The Fund returned approximately 31% over the period in sterling terms. Over the same period, the IA Japan Sector peer group delivered returns of approximately 19%. Sterling strengthened against the yen by 8.3% during the period, representing a material headwind to returns. Performance was driven by strong contributions from a range of individual holdings across the portfolio.
Market leadership was more balanced between small and large capitalisation stocks over the year, with Value outperforming Growth by more than 10%. Returns became increasingly bifurcated in the second half of the year, as a narrow group of AI-related stocks dominated index performance, leaving a large proportion of the market behind. Financials performed well as markets began to anticipate an initial interest rate increase from the Bank of Japan.
Throughout the year, the Fund maintained a clear bias towards small and mid-capitalisation companies, with these representing just over 80% of the portfolio on average. Zennor allocated meaningful capital towards Industrials, followed by Materials and Information Technology, reflecting our focus on domestic-oriented businesses, capital discipline, and companies undergoing structural change. This positioning meant that performance was driven primarily by company-specific outcomes rather than broad index movements, particularly during periods when market returns were concentrated in a narrow set of large capitalisation stocks.
Contribution within the Materials sector was particularly strong. We exited Kurimoto (5602), the civil engineering company, after the shares rallied over 80% during the year and approached our estimate of fair value around book value. Nittetsu Mining (1515) was also sold after a 125% rise as intrinsic value was reached, using buying activity from a new activist investor as an opportunity to exit. T. Hasegawa (4958) was a disappointment during the period, although inventory issues in North America appear to be easing.
Within Financials, regional banks performed very well. Bank of Iwate (8345) rose over 80%, while Hachijuni Bank (8359) and Kyoto Financial Group (5844) also delivered strong returns, benefiting from improving capital allocation and expectations of widening net interest margins.
In Communications, the Fund’s largest contributor was Fuji Media (4676), where the shares rose approximately 90% during the period. We actively engaged with the company following a high-profile governance scandal, which resulted in significant board changes and a renewed focus on capital structure and governance. We subsequently exited the position after a strong run, redeploying capital into TBS Holdings (9401), where we see considerable upside to our estimate of intrinsic value supported by valuable investment securities and real assets.
Within Consumer Discretionary, Hi-Lex (7279), an automotive components manufacturer, saw its shares rise by over 100%. We saw the company in October 2025 and will see them again in Japan in January 2026. The company has been restructuring effectively, unwinding cross-shareholdings and announcing an accretive acquisition, reinforcing our investment thesis.
Corporate activity and take-privates were an important contributor to returns during the year. Japan continues to see an acceleration in management buyouts and parent–subsidiary unwind transactions, driven by Tokyo Stock Exchange pressure on governance standards, capital efficiency and listed subsidiary structures. This environment remains highly supportive for our special situations approach.
During the period, Tenma Corporation (7958) announced a management buyout at a c.40% premium following prolonged shareholder engagement and substantial share buybacks, allowing the Fund to crystallise value. Nippon Road (1884), a listed subsidiary of Shimizu Corporation, was acquired just above book value, consistent with our long-held view that parent–child listed structures are increasingly untenable under current governance reforms. In pharmaceuticals, Torii Pharmaceutical (4551) was acquired by Shionogi, delivering a premium to minority shareholders through a tax-efficient structure. Finally, Piolax (5988) launched a tender offer following activist pressure and a strategic review, which we used as an opportunity to exit the position. These outcomes underline the growing trend towards de-equitisation in Japan through buyouts, consolidation and balance-sheet driven transactions.
At the time of writing, market valuations appear stretched in historical terms. The bifurcation between AI-related winners and the broader market has become extreme. While recent results have generally exceeded expectations, earnings momentum remains strongest in domestic-oriented areas of the economy. Ex-AI, manufacturing earnings growth has been more subdued.
The Bank of Japan raised its policy rate by 0.25% at the time of writing, marking the start of what may prove to be a gradual tightening cycle. Inflation is running at around 3%, above the Bank’s 2% target, and yen weakness continues to encourage imported inflation. Ten-year government bond yields, at around 2%, stand at multi-decade highs. The risk remains a further weakening of the yen and then intervention by the Ministry of Finance. Government debt levels in Japan, the UK and the US remain a key focus for global markets.
Despite strong absolute returns, we remain disciplined in our valuation approach. We continue to prioritise companies with robust balance sheets, improving governance and sustainable cash flows, and prefer to avoid areas where valuations offer little margin of safety.
Dividend
The Fund continued to deliver a growing level of income over the period. For the A Income share class, an interim distribution of 2.01p was paid, and a final distribution of 1.19p is expected to be paid, bringing total distributions for the year to 3.20p, representing 12.9% growth compared to the previous year.
The B Income share class paid an interim distribution of 1.99p, and a final distribution of 1.18p has been declared, totalling 3.17p for the year, an increase of 12.3% year-on-year. The Fund yielded approximately 2.13% at the ex-dividend date.
Underlying dividend growth in Japanese yen terms continued to be strong across the portfolio. Sterling strength over the period moderated reported GBP income; however, this leaves the Fund well positioned to benefit should the yen strengthen in future.
Income generation remains supported by improving payout ratios across the Japanese market, stronger corporate balance sheets and an increasing focus on shareholder returns. We remain confident in the sustainability of the Fund’s income profile, underpinned by our emphasis on capital discipline, earnings resilience and high-quality balance sheets.
