Man GLG Japan CoreAlpha: February 2022 fund update

• Jeff Atherton has built over three decades of experience investing in Japanese equities
• We think the fund’s a good option for exposure to large, value-focused companies
• Value investing returned to favour last year which boosted performance
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The Man GLG Japan CoreAlpha fund aims to provide investors with long-term capital growth in excess of the return provided by the TOPIX and Russell/Nomura Large Cap Value benchmarks. The managers are true contrarians and invest in larger, more established Japanese companies. They stick to an investment style known as value investing and the fund managers’ discipline in this style sets them apart from their peers.

We think this fund could work well in a global investment portfolio designed to provide long-term growth, or sit well alongside a Japanese fund using a growth-style investment approach or focused on smaller or medium-sized companies.

Manager

Jeff Atherton’s career managing Japanese funds stretches back to the early 90s and he’s worked for a number of companies including Insight Investment and Société Générale. Over this time, he’s built a deep understanding of the Japanese market.

He joined Man GLG in 2011 as co-manager of the Japan CoreAlpha fund. He took over as lead manager in January 2021, after former lead manager Stephen Harker and co-manager Neil Edwards announced their retirement. Atherton worked alongside Harker for over a decade, using the same value and contrarian investment philosophy, though it’s a style he’s used throughout his career.

While Atherton has the support of co-manager Adrian Edwards and analysts Stephen Harget and Emily Badger, a lot of experience has been lost following the departure of Harker and Edwards. The fund has less resource behind it, which naturally dented our conviction.

The team are not involved in running other funds and are purely dedicated to the Japan CoreAlpha strategy. Atherton is a highly experienced Japanese equities investor and we believe he can lead the team and fund successfully going forward.

The fund remains on our Wealth Shortlist as we feel it’s still in capable hands. But we remain in close contact with the managers and continue to monitor the situation. We’ll inform investors if our views change.

Process

The team continues to implement the same longstanding investing process – buying companies at a lower share price than their true worth. Lower valuations are naturally crucial to their process and they like to emulate Warren Buffett’s approach by being greedy when others are fearful. That said, they don’t want to invest in ‘cheaper’ companies purely based on them being cheap. They need to believe the company has the potential to recover over time.

They steer towards companies they feel are dominant in their respective sectors and those that are run by quality management but have fallen out of favour. When the company becomes popular again and the share price has recovered, they’ll sell and move onto the next opportunity. This is a style known as value investing. The managers tend to invest in relatively few companies as well, currently totaling 50. This means each one can make a significant contribution to returns, although it increases risk.

The managers aim to keep buying and selling to a minimum, but we’d expect this to increase if the market rises strongly. And we’ve seen this in practice over the past year.

The team sold some of their longstanding investments in banks following good performance and recycled those profits into some more attractively priced insurance companies, including MS & AD Insurance. Overall exposure to steel has also been reduced due to a combination of strong recent performance and future concerns around increasing Chinese competition. Investments in steel now make up almost 3% of the fund compared to 8% at the beginning of last year.

The automotive sector continues to be an area of opportunity in their view. The managers recently made a new investment in Subaru and increased their investment in Toyota Motor. On the other hand, airlines, although cheap, aren’t filling the team with much confidence as COVID continues to disrupt the industry. They sold Japan Airlines last year.

Culture

Man GLG continues to invest in talent, technology and research, giving fund managers every opportunity to perform well over the long term. They promote an open and collaborative culture where the sharing of ideas and debate is encouraged.

The managers and the wider team invest a significant amount of their own money in the fund. We feel their incentives are aligned with those of investors.

They also integrate a focus on environmental, social and governance (ESG) factors into their investment process. Working closely with the in-house Responsible Investment team, they can identify companies that use more sustainable practices and those that don’t. A low ESG score isn’t necessarily a reason for them not to invest though, providing that company can demonstrate what they are doing to improve, like reducing their emissions for example.

Cost

This fund usually has an ongoing annual charge of 0.90%, but we've secured HL clients an ongoing saving of 0.10%. This means you pay a net ongoing charge of 0.80%.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Atherton joined the team as co-manager in 2011, the fund’s lagged the broader Japanese stock market. The team’s investment style has largely been out-of-favour over the years and because of their ‘deep value’ focus, the fund’s performance has been put under more pressure than most. Value companies performed particularly poorly since the start of 2020 amid the coronavirus crisis. Past performance isn’t a guide to future returns.

The tides have turned more recently though. Atherton became lead manager in January 2021 and has benefited from the tailwinds of value investing returning to favour with investors. The fund returned 23.46%* over his time as lead manager.

This was driven largely by the rotation in investment styles and improved performance from companies and sectors that are more sensitive to the health of the economy, including financials.

Nikon Corporation and energy company Inpex were among the fund’s top performers. The imagery part of Nikon’s business was hit hard due to travel restrictions but as they’ve eased, there has been an uplift in demand for Nikon’s cameras. Inpex has benefited from the increased demand for oil & gas.

On the other hand, Takeda Pharmaceutical and Mitsubishi Heavy Industries were weaker performers. Some Real Estate companies also performed poorly, including Mitsubishi Estate. But in keeping with their investment process, the team have increased their exposure to real estate due to the attractive share price and promising outlook.

It can take time for a company's share price to recover following a disappointment though and shorter-term periods of weaker performance should be expected.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2022.

Find out more about Man GLG Japan CoreAlpha, including charges

Man GLG Japan CoreAlpha Key investor information