Dean Cashman has been running the M&G Japan fund since June 2006 and is assisted by deputy Max Godwin. This £95.5m fund launched in 1971 and has built up a track record of outperformance in a country that has experienced its fair share of economic challenges.
“The fund is a concentrated portfolio of our best investment ideas, built from the bottom up,” Mr Cashman says. “It is not constrained by a benchmark and therefore its positioning may vary significantly from typical industry or sector weights.”
The fund is a relatively concentrated portfolio of between 30 and 50 stocks, so how does this active manager select holdings for his fund? He explains: “We believe the greatest investment opportunities are to be found where changes in the market’s risk perceptions and expectations have caused a large dislocation between the price and relative value of a company.
“For example, the market obsesses over recently reported earnings. The myopic view on recently reported earnings is a source of the behavioural biases that drive the extrapolation of trends, and ultimately give rise to herding behaviour in markets. We exploit these market biases, which can often drive share prices to extremes. We try to ensure we have a significant margin for error by investing only in our highest-conviction opportunities where price has moved significantly from the value of a company.” Unsurprisingly, the manager does not try to forecast or invest in macro themes, with the aim instead to exploit this type of behaviour.
Mr Cashman is assisted on the fund by a team of five investment professionals, who between them have more than 94 years of investment experience. He suggests that this depth of financial expertise and team culture help foster healthy debate, ensuring rigour and objectivity in all investment decisions. He reveals that the hunt for mispriced companies with large valuation upside has seen Mr Godwin and he develop high levels of conviction around undervalued companies in sectors including technology, materials and financials.
“This year we have taken profit in a number of outperforming, technology-related and basic materials names and recycled the proceeds into a number of high-conviction market laggards,” he says. He cites financials, which underperformed the market in 2014. “Given our high conviction around the fundamental case for some of the major banks and insurance companies, we have taken the opportunity to add back to these names.”
On a risk-reward profile, the fund, which is a member of the Investment Adviser 100 Club 2014, sits at the riskier end, falling at a level six out of a possible seven. The sterling R-share class, which is for advisers and is commission free, has an ongoing charge of 1.22 per cent.
The fund has consistently outperformed its comparative index, the MSCI Japan index, across one, three, five and 10 years, according to data from FE Analytics. It delivered a return of 74.04 per cent to investors in the 10 years to December 4, compared with 64.71 per cent by the index. Across three years the fund remains top quartile, generating a respectable 44.01 per cent, compared with 33.56 per cent by the MSCI Japan index.
Mr Cashman acknowledges that the fund performed better than the broader market in 2014, with those stocks linked to the global cycle helping to deliver strong performance. “One of the recent thematic trends that the market has picked up on has been the buying of weak yen beneficiaries post the Japanese QE2 [second round of quantitative easing] announcement,” he says.
“As share prices have been bid up by the market for these kinds of names, we have been able to take profit on the outperforming technology-related and basic materials names in the fund.”
So what is Mr Cashman’s view on the outlook for Japan, which continues to face questions over the success or otherwise of its economic reforms? He says: “Long-entrenched, negative views on Japan are now beginning to be challenged. With the strong corporate health we observe, we believe the preconditions are in place to offer investors a very good investment opportunity. Our analysis suggests there are crucial positives that have not yet been incorporated into the share price for many firms, providing the potential for significant valuation upside.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities
Dean Cashman has consistently beaten both sector and benchmark since taking over this fund in 2006. However, the fund will have been ignored in recent years as it offers no hedged version. So in spite of relatively strong returns, funds with currency hedges or hedged share classes will have overshadowed this fund. Basically, this is a solid Japanese fund.
