The aim remains to provide long-term growth through investing in the Japanese equity market, but portfolio manager Kuniyuki Sugihara – part of the team running the fund for SuMI Trust on behalf of SLI – notes the ‘high-alpha’ approach “is the best way to take advantage of the local insights generated and consistent delivery of alpha by the portfolio management team”.
Adopting a high-conviction approach with a portfolio of between 30-50 stocks, a key focus for the team is that “change creates opportunities”. The process is closely aligned with Standard Life Investment’s Focus on Change philosophy.
Mr Sugihara explains: “Our Tokyo-based Japan analyst team seeks to detect change and identify opportunities where change might improve the future growth prospects of a company. This is done through frequent company meetings and extensive research. Analysts create a high conviction list with their best investment ideas. These are then debated with the portfolio management team to distill the strongest ideas and construct a high-conviction portfolio. Portfolio managers are involved in every stage of the process.”
Primarily a bottom-up stockpicking process, the team are nevertheless aware of the impact macroeconomic factors have on the Japanese market and Japanese companies. “Typically, when portfolio managers identify changes in the macro environment, they will reassess every investment case affected by these changes with the relevant analyst,” adds Mr Sugihara.
Since SuMI Trust took over the management in 2010, the fund has outperformed the IMA Japan sector average and the MSCI Japan index in 2011, 2012 and 2013, albeit with a loss in 2011. For the three years to February 18 2014 the fund has returned 14.67 per cent, compared with the IMA Japan sector average of 7.58 per cent and the MSCI Japan index return of 4.46 per cent, according to data from FE Analytics.
Mr Sugihara says: “We have made only modest changes to the portfolio, which reflects our continuing confidence in our existing selections. We trimmed some existing stocks where we saw our investment cases mostly played out on the recent rally. Furthermore, we added positions in existing cases where a new idea was compelling or we noted existing investment cases were upgraded. Where investment ideas were particularly compelling we have added new stock, for example Dainippon Sumitomo Pharmaceutical, following the development of new drugs for mental health and sales of these in the US. ”
Mr Sugihara adds: “This year, earnings results have been stronger than the market expected and the share prices of our holdings have performed well with the majority of our investment ideas paying off with our initial objectives. As a result of stock selection, the fund is currently underweight in mega-caps. This position proved profitable as mega-cap stocks were affected heavily by the sell-off and share prices were dragged down. We managed to make positive gains when the overall market performance took this recent dip.”
The manager suggests this correction has been as a result of profit taking from the strong rally last year, but acknowledges that “a preference among investors for perceived safer assets during the recent volatility also hurt performance”.
He adds: “It looks like this process is coming to an end. We are concerned about the possibility of a shock in emerging markets and likely contagion in other regions. On the other hand, we see the continuous improvement of the domestic economy in Japan. We expect robust domestic consumption and improving investment to continue, driven by improving consumer sentiment, business confidence, wage increase and pro-growth measures from the government.
“We are relatively optimistic on the likely demand for Japanese equities.”
EXPERT VIEW
Ben Willis, investment manager and head of research at Whitechurch Securities
VERDICT
This fund has been outsourced to Sumitomo Mitsui Trust Bank since 2010 and, as such, it has an ‘institutional’ risk/return profile. Don’t be deceived by the cumulative figures: alpha has only really been added in the past year, although credit to the management team for that. If you are looking for core exposure here it might appeal, but it would not be my pick.
