Overall Morningstar RatingTM (As of 12/31/2022)
Based on risk-adjusted return among 32 funds in the Japan Stock Category
MutualFund
Snapshot
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 02/28/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
-4.72%
-1.84%
1.68%
-15.90%
2.20%
-2.11%
6.52%
5.09%
MSCI Japan Index
-3.83%
2.44%
2.14%
-8.93%
3.80%
0.42%
5.46%
3.31%
As of 12/31/2022
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Japan Fund - MJFOX
12/31/1998
MJFOX
-3.46%
10.76%
-27.85%
-27.85%
-2.79%
-1.56%
6.90%
5.05%
MSCI Japan Index
0.29%
13.26%
-16.31%
-16.31%
-0.63%
0.60%
5.90%
3.24%
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 $10,000 Investment Since Inception
(as of 12/31/2022)
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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 Asia and manages the firm’s Asia Growth and Japan Strategies, and co-manages the firm’s Asia Innovators Strategy. Prior to joining Matthews Asia 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 Asia and manages the firm’s Japan Strategy. Prior to joining the firm 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.
Portfolio Characteristics
(as of 12/31/2022)
Fund
Benchmark
Number of Positions
48
237
Weighted Average Market Cap
$34.7 billion
$43.4 billion
Active Share
68.5
n.a.
P/E using FY1 estimates
15.9x
11.6x
P/E using FY2 estimates
15.4x
11.6x
Price/Cash Flow
11.6
7.9
Price/Book
1.8
1.2
Return On Equity
12.7
12.5
EPS Growth (3 Yr)
5.7%
3.3%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 12/31/2022)
Category
3YR Return Metric
Alpha
-1.9%
Beta
0.98
Upside Capture
94.78%
Downside Capture
104.24%
Sharpe Ratio
-0.18
Information Ratio
-0.26
Tracking Error
8.36%
R²
80.88
-1.90%
Alpha
0.98
Beta
94.78%
Upside Capture
104.24%
Downside Capture
-0.18
Sharpe Ratio
-0.26
Information Ratio
8.36%
Tracking Error
80.88
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 12/31/2022)
Sector Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Industrials
21.3
22.2
-0.9
Consumer Discretionary
13.6
17.7
-4.1
Financials
13.0
12.1
0.9
Health Care
13.0
9.9
3.1
Information Technology
12.4
13.1
-0.7
Communication Services
11.2
8.5
2.7
Consumer Staples
6.6
6.9
-0.3
Materials
6.1
4.5
1.6
Real Estate
1.0
3.3
-2.3
Utilities
0.0
1.0
-1.0
Energy
0.0
0.8
-0.8
Cash and Other Assets, Less Liabilities
1.8
0.0
1.8
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)
48.6
53.6
-5.0
Large Cap ($10B-$25B)
22.0
27.8
-5.8
Mid Cap ($3B-$10B)
16.6
18.6
-2.0
Small Cap (under $3B)
11.1
0.0
11.1
Cash and Other Assets, Less Liabilities
1.8
0.0
1.8
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 year ending December 31, 2022, the Matthews Japan Fund returned -27.85% (Investor Class) and -27.84% (Institutional Class), while its benchmark, the MSCI Japan Index, returned -16.31% over the same period. For the fourth quarter, the Fund returned 10.76% (Investor Class) and 10.74% (Institutional Class), while the benchmark returned 13.26%.
Market Environment:
Japan equity markets in 2022 delivered very different performances depending on the currency and style of investment used. Taking currency first, the Japanese yen weakened to 150 to the U.S. dollar in October, a level last seen in 1998. Multiple rate hikes by the U.S. Federal Reserve in tandem with the accommodative stance of the Bank of Japan resulted in the widening of the U.S.-Japan bond-yield spread. For investors, the yen’s decline meant that in local currency terms Japanese equities outperformed developed markets while in U.S. dollar terms they traded more in line. The other trend to have impacted Japanese equity markets was the continued significant spread between performance of value stocks and growth stocks. The one-year performance gap between value stocks and growth stocks in 2022 ended at 2,260 basis points (22.26%), the largest in international equity markets. The Matthews Japan Fund is a quality core growth portfolio and the widening of the growth-value spread has been a challenge.
Performance Contributors and Detractors:
From a sector perspective, our stock selection in consumer staples was the largest contributor to relative performance in 2022. Stock selection in real estate was also a contributor though its impact was mitigated by our underweight in the sector. On the other hand, stock selection in industrials was the biggest detractor while our selections in financials, materials and information technology (IT) were also detractors.
At the holdings level, Daiichi Sankyo, a pharmaceutical company, was the largest contributor to the investment results. We view the company as evolving into specialty pharma company focused on oncology and based on their proprietary antibody-drug conjugate (ADC) platform. The success of Daiichi Sankyo's first ADC—Enhertu, an anticancer agent for breast cancer—coupled with a favorable court ruling in a dispute with a competitor regarding ADC technology in August drove the strong performance in the year.
P&C insurance company Tokio Marine Holdings was the second-largest contributor to performance. We regard the company as a prudent allocator of capital with a mid-teens dividend compound annual growth rate (CAGR) coupled with earnings-per-share (EPS) growth that is driven by both earnings and buybacks.
Game developer Capcom was also a positive contributor. Owner of key intellectual property (IP), such as “Monster Hunter” and “Resident Evil”, the company pledges to deliver stable and continuous double-digit growth. Given the uncertainty in macro situations, Capcom’s stable growth has resulted in equity outperformance.
Technology conglomerate Sony Group was the largest detractor last year. After approaching an all-time high in January, performance has struggled due to weakness in the mainstay PlayStation game business. While we remain constructive on Sony's management capability and its competitive position in games, music and image sensors, the weakness in their highest return-on-invested-capital (ROIC) business segment makes it difficult for the share price to perform.
Recruit, a leading HR and media marketing solution provider was the second-largest detractor. The company benefited from the reopening of economic activity in 2021 with their crown jewel HR Tech segment but growth slowed due to the peaking out of global economic activity.
JSR, an electronic material manufacturer, was also a detractor. The company’s recent earnings were below expectations due to the slower-than-expected commercial production ramp of its highly-anticipated Contract Development and Manufacturing (CDMO) for bio-pharma products, as well as the weaker topline in display materials segment. Despite the near-term weakness, our conversation with the management suggests that the issues in the health-care businesses are transitory and the display business topline will bottom out. We still calculate that JSR trades below its intrinsic value and believe that a re-rating would accelerate as JSR’s health-care profit contribution increases in the later part of this fiscal year.
Notable Portfolio Changes:
During the fourth quarter, we re-initiated furniture and household goods retailer Nitori Holdings. We exited the name in 2021 due to the negative impact from a weaker yen and tough year-on-year after COVID lockdowns had pushed up their home fashion goods demand in 2020. After a year, both consensus earnings and valuation levels came down enough to warrant a review, especially as cost pressures and the weakness of the Japanese yen have started to peak out, in our view. The long-term thesis remains unchanged. Nitori is the last man standing in the furniture retail space in Japan and has achieved 35 consecutive years of earnings growth. The company’s track record in cost adjustment is also impressive.
We also initiated a position in Sumitomo Mitsui Financial Group in anticipation of potential changes in Japan’s monetary policy. The Bank of Japan revised its yield curve control (YCC) targets at its December 20 monetary policy meeting. While the move came as a surprise to the market including us, we had discussed the possibility of this happening. As current BoJ Governor Haruhiko Kuroda's term expires in the Spring, increasing news flow around the upcoming change in leadership will drive expectations for a change in the bank’s negative interest rate policy and steps toward monetary policy normalization.
To fund these positions, we have exited Toyota Motor, Suntory Beverage and Food, SMC, Septeni Holdings, Roland, Ono Pharmaceutical, Mazda Motor, Kyoritsu Maintenance, Japan Steel Works, GMO Payment Gateway and Direct Marketing Mix.
Outlook:
While the market seems ready for the Fed to pivot with its interest-rate policy and for inflation to peak out, we believe the Fed is hesitant to prematurely remove its hawkish policies to contain inflation. With this backdrop, we don’t see a reversal of growth underperformance in Japan anytime soon and are taking a more balanced approach towards multiple stages of growth and valuation levels. For the year of 2023, earnings growth and cash flow-generation ability will be ever more important as financial estimates for Japanese corporates have started to be revised down.
Looking long term, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle. Last year, the Japanese equity market outperformed both developed markets (MSCI World) and emerging markets (MSCI Emerging Market) in U.S. dollar terms. With the yen at a near quarter-century-low to the dollar, Japanese companies are in good health and, importantly, the country is firmly open for tourism. We believe this is the time for investors to add a long-term exposure to the market.
Top 10 holdings as of December 31, 2022. Current and future holdings are subject to change and risk.
Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target.
Average Annual Total Returns - MJFOX as of 12/31/2022
1YR
3YR
5YR
10YR
Since Inception
Inception Date
-27.85%
-2.79%
-1.56%
6.90%
5.05%
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
0.95%
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 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, 2022
For the year ending December 31, 2022, the Matthews Japan Fund returned -27.85% (Investor Class) and -27.84% (Institutional Class), while its benchmark, the MSCI Japan Index, returned -16.31% over the same period. For the fourth quarter, the Fund returned 10.76% (Investor Class) and 10.74% (Institutional Class), while the benchmark returned 13.26%.
Market Environment:
Japan equity markets in 2022 delivered very different performances depending on the currency and style of investment used. Taking currency first, the Japanese yen weakened to 150 to the U.S. dollar in October, a level last seen in 1998. Multiple rate hikes by the U.S. Federal Reserve in tandem with the accommodative stance of the Bank of Japan resulted in the widening of the U.S.-Japan bond-yield spread. For investors, the yen’s decline meant that in local currency terms Japanese equities outperformed developed markets while in U.S. dollar terms they traded more in line. The other trend to have impacted Japanese equity markets was the continued significant spread between performance of value stocks and growth stocks. The one-year performance gap between value stocks and growth stocks in 2022 ended at 2,260 basis points (22.26%), the largest in international equity markets. The Matthews Japan Fund is a quality core growth portfolio and the widening of the growth-value spread has been a challenge.
Performance Contributors and Detractors:
From a sector perspective, our stock selection in consumer staples was the largest contributor to relative performance in 2022. Stock selection in real estate was also a contributor though its impact was mitigated by our underweight in the sector. On the other hand, stock selection in industrials was the biggest detractor while our selections in financials, materials and information technology (IT) were also detractors.
At the holdings level, Daiichi Sankyo, a pharmaceutical company, was the largest contributor to the investment results. We view the company as evolving into specialty pharma company focused on oncology and based on their proprietary antibody-drug conjugate (ADC) platform. The success of Daiichi Sankyo's first ADC—Enhertu, an anticancer agent for breast cancer—coupled with a favorable court ruling in a dispute with a competitor regarding ADC technology in August drove the strong performance in the year.
P&C insurance company Tokio Marine Holdings was the second-largest contributor to performance. We regard the company as a prudent allocator of capital with a mid-teens dividend compound annual growth rate (CAGR) coupled with earnings-per-share (EPS) growth that is driven by both earnings and buybacks.
Game developer Capcom was also a positive contributor. Owner of key intellectual property (IP), such as “Monster Hunter” and “Resident Evil”, the company pledges to deliver stable and continuous double-digit growth. Given the uncertainty in macro situations, Capcom’s stable growth has resulted in equity outperformance.
Technology conglomerate Sony Group was the largest detractor last year. After approaching an all-time high in January, performance has struggled due to weakness in the mainstay PlayStation game business. While we remain constructive on Sony's management capability and its competitive position in games, music and image sensors, the weakness in their highest return-on-invested-capital (ROIC) business segment makes it difficult for the share price to perform.
Recruit, a leading HR and media marketing solution provider was the second-largest detractor. The company benefited from the reopening of economic activity in 2021 with their crown jewel HR Tech segment but growth slowed due to the peaking out of global economic activity.
JSR, an electronic material manufacturer, was also a detractor. The company’s recent earnings were below expectations due to the slower-than-expected commercial production ramp of its highly-anticipated Contract Development and Manufacturing (CDMO) for bio-pharma products, as well as the weaker topline in display materials segment. Despite the near-term weakness, our conversation with the management suggests that the issues in the health-care businesses are transitory and the display business topline will bottom out. We still calculate that JSR trades below its intrinsic value and believe that a re-rating would accelerate as JSR’s health-care profit contribution increases in the later part of this fiscal year.
Notable Portfolio Changes:
During the fourth quarter, we re-initiated furniture and household goods retailer Nitori Holdings. We exited the name in 2021 due to the negative impact from a weaker yen and tough year-on-year after COVID lockdowns had pushed up their home fashion goods demand in 2020. After a year, both consensus earnings and valuation levels came down enough to warrant a review, especially as cost pressures and the weakness of the Japanese yen have started to peak out, in our view. The long-term thesis remains unchanged. Nitori is the last man standing in the furniture retail space in Japan and has achieved 35 consecutive years of earnings growth. The company’s track record in cost adjustment is also impressive.
We also initiated a position in Sumitomo Mitsui Financial Group in anticipation of potential changes in Japan’s monetary policy. The Bank of Japan revised its yield curve control (YCC) targets at its December 20 monetary policy meeting. While the move came as a surprise to the market including us, we had discussed the possibility of this happening. As current BoJ Governor Haruhiko Kuroda's term expires in the Spring, increasing news flow around the upcoming change in leadership will drive expectations for a change in the bank’s negative interest rate policy and steps toward monetary policy normalization.
To fund these positions, we have exited Toyota Motor, Suntory Beverage and Food, SMC, Septeni Holdings, Roland, Ono Pharmaceutical, Mazda Motor, Kyoritsu Maintenance, Japan Steel Works, GMO Payment Gateway and Direct Marketing Mix.
Outlook:
While the market seems ready for the Fed to pivot with its interest-rate policy and for inflation to peak out, we believe the Fed is hesitant to prematurely remove its hawkish policies to contain inflation. With this backdrop, we don’t see a reversal of growth underperformance in Japan anytime soon and are taking a more balanced approach towards multiple stages of growth and valuation levels. For the year of 2023, earnings growth and cash flow-generation ability will be ever more important as financial estimates for Japanese corporates have started to be revised down.
Looking long term, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle. Last year, the Japanese equity market outperformed both developed markets (MSCI World) and emerging markets (MSCI Emerging Market) in U.S. dollar terms. With the yen at a near quarter-century-low to the dollar, Japanese companies are in good health and, importantly, the country is firmly open for tourism. We believe this is the time for investors to add a long-term exposure to the market.
Top 10 holdings as of December 31, 2022. Current and future holdings are subject to change and risk.
Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target.
Average Annual Total Returns - MJFOX as of 12/31/2022
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.