Chesson admits 'errors of judgement' caused slump into bottom quartile

Invesco Perpetual’s Paul Chesson has admitted to some “errors of judgement” which have caused his £289m Japan fund to underperform for the past 18 months.

The head of Japanese equities said his decision to favour cyclicals over defensives during that time has cost the fund, but he believes the stance is correct and is sticking with his positions.

“We have seen very poor performance over the past one and a half years and there have been some errors of judgement on individual stocks. “We chose cyclicals over defensives during that time and as the market focused more on macroeconomic risk cyclicals have been weak.”

Over the past year the fund has slipped to the very bottom of the 63-strong sector, losing 19.9%. This compares to the sector average fall of 8.4%, according to Morningstar.

However, he is continuing with his pro-cyclical strategy in the view Japanese companies can grow profitability by 20% and this will eventually be reflected in the stock market.

“Japanese companies have been rebuilding profitability since the Lehman crisis and will continue to do so. The discounts on the cyclicals earnings streams versus defensive earnings streams are more attractive.”

He added concerns on the economies of US, China and the eurozone have impacted Japanese equities disproportionately, and, Chesson said, the European economy only contributes 10%-15% to the average Japanese company’s revenue.

"In early December, Japanese equities returned to the lows of the Lehman crisis. This shows the magnitude of the impact and how risk is exaggerated. Back then we had many more problems as everyone worried about global economic collapse – we are far from that now.

“There are no fundamental reasons to justify a change in our view and cyclicals have become even cheaper relative to their counterparts,” he added.

Chesson has made few changes to the fund in the past, year but one major portfolio movement was a shift out of banks - the largest overweight this time last year - into technology companies.

“Banks in other markets have suffered, but not in Japan where they were performing very well. However, there was suffering in the manufacturing and technology sectors on concerns about oversupply and too high inventories.

“So we used this opportunity to move out of the better performing banks into the weaker technology sector.” He added, so far this year tech companies have already seen a pick-up in orders and inventories are coming down. “We look forward to a good first six months of the year in technology,” Chesson said.