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 10/31/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
-4.13%
-9.84%
4.50%
12.00%
-4.97%
2.13%
4.35%
5.06%
MSCI Japan Index
-4.50%
-8.65%
6.57%
17.23%
2.16%
3.31%
4.27%
3.40%
As of 09/30/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
-3.79%
-3.91%
8.99%
20.72%
-3.68%
0.10%
4.74%
5.26%
MSCI Japan Index
-1.97%
-1.45%
11.60%
26.40%
3.19%
2.44%
4.75%
3.60%
For the years ended December 31st
Name
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Matthews Japan Fund - MJFOX
MJFOX
-27.85%
-1.92%
29.82%
26.08%
-20.18%
33.14%
0.40%
20.83%
-2.60%
34.03%
MSCI Japan Index
-16.31%
2.04%
14.91%
20.07%
-12.58%
24.39%
2.73%
9.90%
-3.72%
27.35%
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 $10,000 Investment Since Inception
(as of 09/30/2023)
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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.
Taizo Ishida is a Portfolio Manager at Matthews and manages the firm’s Asia Growth and Japan Strategies, and co-manages the firm’s Asia Innovators Strategy. Prior to joining Matthews in 2006, Taizo spent six years on the global and international teams at Wellington Management Company as a Vice President and Portfolio Manager. From 1997 to 2000, he was a Senior Securities Analyst and a member of the international investment team at USAA Investment Management Company. From 1990 to 1997, he was a Principal and Senior Research Analyst at Sanford Bernstein & Co. Prior to beginning his investment career at Yamaichi International (America), Inc. as a Research Analyst, he spent two years in Dhaka, Bangladesh as a Program Officer with the United Nations Development Program. Taizo received a B.A. in Social Science from International Christian University in Tokyo and an M.A. in International Relations from The City College of New York. He is fluent in Japanese.
Shuntaro Takeuchi is a Portfolio Manager at Matthews and manages the firm’s Japan 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 co-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 09/30/2023)
Fund
Benchmark
Number of Positions
56
235
Weighted Average Market Cap
$38.7 billion
$52.4 billion
Active Share
69.8
n.a.
P/E using FY1 estimates
15.7x
14.4x
P/E using FY2 estimates
14.3x
13.6x
Price/Cash Flow
10.2
9.2
Price/Book
1.7
1.4
Return On Equity
13.4
11.9
EPS Growth (3 Yr)
15.5%
12.1%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 09/30/2023)
Category
3YR Return Metric
Alpha
-6.49%
Beta
1.06
Upside Capture
85%
Downside Capture
116.61%
Sharpe Ratio
-0.3
Information Ratio
-1.08
Tracking Error
6.36%
R²
88
-6.49%
Alpha
1.06
Beta
85.00%
Upside Capture
116.61%
Downside Capture
-0.30
Sharpe Ratio
-1.08
Information Ratio
6.36%
Tracking Error
88.00
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 09/30/2023)
Sector Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Consumer Discretionary
22.2
19.4
2.8
Industrials
19.9
22.5
-2.6
Financials
15.5
12.8
2.7
Information Technology
15.3
13.6
1.7
Consumer Staples
6.7
6.1
0.6
Materials
6.5
4.6
1.9
Communication Services
5.0
7.2
-2.2
Health Care
3.5
8.5
-5.0
Real Estate
0.2
3.1
-2.9
Utilities
0.0
1.2
-1.2
Energy
0.0
0.9
-0.9
Cash and Other Assets, Less Liabilities
5.1
0.0
5.1
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)
37.9
57.2
-19.3
Large Cap ($10B-$25B)
26.3
24.6
1.7
Mid Cap ($3B-$10B)
22.2
18.2
4.0
Small Cap (under $3B)
8.5
0.1
8.4
Cash and Other Assets, Less Liabilities
5.1
0.0
5.1
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.
There is no guarantee that the Fund will pay or continue to pay distributions.
Past performance 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.
For the quarter ending September 30, 2023, the Matthews Japan Fund returned -3.91% (Investor Class) and -3.90% (Institutional Class), while its benchmark, the MSCI Japan Index, returned -1.45%.
Market Environment:
Japan equity markets continued to post healthy total returns in the last quarter. One key tailwind was government policy and activist pressure that pushed undervalued companies to increase their payout and buyback ratios. In the period, hopes waned over the Federal Reserve’s interest rate strategy amid inflation rates starting to peak out as the central bank increasingly telegraphed a ‘higher for longer’ approach which spurred a risk-off move across global markets. As the strategy gained traction, so the U.S. dollar strengthened and Japan’s currency weakened, dropping to 150 yen to the dollar. Overall, however, Japan equities continue to enjoy several areas of support, primarily from a positive earnings cycle driven by moderate inflation, meaningful wage gains and policy-driven corporate reforms. In addition, a recovery in inbound tourism and absence of the geopolitical headwinds China is facing is creating positive inflows into the country.
Performance Contributors and Detractors:
The third quarter saw a marked shift toward value investing from growth investing–the MSCI Japan Value Index outperformed the MSCI Japan Growth Index by 14.49% in the period. This shift hurt sentiment toward many of the sectors and stocks we hold in the portfolio which is in the main growth orientated. Consequently, from a sector perspective, stock selection in industrials and consumer staples were the two largest contributors to relative performance during the quarter. On the other hand, the portfolio’s stock selection in financials and health care were the two single biggest detractors from relative performance. An overweight and stock selection in information technology (IT) combined to make the sector the biggest drag on the portfolio.
At the holdings level, Toyota Tsusho, the trading arm of Toyota Motor, was the top contributor to total and relative returns. The company delivered strong quarter results and we think it will be sustained in the quarters ahead, helped by production momentum within its business units and continued growth of the auto industry in emerging markets, especially in Africa. The company is also part of ongoing discussions at Toyota Motor over the group’s stance toward improvement shareholder returns. The company's dividend payout ratio of 25% lags other peers as well as that of its parent company.
Athletic apparel and shoe company Asics was another top performer. Its June quarter results were a clean beat and the company raised full-year guidance above consensus. We like Asics' execution capability. They are making progress in improving profitability by reducing low gross-profit margin (GPM) products and in improving sales channel mix.
On the other hand, semiconductor company Renesas Electronics was one of the bottom performers and the biggest detractor to relative returns. The stock faced profit taking after a strong year-to-date performance as the company delivered positive results with progress being made in inventory adjustments, which showed the management’s solid execution during downturns. We continue to see Renesas constructively as its valuation remains compelling.
Factory automation business Keyence was also a detractor. While the company continues to outpace peers in terms of underlying results and execution capability, the company trades at a premium valuation and has one of the highest price-to-earnings (P/E) ratios among Japan mega cap names. It experienced huge growth factor underperformance in September.
Notable Portfolio Changes:
During the third quarter we initiated a position in ZOZO, an online fashion and accessories platform. The company has shown solid execution capability with gross merchandise value (GMV) growth still a respectable high-single digits and with higher profit growth. Valuation was at a 10-year low at the timing of our investment and looks attractive for a company that in our view has cashflow generation capable of supporting an above-benchmark average dividend yield with mid-high teens dividend growth while continuing to invest for its own growth.
Department store operator Isetan Mitsukoshi is another new holding. We see multiple areas of growth both from cyclical and structural changes, such as monthly sales momentum driven by inbound tourists and the rise of the dual-income young ‘power couple’ in the metropolitan Tokyo area. Management is also starting to take bolder actions in its capital policy plans.
To fund these new positions, we exited Takeda Pharmaceutical, Taisei, Simplex, Shift, Olympus, NTN, JGC, HOYA and Fast Retailing.
Outlook:
Strong underlying U.S. employment data suggests that the Fed’s ‘higher for longer’ rate strategy will remain in place at least for the near term. While there are downsides to this, higher rates and a strong U.S. dollar do offer a tailwind for Japanese exports. And while a value investing bias across large areas of the Japan equity market is a headwind for quality growth strategies, we also believe our investment philosophy of investing in positive margin slopes generates incremental returns over the long term.
As for the long term, we believe the earnings capability of Japanese companies has improved meaningfully. Last year, the Japanese equity market outperformed both developed markets (MSCI World) and emerging markets (MSCI Emerging Markets) in U.S. dollar terms. With the yen at a near quarter-century-low to the dollar, inflationary growth seemingly bedding in and corporate reforms gaining traction, we think the case for Japan is becoming easier to make.
Definitions: MSCI Japan Value Index: captures large and mid cap Japanese securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
MSCI Japan Growth Index: captures large and mid cap securities exhibiting overall growth style characteristics in Japan. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.
View the Fund’s Top 10 holdings as of September 30, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MJFOX as of 09/30/2023
1YR
3YR
5YR
10YR
Since Inception
Inception Date
20.72%
-3.68%
0.10%
4.74%
5.26%
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 September 30, 2023
For the quarter ending September 30, 2023, the Matthews Japan Fund returned -3.91% (Investor Class) and -3.90% (Institutional Class), while its benchmark, the MSCI Japan Index, returned -1.45%.
Market Environment:
Japan equity markets continued to post healthy total returns in the last quarter. One key tailwind was government policy and activist pressure that pushed undervalued companies to increase their payout and buyback ratios. In the period, hopes waned over the Federal Reserve’s interest rate strategy amid inflation rates starting to peak out as the central bank increasingly telegraphed a ‘higher for longer’ approach which spurred a risk-off move across global markets. As the strategy gained traction, so the U.S. dollar strengthened and Japan’s currency weakened, dropping to 150 yen to the dollar. Overall, however, Japan equities continue to enjoy several areas of support, primarily from a positive earnings cycle driven by moderate inflation, meaningful wage gains and policy-driven corporate reforms. In addition, a recovery in inbound tourism and absence of the geopolitical headwinds China is facing is creating positive inflows into the country.
Performance Contributors and Detractors:
The third quarter saw a marked shift toward value investing from growth investing–the MSCI Japan Value Index outperformed the MSCI Japan Growth Index by 14.49% in the period. This shift hurt sentiment toward many of the sectors and stocks we hold in the portfolio which is in the main growth orientated. Consequently, from a sector perspective, stock selection in industrials and consumer staples were the two largest contributors to relative performance during the quarter. On the other hand, the portfolio’s stock selection in financials and health care were the two single biggest detractors from relative performance. An overweight and stock selection in information technology (IT) combined to make the sector the biggest drag on the portfolio.
At the holdings level, Toyota Tsusho, the trading arm of Toyota Motor, was the top contributor to total and relative returns. The company delivered strong quarter results and we think it will be sustained in the quarters ahead, helped by production momentum within its business units and continued growth of the auto industry in emerging markets, especially in Africa. The company is also part of ongoing discussions at Toyota Motor over the group’s stance toward improvement shareholder returns. The company's dividend payout ratio of 25% lags other peers as well as that of its parent company.
Athletic apparel and shoe company Asics was another top performer. Its June quarter results were a clean beat and the company raised full-year guidance above consensus. We like Asics' execution capability. They are making progress in improving profitability by reducing low gross-profit margin (GPM) products and in improving sales channel mix.
On the other hand, semiconductor company Renesas Electronics was one of the bottom performers and the biggest detractor to relative returns. The stock faced profit taking after a strong year-to-date performance as the company delivered positive results with progress being made in inventory adjustments, which showed the management’s solid execution during downturns. We continue to see Renesas constructively as its valuation remains compelling.
Factory automation business Keyence was also a detractor. While the company continues to outpace peers in terms of underlying results and execution capability, the company trades at a premium valuation and has one of the highest price-to-earnings (P/E) ratios among Japan mega cap names. It experienced huge growth factor underperformance in September.
Notable Portfolio Changes:
During the third quarter we initiated a position in ZOZO, an online fashion and accessories platform. The company has shown solid execution capability with gross merchandise value (GMV) growth still a respectable high-single digits and with higher profit growth. Valuation was at a 10-year low at the timing of our investment and looks attractive for a company that in our view has cashflow generation capable of supporting an above-benchmark average dividend yield with mid-high teens dividend growth while continuing to invest for its own growth.
Department store operator Isetan Mitsukoshi is another new holding. We see multiple areas of growth both from cyclical and structural changes, such as monthly sales momentum driven by inbound tourists and the rise of the dual-income young ‘power couple’ in the metropolitan Tokyo area. Management is also starting to take bolder actions in its capital policy plans.
To fund these new positions, we exited Takeda Pharmaceutical, Taisei, Simplex, Shift, Olympus, NTN, JGC, HOYA and Fast Retailing.
Outlook:
Strong underlying U.S. employment data suggests that the Fed’s ‘higher for longer’ rate strategy will remain in place at least for the near term. While there are downsides to this, higher rates and a strong U.S. dollar do offer a tailwind for Japanese exports. And while a value investing bias across large areas of the Japan equity market is a headwind for quality growth strategies, we also believe our investment philosophy of investing in positive margin slopes generates incremental returns over the long term.
As for the long term, we believe the earnings capability of Japanese companies has improved meaningfully. Last year, the Japanese equity market outperformed both developed markets (MSCI World) and emerging markets (MSCI Emerging Markets) in U.S. dollar terms. With the yen at a near quarter-century-low to the dollar, inflationary growth seemingly bedding in and corporate reforms gaining traction, we think the case for Japan is becoming easier to make.
Definitions:
MSCI Japan Value Index: captures large and mid cap Japanese securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
MSCI Japan Growth Index: captures large and mid cap securities exhibiting overall growth style characteristics in Japan. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.
View the Fund’s Top 10 holdings as of September 30, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MJFOX as of 09/30/2023
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.