Dan Buchanan: Welcome to the latest in our Aberdeen Standard Investments Closed-End Fund Podcast series, where we catch up with our closed-end portfolio managers and gain some perspective on these complex market conditions. Today we are focusing on Japanese equities with a manager of the Aberdeen Japan Equity Fund ticker JEQ, Christina Woon. Good morning Christina and thank you for joining us from Singapore.
Christina Woon: Oh, thank you for having me.
Dan Buchanan: 2021 has kicked off rather eventually. Could you give us a quick roundup of how the year has tracked so far?
Christina Woon: Yes, it's been quite an eventful start to a year both on a global and domestic basis. 2021 began strong as invest optimism continued its yearend rally. With political uncertainty in the US receiving post-elections and the ongoing rollout of COVID-19 vaccines, the rotation away from COVID-19 beneficiaries into laggards has become a much strongest trend this quarter. Amid this, we also observed heightened market volatility in the US spilling over to global markets as the retail buying of heavily shorted stocks resulted in large losses for hedge funds and momentarily resulted in a selloff in risk towards the end of January. While the market did recover from that point, the rhetoric has more recently gotten cautious again as bond yields picked up and the fears of inflation compounded a risk of appetite and the rotation away from last year's outperformers.
Coming back a bit closer to home, Japan announced the second state of emergency at the start of the year, which has since been extended as COVID-19 infections spiked up over winter. Measures are less stringent compared to last year’s state of emergency. But it appears to be working as cases have fallen to the point at certain states outside of Tokyo have already started to lift these restrictions.
Dan Buchanan: Christina, it appears sentiment has also recovered somewhat in several markets around the world announcing COVID-19 vaccine rollout programs. I'm just curious on what your stance is here and how it affects Japanese equities in particular?
Christina Woon: This one's a bit tricky, as sentiment is recovered ahead of populations getting vaccinated, and while that's an endpoint that governments are working towards, you're also seeing delays in vaccination programs. I mean, for example, in Japan, the nation's vaccination program is not expected to start until later in the year due to delays in domestic clinical trials and a rather cautious approval process, so based on that we would be prudent not to chase any overshoots in sentiment.
Dan Buchanan: Thank you Christina. How is the fund, JEQ, fairing against this backdrop?
Christina Woon: After strong 2020 rail positions and quality names greatly outperformed, we are understandably seeing a bit of a correction into 2021 and particularly into the reversal from quality and growth into value name.
Dan Buchanan: Could you share a little more about the rotation to the value style in context of Japan?
Christina Woon: Sure. Perhaps to set the context, many of the names that are doing well this year tended to fall in sectors like commodities, financial, steel and other energy intensive industries. Many companies in these sectors have tended to be less progressive, with long term structural issues that have not disappeared despite the recent rises in their share prices. For example, Japanese steel makers are facing headwinds from cheaper imported steel from China. Japanese banks are still plagued with meager loan growth amid an aging population.
On the other hand, companies that are focused on the future and which I'm exposed to areas with structural growth, these have generally lagged this year, but they have more promising prospects. An example here would be the pharmaceutical industry where Daiichi Sankyo is working on leading edge modalities to tackle unmet needs and cancer treatments. Elsewhere in medical equipment, Asahi Intecc’s guide wires are widely used in non-invasive surgeries, and these are widely recognized by physicians for their quality.
Both of these companies, unfortunately, are in sectors that have significantly lagged the benchmark this year. For that reason, as investors of well-run businesses with sound long term outlooks alongside a focus on ESG, we would not be blindly chasing poorer quality companies into this reversal.
Dan Buchanan: Is this happened before and what should we expect?
Christina Woon: Yes, so these sorts of rotations are not new. In the past decade or so, we've seen two notable periods where expectations of high inflation led to similarly sharp rotations in the market. It is of course difficult to call how long this particular rotation will be, but over the longer term, we find that a focus on quality and growth has generally worked.
Dan Buchanan: Where would you be seeing opportunities based on your comments?
Christina Woon: Our approach remains consistent in this area. We believe that going back to the fundamentals is key in finding opportunities that outperform sustainably, not just over short periods of time. But to recap what we touched on in our last update, we continue to see opportunities and companies that are exposed to structural long term trends, as well as those that stand to recover well as the pandemic begins to unwind. We would then be using the volatility in the market right now to reshape the portfolio for these opportunities accordingly.
Dan Buchanan: You touched on ESG earlier, how is the fund JEQ positioned on this aspect?
Christina Woon: You're right, this is a good point to spend some time on given how topical the subject is these days. Firstly, I would highlight that ESG is and has been a core part of our investment process. It's comprehensively executed, fully embedded, investment led and horizon matched. This is a key differentiating factor for us. We also cross-check our findings with external information providers to better understand how our ESG assessments may differ with a broader market. For example, based on data from MSCI ESG Research, our portfolio scores in the slightly higher end of an A rating relative to the benchmark. Now while this is a decent score, it is important to note that our long term relationships with our holdings and deep fundamental work mean that we are able to garner a better picture of what exactly these companies are doing, not just what they disclose or what they currently score based on a set of static data.
This is crucial because it means that we are able to apply a more holistic approach to ESG analysis and gauge accordingly and better understand the trajectory off and potential in our holdings on this journey before the general market begins to recognize this. Now another angle to consider is carbon footprint. Based on true cost data our portfolio also has a far lower carbon footprint than the benchmark, which is a reflection of the level of embeddedness that these considerations has in our overall investment process.
Finally, I would highlight that environmental sustainability is also well represented here in this portfolio. For example, we hold Sanken which is a leading maker of energy saving chips and can cut carbon dioxide emissions of household electronics by as much as 30%. Murata makes components for electric cars, while Koito makes energy saving headlamps for vehicles with low energy usage by 40% compared to conventional headlights.
Dan Buchanan: Great, thank you. Allow me to switch gears for a moment, and let's talk about the closed-end fund structure itself where JEQ rests. How does the closed-end fund vehicle enable you to manage a portfolio like JEQ Japanese Equities?
Christina Woon: It's even more relevant in current volatile times. This immediate benefit of our closed and fund structure is our stable asset base, and that means that we have managed to avoid indiscriminate selling across the portfolio to meet redemptions, which might happen to open- ended fund structures in a risk off environment, particularly in some of the rotations that you've seen this year. Now, this allows us to better focus our efforts on capitalizing on opportunities that the current market volatility provides.
Dan Buchanan: Finally, particularly as it's been quite a volatile start to the year 2021. How are you seeing the rest of the year shaping up?
Christina Woon: As we discussed, volatility in the market has been high and the reversal of winners and losers in the pandemic continues. However, the length of the pandemic suggests that some trends will be more entrenched. This is clear when we look across the Asia Pacific region where economies have reopened, social and business activities have resumed, but some habits formed during shutdowns remain.
Additionally, businesses that have delayed expansion plans are making up for lost time resulting in a broad base pickup in corporate capital expenditures. There is pent-up demand not only from last year's business disruption, but also from geopolitical uncertainties a year before. All of this makes for an attractive backdrop for improving fundamentals across Japanese corporates. Even though markets are volatile at this time, we believe our portfolios are well-positioned to reflect both recovery in economies and broader structural growth trends over the longer term.
Dan Buchanan: Thank you Christina Woon for those insights today, and thank you to our listeners for tuning in. You can find out more about the fund at www.aberdeenjeq.com. I am Dan Buchanan with Aberdeen Standard Investments. Do look out for future episodes.
