Japanese Equity Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

Japan has been a poor performer over the past 18 months—a slow COVID-19 vaccination rollout and concerns about easing growth and increased regulation in China have weighed on the market. However, Japan is trading at a discount to average valuations; in our view, the bad news has been priced in and, with the domestic economy open, border restrictions gradually set to ease, and Chinese activity stimulating the economy, we see an attractive investment opportunity in Japanese equities.

Against this backdrop, our overweight exposure to industrials and business services companies has detracted. We continue to believe that we are invested in exceptional companies that will grow and take market share over the next three to five years, which is our investment horizon.

We have seen a rerating of banks and deep cyclical industries like steel in Japan, which we have limited exposure to; longer term, we believe these companies will struggle to make their cost of capital and generate durable investment growth and believe further upside is limited.

Our portfolio's performance has been hindered by our overweight in small-cap stocks, which have lagged amid investors' flight to assets perceived as safer. To us, small-caps represent the future of Japan and, in a country of low growth, are managing to grow durably and take market share. Japan lags on digitalization and faces the challenge of an aging population, and we believe small-cap companies play an important role in addressing these issues. Among these are companies that are embracing e-commerce, payments, cloud accounting, and recruitment platforms.

The election of the Liberal Democratic Party's Fumio Kishida as prime minister has reduced political uncertainty, and Japan's highly open market is well positioned for a strong recovery in 2022, in our view. Japanese equity valuations are very attractive from both a relative and an absolute perspective, and we believe we can build on our strong track record over longer time periods following a challenging 2021.

Strategy

Fund Summary

Long-term capital appreciation through investment in a broadly diversified portfolio of companies listed on the Japanese equity market.

31-Mar-2022 - Archibald Ciganer, Portfolio Manager,

The portfolio retained its largest overweight positions in the IT and services and machinery sectors. It remained positioned underweight in electric appliances and precision instruments, commercial and wholesale trade, and banks. Trading activity during the quarter was limited. We added to existing positions where we believe valuations were attractive—in companies capable of generating sustainable earnings growth due to their exposure to high-growth economies and those that could stand to benefit from inbound tourism restarting. On the other hand, we sold shares of companies that were highly valued and where there was limited scope for corporate fundamentals to improve further, in our view.

IT and Services

We found attractive opportunities to invest in the IT and services sector, in companies with the potential for further overseas expansion and those that we believe stand to benefit from the restart of inbound tourism and other favorable post-coronavirus trends.

We added a position in Nihon M&A Center, which is principally involved in the merger and acquisition brokerage business. Its shares have suffered due to an accounting issue and the broader sell-off in growth stocks, providing us with an attractive entry point.
We bought shares of e-commerce company Mercari, which operates one of Japan's largest online flea markets for individual buyers/sellers and is aiming to replicate its success in the U.S, at an attractive valuation. We believe investors are underestimating the company's earnings potential over the next several years.
With shares of Pigeon trading at cheap valuations relative to history, we added to our holding. We believe the baby- and child-care goods company stands to benefit from the restart of inbound tourism and a potential one-off rebound in births following the coronavirus pandemic.

Machinery

We retain our overweight position in the machinery sector but took some profits in companies that had performed strongly.

We sold our holding in automatic control equipment company SMC, as corporate fundamentals had peaked and the shares had become too expensively valued, in our view.

Raw Materials and Chemicals

In the raw materials and chemicals sector, we increased our holding in a company that benefits from the rapid prospect of overseas expansion.

Nippon Paint operates in the global paint market, at an attractive valuation. Over the long term, we believe the company can generate sustainable earnings growth due to its exposure to high-growth countries.

Electric Appliances and Precision Instruments

We reduced some of our holdings in the electric appliances and precision instruments sector with a view to increasing our positions in other companies that we had higher conviction in.

We sold shares of life science tool company Shimadzu, which had become expensive, to fund better ideas elsewhere.
We continued to reduce our position in electric appliances and precision instruments sector holding FANUC to finance better ideas. Shares of the factory automation company are highly valued, in our view, and there is limited scope for corporate fundamentals to improve further.

Team

Archibald Ciganer,
Portfolio Manager

Archibald Ciganer is the portfolio manager for the Japan Equity Strategy, having previously covered the telecom, transportation, utility, media and consumer sectors as a research analyst in the Equity Division.

Portfolio Manager since

2013

Years at
T. Rowe Price

Years investment experience

Laurence Taylor,
Portfolio Specialist

Laurence Taylor is a portfolio specialist in the Equity Division at T. Rowe Price, representing the firm's global equity portfolio managers to institutional clients, consultants and prospects.

Years at
T. Rowe Price

Years investment experience

Indicative Benchmark Data Source: Tokyo Stock Exchange

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges, taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures. Past performance is not a reliable indicator of future performance.

Daily performance data is based on the latest available NAV. Performance returns for share classes less than 1 year old (and associated benchmarks) are cumulative rather than annualised.

Benchmark: Investors may use the benchmark to compare the fund’s performance. The benchmark has been selected because it is similar to the investment universe used by the investment manager and therefore acts as an appropriate comparator. The investment manager is not constrained by any country, sector and/or individual security weightings relative to the benchmark and has complete freedom to invest in securities that do not form part of the benchmark.

The Funds are sub-funds of the T. Rowe Price Funds OEIC, an investment company with variable capital incorporated in England and Wales which is registered with the UK Financial Conduct Authority and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors and via www.troweprice.com.

IA Sector: Many UK funds are grouped into sectors by the Investment Association (the “IA”) (the trade body that represents UK investment managers), to help investors to compare funds with broadly similar characteristics. Investors may compare the fund against the performance of the Japan sector. This sector represents the average performance of certain funds that invest at least 80% of their assets in Japanese shares. It can therefore serve as a method of comparing the fund’s performance with other funds that have broadly similar characteristics. The fund is not constrained to or managed in line with this sector. Source for IA Sector Data: © Morningstar. All Rights Reserved.

Please note that the Fund typically has a risk of high volatility.

This material being furnished is for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

The specific securities identified and described in this report do not represent all of the securities purchased, sold, or recommended for the OEIC sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

Attribution Data: Analysis represents the total performance of the portfolio as calculated by the FactSet attribution model and is inclusive of other assets that that will not receive a classification assignment in the detailed structure shown. Returns will not match official T. Rowe Price performance because FactSet uses different exchange rate sources and does not capture intra-day trading. Performance for each security is obtained in the local currency and, if necessary, is converted to U.S. dollars using an exchange rate determined by an independent third party. Figures are shown with gross dividends reinvested.

Sources: Copyright © 2020 FactSet Research Systems Inc. All rights reserved. FT Interactive, IDC; Analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the TOPIX sectors and industries for sector and industry reporting for this product.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

¹ Please note that the Ongoing Charges figure is inclusive of the Management Charge and is charged per annum.

Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.

IT and Services

Machinery

Raw Materials and Chemicals

Electric Appliances and Precision Instruments

Risks

Typical Investor

Commentary for