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.”
Meanwhile, certain economic tailwinds are helping Mr Lee take a relatively optimistic view of the sector’s future. He notes: “While Japanese firms have been enjoying double-digit corporate earnings growth for the past three years, this was driven by a sharp drop in the yen’s value. Looking forward to the next three years we expect the main drivers of corporate earnings growth will be the oil price decline, and private capital expenditure and consumption recovery.”
“After two decades of deflation, Japanese firms have now started to regain pricing power and have more confidence to raise the prices of their products or services. The lower oil price is [also] a boon to Japanese corporate earnings. Given the time lag of six to nine months, the price decline will boost corporate earnings for the next one or two years,” he adds.
EXPERT VIEW
Oliver Stone, head of research, Fairstone Private Wealth
While this fund targets smaller Japanese firms that are undervalued, manager Yun-Young Lee’s portfolio does not have a cyclical bias. The vehicle has relative overweights in consumer defensives and technology and relative underweights in consumer cyclicals and basic materials, giving it a more ‘blended’ feel. Mr Lee has managed the fund since January 2005 and has provided investors with good risk-adjusted returns versus the peer group, though investors should be aware that the portfolio is only available in US dollar- or Japan yen-denominated share classes, meaning they will be taking on additional currency risk should they allocate to it.
