Liontrust Japan Equity Fund

• Weaker global growth and a strong yen will weigh on earnings for major exporters, but the domestic story continues to play out.

• Japan’s economy is transitioning from deflation to a mildly inflationary environment and there is rising corporate return on equity and shareholder returns driven by the Tokyo Stock Exchange’s governance reforms.

• The outlook for Japanese equities remains strong with robust earnings and ongoing corporate governance reform.

The Liontrust Japan Equity Fund returned -4.4%* over the quarter, against the -1.8% return from the TSE TOPIX Index comparator benchmark and the -1.5% average return in the IA Japan sector, also a comparator benchmark.

The first quarter of 2025 saw sharply higher volatility that came with the inauguration of Donald Trump for his second term as US President and considerable policy uncertainty. The spike in policy uncertainty has led to a much weaker US dollar and suggestions that US exceptionalism may be fading, with a corresponding strengthening of the yen from 160 to the dollar in January towards 140. As has been the case for much of the past year, volatility has stemmed from external factors while core domestic drivers continued to progress.

Even before the reciprocal tariffs announced on April 2^nd, US sentiment indicators were cooling rapidly with growing concern over the possibility of recession. This wasn’t helped by the announcement of 25% tariffs on autos and then much higher reciprocal tariffs than had been expected. Weaker global growth and a strong yen will weigh on earnings for major exporters, but the domestic story continues to play out – the economy is transitioning from deflation to a mildly inflationary environment (CPI has been above 2% for three years now) and rising corporate ROE 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 initiatives 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 financials continued to lead the way during Q1, although following elevated tariffs and global growth concerns, expectations of interest rate hikes have been pared back somewhat. Technology was the weakest sector as the DeepSeek announcement in January saw last year’s AI trade lose some steam, particularly impacting Japan’s semiconductor equipment and testing companies. 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 31.03.25, 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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