The three largest sectors for this Japanese fund are: Industrials (26.4% of assets); Consumer Cyclicals (19.38%); and Technology (16.08%).
Fidelity Japan Smaller Companies (FJSCX)
From Moneyletter
Among the various types of international equity funds, Japan funds have been showing a recent spark in performance. And for the year-to-date and trailing year, Japan funds were ranked fourth best (out of 16 Morningstar categories), even though down for both periods. In each of those longer time frames, they trailed the world large stock, Latin America, and world small/mid stock categories, all of which were negative as well.
Japan’s economy appears to be rebounding. Following a decline in real gross domestic product (GDP) in 2018’s first quarter, second quarter growth of 1.9% (annualized) was the strongest since the third quarter of last year. The International Monetary Fund notes that GDP growth is expected to remain above its estimated potential this year at 1.1%, inflation below the Bank of Japan’s 2.0% target, and that financial conditions overall remain generally favorable.
Bloomberg Businessweek recently noted that Japan is “heading into the next year with a shot at racking up the longest expansion since the asset-price bubble ended in 1991.... Deflation no longer stalks the country, corporate profits keep rising, and companies are ramping up investment at the fastest pace in a decade. Even wages, which have remained stagnant for years, are finally edging higher.”
Of course, there are some downside risks on the horizon. A planned sales tax increase in October 2019 could hinder growth, while the US-China trade dispute could hurt Japan’s manufacturing and technology sectors if the dispute were to cause a significant disruption to Asian supply chains, according to Deloitte Insights.
Fidelity Japan Smaller Companies (FJSCX) targets smaller companies in Japan or that are tied economically to Japan (generally firms with market caps similar to the Russell/Nomura Mid-Small Index). Portfolio manager David Jenkins targets high-quality companies trading below their fair value and capable of generating excess returns over a market cycle. These companies should have good balance sheets and strong free-cash-flow conversion (a measure to show how quickly management is able to convert cash into inventory and accounts payable, then into sales and accounts receivable, and finally back into cash). Jenkins also looks for stable returns on capital, durable competitive advantages, and attractive investment opportunities.
The fund holds about 80 stocks, with the top ten accounting for 18.7% of assets. And while they target smaller companies at purchase, the current portfolio has nearly 30% of assets in large-cap firms, about 26% in the mid-range, and the remainder in small-cap issues. Recent strong performers include the second largest holding, As One Corp., which sells scientific, industrial, and hospital/nursing instruments to specialized fields. Another interesting standout from further down the list is Koshidaka Holdings, which has two main businesses in Japan—a karaoke chain and the Curves fitness franchise. It is acquiring the US-based Curves, and will become the global franchisor for the Curves brand, which should benefit earnings.
Walter Frank, Moneyletter, www.moneyletter.com, 800-890-9670, December 2018