InvestmentsJan 19 2015

Fund Review: Aberdeen Global Japanese Smaller Companies

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Chern-Yeh Kwok, head of Japanese equities at Aberdeen Asset Management, says the fund’s objective is long-term total returns through investing at least two-thirds of the fund’s assets in smaller Japanese companies.

He explains: “For the purpose of this fund, smaller companies are defined as those with a market capitalisation in the base currency of the fund, as at the date of initial investment of less than ¥250bn and a maximum market capitalisation of ¥500bn.”

Stocks are selected by way of a bottom-up process, with an emphasis on company visits. “No stock is bought without our managers having first met management, and then detailed notes are written,” he insists. “We estimate a company’s worth in two stages – quality then price. Quality is defined in reference to management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios, market, peer group and business prospects.”

Mr Kwok notes that top-down factors are secondary in the portfolio’s construction, with diversification rather than formal controls guiding sector weights. “Aberdeen portfolios are generally conservatively run with an emphasis on traditional buy and hold, with top slicing/topping up preferred to outright trades, resulting in low turnover,” he notes. “Typically, they have higher return on equity/assets and lower debt to equity than the market average.”

The team behind the fund tends not to look at what is in the benchmark – the Russell/Nomura Small Cap index – when constructing the portfolio. Mr Kwok explains: “We believe cross-coverage of securities increases our objectivity and lessens reliance on individuals. Furthermore, our asset managers are based in the regions where we invest, so investors can benefit from their local knowledge.”

He emphasises that while the fundamental approach behind the running of the fund remains unchanged, the team has refined some aspects during the past five years, with its research becoming more intensive and its sell discipline being tightened up.

There are five equity managers located in Tokyo who manage Japanese portfolios on a day-to-day basis and they also form part of a pan-Asian regional equity team in Singapore.

The fund is placed at level five on a risk-reward profile that goes up to seven, while the ongoing charges on the D2 sterling Acc share class are 1.68 per cent.

The fund has achieved several years of outperformance against the Investment Association (formerly the IMA) Japanese Smaller Companies sector. In the five years to January 6 2015, the fund delivered a return of 92.31 per cent, compared with 68.79 per cent by the sector, putting it in the top quartile. It has maintained top-quartile returns in the sector across one and three years, with returns of 15.91 per cent and 56.86 per cent respectively, according to data from FE Analytics.

Mr Kwok explains that the stock selection process favours those companies with a “competitive edge”. He points out some of its consumer-related holdings added to the fund’s recent performance, including snack food maker Calbee, which rose after reporting strong second-quarter results in 2014 supported by robust demand for its products in Japan and North America.

He acknowledges some holdings have not performed quite so well for the fund, though. “Detracting from performance was car parts supplier Musashi Seimitsu, which corrected after a strong first-half performance,” he notes. “Kansai Paint declined due to slowing demand for automotive paint in Thailand. Meanwhile, lens maker Tamron underperformed on concerns of slower growth in its surveillance camera business.”

There have been some recent changes to the portfolio, mainly in the latter half of last year when it took partial profits in cosmetics company Dr.Ci:Labo and robotics parts maker Harmonic Drive Systems following a run in their share prices. With the proceeds, the fund initiated a position in Sky Perfect Jsat Holdings, which operates a local, direct-to-home pay TV business and owns the world’s fifth-largest commercial satellite fleet, according to Mr Kwok.

EXPERT VIEW

Darius McDermott, managing director, Chelsea Financial Services

Run by Aberdeen’s highly experienced Asian equities team, the fund invests in the dynamic and diverse smaller companies on offer in Japan. The fund is currently highly exposed to both consumer goods and industrials plays, which helps contribute to the fund’s solid outperformance against its small-cap benchmark.