Japanese equities may seem like a consensus trade over the past 12 to 18 months, but it has still yet to have a major impact on portfolio positioning.
According to data from FE fundinfo, most global equity strategies are still underweight Japan, having just 4.68% allocated to the country compared with 6% for the MSCI World index.
Despite the strong rally in Japanese equities over the past 18 months (notwithstanding August’s sell-off when the yen carry trade was unwound), asset managers therefore argue that it has further to go.
Unlike previous rallies, which have tended to be driven by exporters benefiting from a weaker yen, this one is much more broad-based with auto manufacturers, semiconductor companies, banks and construction companies all performing well.
Long-term structural trends, most notably corporate governance reforms, should act as a further tailwind.
Crucially, the corporate governance reforms which have taken place so far have been more geared towards large-cap companies, while regulators are now starting to turn their attention towards small-cap stocks as well.
Against this background, Darius McDermott, managing director at Chelsea Financial Services, chose the M&G Japan fund and the MFS Meridian Japan Equity fund for this week’s head to head.
| M&G | MFS Meridian | |
| Size | $982.8m | $4.4m |
| Inception | 2018 | 2007 |
| Managers | Carl Vine, Dave Perrett | Team of Asian Equity Analysts |
| Three-year cumulative return | 22.59% | -3.15% |
| Three-year annualised return | 7.06% | -1% |
| Three-year annualised alpha | 5.62 | -2.21 |
| Three-year annualised volatility | 16.94 | 17.37 |
| Three-year information ratio | 0.72 | -0.29 |
| FE Crown fund rating | ***** | ** |
Investment approach
The M&G team start by scouring the benchmark MSCI Japan index, but they tend to hone their coverage on around 250 stocks.
McDermott notes that by focusing on a smaller pool of stocks, this allows its managers to have strong dialogue with management and allows them to generate insights which they can subsequently exploit when comparing their own estimates of the value of a stock with the price ascribed by the market.
McDermott also notes that the strategy has a slight value bias and it also tends to skew towards small- and mid-cap stocks.
Meanwhile, the MFS Meridian fund tends to invest more in large- and mid-cap securities and is more diversified across style.
The fund taps into the firm’s huge analyst platform by leveraging the insights of 11 different sector analysts.
The process for stock selection starts with analysts looking at various factors including quality, growth, business risk and appropriate valuations.
The next phase involves picking individual securities, where analysts compare different companies and valuations within sectors.
The end result is a concentrated portfolio of 30-60 stocks.
McDermott notes that there is a large degree of crossover in the top 10 holdings between the two funds with both holding Mitsubishi UFJ, Hitachi and Toyota, for example.
Sector allocation:
| M&G | MFS Meridian | ||
| Industrials | 24.7% | Capital Goods | 36.4% |
| Consumer Discretionary | 21.4% | Technology | 20.9% |
| Financials | 16.3% | Financial Services | 13.2% |
| Information Technology | 14.7% | Consumer Cyclicals | 10.4% |
| Communication Services | 6% | Healthcare | 8.3% |
| Real Estate | 4.9% | Consumer Staples | 5.6% |
| Consumer Staples | 4.6% | Telecommunications | 4.3% |
| Healthcare | 4.5% | Cash & Equivalents | 0.9% |
| Materials | 2.3% | ||
| Cash | 0.9% |
Top five holdings:
| M&G | MFS Meridian | ||
| Mitsubishi UFJ | 6.5% | Hitachi | n/a |
| Orix Corporation | 4.8% | Keyence Corp | n/a |
| Seven & I Holdings | 4.6% | Mitsubishi UFJ Financial Group | n/a |
| Sony | 4.4% | Mitsubishi Electric Corp | n/a |
| Toyota | 4.3% | Tokio Marine Holdings | n/a |
Performance
McDermott notes that while growth stocks have led global market performance in recent years, most notably the Magnificent 7, the exception to the rule has been Japan, where value stocks have been in vogue.
The country’s top performers have been index heavyweights such as auto manufacturers and banks, while growth sectors like technology and smaller companies have barely participated in the rally.
McDermott notes that over the past three years, the MSCI Japan Value index has outperformed the MSCI Japan Growth index by 22.8% to -16.1%.
This explains the discrepancy in performance between the two funds, with the M&G fund having a much greater value focus.
This difference was particularly acute in 2022 when M&G fund avoided the double-digit losses the MFS Meridian fund put up, McDermott notes.
Discrete calendar year performance
| Fund | YTD* | 2023 | 2022 | 2021 | 2020 |
| M&G | 11.88% | 19.24% | -6.07% | 10.62% | 5.76% |
| MFS Meridian | 11.41% | 15.95% | -21.96% | -2.66% | 17.25% |
Manager review
The M&G fund is managed by Carl Vine and supported by deputy fund manager David Perrett.
Vine has over 20 years’ investment experience having begun his career at Prudential in London before relocating to Tokyo to open the Japan office. He went on to work in Hong Kong for SAC Capital Advisors and UBS.
Vine and Perrett co-founded the boutique investment firm Port Meadow Capital in 2014 before both joining M&G in 2019. The two therefore have a strong pedigree working together and are supported by a team of eight analysts and other investment specialists.
Conversely, MFS Meridian eschews appointing individual fund managers and taps into the resources of a whole team of analysts all over the globe.
Having said that, Akira Fuse has general oversight of the portfolio and communicates investment policy, strategy and positioning. He joined the firm in 2019.
Conclusion
McDermott said that he likes both funds and he expects the strengthening yen to help some of the more small-cap and growthier names, which should aid MFS Meridian.
Although, overall he notes it is hard to ignore the performance of the M&G fund.
“It really is a strong core option for anyone wanting to invest in the region. I’d expect the fund to perform well in most markets,” he said.
