Your IndustrySep 17 2015

Selecting a Japanese equity fund

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Advisers should always consider the ‘three Ps’ of philosophy, people and process when assessing Japanese equity fund managers, says Nick Peters, portfolio manager at Fidelity Solutions.

Mr Peters says the ‘three Ps’ are part of Fidelity’s key considerations when undertaking the strategy selection process, which aims to find suitable funds through which to invest in Japanese equities.

By asking about philosophy, people and process, Mr Peters says investors can understand exactly what they are investing in, such as whether the fund has a growth or a value bias, the level of resource the manager has at his disposal and the consistency or drivers of a fund’s returns.

A Japanese equity fund needs to be viewed no differently than any other collective investment vehicle that is included in portfolios, says Ash Misra, head of portfolio specialists at Lloyds Bank Private Banking.

He says it is different only to the extent that the profile of its future performance and returns is likely to differ on account of Japan’s country risk, economic/business-cycle factors, company/sector-specific idiosyncratic risk and, of course, currency risk.

Therefore Mr Misra says the questions must focus on long-term fund manager track record, medium to long-term portfolio risk, as well as the measurement, management and control of the portfolio risk.

He says: “It is worth noting past periods of above or below average performance to understand what caused that performance (skill, luck, etc), what was done to maximise or minimise its impact, what were the key learning points from those episodes and how that learning is benefiting investors on an ongoing basis.”

Matthew Brett, co- manager of Baillie Gifford’s Japanese fund, agrees advisers should ask questions around the investor’s process in order to gain conviction that the approach can be repeated.

He adds another question should be on what the turnover of the fund is to check whether the fund manager takes a long-term investment approach.

In addition to the usual questions about approach, experience and process there are some specific questions about corporate Japan that investors might wish to quiz their Japanese equity manger on.

With respect to Japan in particular, Fidelity’s Mr Peters says advisers might wish to question how effective the portfolio manager thinks the economic reform agenda of Shinzo Abe, the prime minister, will be and what impact this is likely to have on equity markets.

Michael Stanes, investment director at Heartwood Investment Management, recommends asking, given the changes in corporate behaviour being seen as a result of initiatives such as the shareholder code, how does the manager go about understanding whether corporate management is serious about more effective capital allocation (deeds rather than words)?

Corporate Japan is notoriously bad at producing credible and accurate projections of profitability, so Mr Stanes recommends finding out how the manager assesses profit potential.

He says advisers should find out how the manager incorporates a view on the yen (either by hedging policy or in terms of domestic/exporter split) in portfolio construction.

Japanese mid cap stocks are considered to be under-researched, Mr Stanes points out, so he recommends finding out if the manager invests in this space.

If the manager does invest, Mr Stanes says the adviser should find out how he manages liquidity and would this put a cap on the potential maximum asset size.