The Japanese economy is not exactly compelling, but the potential for corporate earnings has been keeping investors interested.
The weaker yen has had a significant impact on the profitability of exporting companies. Standard Life Investments noted that corporate profits before tax rose by an average of 16% during 2012-2014, and are forecast to hit a similar level this year.
BlackRock said recently that it retains an overweight position on Japanese equities, given attractive valuations and continued aggressive stimulus that is supporting earnings.
However, there are headwinds. The government recently decided not to increase its QE programme and the BoJ said it doesn’t expect to hit its 2% inflation target until the start of 2017. The central bank also cut Japan’s growth outlook by 0.5 percentage points to 1.2%.
Against this backdrop, Fund Selector Asia compares the Polar Capital Japan Fund and the Man GLG Japan CoreAlpha Equity Fund.
Serene Ang, director for fund solutions at Coutts, has provided a comparative analysis.
Investment strategy review
The Polar and Man GLG instruments are similar in the way that they invest in Japanese equities. Both the fund managers adopt a high-conviction approach (adopting fewer than 100 holdings) and build their portfolios through a bottom-up approach.
However, the reference index the funds adopt is different and the fund managers invest in stocks according to their individual philosophies.
For Polar Capital, the fund managers, James Salter and Gerard Cawley, adopt the Tokyo Stock Price Index (Topix) as the reference benchmark. Ang said that Salter, the lead portfolio manager, has deep knowledge in managing funds of under-researched domestic Japanese small and mid cap stocks.
She noted that the fund consists of 70-100 holdings. The fund is overweight small caps, with a 37.5% exposure relative to a 9.1% exposure in the Topix index.
The fund has been increasing its exposure to smaller companies because they have been recently underperforming, Ang said.
Turning to the Man GLG fund, portfolio manager Stephen Harker uses the Topix Total Return Index as the fund’s reference. Ang noted that Harker targets the top 300 stocks in the Topix universe. The fund has a concentration in the top 100 stocks of the index (which makes up 1/3 of the portfolio). Mega and large-cap stocks currently make up over 88% of the fund.
A snapshot of portfolio allocation:
|Polar Capital fund||GLG Japan fund|
|Launch||19 October, 2001||28 January, 2010|
|Number of holdings||75||47|
Financing business – 10.8%
Construction – 7.0%
Machinery – 6.8%
Textiles & apparels – 2.6%
Rubber products – 2.7%
| Banks – 10.73%
Iron & steel – 5.97%
Wholesale trade – 5.20%
Glass & Ceramics – 4.81%
Mining – 3.68%
ORIX – 3.8%
Dai-ichi Life Insurance – 3.4%
Mazda Motor – 3.3%
Mitsubushi UFJ Financial – 3.0%
Credit Saison – 3.0%
| Canon – 4.31%
Asahi Glass – 4.00%
Nippon Steel & Sumitomo Metal – 3.85%
Inpex – 3.72%
Sumitomo Mitsui Trust Holdings – 3.68%