Sumitomo Mitsui DS Asset Management (SMDSAM) launched a Japan Equity High Conviction Strategy in Singapore on 5 April, hoping to tap into the positive investor sentiment for the asset class.
The fund is unconstrained with no sector allocation restrictions. It will typically hold about 30 individual stocks, and its active component will be at least 80%.
Japanese equities have been on a roll since the beginning of last year, as fund selectors and manager have been impressed by corporate governance reforms in Japan and indications that the long period of deflation and low economic growth might be ending.
The TSE Topix index rose 28.26% in yen terms and 20.40% in US dollars in 2023, according to FE fundinfo data. So far this year, it is up 17.55% and 9.28% respectively.
The AUM of the SMDSAM fund as of 5 April 2024 is $200m, and the lead portfolio manager is Hideyuki Taniuci, who also the head of the JE market group at Sumitomo Mitsui DS Asset Management.
The return target is the benchmark Topix with dividends plus 5%.
Investment process
It is an actively managed core strategy with a high conviction concentrated portfolio, with a fundamental, bottom-up approach to company research with an emphasis on micro leading indicators. The process also includes ESG negative screening and inclusion of positive ESF factors.
According to the portfolio manager, “agility” is key to performance.
“There is no factor investing technique that is always effective in terms of alpha generation. This means a portfolio betting on particular factor(s) does not always generate sufficient alpha,” said the manager.
The strategy has generated a 26.44% return in yen since inception at the end of February 2020, compared with 19.04% by its benchmark, according to Bloomberg data. In the first quarter of this year, it returned 23.03%, a 4.89% excess return over the benchmark.
Its excess cumulative return since February 2020 is about 40% during different market environments when growth or value styles have alternated, according to the manager.
Top five holdings include Mitsubishi UFJ Financial, Mitsubishi Heavy Industries, NTT, Mitsubishi Corporation and Disco Corporation. Significant overweight positions include Mitsubishi Heavy Industries, Disco and Ibiden.
“In order to achieve continuous alpha generation, portfolio managers must consistently invest in the appropriate stocks in a timely manner, ahead of the economic cycle,” said the manager.
The premise is that all companies have one or more reliable micro leading indicators that enable investors to project their near-term earnings Changes in the indicators are shown before the macroeconomic cycle enters the next phase.
For example, micro leading indicators in the automobile sector include the number of units sold or produced, the product mix, sales incentives and financial services availability. Within the supply change for automobiles, micro indicators to monitor include stock volume held by car dealers, component inventory, used-car prices and auto-loan delinquency rate.
“By understanding what drives these micro leading indicators and projecting how they are likely to change through rigorous research and supply chain analysis portfolio managers can construct a portfolio that agilely adapts to different economic and market cycles,” said the manager.
Currently, this fund is only available to accredited investors in Singapore. “SMDSAM is in the process of getting Hong Kong’s Securities and Futures Commission authorisation, and once that is granted, this fund will be available to the retail market in Hong Kong,” said a spokesperson.
Meanwhile, “this Ucits fund is available on AllFunds platform, and therefore all private banks and sub-distributors who distribute through the AllFunds platform”.
