Japan seems to be very much at the forefront of investors’ minds at the moment. Only last Friday, the Bank of Japan (BOJ) sent markets whipsawing as it effectively loosened its yield curve control policy, in a surprising move.
The BOJ stuck to its -0.1% benchmark interest rate and kept the range for its 10-year government bonds at between -0.5% and 0.5%, but said it would execute its yield curve control policy with much greater flexibility than it has in the past.
The move lifted stock prices globally and sent US Treasury yields lower, although ironically one casualty of the announcement was the Japanese stock market, which ended the day lower as investors factored in the impact of a stronger currency on some of the country’s conglomerates.
It is also worth noting that the Japanese equity market is at a 33-year high, with the Nikkei 225 gaining 27.5% year to date, according to Morningstar, as foreign investors have flocked to the country due to a combination of a weaker currency and ongoing corporate governance reforms.
Against this background, FSA asked Darius McDermott, managing director of Chelsea Financial Services, to select two Japanese equity funds for comparison. He chose the FSSA Japan Equity fund and the MFS Meridian Japan Equity fund.
| FSSA | MFS Meridian Funds | |
| Size | $367.6m | $3.8 m |
| Inception | 2016 | 2016 |
| Managers | Martin Lau, Sophia Li | n/a |
| Three-year cumulative return | -4.36% | 3.18% |
| Three-year annualised return | -3.70% | 3.28% |
| Three-year annualised alpha | -9.31 | -1.95 |
| Three-year annualised volatility | 24.67 | 16.62 |
| Three-year information ratio | -0.64 | -0.35 |
| FE Crown fund rating | * | ** |
| OCF (retail share class) | 0.91% | 0.85% |
Investment approach
The FSSA fund emphasises quality businesses and the managers look for quality of franchise, quality of management and sustainable long-term growth. Stocks tend to be high return, asset light, have good earnings visibility and low leverage as well.
The management team often look at potential new secular themes and conduct more than 300 company meetings a year to help stimulate ideas. The fund has about 120 names on its watchlist at any one time.
The team carries out valuation analysis on the companies on the watchlist, although the managers recognise the pitfalls of models and valuation methodologies and eschew set price targets, McDermott notes.
Overall, the portfolio is highly concentrated with 53 stocks at the moment and does not concern itself with benchmarks. The fund is usually underweight financials, energy, utilities, real estate and materials, while it is overweight technology and consumer staples.
Meanwhile, the MFS Meridan fund draws on the strengths of eight global sector teams to funnel ideas for the portfolio. The fund has a particular focus on mid and large-caps.
In terms of sectors, its largest positions are in capital goods/industrials and technology, with its exposure to technology even greater than FSSA’s. Unlike FSSA, it is underweight consumer staples.
The fund also tends to have a low turnover in an effort to benefit from opportunities resulting from other investors having a shorter time horizon.
Fund characteristics
Sector allocation:
| FSSA | MFS Meridian Funds | ||
| Industrials | 26.9% | Capital Goods | 35.2% |
| Information Technology | 19.8% | Technology | 25% |
| Healthcare | 14.2% | Financial Services | 9.7% |
| Consumer Discretionary | 12.1% | Healthcare | 9.5% |
| Consumer Staples | 11.5% | Consumer Cyclicals | 9.1% |
| Materials | 7.2% | Consumer Staples | 6.5% |
| Financials | 5.4% | Telecom/CATV | 3.7% |
| Communication Services | 1.9% | Cash & Cash Equivalents | 1.3% |
| Cash | 1.1% |
Top 5 holdings:
| FSSA | Weighting | MFS Meridian Funds | Weighting |
| Olympus Corp | 4.8% | Hitachi | n/a |
| Sony Corporation | 4.7% | Daikin Industries | n/a |
| BayCurrent Consulting | 4.4% | Denso Corp | n/a |
| Rakus Co | 4.4% | SMC Corp | n/a |
| Recruit Holdings | 4.2% | Bridgestone Corp | n/a |
Performance
As mentioned, the FSSA fund has more of a focus on quality growth, whereas the MFS Meridian fund has more of a blended approach.
This perhaps explains the difference in performance between the two funds. The FSSA fund excelled in 2019 and 2020, while 2022 was a dismal year. In contrast, the MFS Meridian fund did not see nearly as high peaks and troughs, although it was up in both 2019 and 2020, while 2022 was a challenging year.
“Year-to-date the MFS Meridian fund has returned a reasonable 11%, while the FSSA fund has risen by just 1%. A reflection perhaps of the more blended style benefitting the former,” said McDermott.
The fees are fairly comparable with FSSA having an ongoing charge of 0.91%, while for MFS Meridian Funds, it is 0.85%.
Discrete calendar year performance
| Fund | YTD* | 2022 | 2021 | 2020 | 2019 |
| FSSA | -0.98% | -29.75% | 8.89% | 30.08% | 38.8% |
| MFS Meridian Funds | 13.44% | -21.23% | -1.67% | 18.5% | 20.13% |
Manager review
McDermott notes that FSSA is one of the foremost specialists in Asian equities, with a strong repeatable investment process supported by a capable team of analysts. Martin Lau is also one of the most well-known managers in Asian equities given his more than two decades experience, McDermott adds.
Co-manager Sophia Li actually joined FSSA as a graduate in 2009 and after a brief stint covering Chinese equities switched over to Japanese stocks. Both her and Lau are based in Hong Kong.
Meanwhile, in keeping with its overall stance, MFS adopts a team-based approach, drawing on the skills of analysts all over the world. Ayako Mikami, who is an investment officer, portfolio manager and equity research analyst, and Akira Fuse, also chief investment officer, have additional oversight of the portfolio.
Conclusion
Overall, McDermott favours the FSSA fund slightly because of the success of the process elsewhere in Asia as well as its strong outperformance in previous years, notwithstanding this year has been more challenging.
“We think the fund is a good core option for investors wanting exposure to this part of the world,” he said.
McDermott also notes though that both funds are backed by two of the best teams in the market and MFS Meridian Fund has also produced consistent returns.
