Japan’s $1.1trn Government Pension Investment Fund followed by saying target allocations for the separate categories of domestic and foreign equities will both go to 25% from 12%, while local fixed income bonds will drop to 35% from 60%.
Against this backdrop, Fund Selector Asia takes a look at two equity funds from Eastspring Investments and Invesco Management that are similar in their structure and investment objective.
Both Luxembourg-domiciled funds aim to seek long-term capital appreciation by investing mainly into Japanese equities, but they also have a provision to invest in bonds.
Investment strategy review
Luke Ng, vice president at FE, finds similarities between the management approaches of the two funds. Both adopt a bottom-up stock picking approach and maintain a concentrated portfolio of about 40 stocks.
“Despite the similar investment approach, Eastspring focuses more on seeking opportunities from relative valuation dispersion in the market. The fund is also positioned with companies that are expected to benefit from their restructuring processes,” Ng said.
He cited examples of companies like TDK Corp and NEC which feature among the top 10 holdings of Eastspring’s fund, with a 4.4% and 3.8% weighting, respectively.
“On the other hand, Invesco favors companies with free cash flow and competitive advantage, including names with intangible assets such as customer loyalty, brand and technology.”
Industry exposure also differs.
Consumer discretionary and financial sectors each account for about a quarter of the weightings in Eastspring’s portfolio. The information technology sector follows with an 18% allocation.
“Eastspring is overweight in those three sectors against its relevant benchmark [MSCI Japan],” Ng said.
Comparatively, Invesco has much lower exposures to consumer discretionary (13.9%) and financials (14%). Invesco has the highest allocation to the information technology sector, which accounts for 33.5% of the portfolio, followed by industrials (20.7%).
“Invesco has a long standing bias towards IT and continues to add exposure to the sector throughout 2014,” Ng said, adding that the two funds had big differences in their holdings.
Invesco’s top 10 holdings show exposure to four information technology companies with Keyence (5.2%) and Sqaure Enix (5.1%) being the top two holdings. Ricoh (4.2%) and Hoya (4.1%) also feature among its IT stock bets.
Invesco benchmarks its performance against the TOPIX Index, which has a broader coverage in terms of the number of constituents than that of the MSCI Japan (the Eastspring fund benchmark).
The top three holdings of the Eastspring fund are Mitsubishi UFJ Financial, Sony and Ricoh.
For Invesco, the top three are Keyence, Sqaure Enix and financial company Orix.
Performance review
Over one-year period ending 31 October, the Eastspring fund registered 6.6% return whjile the Invesco fund posted 1.3% return. Even over a two-year period, the Eastspring fund with a 42% return outperformed that of Invesco with 29.7% return.
Over a five-year horizon, the Eastspring fund recorded 11.9% return compared with 3% of the Invesco fund.
“However, volatility of the Invesco fund was much lower over those periods,” Ng noted.
According to Ng, the Eastspring fund tends to outperform during a rising market and Invesco should perform better in a downmarket.
“Both funds consistently added value for investors against peers and against their respective benchmarks. This is reflected by the `4 Crown’and `5 Crown’ ratings awarded for the Eastspring and Invesco funds respectively from FE,” Ng said.
Portfolio Managers
Dean Cashman, investment director, Japan equities, has been managing the fund since July 2006. He has been with Eastspring since 2004 and has over 25 years of investment experience.
Tadao Minaguchi has been the chief portfolio manager for the Invesco fund since 2006. He started his career in 1993.
Fees
Fees and charges of both funds vary among different share classes, but they do not deviate much from the average of their peers, Ng said.
For the period ended 30 June, the management fees charged by the Eastspring fund in share classes A, B and C are 1.5%, 1.2% and 1%, respectively, while there are no management fees under share class D and E.
On the other hand, the management fees on the Invesco fund under Class A, A(EUR hedged), A(USD hedged) and R are 1.40%, while fees are 0.75% under Class C, C(EUR hedged) and 2% in Class E.
Conclusion
“Backed by decent investment approaches, both funds have been demonstrating good abilities to add value for investors over the long term.
“While the teams focus on different stock picking ideas, they tend to benefit from different market conditions.
“As both funds are maintaining a concentrated portfolio with different investment themes, diversification benefits could be enhanced by holding both funds in a Japanese fund portfolio.”
