Liontrust Japan Equity Fund

• Japanese equities suffered a bout of extreme volatility during the third quarter but emerged with a small positive return.
• A Bank of Japan rate hike and 50bp cut from the US Federal Reserve reduced the yield differential between the two countries, triggering fears of an unwinding carry trade
• From a domestic perspective, Japan’s strong drivers – including corporate governance reform – remain intact, while the earnings growth outlook is robust. 

The Liontrust Japan Equity Fund returned 0.9% over the quarter, against the 0.6% return from the TSE TOPIX Index comparator benchmark and the 1.4% average return in the IA Japan sector, also a comparator benchmark*.

Japanese equities suffered a bout of extreme volatility during the third quarter but emerged with a small positive return. From  July 31st to  August 5th, the TOPIX fell by 20% in three trading days. Expectations for a rate hike had been building into the Bank of Japan’s (BOJ) July meeting but hadn’t quite become consensus when the hike was delivered. Alongside weak US employment data and renewed fears over a looming recession, this led to a sharp reduction in the yield differential between the US and Japan, a stronger yen and unwinding of the carry trade. For a brief period there was even talk of an emergency rate cut from the US Federal Reserve (Fed), although over the weeks that followed US data improved and the BOJ calmed the market over the prospect of aggressive hikes. The Fed was able to deliver a 50 basis point cut in September without spooking the market, and equites staged a solid rebound from the August turmoil.

Aside from the global factors causing volatility in Japan, the core domestic drivers continued to progress, including the gradual transition from deflation to a mildly inflationary economy (CPI has been above 2% for more than two years now), and rising corporate return on equity and shareholder returns driven by the Tokyo Stock Exchange’s governance reforms. We continue to see progress being made on the back of the TSE’s initiative last year aimed at getting companies to focus on their cost of capital and encourage those generating unsatisfactory returns to publish plans detailing how they intend to rectify this. The first and most straightforward step has seen companies reduce their complex web of cross-shareholdings and initiate share buybacks or raise dividends in order to improve the efficiency of balance sheets. The hope is that this can be followed by operational improvements that can sustainably raise the return on capital of corporate Japan.

The Fund’s Q3return was broadly in line with the Topix , with more defensive sectors and those benefitting from lower interest rates leading the way, including consumer staples, real estate and healthcare; banks, autos and semiconductor equipment lagged. The outlook for Japanese equities remains strong with robust earnings and ongoing corporate governance reform.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 30.09.24, primary share class, total return, net of fees and income reinvested.

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. ESG Risk: In reference to any component (where applicable) of a fund's investment process that uses external ESG data, there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG. There is no guarantee that an absolute return will be generated over a three year time period or within another time period.

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