Stock selection and borrowing money to invest have helped the Schroder Japan Growth trust to deliver a strong outperformance, in spite of a significant rise in its benchmark.
The £206.7m Schroder trust has returned 22.2 per cent year to date, compared with the 15.1 per cent rise in its Topix benchmark.
Manager Andrew Rose said the main driver behind the outperformance was the high level of borrowing, or gearing, he had maintained.
“The market itself has been pretty strong year to date. Our fundamental difference has been I have had some gearing between 10 and 15 per cent, so that will have been a positive contributor,” he said.
“There have also been some positive contributors at a stock selection level.”
One strong performer has been games company Nintendo, a long-term holding that has recently come good.
“The stock was depressed because the company had a policy of only producing games for its own hardware, which was looking outdated, but they announced they would produce games for smartphones, which provided a boost to the share price. I have had that [stock] for a long time, but it has started to go very well,” Mr Rose said.
He has also been rewarded for investments in Japan’s unloved insurance sector.
“My holdings in the insurance sector have been very cheap but have not had a catalyst,” the manager added.
“They have come right this year, but that has been slightly offset by commodity companies like Mitsui, which have been a drag... In general, stock selection has been positive.”
Mitsui, the ninth-biggest holding in the fund, includes energy, machinery and chemicals in its remit.
Although it has detracted from performance, Mr Rose said he was looking to increase his share of the stock in the event of a market correction.
“Mitsui is very clearly a commodity-related stock. Over the last six to 12 months, anything to do with commodity prices has been weak [but] something like Mitsui I’m inclined to be adding to, because commodity prices have fallen so much,” he said.
Mr Rose thinks “the second half of this year is probably going to be more challenging than the first half” as elements of the economy itself begin to disappoint.
Second quarter GDP looks like it will be “flat at best” the manager said, weaker than the market expected after a 3.9 per cent annualised growth in the three months to March.
Elsewhere, the yen has continued to weaken, falling by more than 20 per cent against the US dollar in the past year. “The good side of it is that in the grand scheme of things, the weak yen equals better profits and better wages,” the manager said.
“The broad outline is pretty much as expected [but] on a more negative note is recent export performance. Exports appeared to be recovering earlier on this year but are starting to see weakness, particularly because of the slowdown in China.”
In the three years to August 1, Japan Growth has seen its share price rise by 89.9 per cent, compared with a 49.9 per cent rise for the Topix. In five years, the trust has risen by 108.7 per cent, compared with 50.7 per cent for the index.
