In the wake of the crisis hitting Japan, we take a look at the Japanese closed-end funds sector to see how the funds are responding.
There are just eight dedicated Japanese equity closed-end funds, of which six are biased towards smaller companies, an area of the market that’s been hit particularly hard in the last few days. Yesterday alone saw the TSE 1 Small fall more than 10%. Add to that the fact that all six smaller-companies funds are geared to some extent and it doesn’t sound like it will paint a pretty picture.
But a look at the CEFs’ discounts, as shown in Table 1 below, suggests the recent falls haven’t made them screamingly cheap. Only three funds are trading at discounts greater than their three-year average and all are well above their discount levels from six months ago.
That’s not the whole picture, though. We need to look at how their NAVs have been affected by the market turmoil. It’s no good just looking at the level of absolute discount; relative discounts matter. After all, there’s no guarantee the NAV will be less affected than the share price.
We can see in Table 2 below, though, that NAVs have held up marginally better than the share prices, albeit everything has headed south. What’s encouraging is that we’re not seeing panic-selling driving the share prices down at a rate faster than the Japanese market, adding further credence to our view above.
We should also look at gearing in the funds as this has an impact, too. The highest geared fund is Baillie Gifford Japan (BGFD) at 23% net gearing. Some way behind this is Baillie Gifford’s smaller companies fund, Shin Nippon (BGS), and JPMorgan Japan Smaller Companies (JPS) at 17%. While the two Baillie Gifford funds are long-standing fans of gearing, with it in place as a matter of course, the managers at JPS only brought gearing back into the fund in January this year, having taken it off in July 2010.
As yet, the gearing hasn’t had a significantly detrimental effect on these funds. However, it’s way too early to tell if this can last and the full impact of the quake and tsunami is far from clear yet.
What we do know is that these funds are weathering the storm as well as can be expected, for now, and there’s no reason for investors to panic-sell.
