Who are OBSR's top Japan fund managers?

OBSR’s Amaya Assan and Richard Whitehall reveal their top fund picks.

Where once the innovative Japanese economy was held up as the example that others should follow, it is now seen as the deflationary experience that others should strive to avoid. It is, therefore, not surprising that Japanese equity has become an ignored asset class for many investors.

However, investors may be surprised to learn that the FTSE All-Share index underperformed the TOPIX, Japanese All-Share index, by 1.29% pa over the past three years when the returns are measured in sterling.

2010 was a year of mixed signals from the Japanese economy. Economic output has been strong with growth rates in the first three quarters of 1.22%, 0.37% and 0.9%. Corporate profits have also impressed, continuing their strong recovery from early 2009 lows. Yet, deflation has remained a problem and the critical export sector has been hampered by the continuing appreciation of the yen.

At the start of 2010 the exchange rate with the dollar was $1:Y92.7, by the end of October the yen had appreciated to $1:Y80.4, a level which meant the yen had appreciated by over 50% since July 2007.

Value for investors

There are strong arguments to suggest that the Japanese equity market contains significant value for investors. For instance, Goldman Sachs recently noted that price-book ratios were now as low as at the start of 2009. Similarly Deutsche Bank reported in October that Japan now dominates the cheapest quartile of sectors globally.

There are signs the export sector could be boosted in 2011 from many positive forces. The yen has already begun to lose some ground against the dollar; this depreciation is likely to be furthered if The Bank of Japan further loosens its monetary policy by purchasing more financial assets.

If such a move is coupled with stronger than expected US demand along with a well-managed soft landing for China, the export outlook for Japanese companies would be far more positive. Given both the economic and psychological importance of the export sector, this would likely lead to an equity rally. Yet all is not so clear cut and it could be that even if such an export revival occurs, it may merely offset domestic demand weakness as many government subsidies are withdrawn in early 2011.

Fund choices

Should investors wish to access the Japanese equity market then there are many impressive funds that OBSR would suggest they consider. Within the onshore universe, OBSR has a high regard for the Schroder Tokyo fund, which is managed by an experienced manager Andrew Rose who is based in London. The investment approach tends to be longer term, as the emphasis is on the future earnings stream of a company and its fair valuation. The preference is for companies where the market has taken a short-term negative view but the manager believes have potential for earnings surprise in the next two-three years. Rose’s disciplined approach to valuations and fundamentals, combined with his strong grasp of market sentiment, is considered in our opinion.

We also have a high regard for Stephen Harker and his team at GLG. They manage the large cap Japan CoreAlpha fund following a value-bias, contrarian approach. Another strong offering is Paul Chesson’s Invesco Perpetual Japan, a value-oriented fund managed with strong conviction on valuations and the manager’s longer-term view of Japan. If an investor is looking for a total return approach, then consideration should be given to Jupiter Japan Income which aims to achieve long-term capital growth while generating a 30% higher yield than the TOPIX index.

The fund manager Simon Somerville aims to add value by identifying well managed companies with superior growth prospects, and companies with strong excess cash flows where management is willing to pay above average dividends.

In the smaller companies’ universe the BNP Paribas Parvest Japan Small Cap is a solid offshore offering. The fund is managed by Sumitomo Mitsui Asset Management and led by Shunsuke Matsushima who has been dedicated to small cap investments since 1996. Shunsuke believes that low profitability companies have the potential to transform into higher profitability and growth potential through various types of reforms, such as organisational restructuring or development of new products or by cultivating market needs.

The investment approach tends to be longer-term with the manager typically buying stocks at valuations below their sector average and selling them when they are above the sector average. He will remain invested if he continues to see strong future growth and the market continues rewarding a high price earnings ratio.

Flexible approach

For all-cap exposure, Melchior has both onshore and offshore versions of their Japan Advantage fund. The fund is managed by Akira Yoshimi at FuNNeX who has over 20 years investment experience. Yoshimi combines bottom-up research with a strong awareness of the market, which he believes is critical to protect the fund from short-term volatility.

His flexible approach targets undervalued stocks with mid to long-term earnings catalysts. Another strong offering is the Invesco Japanese Value Equity fund (previously named the Morgan Stanley Japanese Value Equity). Lead manager Kunihiko Sugio and co-manager Daiji Ozawa focus on undervalued opportunities enabling them to adjust the portfolio to reflect changing micro and macroeconomic conditions. We also like the Syz Oyster Japan Opportunities fund; the London-based Morant Wright Management team employs a comprehensive research-based process which strongly focuses on undervalued quality companies.

For instance, they believe that well established businesses generally have assets that have not been appraised properly in the accounts for years and therefore there is potential for the company to develop this asset or is indeed in the process of developing it. The Goldman Sachs Japanese Equity team take a different view to equity investing in Japan as they believe that the high volatility of the Japanese stock market does not reward traditional buy and hold investing.

Their approach is therefore driven by the analysis of relative value and following the areas and stocks with the best risk-reward profiles. The team have two funds, Goldman Sachs Japan Portfolio and Japan Small Cap Portfolio. Hiroyuki Ito is lead manager of the Japan Portfolio which is an all cap, blended portfolio, whereas Nakaba Minai and Kota Takahashi manage the small-cap product.