JPMorgan Japan Small Cap Growth and Income Trust plc (LON:JSGI) has reported its final results the year ending 31st March 2021. Tim Mitchell, Investment Trust Client Director, at J.P. Morgan Asset Management, was particularly pleased to note:
“Over that period JSGI generated a NAV total return of 42.4% and a share price return of 47.9%, beating the 21.7% return of its benchmark, the S&P Japan Small Cap Net Return Index.
The trust continues to offer investors a competitive yield despite investing in a portfolio of Japanese small caps, which are not traditionally hunting grounds for income investors. This is due to the board’s policy of paying out 1% of its NAV each quarter, from capital if necessary. Japan Small Cap Growth & Income currently has a dividend yield of 4.3% (as of 17/06/2021).
While the pandemic has brought about a number of challenges, JSGI’s focus on quality growth has allowed it to generate very competitive returns, helped by the strong performance over the first half of its financial year. The trust´s team also make heavy use of thematic investing, often capitalizing on the themes underpinning ‘New Japan’. We think this means it continues to offer a compelling long-term story.
Over the financial year JSGI’s discount continued to narrow, from 11.9% to 8.7%. We believe this is the result of not just JSGI’s impressive performance but also the rare combination of small-cap quality growth investing and a strong yield, which offers a rare source of diversification to income investors. JSGI currently trades on around a 5.0% discount.”
CHAIRMAN’S STATEMENT
Investment Performance
The Company’s financial year to 31st March 2021 was dominated by the COVID-19 pandemic indiscriminately impacting people, economies, governments, and businesses across the globe, as countries struggled under various, intermittent lockdowns. Late in the year, the arrival of effective vaccines signalled a path to economic recovery. Political uncertainties eased early in 2021 with the inauguration of new US President Joe Biden, who acted quickly to implement unprecedented levels of fiscal stimulus. These developments, combined with associated concerns about resurgent inflation pressures, marked a decisive turning point in global equity markets. The technology and other growth stocks so popular over most of 2020 fell out of favour with investors, who turned their attention instead to economically sensitive cyclical and value stocks expected to benefit from the improved economic outlook. These stocks outperformed growth strategies in late 2020 and the first quarter of 2021.
Against this backdrop, shareholders enjoyed very strong absolute returns in the financial year to 31st March 2021, and significant outperformance against the benchmark was combined with a tightening of the discount to net asset value. The return to shareholders was +47.9%, while the Company’s total return on net asset value (NAV) was +42.4%. The Company’s benchmark, the S&P Japan SmallCap Net Return Index (in sterling terms), returned +21.7%. This represents outperformance of 20.7 percentage points. The return to shareholders of +47.9%, reflected the narrowing of the share price discount to net asset value from 11.9% to 8.7% over the year.
However, these very satisfying results obscure the fact that the year was characterised by two distinct periods for performance. Most of the Company’s annual returns were realised in the first half of the financial year, when the quality and growth stocks favoured by the Investment Managers outperformed the Company’s benchmark. During the second half, as cyclical and value stocks outpaced growth and quality stocks, both the share price and NAV per share fell marginally. However, after adding back the two interim dividends paid in that period, the total return on NAV for the full year was slightly higher than it had been over the first six months. The total return to shareholders was marginally lower as the share price discount widened from 6.4% at the end of September 2020 to 8.7% at the end of March 2021.
The Investment Managers’ Report that follows explains the market backdrop in depth and details the stock and sector stories that most impacted the Company’s performance over the past year. The Managers also discuss their optimism about the outlook for the Japanese economy and outline the trends and themes they believe will drive the growth in Japanese smaller companies over the short and longer term.
Dividend Policy and Discount Management
The Company’s revised dividend policy has now been in place for three years. As a reminder, the dividend policy aims to pay, in the absence of unforeseen circumstances, a regular quarterly dividend equal to 1% of the Company’s NAV on the last business day of the preceding financial quarter, being the end of March, June, September and December. Over the year, this would approximate to 4% of the average NAV. This dividend is paid from a combination of revenue, capital and other reserves.
In respect of the year to 31st March 2021, quarterly dividends totalling 21.9p (2020: 17.7p) per share were declared.
One of the objectives of the revised dividend policy is to enhance the Company’s appeal to a broader range of investors. Since its introduction, it has therefore been pleasing to note some narrowing of the Company’s discount, driven by new demand and positive press commentary.
The Board will keep the dividend policy under constant review and monitor its impact on demand for the Company’s shares and the discount. The Board may use share buy-backs, when appropriate, to narrow the discount at which your Company’s shares trade.
A Resolution to approve the Company’s dividend policy will be put to shareholders at the forthcoming Annual General Meeting.
Company Name and Ticker
Reflecting the now established dividend policy, the Company has changed its name to JPMorgan Japan Small Cap Growth & Income plc. This change took effect from 16th December 2020. Following the change of name, the Company also changed its London Stock Exchange stock ticker symbol (TIDM) from JPS to JSGI, with effect from 17th December 2020. The Company’s ISIN, SEDOL and LEI remain unchanged and its website URL was renamed www.jpmjapansmallcapgrowthandincome.co.uk .
Benchmark Index
F ollowing a review of the composition of relevant indices, the Board decided to change the Company’s benchmark from the S&P Japan SmallCap Net Return Index (in sterling terms) to the MSCI Japan Small Cap Index (in sterling terms). This decision was reported in the half year results and took effect from 1st April 2021. The new benchmark index has long term performance very similar to that of the former benchmark, but the Board believes that the new benchmark has the benefit of being more widely recognised by investors.
Gearing
The Company seeks to enhance investment returns for shareholders by borrowing money to buy more assets (‘gearing’). The Company’s gearing is discussed regularly by the Board and the Investment Managers, and the gearing level is reviewed by the Directors at each Board meeting.
The Company has a revolving credit facility of Yen 4.0 billion (with an option to increase available credit to Yen 6.0 billion) with Scotiabank. This facility has a maturity date of October 2022. The loan facility is on favourable and flexible terms, allowing the Company to repay the loan if required, without any penalties.
This credit facility provides the Managers with the ability to gear tactically within the set guidelines. The Company’s investment policy permits gearing within a range of 10% net cash to 25% geared. However, the Board requires the Investment Managers to operate in the narrower range of 5% net cash to 15% geared, in normal market conditions. During the year, the Company’s gearing level ranged between 6.1% and 10.4%, finishing the financial year at 8.1% (2020: 7.5%).
The Board and Corporate Governance
There has been no change to the composition of the Board during the reporting period. Following the Board’s annual evaluation by the Nomination Committee, the Committee felt that the Board’s current composition and size is appropriate, and no changes are anticipated over the next twelve months. The Board has a plan to refresh its membership in an orderly manner over time. As part of its long-term succession planning, and to ensure continuity, the Board will seek to recruit new non-executive Directors when current members come up for retirement.
The Board supports annual re-election for all Directors, as recommended by the AIC Code of Corporate Governance, and all Directors will therefore stand for re-election at the forthcoming Annual General Meeting. Shareholders who wish to contact the Chairman or other members of the Board may do so through the Company Secretary or the Company’s website, details of which appear below.
As reported in the Investment Managers’ report, environmental, social and governance (‘ESG’) considerations are integral to the Managers’ investment process. The Board shares the Managers’ view of the importance of ESG when making investments that are sustainable over the long term, and the necessity of continual engagement with investee companies throughout the duration of the investment. The Managers use their regular company meetings with potential and existing portfolio companies to discuss and challenge management on their adherence to best practice. The Board believes that effective stewardship can help to create sustainable value for shareholders. Further information on the Manager’s ESG process and engagement is set out in the ESG Report on pages 14 to 17 of the Annual Report.
Outlook
It is likely to be some time before vaccination programmes vanquish the virus around the world, but the Board shares the Managers’ view that the situation will continue to improve. The global economic recovery is gathering momentum, underpinned by ongoing support from governments and central banks. Amidst all its devastating effects on people and businesses, there is reason to hope that the pandemic will also leave some positive changes in its wake, especially in Japan. The impetus the pandemic has given to Japan’s digitalisation efforts is likely to be particularly beneficial for productivity over the medium term. Furthermore, Japan’s membership of the new regional trading bloc, the Regional Comprehensive Economic Partnership (RCEP) should increase its access to the region’s rapidly expanding economies. Japan’s smaller companies, which tend to be the economy’s most entrepreneurial innovators, should thrive in such an environment, generating many exciting investment opportunities. See the Investment Managers’ Report for further discussion.
While the Managers’ focus on quality and growth means the portfolio may lag in ‘value’ rallies such as the one we experienced in the latter part of the review period, the Board shares the Managers’ belief that their preference for resilient businesses with leading market positions, robust balance sheets and healthy cash flows, remains the best approach to deliver positive and sustained returns and outperformance over the long term, as it has done in the past.
Annual General Meeting
We are holding the Company’s Annual General Meeting at 60 Victoria Embankment, London EC4Y 0JP on 28th July 2021 at 12.00 noon.
The format of the Company’s 2021 AGM has unfortunately had to be adapted again. Given the uncertainty about the course of COVID-19, and due to ongoing public health concerns, the Board intends to limit physical attendance at the AGM to the minimum quorum required to allow the formal business to proceed.
Despite these restrictions, the Board is keen to ensure shareholders have the opportunity to hear from the Manager and, accordingly, at the time of the AGM, a webinar will be organised, to include a presentation from the Investment Managers, which may be viewed at the time by registered participants. This will be followed by a live question and answer session. Shareholders are invited to register as webinar participants and pose any questions they have either by submitting them during the webinar or in advance of the AGM via the ‘Ask a Question’ link on the Company’s website, or via email to invtrusts.cosec@jpmorgan.com. Details on how to register as a participant for this event will be available on the Company’s website, or they can be requested via the email address above.
The Board strongly encourages all shareholders to submit their votes in advance of the meeting, so that these are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting on pages 84 and 85 of the Annual Report.
If there are any changes to the above AGM arrangements, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company’s website.
The Board would like to thank shareholders for their understanding, co-operation and support at this difficult time. We very much hope that you and your families are safe and well and we look forward to meeting with you when, as we all hope, normality has returned.
Alexa Henderson
Chairman 22nd June 2021
