Questions for Hiroyasu Sato, Senior Fund Manager, at Tokio Marine Asset Management Co., Ltd. Who is a Chief Portfolio Manager of their JE flagship fund ‘Tokio Marine Japanese Equity Focus Fund'
1. What are the five reasons why you believe it is good time to invest in Japan?
A. We believe that this is an opportune time to place a relative emphasis on Japanese equity investment, given that:
- Political stability as a comparative advantage
Unlike some other countries, Japan now has the political stability and key policymakers in place to push through plans to revive the economy - both Abe and Kuroda are set to stay in office for the next three years until 2018. For the first time in a decade, Japan has a leader with the necessary political strength to carry out major reforms to revitalise the economy and the cooperation of the BOJ who remain firmly committed to reintroducing inflation.
- Evolution of Corporate Governance
The introduction of the Stewardship and Corporate Governance codes are already having an effect and should encourage companies to achieve sustainable growth in the long run through better governance.
- Tokyo Olympics in 2020
Infrastructure, particularly in Tokyo, dating back to the 1960s (the last time Japan held the Olympics) sorely needs to be upgraded and new construction work should continue to accelerate leading up to the Olympics.
- Domestic Buyers of Japanese Equities
Japanese pension funds (first public, now private) are allocating a greater portion of their assets to equities and this in turn is filtering through to the retail space, where Japanese equity funds were ranked in the top 15 largest new funds in the first half of 2015.
- Return to Inflation for the First Time in 25 Years
A deteriorating labour balance in the late 1990s triggered Japan's slide into deflation. However, with rising wages owing to a tighter labour market and support from the BOJ's on-going QE programme, we are seeing signs of a return to inflation after all this time.
2. How important is the success of Abenomics to potential returns from the stock market?
- The success of Abenomics is important, but what's more important is the change in the underlying economic structure of Japan which is a consequence of the last 20 years of deflation. We believe that Japan's famously value-oriented market will become more growth biased. The stock market is supposed to supply growing companies with risk taking capital; investing in stocks based on breakup value was not natural. In our view, the Japanese market turned growth-biased from 2011, exactly when wages started to rise and drive Japan's return to inflation. It's not Abenomics that's changed the country; rather, Abenomics just made the change more visible and sped it up.
3. Do investors focus too much on the macro-economic situation when looking at Japanese equities?
- In our view, relying on headline macro events will be more risky these days as the impact of the Abe government/BoJ's macro policy will lessen. We would like to emphasise the recent dispersion between the macro and micro figures. For example, in the past, Japanese companies' EPS had a strong correlation with industrial production. But, since 2011 and 2012, this correlation has changed dramatically. Now, EPS is rising even though industrial production is not. We believe this indicates important structural changes in Japan.
Japanese corporate activism is also crucial. We believe that the mindset of Japanese corporate management and their behaviour as a whole is changing. It is very difficult to identify these changes if you look only at the macro numbers.
4. What are the objectives and characteristics of the Tokio Marine Japanese Equity Focus Fund?
- The objective of the Fund is to achieve long-term capital growth over the TOPIX Total Return Index by investing in a concentrated, high-conviction portfolio of stocks, focusing on companies' 3-5 year earnings growth. Our investment ethos is 1) fundamental research: we identify secular growth drivers; 2) strong price discipline: we impose strong price discipline and concentrate on the best ideas of today, not yesterday; and 3) ‘hybrid' portfolio management: we complement our fundamental approach with market views.
5. How many companies do you have in the Focus fund portfolio and when do you sell a holding and add in a new holding?
- The portfolio is a highly concentrated portfolio, with just 20-40 names. At entry, we set a clear ‘reasonable valuation' (P/E) range and sell once the price has broken this range to the upside. We also sell if the degree/probability of profit growth slowdown rises. We manage this at the portfolio level by controlling PER and ROE throughout the fund, not just with individual stocks. Risk factors are managed using ‘tactical positions.'
The portfolio's ultimate target is to achieve a better IR, not just significant returns. Identifying transformational or inflectional points of earnings growth is always the first step in our bottom-up research. I work closely with each sector analyst to screen the best ideas in terms of earnings gamma.
6. Which sectors of the economy are you investing in with the Tokio Marine Japanese Equity Fund?
- The current portfolio weights more on small- to mid-cap and non-cyclical sectors. These stocks are not well-known among the market and require extensive on-the-ground research to find. We invest more on specific factors than common factors. We don't like to bet on macro; we like to bet on individual companies.
One of my investment ideas relates to the rise of a new breed of exporters to Asian markets. The auto and electronics sectors are traditional Japanese exporters. However, we see that several companies in historically ‘domestic' sectors are growing their earnings from the Asian market. As widely acknowledged, a growing middle income class in Asia is a long-term trend in the global economy. With their growth in income, they tend to seek better quality items, and the ‘Made in Japan' brand can have a big appeal. In our view, some Japanese companies which have both strong global products and a robust local logistics position can take advantage of this. These defensive sector players are now becoming ‘new exporters.'
7. Why should investors invest in the Tokio Marine Japanese Equity Focus fund instead an index fund or an ETF?
- In this low-growth world, relying on beta may not be the best risk-return strategy. While growth will not increase dramatically, it is logical to focus on how to get ‘thicker slices of the whole pie.' Not everyone will win; if there are winners, there must be (a lot of) losers. Each region has its own intricacy in terms of economic structure/cycles and a more focused and specific strategy might make sense.
In Japan, we look for a higher dispersion among/within sectors; PBR dispersion is key (ROE x PER). Companies which can extend ROE consistently can be re-rated and their PBR will rise faster and vice-versa. Currently, dispersion among sectors and within sectors (for several sectors) is widening significantly and we believe that this will continue.
In our view, looking at the consequences of structural changes and picking winning stocks may be the best strategy for investors seeking an efficient return in Japan moving forward.
For further information regarding this article or Tokio Marine Asset Management, please contact:
Tokio Marine Asset Management (London) Limited
Authorised and Regulated by the Financial Conduct Authority
Tel: + 44 (0) 20 7280 8580 (calls may be recorded)
Business Development: [email protected]
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