Fund Review: Gam Star Japan Equity

The first stages of Abenomics in Japan saw this Dublin-domiciled portfolio struggle slightly as lower quality stocks benefited from hedge funds having to cover short positions in these areas, but a strong second quarter has seen the £95.2m fund move back in line with the market.

Managed by Ben Williams since January 2012, the aim of the Gam Star Japan Equity fund is to provide investors with exposure to quality companies in Japan with good franchises, good balance sheets and those companies with prospects of better than average returns to shareholders.

Mr Williams notes that since taking over the fund, the portfolio has perhaps had a greater emphasis on looking at companies with strong balance sheets and companies that have the potential ability to generate good returns to shareholders. “I think that is generally key for Japan going forward and I think that is a real focus I have been having in terms of trying to build the portfolio and trying to find names which have those attributes.”

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While adopting a clear stockpicking process, the manager notes that macro factors do have large influence on the fund simply because Japanese equities are very geared into the economic cycle.

“When economic conditions are good Japanese profits generally grow much quicker than other global equities and when economic conditions are poor, profits in Japan typically fall greater than other global equities,” explains Mr Williams. “So I am mindful of that when I make investment decisions, the fact that if economic conditions are better and if sales are better typically profit growth can be a lot, lot better. Therefore earnings surprises to the upside or downside are very much influenced by the macro factors, so I always have to take that into account when I’m building the portfolio.”

The long-term performance of the fund leaves a lot to be desired. It has underperformed both the Topix index and the IMA Japan sector with a five-year return of 17.42 per cent to October 2 2013, compared with 42.05 per cent from the benchmark and the 53.72 per cent sector average.

In the shorter term however, performance is improving under Mr Williams with the 12-month return to October 2 2013 of 31.56 per cent sitting just ahead of the Topix return of 30.69 per cent and just behind the sector average of 32.24 per cent.

Mr Williams notes: “Abenomics initially was quite negative for our portfolio, and basically the reason why is that the first stages of Abenomics saw a lot of hedge funds cover their short positions and that was typically in stocks that are pretty much unloved and don’t fit into our decent franchises, good balance sheets etc. But because hedge funds were massively short these and needed to cover, these are the stocks that typically performed really, really well in the first few months of Abenomics.

“Since then, we had a pretty good run from February to May, and then in the summer, when there were concerns about [US] Fed tapering and emerging markets, we haven’t performed quite so well.