The ¥25.3bn (£160m) Henderson Horizon Japanese Smaller Companies fund was launched in 1985 and is an an offshore Luxembourg-based Sicav available to UK investors.
The vehicle aims to seek long-term capital appreciation by investing at least two-thirds of its total assets in smaller Japanese companies, with a focus on stocks that appear to manager Yun-Young Lee to be undervalued by the market but with the potential for long-term price rises.
Mr Lee explains this strategy tends to focus on firms falling within the bottom 25 per cent of the relevant market in terms of market cap. Although the investment process has remained unaltered during his tenure, the benchmark changed last November from the Tokyo SE Second Section index to the Russell/Nomura Small Cap index, while the base currency changed from US dollars to Japanese yen in the same month.
With increased global market volatility, the manager notes that macroeconomic factors can affect the process “to an extent”. But he adds: “Since this is a bottom-up, stockpicking fund, the largest factor for investment decisions comes from our intensive management meetings.”
Mr Lee notes the portfolio “is more heavily invested in companies that benefit from the recovery in domestic capital investment and consumption. We have had more positive meetings with the firms in these sectors based on our recent meetings,” he says. It is therefore not surprising that the fund’s largest sector weighting is to the consumer discretionary space at just over a quarter of the portfolio, with industrials accounting for 23 per cent.
The fund’s key investor information document notes the vehicle sits at a median risk level of five out of seven for the A2 US dollar accumulation share class, while the ongoing charge is 1.82 per cent.
For the five years to February 17 2016 the vehicle has returned a strong 69.7 per cent, while its benchmark has increased just 41.2 per cent, data from FE Analytics shows. The portfolio has been a consistent performer across most time periods, outperforming the index across one and three years, while the fund’s gain of 3.8 per cent in the past six months clearly outstrips the benchmark’s 3.8 per cent loss.
Mr Lee attributes the outperformance to stock selection. “There were a number of positive contributors to fund performance. They included automobile navigation system maker Pioneer, which turned in stronger quarterly earnings and also announced several business alliances in driverless car technology,” he notes.
The manager also highlighted the contribution of restaurant operator Saizeriya, which continued to turn in strong monthly sales. Meanwhile, construction firm Toa Corp gained more than 45 per cent after the firm delivered better-than-expected quarterly earnings.
However, there were some detractors to performance, with Mr Lee singling out bowling alley operator Round One and games software maker Sega Sammy, both of which are top-10 holdings. “Round One’s monthly store sales showed no sign of improvement, while Sega Sammy has given back some of the earlier gains. We have increased our positions in Round One and Sega Sammy after our meetings with the managements reconfirmed our positive views on both companies.”