Japan manager Nicholas Weindling has seen his investment trust struggle after exposure to sectors that performed strongly in 2013 have dented performance this year.
Mr Weindling, who manages the £429m JPMorgan Japanese Investment Trust, said the portfolio had struggled during a tough period for the region, with its share price falling greater than its benchmark Topix index in the three months to the end of April.
The Japanese market has certainly taken a pause for breath in 2014 following the Topix’s 51.4 per cent rise in yen terms in 2013.
The bourse has fallen nearly 8.3 per cent this year as profit taking has ensued, as well as concern in some camps about the rise in sales tax in Japan.
The manager said two groups of stocks in particular had hit performance – financials and internet stocks.
“Banks and real estate, which we see as beneficiaries of the return of inflation to Japan, fell as investors became disillusioned by ‘Abenomics’, particularly the pace of structural reform,” he said.
“Internet companies performed poorly globally. Several of the largest detractors were stocks that had performed well over the previous year, including Digital Garage, which invests in unlisted internet start-ups, online restaurant review and booking company Kakaku.com and Cookpad, a recipe website.”
All three were top contributors to trust performance in the last financial year.
“We do not believe the investment cases for any of these stocks have changed and continue to hold them,” he added.
“We have maintained a bias towards domestic sectors that benefit from aggressive monetary easing, such as financials and real estate. [Prime minister Shinzo] Abe remains popular, more so than even [Junichiro] Koizumi at the same stage of his premiership and, unusually, there has been no change in the cabinet since he came to power.”
Mr Weindling said this leads him to believe the market should give Mr Abe the benefit of the doubt in pushing through his policy agenda.
Elsewhere in the fund, the team has favoured companies expected to deliver long-term, sustained growth thanks to a combination of secular trends, quality management and strong balance sheets.
Examples of these trends include factory automation, the growth of e-commerce, greater use of mobile devices, domestic consolidation and the creation of strong Japanese brands in new areas such as consumer goods.
“We expect these trends to last for years and continue to avoid companies whose products and services have been commoditised, such as televisions, white goods and even mobile devices.”
In spite of the recent pullback, Mr Weindling said he remained positive on Japan overall, citing strong company earnings, a central bank committed to fighting deflation and improving global demand.
“With prices rising and consumption tax increasing from April, it is important bonuses and salaries in particular follow suit,” he added.
“It is important people expect both prices and wages to rise if Japan is to escape deflation permanently, and we continue to watch this data carefully”.
Japan in the middle of the bulls and bears
There are always investors on either side of the debate about any asset class and its value, but Japan seems to be firmly locked in the jaws of the bulls and bears.
In March, Artemis’ William Littlewood said he had a short position on Japanese bonds, a bet that will gain money if the bond’s value falls. The position in his Strategic Assets fund was equivalent to 64.5 per cent of the net asset value of the portfolio.
The manager said the high debt level in the country, plus its aging population, meant it is on a downward spiral. He remained unconvinced by the reflationary policies of prime minster Shinzo Abe (pictured above), too.
The index has only delivered positive returns in May this year – to May 28 – and has dropped every other month.
However, managers who were previously cautious on the country have become less so of late.
Multi-manager David Coombs (pictured right) recently said he had “grudgingly” added Japanese equity exposure to his funds for the first time in more than 10 years, and bear Martin Gray revealed Japan is one of the few areas he is optimistic about, citing an investment in Mr Weindling’s trust as a key investment.
With the Japanese market range-bound, now could be a good time to get on board with the bulls.
