Best In ClassApr 27 2021

Best in Class: FSSA Japan Focus

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Best in Class: FSSA Japan Focus
Pexels/Satoshi Hirayama

As a Chelsea fan, trust has been a big buzzword in my mind in the last few days.

Yes, football’s European Super League is no more – but you do worry about the motives of the powers that be at your club when they try to do something as underhanded as this. Without trust, there is nothing.

The same is true of investing; regardless of performance, if you do not trust a market or an asset class you can not back it.

That brings us to Japan – a market which is now close to its 30-year investment highs but is still widely overlooked by foreign investors. Take the last 12 months as a proxy: we have seen almost £500m of net outflows across the two main Investment Association sectors for Japanese equities, despite the MSCI Japan rising almost 23 per cent.

Three decades of stagnant economic growth and deflation will do that, but there are clear attractions with political stability, stringent corporate governance and reasonably low valuations – that is without going into the digital transformation taking place due to the pandemic (such as digital payments, e-commerce and software-as-a-service) which are also being seen in other parts of the world.

This is one of the reasons we like the asset class – the other is the spate of top quality active managers in the region. This week’s Best in Class is backed by one of the most experienced investors in Japan, and is a perfect example of that.

The FSSA Japan Focus fund pays no attention to the benchmark, instead following the team’s clear philosophy and process that has proven to be so successful in other parts of Asia. It is an attitude that has been backed up by exceptional performance, with the fund returning 124 per cent in the past five years, compared to 70 per cent for the average fund in the IA Japan sector.

It is backed by two experienced members of the highly successful FSSA Investment Managers team, in the shape of industry veteran Martin Lau and Sophia Li.

The team believes that, despite having a large investment universe, the Japanese market is under-researched and ignored by most international investors.

This provides a great opportunity. The team’s philosophy is to invest in quality businesses and the managers look for quality of franchise, quality of management and sustainable long-term growth.

This means that underlying companies often have characteristics such as dominant market share, perpetual innovation, zero tolerance for complacency, fast decision-making, secular growth opportunities and limited competition. Stocks also tend to be high return, asset light, have good earnings visibility and are conservatively geared.

The team has regular discussions on potential new secular themes and new ideas are generated through more than 300 company meetings a year. Companies which are deemed good enough make it onto the fund’s watchlist which has around 120 companies. The existing watchlist is regularly monitored.

The team then conducts valuation analysis on the watchlist constituents. The entire portfolio is reviewed annually. The managers avoid the use of set price targets and recognise the limitations of models and valuation methodologies. However, this exercise helps encourage discussion and helps them to understand the key upside and downside risks for a stock.

The result is a high conviction fund - currently holding less than 40 stocks – which invests predominantly in large and medium-sized Japanese companies, with a quality focus. Human resources company Recruit Holdings (4.8 per cent) is currently the largest holding, with Keyence Corporation and Tokyo Electron (4.6 and 4.5 per cent respectively) completing the top three.

At 0.83 per cent, the ongoing charge for the fund is also reasonable for the region it invests in.

We like true active management – and they do not come more active than this. Performance has been exceptional since launch in October 2015 and we believe this fund should be considered as a core option for those looking to invest in Japan.

Darius McDermott is managing director of FundCalibre