abrdn JEQ Fund Update February 2024

In this episode, Mike Taggart is joined by Chern Yeh-Kwok to share his insights on JEQ and the Japanese markets. 

Transcript

Mike Taggart

Welcome to the latest podcast for the Aberdeen, Japan Equity Fund, Ticker symbol JEQ. I'm Mike Taggert, Aberdeen's U.S. Closed and Fund Specialist. Today we have Chern Yeh-Kwok, Aberdeen's, head of Japanese equities and the portfolio manager on JEQ. Chern, thank you for joining us today. 

Chern Yeh-Kwok

My pleasure. Thank you for having me.

Mike

So Chern, my first question is why should U.S. investors consider allocating capital to Japanese equities?

Chern

Sure. I think one of the simple reasons why U.S. investors should consider allocating capital to Japan equities is, of course, to diversify their portfolios. But but, you know, the question the follow up question then is why Japan? So we think Japan is interesting for not only, of course, U.S. investors. You know, we think that, you know, it's a it's a market.

It's it's undergoing quite a few changes that I think that investors should pay attention to. Okay. So and if you look at where the Japan Equity market is today, we believe that in the future, in the very near near to medium term, the Japan equity market and the economy will be quite unlike what it was in the past.

 Right. So so a few read a few a few points that I'd like to mention here. The first thing is that deflation we just played the country for many years appears to be ending. Right. The evidence here is the acceptance of price hikes from both consumers and corporates, whereas in the past was always a struggle for prices to be raised.

 Right. So this sector of higher prices leads to improvement in corporate profits, which in turn should lead to a rise in wages, which then enables companies to further raise the selling prices, allowing for what we think is a virtuous cycle between corporate and wholesale sectors. Right. And at the same time, companies are being pushed to be more aware not only on of of return on invested capital, ROIC, but also ROE, which consists of returning excess capital to shareholders.

 So this again, leads to better returns for shareholders, better governance, and which helps improve the previous perception of the market as being one where confidence is poor and companies can make a decent return on their business because of the difficulty in sustaining the company's profitability. So so all these points we think are interesting and point to and help to answer the question of why Japan in the midst of this, you know, you have a market that is deep with more than 2000 listed companies and you can find companies that are domestic focused, international, some that are benefiting from digitalization or artificial intelligence, or they may possess strong brands or involve in hybrids or electric vehicles and might produce products that are mission critical to companies that operate across the globe. And so these companies are not very well covered, especially within the mid to small companies, which then again offers investors opportunities if they do their homework. So so what this all means when you put all these things together is that we're seeing an increasing number of companies that are interesting.

 And for investors, that means the opportunity set is expanding. 

Mike 

Excellent. So basically, you know, end of deflation, a new focus on returning capital to shareholders, a new focus on corporate governance. And, you know, I mean, obviously, Japan has a deep and developed market for shareholders. So I think, you know, the next question, I guess, is for JEQ specifically, you know, would you please talk about, you know, your team's investment philosophy, your investment approach and kind of, you know, the investment strategy?

Chern

Absolutely. So we are a team of five led by myself, and we have people on the ground, you know, help us dig deep into companies and understand how they make money, what the risks within these businesses. And we then pick out the companies that we deem to be of good quality through our assessment of management teams, business moves, the financials and returns and the governance.

And, you know, our investment philosophy here, this is then, you know, to just look for good companies, just to keep it simple, right? And then we size up these opportunities accordingly. 

Mike

Could you talk about what a good company means, going a little deeper into that? 

Chern

Sure. So what we mean by good companies is companies with a very strong business moat, meaning that, you know, it's defensible.

They have cash flows of business or earnings that's sustainable. And and businesses that have good management teams that have a proven track record. Right. Companies that have a good culture within. So we spend a lot of time understanding the ins and outs, the nuts and bolts of a business, the ins and outs of how management teams manage their companies and how they manage risk within the business.

And and of course, you know, in Japan, it's important to focus on governance, right? We we spend a fair bit of time understanding how and how governance, how how companies are being covered internally and how they deal with shareholders and other stakeholders. Right. So so is that is it's a combination of all these factors that we are trying to understand.

 And and that helps us that helps us be informed about what what companies are of above average or perhaps way above average in Japan and which allows us to get that additional return from investing in them. 

Mike

And then once you do the security selection, how do you go about thinking about portfolio construction? You know, is it is it simply large cap?

Do you go up and down the cap structure? And then like in sector allocation, that sort of thing? 

Chern

Sure. So first we look at where the best quality companies are in each sector within the universe and we size up these opportunities according to factors such as the quality of the business, the visibility of the business, the outlook and the valuations.

Right. So, so it's more of a qualitative process and how we we come up with this. But of course, at the same time, we do use some risk tools to help ensure that we aren't taking excessive risks across the portfolio. 

Mike

Yeah. Excellent. Excellent. And you mentioned you have a team of five, but surely, I mean, Aberdeen has hundreds of equity analysts and I'm sure that you must rely on those.

Or is it just due to the five of you picking the Japanese equities? 

Chern

You're right in that we should tap on the broader group of investors across equities. Now, the five of us spend all of our time looking at Japan Equities. As we know, Japanese companies are not just operating within Japan, copying, competing amongst each other. They are actually plugged in to the global supply chain, know they are competing with companies based elsewhere in the world and we spend a decent amount of time, you know, communicating with our colleagues elsewhere to get a better sense of of the competitive environment of the competition and and believe that that helps us be better informed as investors within the Japan equity market. 

Now, just to give a quick example here, the number of companies in Japan that are plugged into the semiconductor production, semiconductor manufacturing process. Right. So and understanding how that chain works, whether it's in North Asia, in Taiwan, in Korea or elsewhere, you know, in America, you know, you've got some very good companies there and in other parts of the world and parts of Europe and so on, that allows us to form a more complete picture.

You know, to understand which parts of the companies or which parts of the supply chain are seeing some additional demand or seeing what challenges they're facing and whether, you know, the companies who are investing in just just as good or actually excellent in what do and how they run their business. 

Mike

Well, great. And, you know, I noticed that about 20% of the portfolio is invested in information technology, and that's a broad category.

So you just mentioned semiconductors. Is that a particular subsector that you're invested in right now, or is there another subsector or are you just broadly invested across information technology? 

Chern

Well, if you look at the information technology sector is split three ways and we are invested in all three areas. So the first area is semiconductor related companies, and that includes those that produce equipment for producing chips.

 And you can count Japanese companies as the leaders in producing equipment for parts of the very complex semiconductor manufacturing process. You also have technology, hardware companies where they are businesses that invest in components for smartphones or other electronic devices, which could be used for, for example, automation of manufacturing process right across many sectors. And lastly, you also have I.T. software companies and in the Japanese equity market, you can find companies that are helping businesses to integrate software into their processes and companies that are working on, say, a Japanese language, large language model for artificial intelligence and which can then be used to help businesses to be more efficient.

 And this is quite important, of course, in a country where the population is aging and there are fewer workers around. 

Mike

Okay, That's interesting. And then, you know, in about another 20% of the portfolio is invested in industrials. And I mean, I guess my question is, what makes that sector compelling right now? 

Chern

So industrials, it's actually quite a diverse sector.

So you can find the old conglomerates in Japan, some of which have or are undergoing restructuring. You can also find more focused businesses such as those that deal with business services, like providing human resources, for instance. So within that range of companies, with shareholders of companies that are plugged into the digitalization of industrial companies and the upgrading of power grids, which as we know is quite important with renewable energy and increasingly being adopted by many countries.

We also invested in companies that produce semiconductors for electric vehicles and hybrid vehicles. We are investing in companies that operate online platforms for job listings, for which you the adoption of artificial intelligence is helping to better match opportunities between employees and those looking for job opportunities. 

Mike

You know, that's a very broad category that much broader than that, than just the headline industrials.

So. Well, thank you, Chern, for that update on JEQ. It's always a pleasure speaking with you. 

Chern

Thank you. 

Mike

And thank you, everyone, for listening to this podcast. There are three convenient ways to learn more about JEQ, on the Internet. Visit abrdnjeq.com Email us at Investor.Relations@abrdn.com. Or give us a call at 1 800-522-5465.

 I'm Mike Taggart of Aberdeen. Thank you for listening.

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