Managers find returns in notoriously turbulent Japan sector, with Nathan Gibbs’ Schroders Japan Alpha Plus fund outperforming in rising and falling markets
The IMA Japan sector has historically been one of the most volatile, and the last year has been no exception.
According to Morningstar, Clerical Medical’s Japanese Focus is the top performer over one year to 28 June, up 23.3%, compared to a sector average increase of 11.4%. The worst performer over the same timeframe is Chris Taylor’s Neptune Japan Opportunities fund, down 17.5%.
While currency movements are a factor, the sector returns lag behind the other IMA major market sectors. Over
the same time period, the Europe excluding UK, Europe including UK, and US sectors have gained 19.3%, 20%, and 30.4% respectively.
However, the sector boasts many managers who can still deliver through the volatility.
Schroders’ Nathan Gibbs has consistently outperformed
against his sector peers across the market cycle.
Gibbs, who has managed the Schroder Japan Alpha Plus fund since launch in December 2000, has been highlighted by Trustnet as one of its Alpha Managers, performing well against peers in both rising and falling markets.
Fantastic opportunities
The £107m Japan Alpha Plus vehicle is ranked second in the sector over one year, up 22.3%.
The manager believes Japan represents a “fantastic investment opportunity”.
He says: “Valuations are at attractive levels as Japan has lagged other global markets – we expect the macroeconomic picture to improve and this is not reflected in company valuations in many cases.”
Gibbs says many of Japan’s problems, either real or imagined, are poorly understood. One example he gives is trade.
He says: “The trade picture has been perceived to be a problem for Japan but I believe this is, frankly, history.
“A lot of Japan’s trade growth has been driven by Asia, particularly the strongly growing Chinese economy.
Gibbs adds: “We have been taking advantage of this improving backdrop over the last 12 months and believe there is more to go for.”
“We believe expectations on growth and earnings will improve, so I have positioned the fund to take advantage of that.”
Real estate
The fund is exposed to shipping companies and transportation firms, which Gibbs believes will benefit from the upturn he expects to see in the economic cycle.
He is also interested in real estate stocks.
“Real estate has been under significant pressure over the last few years, but I think we will see that situation improve over the next few quarters, so we are taking some initial positions in this area of the market,” Gibbs says.
“We also remain overweight small caps on a selective basis as we believe that the most significant mispricings in the market are among these stocks.”
Launched in January 2006, Martin Currie’s Japan Alpha fund is top quartile over three years and one year, up 3.7% and 17.5% respectively.
Co-manager Claire Marwick attributes the fund’s outperformance over the last year to the managers’ investment process.
She explains: “At the start of 2009 we were going into a terrible recession. Demand and stock prices were falling and analyst expectations of earnings were falling a great deal as well.
“From our contacts with companies it became apparent to us they had cut production by more than the demand was falling, with the result inventories too were falling.”
Marwick adds: “We deduced production levels could not remain as low as they were at that point and they would have to rise through the rest of 2009.
“When we compared our outlook for earnings based on this observation with analysts, who by this point were resolutely negative, we saw a gap between ourselves and the analysts.”
Low valuations
This applied to all the cyclical sectors such as cars, machinery, tech and chemicals.
“At the same time, valuations were very low because the market had been performing very poorly and balance sheets in Japan were generally strong,” Marwick says.
“By looking at the companies, and talking to them, we invested in a lot of those sectors.”
This fed into the fund’s
performance for the rest of 2009 as companies started to raise production from very low capacity levels.
“These were as low as 20%
in some cases, having been 100% in the middle of 2008,” Marwick says.
“This allowed a recovery in capacity utilisation levels, which allowed a recovery in operating profits and share prices.”
While in 2009 the fund’s winners were cyclical companies, this year automakers, utilities, refiners and internet companies have all performed well.
Marwick says: “We are starting to get to a point where Japan offers some good value again.
“It is a cyclical market and related to global growth, so as long as the recovery stays on then Japan is a very good place to be.”
David Mitchinson’s £122m JP Morgan Japan fund is ranked fifth in the sector over one year, up 18.4%.
Asia connections
Mitchinson believes performance was boosted by the group’s strong presence across Asia, in particular the strong connections the manager has with the firm’s teams in Hong Kong, India and Taiwan.
He says: “It meant we were quite early in thinking Asia would recover more aggressively than Western economies from the slowdown, and we focused very much on those highly emerging market oriented companies.”
He was also quite quick to switch away from infrastructure companies and focus more on consumer companies, which he believed would be less exposed to Japanese Government policy.
Internet businesses have been among the strongest performers for the fund.
Mitchinson explains: “They got beaten down to a very low level, and as the economy began to recover not only did consumer spending patterns go up but they also saw some advertising pick up.”
The manager has also been adding to exposure in technology-oriented capital goods stocks.
He says: “We saw a lot of the tech companies we looked at were very strongly driven, particularly by emerging demand, and their capacity recovered very quickly.
“They then had to go out and build more plants and machinery to cope with the demand their customers wanted.”
He adds: “These stocks had seen a complete collapse in their sales, and in the course of a year the sales in one case went up seven times.”
Earnings and cashflow
Mitchinson says the bulk of the stocks in the fund’s portfolio are currently trading at single-digit or low double-digit P/E multiples.
“One of the important things in this cycle is finally a lot of Japanese stocks have become cheap based on their earnings and cashflow,” he says.
“The market is pricing Japan as though we are in the same situation as we were at the end of 2008 and beginning of 2009 when the world was totally dead and nothing good was happening.
“But clearly, although there are big problems in Europe, at least in terms of demand we are in a better place now.”
Cavendish’s Japan fund, which was launched in May 2009, is ranked eighth in the IMA peer group over one year, up 17.2%.
Manager Ron Bullivant says it has been a fairly steady outperformance rather than any one particularly strong month.
He says: “Within my portfolio I have not had weightings greater than 3% in any stock at any time during the year, so it is not down to any particular companies.
“It has been more to do with lots of little moves I have made.”
Market swings
He says over the course of the year markets have swung quite sharply, leading to fluctuations in the fortunes of exporters.
“For a period of two or three months the export companies did well,” he says. “Then suddenly Greece blew up, the yen went up in value and the exporting sector started to come off quite sharply. Some of the more dull domestic companies did rather better.”
Bullivant adds: “I bought Toshiba at a good time when it was out of favour, and I trimmed a bit of my commodity weighting a couple of months ago when things started coming off.”
