Gerard Cawley, lead manager on the Dublin-domiciled fund alongside James Salter, notes: “The launch took place on October 31 2012 and at that moment there was no ‘Abenomics’ or prime minister Abe and no expectation of an imminent general election.
“Within two weeks, the election was announced, Mr Abe unveiled his Abenomics programme and life changed pretty dramatically. So the turnover in the first two months was actually quite high because we set up the portfolio for the situation we found ourselves in in October 2012, then events changed very dramatically. But the portfolio as it stands today is broadly similar to what we had at the end of 2012. We made changes in November/December 2012 to take account of what Mr Abe was suggesting he was going to do and those changes have largely held.”
The newest of Polar Capital’s Japan offerings, the £102.1m Japan Alpha fund has a similar investment process, using the same team of seven members – three in Tokyo and four in London – and with the aim of outperforming the Topix by approximately 5 per cent a year. The key difference between the two funds is this vehicle has a more concentrated portfolio of just 25-35 stocks.
Mr Cawley adds: “It is predominantly bottom-up. The core of our process is predominantly driven by our views on individual companies and then building the portfolio on individual ideas. There is an element of a macro overlay, but it is very much a secondary driver of performance.” He admits it was more relevant in the first half of 2013 with the arrival of Mr Abe and his Abenomics programme.
The manager notes: “We tend to be a blend of value and growth at a reasonable price (GARP) and we are fairly benchmark agnostic.”
He points out the portfolio has a strong bias to financials and exporters with almost no exposure to the traditional defensive areas of the market. It also has a mid-cap bias, with approximately 50 per cent of the portfolio in this part of the market. Mr Cawley explains: “Mid-caps is an area where we’ve historically had a lot of success on the stockpicking front, so the fund is naturally biased to that part of the market that is just less researched generally.”
Aside from the initial reorganisation of the portfolio, the timing of the fund launch has been fortuitous, coinciding with a strong market rally in Japan.
Since launch to February 19 2014, the fund has returned 29.16 per cent compared with the Topix index return of 25.03 per cent. In 2013, the fund delivered a return of 34.76 per cent, according to data from FE Analytics – more than 10 percentage points higher than the 24.67 per cent returned by the Topix index.
Mr Cawley says: “I think our recognition that the political changes afoot would be a significant inflection point was an important driver of performance because it made us change strategy and pushed us into researching more of the exporter segment and financial areas. Largely, those two big themes – exporters and financials – have worked very well in 2013, but less well this year so far, as the market has been much weaker year to date.”
Although 2014 has had a less positive start for Japanese equities, the fund remains ahead of the Topix on a 12-month view with a return of 13.44 per cent against the index return of 9.42 per cent.
The manager notes that while the market has struggled, in the context of the rally in 2013 it could be argued the dip is ‘healthy profit-taking’.
“Fundamentally, we still see improvement on the horizon. We are still very upbeat on the outlook for 2014, hence we haven’t changed our portfolio positioning and we still have a very positive bias. We have been using the pullback to add to positions where we find most value.
“Abenomics is just over one year old – it is a bit early to give up on it just yet. We think we have a very positive government and central bank that wants to support asset prices and an enormous quantitative easing programme still to run.”
EXPERT VIEW
Ben Willis, investment manager and head of research at Whitechurch Securities
VERDICT
Great timing from Polar Capital to launch a Japanese equity fund just prior to ‘Abenomics’. There are not many times that investors can say they have had just shy of 30 per cent returns from a Japanese fund, but this is what manager Gerard Cawley has – and outperforming the sector too. Early days, but this could represent a solid core holding.
