The Fund rose by +24% in Yen during CY2025. This compares with the broader markets which returned +22%. Since inception returns are +164%, representing a 22% compound return.
Our commitment to smaller growth names, combined with not participating fully in AI-related investments, detracted from the fund’s potential returns. The Fund focuses on intrinsic value with a catalyst: blending special situations, value and GARP (growth at a reasonable price) as the opportunity set presents itself. Value as a style rose +30% versus the Growth index move of +15%. Smaller cap shares performed a little better than the bigger names, which helped us overall. The year was divided into a strong first nine months and then an extremely difficult final quarter, where small cap indices lagged their larger counterparts and the market became fixated on a small number of thematic AI, defence and robotics names. Whilst there is much truth in the promising outlook for these areas, we believe that markets are embedding very optimistic outcomes now. Our ‘mispriced cashflow’ holdings suffered in this scenario, falling as the market rose. Softbank, a core AI thematic stock not held by Zennor, rose by +62% in just eight weeks. The cable (optical networking) sector rose by +108% for the calendar year with bellwether shares, such as Sumitomo Electric (5802) and Fujikura (5803), each appreciating more than +120% each. History may not repeat itself, but it rhymes, and valuations in many areas feel rich; we try and underwrite a conservatively assessed 20% Internal Rate of Return (IRR) to our intrinsic value estimate, and we cannot do so for many of the popular themes in the market today.
Our Financial weighting paid off - especially our exposure to regional banks. Hachijuni Bank (8359) rose by +67% and Kyoto Financial (5844) +48% over the year. Both stocks still trade at discounts to net asset value and have abundant cross shareholdings. We hope that in this climate of corporate governance reform we will see further moves to improve capital allocation, increase dividends and buy back shares. Shiga Bank (8366) rose +82% encouraged by several activist shareholders on its shareholder register.
In the Material sector we sold two important positions. Kurimoto (5602), a civil engineering stock, rose by +91% and Nittetsu Mining (1515), a copper miner and distributor, +150%. Both shares have been long term holdings, but our assessment of intrinsic value suggested limited upside. We’re seeing the same pattern elsewhere in the portfolio, where Value positions have moved closer to our intrinsic value assessments, reflecting Value’s strong performance over the past three years.
Within the Communications sector our performance was driven by a large weighting in Fuji Media (4676), which had undergone a huge employee related scandal. Virtually the entire board resigned, and several activist investors took aggressive stakes and made proposals to unlock abundant cash, investment securities and leased assets. The shares rose over +100% during the year. We exited the position when fair value was reached.
A few growth holdings performed poorly and significantly detracted from overall portfolio returns. GENDA (9166), an entertainment company, fell by -45%. While we remain positive about a strong long-term outlook for GENDA, we misjudged a poor demand/supply situation at the company, a new issue of equity to fund North American growth and selling pressure from the former CEO, who is looking to exit a significant stake of 6%. On 4x EBITDA, the shares look attractively priced.
GNI (2160), a pharmaceutical manufacturer, have lost -30% in share value this year as the lull between approval and profits weighed on the shares as impatient investors exited. We are hopeful that the strong earnings momentum from now on should cause a rerating. A long-term winner, Lifedrink (2585), in the beverage space saw profit taking. However, as the year ended, the company issued a very positive 5-year growth target. The shares trade on a PER of 14x without including any incremental capacity additions.
The Fund has risen by +164% in Yen terms since inception and has now soft closed to new investors.
The corporate governance story continues to be a positive tailwind. The managers believe that the focus on reform will pivot positive attention towards many mid and small capitalised companies. Previously, the momentum has been with the bigger companies. Recently, share buyback activity has flattened out, and we need to be cognisant of this. The Japan Stock Exchange are keen for companies sitting on idle cash to demonstrate why this is the case, and if not, to use that cash to return to shareholders or spend wisely on M&A.
Ms Takaichi was elected as head of the LDP and appointed as Japan’s first female Prime Minister. She seems to have got off to a generally good start although Sino-Japanese relations have soured. It is imperative that Takaichi demonstrates a credible plan to reduce the overall government debt burden, particularly in light of her recent expansionary fiscal package. Defence spending will be a core theme of her administration.
After such a positive year for the major indices in Japan, the managers are somewhat cautious. Valuations on the overall market seem stretched but not excessively overpriced. We believe that there is a bubble in technology and AI shares which could unwind. Added to that, there is a risk that the Bank of Japan is behind the curve regarding inflation. The recent interest rate hike in December by +0.25%, still means that real interest rates are -2%. Policy is thus loose and the Yen continues to decline and threatens to cause more imported inflation. The recent fiscal stimulus announcement has seen 10-year government bond yields above +2.1% and 30-year paper bond yields at 3.4%. Whilst our central case is that net debt is perhaps healthier than most commentators think, there remains a risk that the Bank of Japan may delay further rate hikes for too long. The government’s fiscal expansion is adding to the perception that the monetary policy will stay accommodative. Our view is that the Yen is very undervalued and has significant room to appreciate higher against the dollar.
Stock selection should come to the fore in 2026. We expect small caps to perform much better than they have since our fund began. The corporate governance story will favour these names as expectations for change are still low. The fund maintains a very domestic feel. This is from a purely bottom-up perspective. AI and Technology shares look expensive and the Japanese auto OEMs (Original Equipment Manufacturers) are struggling competitively against China. BYD has now officially become the world’s largest electronic vehicle producer. City Banks, like MUFG (8306), which the fund bought in 2021, has since seen their share price rise over 3x, showing significant gains already made in large value stocks.
With an active ratio of over 98%, the fund is positioned to see less impact from any market pullbacks. Our beta is low and we generally do not hold core index names in the portfolio. Whilst not negative, we remain more conservative on the index outlook given that many stocks have now reached fair valuations. In contrast we remain much more positive on our portfolio holdings, which remain deeply discounted against our intrinsic value assessments.
