Unicorn Asset Management’s Peter Walls said he is questioning whether to maintain his level of exposure to two Japan-focused investment trusts after they shot to trading at premiums on the back of market rallies.
Mr Walls said his exposure to Japan in his £6.3m Mastertrust fund had paid off recently, after the Japanese authorities embarked on a major stimulus programme that propelled the bourse to multi-year highs.
The Nikkei 225 rose above 14,000 last week for the first time since the height of the financial crisis in the autumn of 2008. This follows a government announcement in April that laid out plans for the Bank of Japan to double the amount of money in circulation in Japan within two years, including buying up ¥50trn (£326bn) in Japanese government bonds.
But now the manager has said two of his most successful Japanese holdings – Baillie Gifford’s Japan trust and Shin Nippon trust – have performed so strongly that they have entered his top 10, prompting him to consider taking profits.
In the past six months Baillie Gifford Japan, run by Sarah Whitley, has delivered a share price total return of 73 per cent compared with the rise of 30.1 per cent by its benchmark Topix index, according to FE Analytics.
The £99.1m Shin Nippon trust, run by John MacDougall, has also fared well. It delivered a share price total return of 55 per cent against the benchmark MSCI Japan Small Cap index’s 29.2 per cent, the data provider added.
Mr Walls said because the two trusts had performed so strongly he was considering whether he could still justify holding them.
He said Baillie Gifford Japan’s share price now stood at a 5 per cent premium to the net value of its assets, while Shin Nippon traded at a 3.4 per cent premium to the assets held by the trust.
Mr Walls said he preferred to buy or add to trusts when their share prices were trading at discounts to their assets, but he drew “a lot of comfort” from the fact that the Baillie Gifford managers had told him they were uncomfortable with the premium.
When investment trusts trade at big premiums, it means investors are paying more for the assets the trust holds than they are worth. This may deter new investors or existing ones wishing to top up their holdings.
Elsewhere, Mr Walls said another positive contributor to the Mastertrust’s strong performance was its high exposure to UK smaller companies.
The fund holds in its top five the £265m North Atlantic Smaller Companies, the £186.4m Montanaro UK Smaller Companies and the £37.9m Acorn Income fund, which is run jointly by Premier Asset Management and Mr Walls’s colleague John McClure.
Mr Walls said in spite of the strong performance of UK smaller companies the sector could still add value and so he was sticking with his holdings.
The Japanese conundrum
Pro-Japan managers have predicted for some time that the country’s stockmarket would deliver because investors would realise its companies were undervalued. Meanwhile, bears have argued its cycle of deflation would continue unabated.
Now there is something for investors to get their teeth into with prime minister Shinzo Abe’s (pictured) giant stimulus package. But with the market rising, there is now a question of whether to stay on for the ride.
Mr Walls is not alone in wondering whether to take profits.
In April fund managers, including Jupiter’s Guy de Blonay, increased their exposure to the country. But Cazenove Capital multi-managers Marcus Brookes and Robin McDonald trimmed their exposure to Japan, citing large swings in the market.
