Johan Du Preez took over as manager of this £106m portfolio in September 2015, and runs a fairly concentrated portfolio of between 30 and 50 stocks. The manager notes: “The sole objective of the fund is long-term capital growth..
The vehicle invests wholly or predominantly in securities of smaller Japanese companies, the universe for which is the bottom third in terms of the total market cap of all publicly-listed equity in Japan.”
Mr Du Preez describes his process as bottom-up and seeks to exploit what he calls “episodes”, where prices move for non-fundamental reasons. He elaborates: “These episodes occur when investors’ emotions drive shifts in their perceptions of risk and return, causing a meaningful dislocation between share price and value. This behavioural approach to active management is central to the investment strategy.”
It is a four-stage process, the first of which is identifying those episodes from a universe of 1,500 companies. The manager then focuses on fundamental analysis to get an understanding of a company’s sustainable earnings. He explains:“In assessing the sustainability of company earnings, particular focus is placed on understanding the quality of management, industry structure and barriers to entry. Companies are also assessed for aspects such as the quality of corporate governance, with an emphasis on the interests of shareholders.”
Mr Du Preez believes his approach differs from other investors who “tend to obsess about regularly released earnings reports”, which in turn results in herding behaviour as they use past results to extrapolate future earnings. “In this way, the fund seeks to actively exploit the inconsistent pricing of beliefs and the comfort, or concerns, of others,” he adds.
The final stages are portfolio positioning and then reviewing the holdings in the fund, with a valuation target for each stock. “Only two things can change that influence the decision to buy or sell – a movement in share price or a change in company fundamentals and its impact on sustainable earnings,” he says.
Unsurprisingly for a fund that invests at the smaller end of the market-cap spectrum it is at the riskier end of the risk-reward scale at level six, while an ongoing charge of 1.2 per cent applies to the R clean share class.
The fund has consistently generated strong returns for investors over the longer term, according to FE Analytics. The vehicle returned 60.5 per cent for the five years to February 19, against the Investment Association Japanese Smaller Companies sector average of 50.6 per cent.
But in the past 12 months the fund has underperformed its peer group, delivering 1.7 per cent compared with the 5.3 per cent sector average. The manager explains: “Japanese equities rallied sharply during October and November as investors’ fears over global growth – which had caused such turbulence in the summer – appeared to be diminishing. However, December was a different story and the market ended lower as fears over a slowing Chinese economy resurfaced. The fund underperformed the Russell/Nomura Mid-Small Cap index in the fourth quarter of 2015 due to a combination of sector allocation and stockpicking.”
There were some standout holdings though, with chemicals company Kaneka, housebuilder Iida and pharmacies operator Cocokara Fine all contributing positively to performance. “Investor sentiment in Iida has been boosted by a pick-up in housing demand and rising home prices, and its recent merger means that it can buy building plots more cost-effectively. Cocokara recently merged with one of its peers and the full benefits of the restructuring have yet to be factored into its share price,” the manager adds. He points out underweight positions in healthcare and consumer goods hurt returns though as both sectors performed well.
Mr Du Preez remains positive on the outlook for Japanese equities. “Quantitative easing under Shinzo Abe’s administration – which has proved very positive for the stockmarket – will remain a feature of the investing landscape. Companies in Japan have started restructuring marginal businesses and increased their competitiveness by lowering their cost structure.”
EXPERT VIEW
Oliver Stone, head of research, Fairstone Private Wealth
The fund has a value bias in searching for cheap stocks offering good medium- to long-term capital appreciation. This often leads the underlying portfolio to look contrarian in nature. Indeed, it currently has overweights to cyclical sectors such as industrials, financials and basic materials, and underweights to more ‘defensive’ sectors including healthcare, utilities and consumer defensives. The fund underwent a management change last September as Johan Du Preez took over following M&G’s decision to bring management of this and the sister M&G Japan fund back in-house. Mr Du Preez has a superior long-term track record of Japan equity investing and is a good appointment moving forward.
