Interactive Investor

A 'ludicrously cheap' Japan trust

11th May 2016 17:05

Kyle Caldwell from interactive investor

JPMorgan Japanese is looking "ludicrously cheap" on a 14% discount, according to analysts.

A year ago the trust, one of our sister magazine Money Observer's prestigious Rated Funds, was trading on a discount of 8%, but it has since steadily seen the gap between its share price and net asset value widen.

Analysts put the widening of the discount down to Japan's stock market giving investors a volatile ride over the past year, with the Nikkei 225 index down 15%. This has spooked investors, and the lower levels of demand have driven the discount wider.

But for long-term investors the investment case for Japan remains attractive, argues Mona Shah, senior research analyst at Rathbone Asset Management. Shah described the 14% discount on offer as "ludicrously cheap".

"The trust's average discount over the past year is 10%, so at 14% it presents a buying opportunity for investors who are happy to tolerate some volatility. We are positive on Japan, as we like the reforms introduced by Japan's government, which should hopefully give its economy a boost," Shah says.

"Another positive is the fact that Japan's government is putting pressure on Japanese firms to become more shareholder-friendly."

Shah says JPMorgan Japanese is aiming to profit from the reforms, with around 40% of the portfolio investing in consumer businesses, such as retailers.

"Other themes the trust seeks to profit from include Japan's ageing population, robotics and tourism," Shah adds.

She also invests in Baillie Gifford Shin Nippon, another Rated Fund, but notes the trust will not appeal to bargain hunters, as it is currently trading on a premium of 2%.

Stephen Peters, an investment trust analyst at Charles Stanley, also described JPMorgan Japanese as "cheap".

"Trading out of Ballie Gifford Japan Trust (1.4% premium) into JPMorgan Japanese to me seems like a good trade," Peters says.

How we find investment trust bargains

Each month we highlight a couple of investment trust bargains and occasionally draw attention to investment trusts that are "too hot to handle" - those that are trading on big premiums.

The ideas come from regular conversations with investment trust analysts, and we try to provide a mixture of bargains, from "hidden gem" trusts with less than £200 million in assets to the more established names that typically trade on a smaller discount or premium.

For the sake of simplicity, rather than using technical measures such as the "Z score", we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.