GLG Japan Core Alpha managers Stephen Harker and Neil Edwards score highly on Inalytics trading analysis
The GLG Japan Core Alpha fund has, according to Morningstar, returned 59.7% over five years, coming in second over the same period in a notoriously difficult sector. Analysis of the fund’s trading data by Inalytics (see below for a full explanation) show the managers, Stephen Harker and Neil Edwards, have shown a high level of skill to achieve this. Stephen Harker explains the process.
How have you managed to beat the index by so much?
All we have been doing is tactically switching between three sectors: technology, financials and defensives, and we have made some really good calls. Historically, the turnover on the fund has been quite high, but the past year it has slowed down really dramatically. In the first two years it was low but then in 2008 and 2009, through the crisis, it was really high. Since October last year it has moved to being really low again.
The hit rate on the buys is 57%, which is a very high score. What is your process?
We do the same thing over and over again and I have been doing this for 24 years. It is basically buying stuff everybody hates and then waiting to pounce at the bottom. We use the consensus of analysts’ views and the consensus of investors’ behaviour and are just betting against it at the point of maximum extension, if we are right. All we do is bottom fishing and we do it over and over again. For the past 25 years it has been all about refining our style.
How do you distinguish between undervalued companies and duds?
You do not know it is a dud until you buy it and it does not work for you, the important thing is to make sure you do not have too many of them.
Over the past four and a half years we have had four things that have failed, but we have probably invested in around 120 stocks during that time.
You are back into financials in quite a large way. Why is this?
We started about four and half years ago with a very low waiting and then beefed it up.
One of the best things we did was the month Lehman went bust in 2008. At that point the big Japanese banks were some of the best performing stocks in the market.
Mitsubishi UFJ, which is the biggest bank and number two stock in the index, out performed by 25% in September of 2008 which is just barmy when you think of what was happening in the rest of the world.
We got to September 2008 with an 8% weighting in Mitsubishi UFJ and then came back to 2%. Having not done that, we would have had problems in the following quarter.
Post-Lehman, we started buying tech and then in 2009 we started re-building financials. We now have our biggest weighting in financials we have ever had – 28%.
Favouring financials means you are now focused on very large caps in your fund. What is the thinking behind this?
Large caps peaked in 1999, so we have had 10 and half years of small caps winning, which is a very long period of time and the extent from top to bottom is a really big move.
These things repeat themselves and small caps are going to be out of favour at some stage and there is massive amounts of money to made on the way up.
The banks and financials bear market happened for a reason but it has now been cleaned out. Over the past seven years they have been recapitalised on many occasions. For example of the big financials we own, nearly all of them have had two rights issues in the past 18 months. Basically, we think the Japanese market is not going to go up unless it is led by the financials.
This is the central story for Japan for the next 10 years and these are big stocks.
The data from Inalytics shows you perform well when markets fall. How do you achieve this?
Statistically we have done better in down markets but it is not because of beta. It is because our best performance has come in that period when the market is under pressure.
As a contrarian you have to go in when it hurts and we are noise trades, we are just trying to observe the behaviour of the masses and then do the opposite. For example, we currently have no Bric exposure in our stocks. We believe the Bric story is an accident waiting to happen and we hate emerging markets. This is because the weakness of the US dollar is really profoundly important for the next 10 years.
We are going through the sort of torture we went through in the 1970’s. US monetary policy is just too loose and at some point America is going to have to get its house in order and underwrite the strength of the dollar. The consequences of that will be a washout in the emerging markets and our real concern is we are going to wake up one morning and small caps are going to be untradable, liquidity will just disappear.
This is one of our fears about Japan, small cap liquidity will just evaporate.
Relative performance before and after
Performance from over/under weights
Understanding the analysis
Inalytics analyses the trades of a manager of a given period of time.
● Hit rate. This is the number of correct calls a manager made when buying or selling stocks, to see if they get more decisions right than wrong
● Win/loss ratio. This looks at whether the returns from the good decisions outweighed the losses from the poor ones. This reveals if a manager runs their winners and cuts their losers
● Investment skill, timing decisions. An analysis of how much value is added by the buying and selling decisions
● Relative performance before and after. A graphical analysis of how the shares had performed before and then after they were bought and sold. This illustrates the style (momentum, contrarian) of the manager and if they add value through timing decisions
● Investment skill, holding decisions. An analysis of whether the returns come from the conscious decisions to own stocks, which is a key issue when assessing whether the track record is down to luck or judgement
● Performance from over/underweights. A graphical analysis of the cumulative contributions from the stocks that are owned (over weight) and from those that were excluded (under weight), to look for persistence skills in the manager
● Investments style: size. Where did the manager get his or her best performance from? Large, mid or small cap?
● Investment style: Market direction. Does the manager perform best in rising or falling markets? Or can they make money in both?
