Lagging Japanese equity market proves challenging for Asia Pacific inc Japan funds
Asia Pacific including Japan funds have delivered strong returns over the past year despite the lagging Japanese equity market.
The main drivers of markets in the Asia Pacific region continue to come from China. However, investors have become concerned in recent months that fiscal policy could become too tight in the country as the authorities try to prevent the economy overheating.
According to Morningstar, Aberdeen Asia Pacific & Japan is the top performer over one year to 12 July, up 41.4% compared to a sector average increase of 29.9%.
The worst performer over one year is GAM Star Asia-Pacific Equity, up 13.8%.
Stuart Parks’ £213m Invesco Perpetual Pacific fund is the top performer over three years, up 28.3%. Over one year the fund has returned 27.4%.
Parks says asset allocation has been consistently adding value, and in particular he has had a fairly consistent underweight to Japan in the fund.
However, he says, there have been times when he has increased Japanese weightings, which have coincided with periods of outperformance in the Japanese market.
Japan accounts for 39.7% of the fund’s exposure by geographical region as at 30 June, followed by Hong Kong at 14.5%, Korea at 12.8% and smaller positions in Taiwan, Australia, China, and India.
“The Japanese element of the fund is concentrated on financials and large car and electronics exporters, where we see compelling value,” Parks says.
The portfolio’s biggest weighting is to financials at 36.7%, with smaller positions in the information technology, industrials, consumer discretionary and materials sectors.
Parks says: “The fund has significant positions in sectors we believe can benefit from rising consumer demand.
“This includes areas directly impacted by greater affluence among Asian consumers, such as household products, food and beverages, as well as insurance and real estate, which we believe will also experience positive long-term trends.”
The manager says the fund’s holdings in China and India reflect his expectations that they will lead consumption growth in the years ahead.
“The semiconductor sector is a major part of the fund and we have significant positions in global industry leaders. We are more cautious on cyclical sectors such as materials as we believe valuations are expensive,” he adds.
Parks’ top 10 positions include Mitsubishi UFJ and Sumitomo Mitsui Financial. The top holding in the fund is Korean firm Samsung Electronics at 5.2%.
He says: “What we are looking for is a continuation of interest in all of the Asian markets. I think people now recognise that Asia ex-Japan, China and India have got a domestic demand which sets them apart from some of less quickly growing markets of the developed world.”
Meanwhile, Jane Andrews, who has managed the Smith and Williamson Far Eastern Growth fund since its 1996 launch, has delivered consistently impressive returns. Over five years, the fund is the top performer in the sector, up 86.6% compared to a 65.2% average. Over three years and one year the fund has gained 17.1% and 34.2% respectively.
The portfolio has an emphasis on Japan but has the flexibility to vary geographical investment throughout the Far East.
Andrews notes allocation to Japan versus Asia and Australia is a key decision for funds within the Asia Pacific including Japan sector.
The manager believes varying the Japanese weighting over the last year has
contributed substantially to performance.
Andrews says: “It was fairly low last summer into the autumn. I increased the weighting towards the end of the year, and am now decreasing it again.
“The weighting has varied over the last year from a low of 20% to a high of 35% and is currently back down to 26%.”
A number of the fund’s top ten holdings have performed particularly well over the last 12 months, including SoftBank, a Japanese mobile telecoms firm. It is the sole distributor of the iPhone in Japan, and
also has exposure to China through Alibaba, an online trading website.
Another is the Japanese robotics firm Nabtesco, which has expanded, driven by the growing trend of automation in China.
“With wage increases in China there is a tendency to use more factory automation,” Andrews says.
“This seems to be the way forward, and any Japanese company which has exposure to this is tending to outperform.”
Domestic consumption plays in Hong Kong and China have also paid off for Andrews, with the fund benefitting from increasing consumption across the region, but it is a very different story with exporters
Andrews explains: “One of the reasons I have reduced the Japanese weighting further is the yen is being stubbornly strong. I think this is weighing on the competitiveness of Japanese exporters.
She adds: “The Koreans have been gaining market share in anything from
autos to electronic goods and phones because the Korean won has not been nearly as strong as the yen.”
In recent months the manager has added a number of defensive Singaporean high yielding stocks.
“A number of Singapore Reits are yielding 5% to 6% and I have quite a lot of exposure there,” Andrews says.
“The Singapore dollar is likely to stay as a firm currency as well so I have an overweight in Singapore. It currently accounts for around 15% of the portfolio.”
Elaine Morrison’s Baillie Gifford Developed Asia Pacific fund is up 28.2% over one year.
Like all Baillie Gifford’s funds, it is driven by bottom-up stock selection, and the manager says some of the individual stocks have performed particular well over the last 12 months
The main positive contributors to performance have been Bank of China (Hong Kong) and CNOOC.
Morgan has also gained from not holding large positions in Japan. “We have no holdings in Japanese banks, for example, and no holding in Toyota,” she says.
“In addition some of the things we had held in the previous year in 2008 were stocks which had been crushed.
“We did not give up on these stocks and they bounced back pretty strongly.
“We have recently sold some of the Japanese names where the growth prospects were looking unappealing, such as Asahi Breweries and Tokio Marine.
“Turnover in the fund is very low, probably on a 12-month basis around 10%, so we do
not tend to churn the portfolio,” she adds.
