First State Japan Focus: June 2020 fund update

Dominic Rowles | Tue 30 June 2020

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• This fund is managed by a team we've held in high regard for a number of years
• It remains small and nimble enough to pounce on new opportunities as they arise
• It's performed exceptionally well since launch, boosted by the managers' astute stock-picking
• This fund has been added to the Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

This fund aims to grow your investment over the long term. The managers look for high quality companies that are dominant in their industries. We think it could be a good option for exposure to Japan within a global portfolio. Its focus on high-quality companies means it could work well alongside another fund focused on Japanese companies that have been through a rough patch, but with the potential to recover.

Manager

Sophia Li has been the fund's lead manager since launch in 2015. She joined First State in 2009, initially working as a China analyst, but has covered Japan since 2011. She manages this fund alongside another similarly-managed Japan equity fund. However given the high degree of crossover between the two funds, and they use the same investment process, we think the workload is manageable.

A significant attraction of this fund is Li’s support from the experienced First State team, including co-manager Martin Lau. He provides oversight and challenge, along with a wealth of experience. That said, Li has the freedom to invest her own way, which we think will keep her motivated and focused on the job in hand.

Process

Li and the team at First State look for high quality companies they can invest in for the long term. They like those with a competitive advantage that others struggle to copy, such as a well-known brand or the ability to raise prices for their products without affecting demand from customers. They should have the potential to grow earnings sustainably over the long run, and be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains.

Importantly, companies must also take into account environmental, social and governance (ESG) factors. They should cause little, if any, harm to the environment or the labour they employ, for example. If Li and team don't think a business meets these standards or is doing enough to address a particular problem, then they won't invest.

The team tends to invest in relatively few companies. This means each one can contribute significantly to returns, although it's a higher-risk approach. The managers' flexibility to invest in derivatives also adds risk.

We like the fund’s relatively small size. It means the managers can pounce on new opportunities as they become available. Investors should be mindful that if the fund grows significantly in size, this could impact the fund’s ability to be nimble, but we will keep an eye on flows on your behalf and ensure any change in our conviction is passed onto clients.

The coronavirus pandemic has caused volatility in stock markets across the globe, including Japan. But Li and the team think the defensive nature of many of their favourite companies means the fund could hold up well. It invests across a diverse range of industries including food retailing, drugstores and medical equipment, many of which are essential regardless of the state of the economy.

Recent investments include Hoya, a leading maker of lenses and related optical products. The company is a market leader and puts a strong emphasis on corporate governance and rewarding shareholders. The managers think the company can grow sales and prices over the next few years, continuing to exploit its near-monopoly in some areas.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (part of the broader First State Investments group). Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that should benefit all shareholders.

First State also places emphasis on recruiting and retaining great people. Every manager and analyst is an advocate of the team's overriding philosophy. At the same time, their individual personalities are allowed to shine and they're encouraged to bring their own ideas to the table. We also like how fund managers are incentivised in a way that aligns their interests with long-term investors. We think this will help deliver stronger performance over the long run.

First State Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively First State Stewart Asia remains an independent investment team. That said, we will continue to look out for potential further change.

Cost

This fund has an ongoing annual charge of 0.90%. We think this is a little high and means the managers have a larger hurdle to deliver positive returns. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund's performed well since launch in October 2015. It's risen 139.2%* over that time, while the broader Japanese stock market rose 54.7%. Our analysis puts this down to the team’s ability to select companies with outstanding prospects, regardless of their size or what sector they're in. Remember past performance isn't a guide to the future.

The fund's also done well more recently, beating the Japanese stock market by 12.9%* since the start of the year. Top performers included GMO, Japan's largest online payment processing company and Welcia, Japan's largest drugstore. Although the share prices of these businesses were hit by the coronavirus crisis, they quickly recovered when investors realised they may be less impacted than first thought.

Like all investments, the fund can fall as well as rise in value so you could get back less than you invest.

Past performance is not a guide to the future. N/A – full year data before 2016 is unavailable. Source: Lipper IM* to 31/05/2020

More on First State Japan Focus, including charges

First State Japan Focus Key Investor Information