Fund Review: Neptune Japan Opportunities

The £185.6m Neptune Japan Opportunities fund has almost doubled the return of both the index and IMA sector in the past 12 months and jumped into this year’s Investment Adviser 100 Club.

The significant outperformance comes on the back of decisions to hedge the yen and increase investments in areas benefiting from the looser fiscal policy resulting from Abenomics.

Managed by Chris Taylor since May 2005 the fund’s aim has remained unchanged since its launch in 2002. The focus is on generating real returns across the medium to long term by outperforming relevant benchmarks through a focused portfolio of approximately 40-50 Japanese companies, selected at the manager’s discretion.

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Mr Taylor, who is assisted by George Boyd-Bowman, explains that the investment process for the fund consists of two parts. “The first is the generic Neptune approach, centred on sector-based research to… identify the best firms within each sector. These stocks then form our investable universe and are valued.”

He adds that the team then selects from this list – on a geographic mandate basis – the best value constituents for inclusion in the relevant portfolio.

The manager adds: “Normally, macroeconomic factors have a secondary influence upon portfolio construction, mainly helping to determine the final choice made between two equally attractively valued stocks – for instance, whether one would do better out of a US economic recovery. On rare occasions macroeconomics can have a much greater impact. For example, in this fund [we have] hedged the yen value of its equity holdings as yen weakness is central to the government’s policies for turning around Japan’s economy.”

The fund has performed consistently well, pushing it into the Investment Adviser 100 Club for the first time this year.

For five years to October 2 2013 the fund has returned 92.67 per cent compared with 42.05 per cent from the Topix benchmark index and the 53.72 per cent IMA Japan sector average, according to Morningstar. The 12-month return has been equally impressive with a return of 61.55 per cent, again more than double the 30.69 per cent index return and the 32.24 per cent sector average.

But it has not all been plain sailing, with figures showing the fund underperforming both the sector and the index in 2010 and 2011 before regaining its previous performance in 2012. The 2012 performance figure of 17.14 per cent once again significantly outperformed the sector average of 2.96 per cent and index return of 2.82 per cent.

Mr Taylor credits the recent outperformance to stock selection and the hedging of the yen, as the impact of Abenomics first arrow of looser monetary policy has seen the yen weaken significantly in 2013.

The manager also adds that “in the past few months investments have been made into the beneficiaries of current government spending targets, such as defence, civil engineering and construction materials. By contrast, other material holdings were sold off, particularly titanium and carbon fibre producers.”

These areas – particularly civil engineering and construction firms such as Taisei and Sumitomo Mitsui Construction – have helped boost performance, although holdings in the heavy electrical engineering and IT systems companies weighed on the fund. These detractors included well-known names such as Toshiba, Hitachi and Fujitsu.