Fund in focus: Man GLG Japan CoreAlpha
Posted by Liz Rees in Fund and industry updates category on 25 Sep 19
The objective of this fund is to achieve capital growth from investing in Japan and to outperform the Topix total return benchmark over the long term.
The fund has a bias to large cap value companies with around 60% invested this area at the time of writing. There is currently negligible exposure to growth stocks or smaller companies.
Stephen Harker is head of Japanese Equities and leads the team which created the Japan CoreAlpha strategy. He has over 30 years of industry experience covering the region.
There are two other long-standing co-managers, Jeff Atherton and Neil Edwards, while Adrian Edwards joined as a fourth manager in 2014. Two assistant portfolio managers carry out in-depth sector research.
The team are based in York but travel frequently to Japan. Companies also visit their offices and regular conference calls are undertaken.
Investment philosophy & process
Harker believes that every sector in the Japanese market is affected by cyclical trends and investors over-react to these which presents opportunities. He targets companies that are deeply out of favour and have significantly underperformed the market for a long period of time.
The fund has a clear and disciplined process, focusing on the 300 largest companies in Japan, using a combination of strategic and contrarian thinking. It is robust and repeatable and relies on extensive knowledge of the economy, culture and stock market.
Valuation is the primary driver of stock selection. The managers avoid companies they deem expensive but nor will they invest in companies whose markets are in decline- value traps.
Companies are screened on metrics such as price to earnings, price to book, and dividend yield to identify ones that are attractive relative to their peers. Those selected must have potential for improvement, supported by sound balance sheets, high market share and credible management.
The CoreAlpha Model establishes target weightings for holdings and any drift is corrected. The objective is to have a fully-invested portfolio at all times. Companies are sold when the price target is reached, and replaced with a new position with more upside potential.
The composition of the fund is very different to the benchmark. It is currently overweight in banks, transport and iron & steel sectors while having low exposure to the information & communication, electric appliances and chemicals sectors.
The top ten stocks account for nearly half the portfolio, reflecting the high conviction approach. The biggest holdings are Mitsubishi Financial, Toyota, Nippon Steel and Honda. Each accounts for over 6% of the portfolio. Toyota has done well this year, despite the difficult environment for autos, as it is leading the competition in the transition to electric vehicles.
Harker has increased exposure to risk this year and has reduced defensives. The largest purchases have been Deso, a global automotive components manufacturer; T&D Holdings, a life insurance business and Seven & I Holdings, a diversified retailer.
Performance & Costs
The value style has had a difficult time over the past decade and the fund’s return of 122% has lagged the gain of 126.1% for the Topix index (FE data, total return in pounds sterling, 10 years to 19/09/2019).
Over the longer term, however, returns have been very strong relative to peers and the benchmark. Since Harker took the helm, on 1st August 2002, the fund has delivered a total return of 339%. This compares with 215% for the Topix index (FE data, total return in pounds sterling, at 19/09/2019).
Investors should also be aware that the Yen has proven to be a volatile currency, and that may affect returns for UK-based investors. The managers do not use currency hedging, although they pay close attention to how moves in the yen may affect companies held.
The ongoing charge for the C share class is 0.90%, which is average for the group and we consider reasonable.
The team believes there are many reasons to be positive about Japan including: compelling valuations, a reputation for innovation and improving corporate governance. The country has a large current account surplus and is politically stable.
Not only is Japan cheap against other developed markets, the gap between value and growth companies is wider there than anywhere else in the world. Harker considers that many stocks are ‘unbelievably cheap’ and is confident that their latent value will eventually be recognised.
In the last few years there has been a significant increase in company pre-tax margins, enabling them to raise dividends and buy back shares. There is scope for this to continue, as over 50% of Japanese companies have cash on their balance sheet.
Harker sees two possible concerns specific to Japanese equities. The first is a stronger yen, however, he believes that as long as it stays above 105 to the US dollar the profit outlook is underpinned. The second relates to political succession as Abe’s third and last term is set to end in October 2021.
Japan is not immune from a global slowdown due to its sensitivity to world trade as a leading exporter. While confidence among manufacturers has reduced, capital spending has held up due to investment in labour saving technology, and research and development.
Moreover, with the rugby world cup taking place now, and the Olympics next year, Japan will be in the spotlight. Nearly 2 trillion yen has been spent on construction of infrastructure, such as stadiums and other facilities. Visitor spending may help offset some of the effect of a consumption tax rise due in October.
We rate Stephen Harker and his team very highly for their consistent approach. They stick to their methodically executed, value driven process and do not let short term noise distract them.
The concentrated portfolio means the fund can deviate substantially from the benchmark and peer group. We cannot predict when value will return to favour so patience may be required.
We share the manager’s view on the prospects for Japanese companies as Abe’s reforms take effect. While companies have begun paying out excess cash in the form of dividends, pay-out ratios are low relative to other markets, so there is scope to catch up. The income units on the fund currently yield 3%.
The fund is over £2bn in size and Man GLG is willing to close it to new money if necessary to protect the interests of existing investors. At some stage the senior managers will retire but we are satisfied that there are other talented members of the team ready to step up.
We believe growth and value styles can complement each other in a portfolio and this Morningstar gold rated fund is certainly worthy of consideration for those seeking a value fund investing in Japan.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.