their wholesalers.
Now, the ordering used to traditionally
be done all by telephone or facsimile,
and Info Mart is the de facto standard
of bringing that online.
And finally, a world class brands.
So we invest in a number of world class consumer brands.
For example, we invest in gaming companies
such as Square Enix and Capcom.
These are two companies with very strong, globally
popular video games.
We also invest in a number of B2B niche top companies.
For example, Nakanishi is the global number one provider
of dental handpieces.
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JSGI invests in growth and quality
names, companies that can compound growth
over the long term.
If you look at the portfolio characteristics,
the portfolio has a higher return on equity, higher
earnings growth rate compared to the benchmark,
balance sheets are also stronger.
Looking back at 2022, it was a very difficult period for us
as the market started to focus more on inflation and rate
hikes globally.
And you saw a very strong reversal into value names.
And the growth in quality names that we invest in struggled.
Now, despite the short-term volatility,
we believe that it's very important to think
about the long-term outlook.
And we continue to focus on growth and quality names
that we believe can continue to grow earnings
over the long term.
The Trust also has the ability to borrow.
And we can position from 5% net cash to 15% year-end.
We do take advantage of this, as we
are positive on the mid and long-term outlook
of the market.
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Following short-term volatility and difficult performance
in 2022, the current forward price-to-earnings ratio
of the portfolio is the lowest levels
that it's been over the past decade.
And we believe that the current valuations
are attractive considering the quality of the companies
that we're investing in.