The Japanese stock market was one of the first to feel the effect of Donald Trump’s victory in the US presidential race. At its close (6am UK time on the 9th November), it was evident Hillary Clinton had lost her battle, and their market fell almost 5%. As with most shock reactions, the market recovered much of its initial fall over the following few days, although it still sits below its pre-election level.
In our view, investors should pay little attention to short-term market movements and leave decisions over how to react to skilled and experienced fund managers. One of our favoured managers in this region is Stephen Harker of the Man GLG Japan CoreAlpha Fund.
His fund is focused on large, undervalued companies and until July 2016 had experienced five years of relatively lacklustre performance. Value strategies worldwide have struggled over the past few years as investors have favoured the relative safety of growth . However, this phenomenon has shown signs of reversal in recent months, with Trump’s victory adding momentum. This, coupled with a fall in sterling and strengthening yen, has helped the fund enjoy one of its strongest periods of performance in its eleven year history, although past performance is not a guide to the future.
According to Stephen Harker, the health of the Japanese stock market is largely driven by macroeconomic events. A fall in oil and commodity prices, for example, is the main contributor to Japan’s recent strength verses the UK, as it imports both in huge quantities. The difficulty in predicting the direction of a stock market based on factors outside of his control is part of what drives the manager and his team to disregard the wider picture and focus on individual companies.
They employ a strategy of ‘bottom fishing’ to uncover opportunities among businesses other investors have discarded. They religiously recycle profits from investments that have performed well into companies yet to be recognised by the wider market, thereby ensuring a constant rotation into tomorrow’s potential winners. Automobiles, steel, banks, mining and real estate are all areas in which they are currently finding value. Toyota, Mitsubishi UFJ Financial, and Nippon Steel Sumitomo Metal are all significant holdings in the fund. The fund is relatively concentrated with around 50 holdings which means each can have a greater impact on returns, but is a higher-risk approach
Real estate companies have only recently been represented in the portfolio. The sector has historically been highly overvalued – at one point, the Tokyo Imperial Palace was valued higher than all the real estate in California – so has not appeared on the manager’s radar. However, share prices of real estate companies have fallen over the past three and a half years and Stephen Harker now feels there are pockets of opportunity to be found.
The fund’s price-to-book ratio is currently at an extreme discount relative to the market, implying he owns some of the most highly undervalued companies in Japan. The fund is therefore well positioned should undervalued companies continue to become more popular with investors.
We believe a well-balanced and diversified portfolio is the best route to good long term returns. A variety of investment strategies is also important to ensure the portfolio doesn’t all move in one direction. As growth investing has been so popular in recent years, we suspect most investors are biased that way, with little exposure to value strategies. We therefore feel this fund is a worthy addition to almost any portfolio and it remains on the Wealth 150+ list as one of our favourite ways to gain exposure to this undervalued market.