Fund Review: Hermes Japan Equity fund

Having launched into the wholesale market in January 2010, this fund has not disappointed its investors. In the period to October 3, the fund has returned 29.98 per cent, compared with a Topix index return of 26.73 per cent.

Manager Jonathan Greig, who has been at Hermes since November 2009, is the architect behind the Japan Equity fund, which has the sole objective of delivering long-term capital growth to those who invest in it.

Japan as an investible region has definitely become more interesting since the election of prime minister Shinzo Abe in December last year. His ‘three arrow’ policy has injected confidence back into the country’s stockmarket and fuelled its comeback.

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“So far everything is on track,” Mr Greig says. “The big question everyone has got is whether they can keep it going. We have had this kind of programme several times before in various forms. Most recently we had a version of this, although with less ambitious goals in mind, in the early 2000s. When we look back a long time to the 1930s we have exactly the same thing going on with spectacular success.”

The manager’s secret weapon when it comes to really getting to grips with the Japanese economy and its effect on stock prices comes in the form of Hermes analyst Andrew Friday who, before becoming an analyst, was an academic specialising in Japanese economic history.

Mr Greig explains; “He has got two post-graduate degrees in this very subject and so we are quite well informed on this whole strategy. We would rather bet that this is going to turn out more like 1933 than 2002/03.”

When investing in the Japanese equity market, particularly more recently, it is difficult to really shut out the macro noise and make stock decisions based on company fundamentals.

But as much as possible Mr Greig and his team attempt to seek out those quality companies that can offer the portfolio significant growth at a discounted market price.

He explains: “Our game is not really to invest [based] on the macroeconomic environment. We are bottom-up people, looking where the market has under priced a well-managed company and its earnings power as measured by return on equity and return on investors capital.

“Usually it is some kind of fashion in the markets – everyone is going for one particular area and this is a neglected area that is left behind. That is what interests us – the out of favour, quality companies that are underpriced by the market.”

Recently this has lead the manager into more domestic-focused companies and those “steady eddie companies” that drive the portfolio’s returns.

“In October/November, everything was cheap and as the market continued to go up it pretty much floated all boats. We probably had less of a bias towards cyclicals and more of a bias towards, what you might call, more ‘steady eddie’ companies – the growers, things like railway companies, telecoms etc,” Mr Greig says.