JPMorgan Japanese Investment Trust (LSE:JFJ) has leaned on corporate reform and a repositioned portfolio after a period in which value stocks outpaced the quality companies it favours.

The half-year figures highlighted the challenge facing a quality-focused manager in a market led by value. In the six months to 31 March, net asset value with Debt at Fair Value rose 2.0% and the share price 3.8%, against 6.7% from the TOPIX index in sterling. The managers estimated that value outperformed growth by about 12 percentage points during those months, which they identified as the main headwind. Longer-term returns remain ahead of the benchmark over both three and ten years, at 16.4% and 10.2% annualised respectively.

Net asset value at the period end was 772.8p, with the shares at a discount of 9.0%, narrower than the 10.5% six months earlier. Gearing stood at 15.3% within a permitted range running from 5% net cash to 20% geared.

About the company

JPMorgan Japanese Investment Trust invests in listed Japanese companies with the aim of delivering long-term Capital growth. Managed by a JPMorgan team in Tokyo and London, the portfolio is concentrated in around 55 holdings, selected for their quality, growth potential and valuation. The trust is benchmarked against the TOPIX index in sterling, and its holdings span banks, electronics, industrial groups, consumer brands and technology businesses.

The trust earns returns through the share prices and dividends of the companies it owns, and it uses borrowing to increase exposure, within a range from 5% net cash to 20% geared. Its closed-ended structure lets the board buy back shares when they trade below asset value, a tool that has been used actively. Because the portfolio is priced in yen and reported in sterling, currency movements are another Factor in the results.

In the six months to 31 March, net asset value with debt at fair value rose 2.0% and the share price 3.8%, behind the 6.7% from the index. Net asset value was 772.8p and the discount 9.0%. Longer-term returns remain ahead of the benchmark, at 16.4% annualised over three years and 10.2% over ten.

Buybacks and portfolio moves

The company (LSE:JFJ) has been an active buyer of its own shares. It repurchased 4,527,000 shares in the half at an average discount of 8.8%, for £33.2m, followed by a further 2,415,000 at an average discount of 8.3%, for £18.5m, by the time the report was published.

Among the top contributors in the half were Modec, on new orders, Seiko Group, helped by its luxury watch business, and Advantest, which continued to benefit from Demand linked to artificial intelligence. Detractors included Rakuten Bank, following a proposed Acquisition of businesses from its parent group, Nintendo and Sony, both affected by rising memory chip costs, and Sanrio, on worries over Chinese demand.

At the end of April, Mitsubishi UFJ Financial was the largest holding at 7.9%, followed by Mitsubishi Electric at 5.8%, Advantest at 5.4% and Sumitomo Electric Industries at 4.5%. The portfolio contained 55 holdings at the end of March.

Japan's governance story

Japanese corporate reform has been a long-running theme. Companies have faced pressure from regulators and the stock exchange to improve capital efficiency, unwind cross-shareholdings, raise dividends and buy back shares. For investors, the appeal is that better governance can raise returns on capital and make profits more accessible to shareholders.

The managers' description of reform as still at an early stage suggests that the process has further to run, but progress varies from company to company. Stock selection therefore matters, particularly in a market where value and growth styles can alternate in leadership.

The trust's quality bias means it tends to hold companies with leading market positions, high returns on capital and the potential to compound earnings. In periods when cheaper, more cyclical stocks lead, such a portfolio can lag, as it did in this half-year, but the managers argue that reform strengthens the case for their approach over time.

Macro factors and what to watch

Interest rate changes by the Bank of Japan, the direction of the yen and the political agenda of the current government all affect the investment case. A weaker yen helps exporters but increases Import costs, while wage growth above 5% for a third year points to a more resilient domestic economy.

Shareholders will look to the next report for evidence on the balance between value and growth stocks, the pace of Buybacks and the effect of the chair's planned departure in January 2027. The managers' named risks, including the Middle East conflict and disruption to software businesses from artificial intelligence, will also remain in view.

Sector exposure is another area to follow. Heavy weightings in banks and electrical and technology companies mean the portfolio is influenced by domestic interest rates, global demand for semiconductors and the progress of corporate investment in Japan.

Reform, politics and energy

The managers, Nicholas Weindling, Miyako Urabe and Xuming Tao, described themselves as very positive on Japanese equities and said the reform process was still in its early stages. They identified the Middle East conflict and disruption to software businesses from artificial intelligence as the main risks to monitor.

The macro backdrop is unusually busy. Sanae Takaichi's February election win gave her a solid mandate for industrial policy across semiconductors, energy security and defence. Yen weakness has raised import costs for consumers, even as wage growth has exceeded 5% for a third consecutive year.

Rate policy has also moved, with the Bank of Japan among the central banks that raised interest rates in September, a change that could influence both the currency and the balance between value and growth styles.

The board is preparing for its own transition. Chair Stephen Cohen, who has described the case for Japan as firmer than ever, will step down at the Annual General Meeting in January 2027, with Sally Duckworth intended as his successor at the FTSE 250 trust.