According to the fund’s January factsheet, co-portfolio manager James Bullock said the firm has “questioned the sustainability” of the company’s trajectory for some time.
One of the fund’s holdings since its 2011, JPX has become one of the strategy’s top performers with an annualised 17.2% return in sterling during the period.
However, the “healthy” performance has not been a “smooth line”, given “big chunks” of returns were delivered between 2013 and 2015 as the Osaka Stock Exchange merged with the Tokyo Stock exchange, improving efficiency and creating a retail trading boom.
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Bullock said that while it was not a “struggling company” the managers said they are ultimately looking for “durable growth, directed by deep-moated companies that go out and make their own luck”.
“The large boost to earnings unlocked by the Osaka-Tokyo merger was triumphal, but also a one-time event,” he added, while noting that any similar future consolidation would require overseas partners, but cross-border deals with exchanges are “difficult to execute”.
Additionally, JPX has not merged with any other index or data services, perhaps due to having its “hands tied by a conservative regulator”, Bullock said, meaning that a majority of revenue comes from trading and clearing services.
He explained that the company’s growth depends on the level of activity in the Japanese stock market. Therefore, despite the long-term potential of major developed markets, “extreme cyclicality has overlain this rewarding trend”.
He added that there are other structural headwinds, such as the potential for trading liquidity to pool globally and the possible shift to China as “Asia’s financial centre”. JPX remains a long-term holding in the Lindsell Train Japanese equity fund.
The fund has replaced JPX with Universal Music Group due to the company’s “impressive oligopolistic” position and new markets emerging within the music industry.
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“UMG supplies roughly a third of the planet’s recorded music (ahead of the other two ‘majors’ Sony and Warner), curating, producing, and promoting artists,” he said.
“On top of this, as a publisher, UMG holds nearly a quarter of humanity’s written songs. Spun out from Vivendi as an independent listed entity in 2021, backed by strategic shareholders such as Tencent, the shares have spent two years languishing.”
Despite a torrent of good news, at the point of the fund’s position initiation the company still traded below their 2021 IPO price, Bullock added.
“Of course, this may simply reflect over-optimism at float, but FY23’s expected sales and operating profit are now already c.50% higher than in FY19, taking UMG’s current multiple to a more reasonable level.”
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