High-conviction growth strategy seeks alpha in Japan
Unconstrained all-cap approach seeking Japanese companies positioned to benefit from Asia's growth
Invests in companies leveraged to the fast growing consumer demand across Asia, global industry leaders and entrepreneurial companies providing innovative domestic solutions
Under normal circumstances, the Matthews Japan Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Japan. The Fund seeks to invest in companies capable of sustainable growth based on the fundamental characteristics of those companies, including balance sheet information; number of employees; size and stability of cash flow; management’s depth, adaptability and integrity; product lines; marketing strategies; corporate governance; and financial health.
Risks
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country.
These and other risks associated with investing in the Fund can be found in the
prospectus.
Under normal circumstances, the Matthews Japan Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Japan. The Fund seeks to invest in companies capable of sustainable growth based on the fundamental characteristics of those companies, including balance sheet information; number of employees; size and stability of cash flow; management’s depth, adaptability and integrity; product lines; marketing strategies; corporate governance; and financial health.
Risks
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country.
The risks associated with investing in the Fund can be found in the prospectus
Performance
Monthly
Quarterly
Calendar Year
As of 02/29/2024
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
6.43%
14.08%
9.22%
26.73%
-1.52%
6.33%
6.66%
5.87%
MSCI Japan Index
3.00%
12.49%
7.76%
27.42%
3.41%
7.65%
6.60%
4.17%
As of 12/31/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
4.46%
8.25%
17.99%
17.99%
-5.84%
6.45%
5.55%
5.54%
MSCI Japan Index
4.39%
8.22%
20.77%
20.77%
1.04%
7.31%
5.34%
3.89%
For the years ended December 31st
Name
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Matthews Japan Fund - MJFOX
MJFOX
17.99%
-27.85%
-1.92%
29.82%
26.08%
-20.18%
33.14%
0.40%
20.83%
-2.60%
MSCI Japan Index
20.77%
-16.31%
2.04%
14.91%
20.07%
-12.58%
24.39%
2.73%
9.90%
-3.72%
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
Assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results.Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. Performance differences between the Institutional class and the Investor class may arise due to differences in fees charged to each class.
Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.
Growth of a Hypothetical $10,000 Investment Since Inception
(as of 12/31/2023)
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.
Past performance is no guarantee of future results. High ratings and rankings does not assure favorable performance.
The Overall Morningstar® Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and (if applicable) ten-year ratings.
Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Lipper Analytical Services, Inc., rankings are based on total return, including reinvestment of dividends and capital gains for the stated periods. Funds are assigned a rank within a universe of funds similar in investment objective as determined by Lipper. For the absolute rankings shown the lower the number rank, the better the Fund performed compared to other funds in the classification group. Lipper also calculates a quartile ranking which divides the peer group into quartiles to identify funds of similar quality. Funds in the 1st or 2nd quartile had outperformed the average fund in the peer group while funds in the 3rd or 4th quartile had underperformed.
Shuntaro Takeuchi is a Portfolio Manager at Matthews and manages the firm’s Japan Strategy and co-manages the Asia Growth Strategy. Prior to joining Matthews in 2016, he was an Executive Director for Japan Equity Sales at UBS Securities LLC in New York. Beginning in 2003, he worked on both Japanese Equity and International Equity Sales at UBS Japan Securities, based in Tokyo, and held the position of Special Situations Analyst from 2006 to 2008, and Head of International Equity Sales from 2009 to 2013. Before that, he worked at Merrill Lynch Japan from 2001 to 2003 in U.S. Equity Sales. Shuntaro received a B.A. in Commerce and Management from Hitotsubashi University in Tokyo. He is fluent in Japanese.
Donghoon Han is a Portfolio Manager at Matthews and manages the firm’s Japan Strategy. Prior to joining Matthews in 2020, Donghoon was Vice President and portfolio manager at Goldman Sachs Asset Management in Tokyo, responsible for investments in technology, automotive and transportation sectors in Japan. From 2014 to 2016, he was a senior associate at Citadel Global Equities researching technology and industrial sectors in Japan. From 2010 to 2014, Donghoon worked at Dodge & Cox as an equity research associate covering global technology sector with a focus on semiconductors and electronic components. He received B.A. in International Liberal Arts from Waseda University in Tokyo. Donghoon is fluent in Japanese and Korean. He is a Chartered Member of the Securities Analysts Association of Japan.
Portfolio Characteristics
(as of 12/31/2023)
Fund
Benchmark
Number of Positions
43
225
Weighted Average Market Cap
$49.2 billion
$56.7 billion
Active Share
65.4
n.a.
P/E using FY1 estimates
16.6x
14.1x
P/E using FY2 estimates
15.3x
13.6x
Price/Cash Flow
11.0
9.4
Price/Book
1.8
1.4
Return On Equity
14.4
12.4
EPS Growth (3 Yr)
13.9%
12.8%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 12/31/2023)
Category
3YR Return Metric
Alpha
-6.45%
Beta
1.08
Upside Capture
85.42%
Downside Capture
116.88%
Sharpe Ratio
-0.46
Information Ratio
-1.1
Tracking Error
6.27%
R²
87.89
-6.45%
Alpha
1.08
Beta
85.42%
Upside Capture
116.88%
Downside Capture
-0.46
Sharpe Ratio
-1.10
Information Ratio
6.27%
Tracking Error
87.89
R²
Fund Risk Metrics are reflective of Investor share class.
Top 10 holdings may combine more than one security from the same issuer and related depositary receipts.
Source: BNY Mellon Investment Servicing (US) Inc.
Portfolio Breakdown (%)
(as of 12/31/2023)
Sector Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Information Technology
22.0
15.0
7.0
Industrials
20.9
22.1
-1.2
Consumer Discretionary
20.1
19.0
1.1
Financials
10.6
12.2
-1.6
Materials
6.3
5.1
1.2
Health Care
5.7
8.3
-2.6
Consumer Staples
5.0
5.8
-0.8
Communication Services
4.3
7.2
-2.9
Real Estate
2.5
3.2
-0.7
Utilities
0.0
1.2
-1.2
Energy
0.0
0.8
-0.8
Cash and Other Assets, Less Liabilities
2.6
0.0
2.6
Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
50.3
59.3
-9.0
Large Cap ($10B-$25B)
28.2
26.0
2.2
Mid Cap ($3B-$10B)
15.8
14.7
1.1
Small Cap (under $3B)
3.1
0.0
3.1
Cash and Other Assets, Less Liabilities
2.6
0.0
2.6
Source: FactSet Research Systems.
Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.
For the year ending December 31, 2023, the Matthews Japan Fund returned 17.99% (Investor Class) and 18.08% (Institutional Class), while its benchmark, the MSCI Japan Index, returned 20.77% over the same period. For the fourth quarter, the Fund returned 8.25% (Investor Class) and 8.29% (Institutional Class), while the benchmark returned 8.22%.
Market Environment
Japan equity markets posted healthy total returns in 2023, along with other developed markets, outpacing emerging markets. Japanese stocks’ outperformance was mainly driven by resilient earnings growth amid a tepid global macro economy. Valuation levels also moved up from the low end to the midpoint of the past 10-year historical range, helped by government policy and activist pressure which pushed undervalued companies to increase their payouts and buybacks.
The direction of interest rates and risk premiums in 2023 was a seesaw between hopes for the U.S. Federal Reserve’s pace of rate hike slowing down. The discussion of rates being ‘higher for longer,’ spurred a risk-off move across global markets for the third quarter, and U.S. 10-year bond yields reached 5% in October for the first time in 2008. Sentiment improved toward the end of the year as investors responded to evidence of softening in global growth and an easing in inflationary pressures. For the full year, the MSCI Japan Value Index outpaced the MSCI Japan Growth Index by 661 basis points (6.61%), reflecting the general rise in interest rates.
The Japanese yen generally traded in a range bound for the first six months of the year but in the third quarter, as U.S. 10-year bond yields rose, the currency weakened back to its 27-year low of 150 yen to the U.S. dollar.
Performance
The portfolio’s overweight to small caps relative to the benchmark resulted in the majority of the detraction while positive stock selection in all market cap spectrums offset the allocation effect. From a sector perspective, stock selection in materials and consumer staples were the two largest contributors to relative performance while stock selection in financials and industrials were the biggest detractors.
At the holdings level, Shin-Etsu Chemical and Renesas Electronics were the top two contributors to both the Fund’s total and relative returns. The share price of semiconductor company Renesas Electronics faced some profit taking in the third quarter, but we continue to view positively the company’s ongoing progress in inventory adjustments as it shows the company’s solid execution during downturns. We continue to see Renesas constructively as its valuation level remains compelling.
Polyvinyl chloride and semiconductor wafer manufacturer Shin-Etsu Chemical’s main businesses faced a downturn through the housing and semiconductor cycle, but the company once again displayed its capability to maneuver slowdowns, maintaining its high-capacity utilization rate and adhering to long-term agreements with key customers.
The largest detractor to the portfolio’s relative returns was Tokyo Electron, a semiconductor production equipment company that we did not own until mid-December of 2023. However, at the portfolio level, we were able to benefit from overweighting semiconductor-related sectors. Debt guarantor eGuarantee was the second-largest detractor to investment results. Although the company continues to execute and generate strong earnings growth, COVID-related relief funds that saved many institutions from bankruptcy led to a slower-than-expected rise in bankruptcy numbers in Japan. We have already exited from this position.
Notable Changes
During the December quarter, we made three major changes to the portfolio. First, with foreign investor flows turning positive for the first time in five years, we shifted our portfolio’s average market cap upwards. Second, we reduced multiple positions that worked as a “value play” within the portfolio, especially names where the majority of the returns were from pure re-ratings. Third, as the global purchase manufacturing index (PMI) stayed below 50 for the full 12 months of 2023, we started to look for names whose fundamentals are set to bottom out as we look toward 2024 and beyond. We took advantage of the market correction in October to initiate some cyclical growth names.
We initiated a position in real estate developer Mitsui Fudosan. We believe the company will continue to produce steady mid-single digit growth from vacancy rates peaking out in central Tokyo. We also look forward to its new management’s stance towards achieving optimal return on equity through asset sales.
We have also re-initiated a position in medical device manufacturer Terumo. After meeting with the management team, we have built a conviction that multiple headwinds such as rising raw materials and logistics and manufacturing cost inflation have started to peak out. Terumo has also taken numerous steps, from shifting its manufacturing locations to raising prices. We initiated our position when the company’s valuation level was in the lower end of its 10-year range.
To fund these positions, we exited several holdings including Amvis, Asahi Intecc, Bandai Namco, Baycurrent Consulting, Denso, Dip and eGuarantee.
Outlook
After a strong finish to the close of 2023, the MSCI Japan Index is trading at 14.7 x forward 12 months price-to-earnings ratio and 1.42 x price-to-book ratio with a 2.24% dividend yield. Valuations have risen compared to 2022 year-end but still look sensible in an international context. Along with the long-term trend of corporate Japan achieving better through-the-cycle margins, recent activist investor activity is working as a clear catalyst for the corporate sector to further enhance shareholder returns via dividends and share buybacks.
Over the long term, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle. As of year-end 2023, the Japanese equity market outperformed both the MSCI EAFE Index and the MSCI Emerging Markets Index in U.S. dollar terms. In other words, ‘not owning Japan’ is no longer a formula for outperformance for global investors. With the yen at a near quarter-century-low to the dollar, Japanese companies are in good health and domestically, a full year of reopening has resulted in record spending despite tourist numbers still below pre-COVID levels. We continue to believe there is a major perception and positioning gap of the Japanese equity market as an asset class in the global market context.
Overall, Japan continues to enjoy several tailwinds including a positive earnings cycle driven by moderate inflation, meaningful wage gains and policy driven reforms which are pushing companies to increase their corporate value via capital efficiencies and shareholder payouts. In addition, the recovery in inbound tourism plus the fact that Japan lacks the geopolitical headwinds of China is creating positive foreign inflows. 2023 saw an inflow of 3.2 trillion yen from foreign investors. While this is not small, it compares with the 11.8 trillion yen foreign investor outflow in the previous five-year period (2018-2022).
Our strategy continues to focus on investing in companies that can grow earnings through a relentless effort to achieve positive margin slope (long-term improvement in corporate margin levels). We are strong believers that these companies will be able to generate incremental returns over the long term. In sub-industries, we continue to be constructive in areas such as semiconductors, automation, software, healthcare service and technology, as well as global intellectual property (IP) owners.
View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MJFOX as of 12/31/2023
1YR
3YR
5YR
10YR
Since Inception
Inception Date
17.99%
-5.84%
6.45%
5.55%
5.54%
12/31/1998
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund's fees and expenses had not been waived. Please see the Fund's most recent month-end performance.
Fees & Expenses
Gross Expense Ratio
1.05%
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Index is a free float-adjusted market capitalization-weighted index of Chinese equities that includes H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, Hong Kong-listed securities known as Red chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China) and foreign listings (e.g. ADRs).
The MSCI China All Shares Index captures large and mid-cap representation across China A shares, B shares, H shares, Red chips (issued by entities owned by national or local governments in China), P chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong,Shanghai, Shenzhen and outside of China.
The MSCI Emerging Markets (EM) Asia Index is a free float-adjusted market capitalization weighted index of the stock markets of China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan and Thailand. The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets ex China Index is a free float-adjusted market capitalization-weighted index that captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries excluding China: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization weighted small cap index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan Thailand, Turkey and United Arab Emirates.
The S&P Bombay Stock Exchange 100 (S&P BSE 100) Index is a free float–adjusted market capitalization–weighted index of 100 stocks listed on the Bombay Stock Exchange.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The Korea Composite Stock Price Index (KOSPI) is a market capitalization–weighted index of all common stocks listed on the Korea Stock Exchange.
The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Small Cap Index is a free float-adjusted market capitalization-weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges,Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g., ADRs).
The MSCI India Index is a free float-adjusted market capitalization-weighted index of Indian equities listed in India.
The MSCI Korea Index is a free float-adjusted market capitalization-weighted index of Korean equities listed in Korea.
Indexes are for comparative purposes only and it is not possible to invest directly in an index.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.
The views and opinions in the commentary were as of the report date, subject to change and may not reflect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund's future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.
Commentary
Period ended December 31, 2023
For the year ending December 31, 2023, the Matthews Japan Fund returned 17.99% (Investor Class) and 18.08% (Institutional Class), while its benchmark, the MSCI Japan Index, returned 20.77% over the same period. For the fourth quarter, the Fund returned 8.25% (Investor Class) and 8.29% (Institutional Class), while the benchmark returned 8.22%.
Market Environment
Japan equity markets posted healthy total returns in 2023, along with other developed markets, outpacing emerging markets. Japanese stocks’ outperformance was mainly driven by resilient earnings growth amid a tepid global macro economy. Valuation levels also moved up from the low end to the midpoint of the past 10-year historical range, helped by government policy and activist pressure which pushed undervalued companies to increase their payouts and buybacks.
The direction of interest rates and risk premiums in 2023 was a seesaw between hopes for the U.S. Federal Reserve’s pace of rate hike slowing down. The discussion of rates being ‘higher for longer,’ spurred a risk-off move across global markets for the third quarter, and U.S. 10-year bond yields reached 5% in October for the first time in 2008. Sentiment improved toward the end of the year as investors responded to evidence of softening in global growth and an easing in inflationary pressures. For the full year, the MSCI Japan Value Index outpaced the MSCI Japan Growth Index by 661 basis points (6.61%), reflecting the general rise in interest rates.
The Japanese yen generally traded in a range bound for the first six months of the year but in the third quarter, as U.S. 10-year bond yields rose, the currency weakened back to its 27-year low of 150 yen to the U.S. dollar.
Performance
The portfolio’s overweight to small caps relative to the benchmark resulted in the majority of the detraction while positive stock selection in all market cap spectrums offset the allocation effect. From a sector perspective, stock selection in materials and consumer staples were the two largest contributors to relative performance while stock selection in financials and industrials were the biggest detractors.
At the holdings level, Shin-Etsu Chemical and Renesas Electronics were the top two contributors to both the Fund’s total and relative returns. The share price of semiconductor company Renesas Electronics faced some profit taking in the third quarter, but we continue to view positively the company’s ongoing progress in inventory adjustments as it shows the company’s solid execution during downturns. We continue to see Renesas constructively as its valuation level remains compelling.
Polyvinyl chloride and semiconductor wafer manufacturer Shin-Etsu Chemical’s main businesses faced a downturn through the housing and semiconductor cycle, but the company once again displayed its capability to maneuver slowdowns, maintaining its high-capacity utilization rate and adhering to long-term agreements with key customers.
The largest detractor to the portfolio’s relative returns was Tokyo Electron, a semiconductor production equipment company that we did not own until mid-December of 2023. However, at the portfolio level, we were able to benefit from overweighting semiconductor-related sectors. Debt guarantor eGuarantee was the second-largest detractor to investment results. Although the company continues to execute and generate strong earnings growth, COVID-related relief funds that saved many institutions from bankruptcy led to a slower-than-expected rise in bankruptcy numbers in Japan. We have already exited from this position.
Notable Changes
During the December quarter, we made three major changes to the portfolio. First, with foreign investor flows turning positive for the first time in five years, we shifted our portfolio’s average market cap upwards. Second, we reduced multiple positions that worked as a “value play” within the portfolio, especially names where the majority of the returns were from pure re-ratings. Third, as the global purchase manufacturing index (PMI) stayed below 50 for the full 12 months of 2023, we started to look for names whose fundamentals are set to bottom out as we look toward 2024 and beyond. We took advantage of the market correction in October to initiate some cyclical growth names.
We initiated a position in real estate developer Mitsui Fudosan. We believe the company will continue to produce steady mid-single digit growth from vacancy rates peaking out in central Tokyo. We also look forward to its new management’s stance towards achieving optimal return on equity through asset sales.
We have also re-initiated a position in medical device manufacturer Terumo. After meeting with the management team, we have built a conviction that multiple headwinds such as rising raw materials and logistics and manufacturing cost inflation have started to peak out. Terumo has also taken numerous steps, from shifting its manufacturing locations to raising prices. We initiated our position when the company’s valuation level was in the lower end of its 10-year range.
To fund these positions, we exited several holdings including Amvis, Asahi Intecc, Bandai Namco, Baycurrent Consulting, Denso, Dip and eGuarantee.
Outlook
After a strong finish to the close of 2023, the MSCI Japan Index is trading at 14.7 x forward 12 months price-to-earnings ratio and 1.42 x price-to-book ratio with a 2.24% dividend yield. Valuations have risen compared to 2022 year-end but still look sensible in an international context. Along with the long-term trend of corporate Japan achieving better through-the-cycle margins, recent activist investor activity is working as a clear catalyst for the corporate sector to further enhance shareholder returns via dividends and share buybacks.
Over the long term, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle. As of year-end 2023, the Japanese equity market outperformed both the MSCI EAFE Index and the MSCI Emerging Markets Index in U.S. dollar terms. In other words, ‘not owning Japan’ is no longer a formula for outperformance for global investors. With the yen at a near quarter-century-low to the dollar, Japanese companies are in good health and domestically, a full year of reopening has resulted in record spending despite tourist numbers still below pre-COVID levels. We continue to believe there is a major perception and positioning gap of the Japanese equity market as an asset class in the global market context.
Overall, Japan continues to enjoy several tailwinds including a positive earnings cycle driven by moderate inflation, meaningful wage gains and policy driven reforms which are pushing companies to increase their corporate value via capital efficiencies and shareholder payouts. In addition, the recovery in inbound tourism plus the fact that Japan lacks the geopolitical headwinds of China is creating positive foreign inflows. 2023 saw an inflow of 3.2 trillion yen from foreign investors. While this is not small, it compares with the 11.8 trillion yen foreign investor outflow in the previous five-year period (2018-2022).
Our strategy continues to focus on investing in companies that can grow earnings through a relentless effort to achieve positive margin slope (long-term improvement in corporate margin levels). We are strong believers that these companies will be able to generate incremental returns over the long term. In sub-industries, we continue to be constructive in areas such as semiconductors, automation, software, healthcare service and technology, as well as global intellectual property (IP) owners.
View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MJFOX as of 12/31/2023
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund's fees and expenses had not been waived. Please see the Fund's most recent month-end performance.
Fees & Expenses
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country.