Fidelity's High-Performing Fund Sees Value in Japan's Smaller AI-Linked Companies
The remarkable ascent of Japanese shares to record highs at the beginning of the year has further solidified the investment strategy of a Fidelity International fund manager. This approach centers on identifying smaller, more affordable companies within the artificial intelligence ecosystem that still present significant growth potential.
A Fund Outperforming the Vast Majority of Its Peers
The $944 million Fidelity Funds Pacific Fund, managed by veteran investor Dale Nicholls, has demonstrated exceptional performance. Data compiled by Bloomberg reveals that the fund has beaten 96% of its peers over the past year. A key component of this success is its substantial allocation to Japanese equities, which constitutes about 23% of its investments—the highest country weighting in the portfolio.
One of the fund's prominent holdings is Fujibo Holdings Inc., a company that manufactures essential polishing pads for semiconductor chip devices. Fujibo's shares have dramatically outperformed the market, rising at twice the pace of the benchmark Topix index in the last twelve months.
Japan: A Stock-Picker's Paradise for Tech Investors
"Japan is always a great stock-picking market," Nicholls emphasized in a recent interview. "If you look into it, there are many names in the tech space, particularly at the smaller end. I still think their competitiveness is under-appreciated."
This perspective comes amid a global AI boom that has sent share prices of major memory chipmakers like Sandisk Corp. in the US and Samsung Electronics Co. in South Korea soaring. While these giants have become relatively expensive, this dynamic has opened the door for more reasonably priced stocks of smaller firms, such as Fujibo, which play critical roles in the AI supply chain.
Fujibo Holdings: From Cotton Spinning to Tech Essential
Fujibo's journey is a testament to industrial transformation. Founded in 1896 as a cotton spinning enterprise, the company now derives approximately 45% of its revenue from its polishing materials business. Its specialized polishing pads are vital components used in manufacturing LCD glass for smartphones, hard disks, and silicon wafers for semiconductors.
The Tokyo-based firm's stock has surged an impressive 80% over the past year, far outpacing the Topix's 32% gain and the 39% advance in the Topix small companies index. Despite this stellar performance, Fujibo's valuation remains attractive. It trades at a price-earnings ratio of about 20 times, only slightly higher than the average for Topix companies and still below the Nikkei 225's P/E of 23 times. This suggests the stock may have additional room for appreciation.
Strategic Focus on Critical Supply Chain Niches
Nicholls, who joined Fidelity in 1996, points out that while Japan's chip device manufacturers may not be the largest globally, they occupy strong market positions in critical parts of the supply chain. He anticipates further gains in small-cap companies that are capitalizing on emerging AI-related business opportunities.
It is important to note that investing in smaller shares typically carries higher risks compared to large-cap stocks. These companies often exhibit greater volatility, and their lower liquidity can pose challenges when executing large sell orders. Reflecting a balanced approach, Nicholls' ten largest holdings are led by industry titans like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.
Increasing Weightings in Japanese Small-Caps
Nevertheless, the fund manager sees compelling opportunities among smaller names. "I do think there's room to increase weightings there," he stated. "I'll say that I'm increasingly finding more opportunity in Japan amongst the smaller caps, particularly in growth areas."
This strategic shift underscores a broader trend where savvy investors are looking beyond the obvious AI winners to uncover value in supporting industries and niche players that are fundamental to technological advancement.
