With a Tokyo-based team of analysts this fund prides itself on its stock picking style involving thorough research of undervalued shares and its core holding of Japanese blue-chips
We regard the DWS Japan Growth fund as a core fund for investors seeking exposure to Japanese equities. The portfolio is carefully constructed, consisting of 50 to 60 predominantly blue-chip Japanese shares. It is managed against the Japan TOPIX index, with the manager seeking to out-perform through stock selection by 2%-3% per annum (gross of fees) over a rolling three-year period.
We select shares that we believe to be undervalued relative to their realistic long-term growth prospects, with positions taken on a two- to three-year time horizon. Our research process highlights about 300 companies for in-depth company research after rigorous screening by our Global Sector Teams and company analysts in Tokyo.
The fund manager and his assistant, Sara Gardiner-Hill, can include their own ideas as well as leveraging the extensive company research of our Tokyo-based fund managers and analysts.
reasons why
• A strong long-term performance track record. The fund is ranked in the top 25% of all Japanese equity funds (6/49) over five years to 31 May 2005*, and has been managed by the same fund manager using a consistent investment approach throughout the period.
• Maximum Fund Management AAA rated by both Forsyth OBSR and Standard & Poor's. Based on the strengths of our investment process and depth and breadth of our fund management team, this is the only double AAA-rated fund in the IMA Japan sector.
• Managed by a proven lead fund manager. James Pulsford began his career as a graduate in the firm in 1984. He spent 12 years in our Tokyo office before returning to London in 1999. He manages a total of £1.1bn in Japanese equities.
• Backed by a large and experienced team. Our Tokyo-based research team boasts a wealth of experience and has a truly global perspective as members of specific Global Sector Teams. The 300 companies warranting detailed research are scrutinised by our analysts, who are remunerated on the performance of their ideas.
• A core holding in Japanese blue-chip shares. The portfolio of about 60 holdings is made up predominantly of blue-chip Japanese shares. Risk is controlled through maximum position sizes at the stock and sector level and a limit on the minimum market capitalisation of any holding.
fund strategy
Recent domestic economic statistics have been encouraging and supportive of our view that growth will recover during the second half of 2005. In particular the strong Q1 economic growth figures were driven by a combination of healthy capital expenditure and growth in personal consumption.
Labour market statistics continue to point to likely growth in consumption with the unemployment rate in decline again and the number of people in permanent employment showing growth for the first time in eight years. We also remain positive on prospects for sustained growth in the Asian region led by growth in China, and believe that the global economy overall remains in an expansionary phase.
Portfolio structure remains tilted towards economically sensitive sectors. However, we have reduced exposure to shipping and steel, two sectors that benefited from sharp increases in pricing last year driven by strong growth in China.
There is some risk here that margins will start to deteriorate going forward. As we believe that the economy will strengthen from the second quarter onwards we continue, on a stock by stock basis, to look for domestic economically sensitive stocks. We also plan to continue to look for companies benefiting from global growth but exposure to foreign sensitivity will be controlled.
recent activity
Our holding in IT services firm Net One Systems has been disappointing after it fell sharply following a disappointing outlook statement relating to its telephone networks business. We have subsequently sold our position.
The performance of our favoured names (Toyota and Nissan) in the automobiles sector has been lacklustre in recent months as they lagged behind the sector's star performer Mitsubishi Motor, which sharply appreciated after securing its financial future.
We still favour Nissan and Toyota however, as they continue to grow their market share in the US and Europe. Despite these short-term disappointments both have been positive contributors over the longer term.
Our stock selection in the telecom sector has been more encouraging. We recently switched exposure within the sector from KDDI into NTT DoCoMo as we believe the latter's earnings outlook is more attractive, while the shares offer an attractive dividend.
Holdings in the machinery sector also added value and we remained overweight the sector as it is a potential beneficiary of improving industrial production.
Construction, mining and utility equipment manufacturer Komatsu has been a strong performer over the period and should continue to benefit from both its cost cutting efforts and improving demand for construction equipment.
why japanese equities?
• Despite recent setbacks, our analysis tells us that the Japanese economy remains in an expansionary phase while Japan is one of the few stock markets where there is good earnings momentum and valuations look reasonable both historically and on a global basis.
• Continued strong demand in China coupled with the beneficial effects of a lower oil price and completion of inventory adjustments should see Japan's upswing resume over the course of 2005.
• A decade of weak demand and the unwinding of cross shareholdings means that Japanese companies have been paying down debt and selling off non-core businesses in recent years. This leaves many well placed to enhance their earnings.
• Japan's expertise in export-orientated industries (automotives and consumer electronics) positions the economy well. Only a meaningful slowdown in China's propensity to import or US consumer could threaten longer term growth.
• The supply/demand of shares has improved as technical selling prompted by the unwinding of cross shareholdings and government sponsored pension schemes has reduced, while buying by overseas investors and share buybacks by Japanese firms is expected to continue to support demand.
stock stories
• Komatsu: one of the world's largest manufacturers of construction, mining and utility equipment, Komatsu's profits are growing strongly and cutting costs remains in focus. New models carry higher margins and demand remains robust with high commodity/oil prices driving a boom in mining development and strong demand in the Middle East.
• Toyota: in addition to its strong domestic position, Toyota Motor continues to successfully roll out new models as well as increase their market share in both the US and Europe.
• Mitsui Corporation: robust growth in Asia is allowing Mitsui to achieve rising returns. It has substantial investments in iron ore, coking coal and oil in the Pacific region while the profit stream looks set to jump sharply in future reflecting higher contract prices and increasing output.
fund at a glance
• Top quartile (6/46) performance over five years to 31/05/05.
• The only Japan fund to be maximum fund Management AAA rated by both Forsyth/OBSR and Standard & Poor's.
• James Pulsford is a highly regarded fund manager with more than 20 years experience.
• James draws on the research of our experienced Tokyo-based company research team.
• The fund represents a potential core holding in Japanese equities.
Source: DWS
