While many Japanese companies have clung to traditional ways of doing business, Fidelity Portfolio Manager David Jenkins believes there’s a new era of opportunity for smaller firms operating within the nation’s information technology landscape, catalyzed by government initiatives and evolving market demands.
“The COVID-19 pandemic served as a wake-up call for Japan’s economy by exposing inefficiency in traditional business practices,” explains Jenkins, who manages Fidelity® International Small Cap Fund (FISMX). “In response, the administration of former Prime Minister Yoshihide Suga launched the Digital Agency in 2021, positioning it as ‘a pillar of the new growth strategy.’”
In helming the opportunistic international small-cap strategy, Jenkins aims to optimize the portfolio’s risk/reward trade-off by investing at the intersection of value and quality, while also seeking small-cap businesses abroad that, in his view, are either undiscovered or out of favor.
He observes that the past few years have seen the Japanese government make a more concerted effort to move firms of all sizes further along the road to digitalization.
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“While the country’s corporate giants have made significant strides on this front, I believe the real story lies in Japan’s smaller IT services businesses,” says Jenkins. “Historically slower to adapt, these companies are now accelerating their efforts, driven both by necessity and opportunity.”
Amid rising demand for cybersecurity compliance, big data management, artificial intelligence/machine learning implementation, and other tech needs, Jenkins highlights that Japanese IT services stocks appear well-positioned for sustained growth, especially those catering to the needs of small and midsize businesses.
Within this dynamic environment, certain small-cap IT firms have recently emerged as standouts, according to Jenkins, including portfolio holdings NSD and TIS. He also cited stakes in Dentsu Soken, WingArc1st and Systena, all of which he believes exemplify innovation and adaptability.
“I think Japan is still only in the second or third inning of this transformation, underscoring its early-stage nature, with plenty of room for growth,” concludes Jenkins. “As momentum builds, the nation’s IT services industry could gain further traction as more enterprises adopt digital solutions.”
For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund investments as of June 30.
David Jenkins is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Jenkins manages Fidelity Japan Smaller Companies Fund. Additionally, he co-manages the Fidelity and Fidelity Advisor International Small Cap Funds, as well as performs fundamental research on Europe, Australasia, and Far East (EAFE) small cap companies.
Prior to joining Fidelity in 2007, Mr. Jenkins served as a vice president and equity analyst at Eaton Vance Management. Previously, he was a senior investment associate focusing on domestic value equities at Putnam Investments. He has been in the financial industry since 2000.
Mr. Jenkins earned his bachelor of science degree in business finance from Brigham Young University. He is also a CFA® charterholder.