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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Specialists in equity portfolios in Asia Pacific, emerging markets, global and sustainable investment strategies

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This is a financial promotion for The First Sentier Japan Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back sigfsnificantly less than the original amount invested.
  • Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares. 
  • Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk. Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.

For details of the firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information.  

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund. 

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Part 2: Niche industries can provide a favourable competitive landscape for sector leaders

Dispelling the myths and misconceptions of investing in Japan

Despite the perception that there is little or no growth in Japan, our core portfolio holdings in the FSSA Japan Equity Fund have been able to adapt and grow despite economic headwinds, and have delivered sustainable earnings growth and attractive shareholder returns.

Throughout this six-part series, we aim to address some of the most common investor concerns about Japan equities and highlight the opportunities for sustainable growth in this market.

In chapter two, we look at how niche industries can provide a favourable competitive landscape for sector leaders. 

Part 2: Niche industries can provide a favourable competitive landscape for sector leaders

While the potential for outsized profits and strong sales growth usually attracts new entrants to an industry, our observations from spending time in Japan and talking to company management teams suggest that the younger generation prefer to work at steady jobs in large corporations rather than take the risk of launching new businesses. Due to the low growth economy, Japanese society has perhaps become even more conservative and focused on stability than ever before.

Additionally, the size of Japan’s venture capital industry is tiny (less than 1% of China’s) and there is little support for fledgling young businesses. As a result, new companies must build a profitable business model almost immediately to generate cash flow and sustain growth levels. There is no “free money”, which reduces the incentive to burn cash in order to capture a share of the market.

Negligible entrepreneurship, particularly in sectors where the market size is small (and thus potential rewards are lower), along with an underdeveloped private capital market, means that in niche sectors with just one or two dominant companies, the leading franchises tend to maintain their market position as there are no significant rivals to compete with. This can lead to sustainably high returns for investors in those companies.

In our Japan portfolios, we own a few companies, such as Benefit One and S-Pool, that benefit from this kind of competitive landscape – we refer to them as the only fisherman in a vast blue ocean. Benefit One is Japan’s largest provider of corporate welfare services, a highly scalable, recurring revenue business. The company has few competitors and generates an extraordinary 70% return on invested capital.

While fringe benefits are typically only provided to permanent workers in large corporations, we expect small-to-medium sized companies (which employ 70% of Japanese workers) to increasingly start offering them as well – thus expanding the potential market size. Benefit One aims to become a “one-stop shop” solutions provider to increase its value to clients, bundling together business travel management and healthcare programs with its core fringe benefit services.

Benefit One’s operating profit has grown 10x over the past 15 years. We believe this could accelerate further, as the company enhances its information technology (IT) systems, digitalises its services, scales the business and improves margins and profitability. As an asset-light business, Benefit One does not need much capital to grow, while its already-large size and the “network effect” acts as a natural barrier to other entrants.

Another company that fits into this category is S-Pool, which provides special needs employment services. S-Pool stands for Solutions, Systems, Staff, Society and Sharing, which represents the company’s core beliefs and corporate philosophy. The company leases and manages farmland where its client’s disabled employees can cultivate vegetable crops. Alongside the philanthropic nature of the business, S-Pool generates a healthy 39% return on invested capital, thanks to high barriers to entry and a niche market with few competitors.

In Japan, the law stipulates that 2.2% of most companies’ overall headcount must be filled with persons with disabilities. However, there are several challenges to meeting this quota. While people with physical rather than mental disabilities are easier to place into jobs, around 35% are already employed – which means a relatively smaller pool of candidates. On the other hand, only 6% of people with learning or mental disabilities are employed, but there are relatively few roles that are suitable – and as much as 50% of those that find work end up leaving within the first year.

As such, out of 90,000 domestic companies that are subject to the Act of Employment Promotions of Persons with Disabilities, around 50% are non-compliant. S-Pool’s long track record in the special needs employment sector places it at the forefront in this niche area. Its unique farming model is built upon years of accumulated experience, resulting in increased employee motivation and an extremely high 93% retention rate. Around 30% of corporate clients are recurring, which attests to the high level of client satisfaction too.

Similar to Benefit One in the fringe benefits sector, S-Pool faces no major competitive threat for its special needs employment services. Demand is defensive and both local governments and blue-chip companies have benefitted from S-Pool’s expertise. S-Pool’s model proves that companies that provide social benefits for the betterment of society do not necessarily need subsidies – and could even be attractive to investors if executed well.

Look out for chapter three of this six part series, as we continue to dispel some of the most common myths and misconceptions. 

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered. It does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First Sentier Investors.

In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK, issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First Sentier Investors ICVC, an open ended investment company registered in England and Wales (“OEIC”) or of First Sentier Investors Global Umbrella Fund plc, an umbrella investment company registered in Ireland (“VCC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC and VCC which are available free of charge by writing to: Client Services, First Sentier Investors (UK) Funds Limited, Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.firstsentierinvestors.com. Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First Sentier Investors may be restricted in certain jurisdictions.

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First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

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