I have been toting Japanese equities for the past three years and it’s been one of my better calls.
The Topix has risen 50 per cent since my ‘Outlook for 2012’, when I first tipped the asset class.
Since the start of Abenomics – the name given to prime minister Shinzo Abe’s efforts to boost the Japanese economy – both the economy and the markets have had a new lease of life.
While the investment case isn’t quite as strong now as it was then, it continues to look interesting. Lower energy prices and currency weakness are boosting the economy, while the reforms are having a beneficial effect on corporates.
The market hit the ground running again this year and, while it has come off slightly in recent weeks, it is up 14 per cent year to date. The FTSE 100 has risen just 5 per cent.
Unbelievably, the Topix is still down 5.65 per cent in sterling terms since it peaked in 1989, while the average fund in the IA Japan sector has risen by 26.27 per cent. Contrast this with the performance of my fund pick this month – Schroder Tokyo – which has increased 149.76 per cent in the same period, and you will see why I think it is best in class.
The fund was launched near the peak of the Japanese bubble in March 1989, and has had only two managers in its lifetime. The lead manager for the past 11 years, Andrew Rose, is a life-long Schroders man, having joined the Tokyo-based Japanese desk in 1981.
The investment process has two elements. Analysts rate companies one (strong buy) to four (strong sell) based on the quality of the business and the value offered by the current price. These views are then combined with the manager’s broader market and economic opinions to create a coherent portfolio.
This approach has usually displayed less risk than its benchmark index, reflecting concern about the health of the Japanese economy.
The portfolio has particularly benefited from this cautious stance in a market that has performed poorly for more than 20 years. The process has been adjusted more recently as the economy has enjoyed a renaissance of sorts, bringing it in line with the broader market. The fund has enjoyed a strong four years.
The aim of this multi-cap fund is to participate in the growth of the Japanese economy, and the conditions in the past few years have been good. The asset class has moved from a situation where it was predominantly a top-down allocation decision, to being one where picking the right company really pays off, playing to the manager’s strengths.
In the past year, Mr Rose has added to certain sectors on share price weakness, particularly to financials, where both valuations and management behaviour have been favourable. He also bought into the weakness of retail stocks in the run-up to the VAT hike last year, which paid off.
When it comes to making the most of a weaker currency, he has invested in car manufacturers, which are leaders in the global field.
The sea change in fortune for the Japanese economy, coupled with the strong performance of the Schroder Tokyo fund, has led to a surge in interest. In 2013, the vehicle had less than £1bn in assets under management, while it now has nearly £2bn.
The experienced and well-resourced team, together with a robust process and an excellent track record, provide the perfect ingredients for a core Japanese fund.
Darius McDermott, managing director of FundCalibre
