Multi-managers start to move back into “unloved” Japan

Skandia and Henderson New Star are among a number of multi-asset groups to start bumping up their weightings to Japan, as they believe the beleaguered country could see a reversal in its fortunes this year.

Last year, Japan was the second worst selling IMA sector, which is unsurprising considering it recorded the lowest performance of any equity market and fell 3.6% in sterling terms.

However, managers are starting to turn more bullish on the country with PSigma Investment Management CIO Tom Becket saying he has taken his "biggest bet on Japan in the company's history".

Managers are buoyed by corporate restructuring, improving valuations, constructive government policies and a weakening of the yen. They also recognise Japan is in pole position to benefit from rapid Asian growth.

Skandia Investment Group CIO James Millard is one manager who has moved overweight Japan.

"With the majority of fund managers still underweight, it seems to us there is scope for this to correct.

"At the end of November the markets were encouraged by Japanese efforts to fight deflation and to tackle the currency concerns. We are not diving in head first but if the government policy and action becomes clearer we think Japan has the ability to perform well relative to other equity markets."

In terms of the group's main asset allocation calls, Skandia is underweight the US and Eurozone and neutral on the UK.

Mark Harris, head of multi-manager at Henderson New Star, had practically zero in Japan in the week or two before the end of 2009. He now has about 6% in the group's Balanced portfolio, as well as 10% in the Active and 10% in the Tactical fund.

"We have been mainly buying Neptune Japan Opportunities, which is fully yen hedged and investing in financials and export-orientated companies, and BDT Invest Japan Smaller Companies, which is a play on the mid-cap market and taps into the supply chain."

He started adding Japan to portfolios for a number of reasons including the market had lagged the global rally and stocks were trading cheaply on a number of measures.

"The Japanese market is export-orientated and linked into intra-regional trade, which has now started to pick up. But the key catalyst for the stock market to do well is whether the yen weakens. It will eventually, because of the big fiscal deficit and demographic problem, but that could take years to play out," he adds.

Meanwhile, PSigma's Becket now has a higher weighting in Japan than the US, at 6.5% of his Balanced Fund of Funds, through the Jupiter Japan Income fund.

"Japan is unloved, unfashionable under-researched, under-owned and, most importantly, relatively undervalued. When one contrasts this to the seemingly "one-way bet" that is China and the emerging markets, you can understand why buying Japanese equities in portfolios is such a controversial move, but could be a very rewarding trade. We are currently reducing emerging market equities and regenerating the proceeds into Japan, in order to play emerging market growth through undervalued companies.

"I expect a pick-up from institutional flows into Japan this year but I struggle to see retail investors going in as they are fed up with what has happened over the past 20 years."

T. Bailey's Jason Britton, has increased the weighting in the GLG Japan Core Alpha fund to 5.6% from 2.9% in his Growth fund, and introduced the iShares MSCI Japan Small Cap ETF at 2%.

"We have gone overweight into Japan due to its limited exposure to the financial crisis and signs that, potentially, changes will come into effect," he says.

Ashburton too has upped its Japan weighting from 10% of equity exposure at the end of 2009 to 25% in its multi-asset and asset management funds.

Tristan Hanson, manager of asset allocation and strategy at Ashburton, says: "After a 20-year bear market and another very poor year in 2009, global investors have lost interest in Japan.

"With sentiment so poor, we believe it would take little in the way of good news for Japanese equities to outperform other regions where expectations are more demanding."