Picking stocks in weak markets
The Japanese economy may have been artificially depressed last year as a result of extraneous factors such as the tragic earthquake and tsunami last March, the eurozone debt crisis, the weaker yen and the Thai floods, but a sharp snap back is underway according to James Salter, manager of the £695.1m Polar Capital Japan fund.
“Our investment case for Japan is predominantly due to the reversal of at least three out of the four things that went wrong last year,” he says.
The manager says that this recovery is being led by the US economy, which is currently showing strong signs of sustainability, an increase in capital expenditure, and consumption, which has been stronger than expected.
Mr Salter says that Polar is taking advantage of these signs of recovery through bottom-up stockpicking and thorough research.
“I would say 80-85 per cent of our returns have come from stockpicking,” proclaims Mr Salter. “Research is important to us. So much so that we have just taken on two new analysts, so we have a total of six people on Japan, two of which are based in Tokyo,” he adds.
One of the companies that Mr Salter and his team have established as a beneficiary of the stronger US economic outlook is Honda Motor. At a 4.2 per cent weighting, the firm is the fund’s second largest holding and contributed 0.66 per cent to its total return in February.
“It’s a play on a return to profitability for the automobile manufacturer after a truly disastrous year last year. We particularly like the motorcycle business because we think it’s a good growth business and the shares are trading on a relatively good price/earnings (p/e) ratio of 10 times,” he says.
Mr Salter has also been adding to the fund’s financials weighting because a lot of the banks have fallen in value by roughly 12 per cent. “They are high beta plays, so when the market does well they do well and their visibility of earnings is pretty good,” he says.
He owns two city and two regional banks, one of which is global player Mitsubishi UFJ Financial, which took a 9.9 per cent stake in Aberdeen in 2008, and was the largest contributor to the fund’s outperformance in February.
Mr Salter has therefore increased the fund’s weighting in the firm from roughly 2.5 per cent to 4 per cent in recent weeks.
He has also upped his weighting in Kyocera, the fund’s third largest holding, because he says its shares are trading at roughly two-thirds the value of its net tangible assets, with a dividend yield of more than 4 per cent. “It’s a beneficiary of lower credit costs and expanding overseas loan growth,” says Mr Salter.
As a result of this careful stockpicking, in the three years to April 11 2012 fund has outperformed its sector, the IMA Japan, and its benchmark, the Topix index, returning 25.87 per cent compared with 19.63 per cent and 15.51 per cent respectively.