Man GLG Japan CoreAlpha: February 2023 fund update

• Lead manager 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
• The fund has had one of its strongest years on record versus peers as value investing returned to favour, although this is over a short time frame
• 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, preferring to go against the herd by investing in larger, more established Japanese companies that are unfashionable and out of favour. This is a 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.

Atherton has the support of co-manager Adrian Edwards and portfolio managers Stephen Harget and Emily Badger, who help with idea generation, the construction of the portfolio and provide challenge around each investment decision. 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's capable of leading the team and fund successfully going forward.

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.

They won't invest in ‘cheaper' companies purely because they're cheap, they need to believe the company is undervalued but has the potential to recover over time. Sometimes a company's assets or profit potential isn't fully reflected in its share price, which could be for a number of reasons. It might be that they've not hit their targets, perhaps there's been a change of management, or maybe there's just a gloomy investor outlook for their part of the market. If this is the case, and the company undergoes a turnaround, the true value of the stock will be realised, which could mean a strong increase in the share price. This is a style known as value investing.

One of the difficulties with this approach is differentiating between the companies with rebound potential and those that are cheap for good reason. To help avoid these types of companies, the team invest in those they feel are dominant in their respective sectors, are in good financial positions and who are run by quality management. When they feel the company becomes popular again and the share price has recovered, they'll sell and move onto the next opportunity.

This discipline tends to mean the managers invest in relatively few companies, so each one can make a significant contribution to returns, although it increases risk. It also means the managers aim to keep buying and selling to a minimum, but we'd expect this to increase if the market rises strongly. We've seen this in practice over the past year.

A lot of the stocks the team have investments in performed well over the past year. In keeping with their process, they've sold or reduced those that have done well, recycling the profits into other undervalued opportunities where a recovery has yet to happen.

Some recent examples include, Nippon Telegraph and Telephone Corporation, more commonly known as NTT, manufacturer of beverages and pharmaceutical products Kirin Holdings and heavy machinery specialists Mitsubishi Heavy Industries and Kawasaki Heavy Industries. The profits from these sales were recycled into a few technology companies, including Shin-Etsu, Sumco and Nitto Denko, which the team feel are currently out of favour and have potential to bounce back.

Ahead of the Bank of Japan's (BoJ) monetary policy announcement in December 2022, the team decided to increase the amount invested in banks and some insurance companies. This included upping investments in Mizuho Financial, Mitsubishi UFJ Financial and Dai-ichi Life, and reducing investments in the auto sector at the same time.

The BoJ remains an outlier compared to other central banks, deciding to keep interest rates the same, despite rising inflation. In December it decided to loosen other elements of monetary policy, linked to government bond prices. The team feel this may be the beginning of policy normalisation in Japan, though nothing is guaranteed. If this belief is correct, it might mean rates could start to rise, or the economy could start to improve, which are potentially good scenarios for the financial sector.

Culture

GLG was founded in 1995 and established itself as one of the largest alternative asset managers in the world. In April 2009 GLG took over the London-based division of Société Générale Asset Management (SGAM), which expanded GLG's investment capabilities and distribution network. Shortly after this, GLG was acquired by Man Group in 2010, and was known thereafter as Man GLG.

Man GLG offers a diverse range of funds encompassing equities, fixed interest and alternative investments. The firm 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.

ESG integration

As a firm, Man Group recognises the importance of Environmental, Social and Governance (ESG) factors, allowing each fund manager autonomy to apply ESG analysis in a way that works for their strategy. Each investment team has access to Man Group's ESG Analytics tool, a proprietary, dashboard-style system enabling the team to monitor non-financial risks and analyse ESG factors on both a single stock basis and across the strategy. All Man Group funds are prohibited from investing in producers of coal (30% revenue threshold), controversial weapons and tobacco.

The firm's Stewardship and Active Ownership team exercises all voting rights where practicably possible, in accordance with their voting policy, with basic headline voting statistics published on their website quarterly. Fund managers also engage with the companies they invest in.

The team have fully integrated ESG analysis into their investment process. They work closely with the in-house Responsible Investment team, identifying 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

Atherton joined the team as co-manager in 2011 and became lead manager in January 2021. Since 2011, the fund's outperformed both the TOPIX and Russell/Nomura Large Cap Value benchmarks. It hasn't been a smooth ride though as the team's investment style has largely been out-of-favour over this period.

Value underperformed growth for many years, experiencing its worst year in recorded history during 2020 as the coronavirus pandemic took hold. This naturally put pressure on the fund to perform. But nothing lasts forever. The announcement of the first COVID-19 vaccine in November 2020 acted as the catalyst for a comeback in value investing.

Since Atherton became lead manager, the fund has returned 42.62%* versus the IA Japan sector average return of -3.24%. 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. Though past performance isn't a guide to future returns.

Resona Holdings, Mitsubishi UFJ Financial and T&D Holdings were among the fund's top performers. Each company plays a part in the financial sector, either in banking or insurance services, and are benefiting from higher interest rates.

In contrast, some of the fund's investments in the auto sector didn't hold up as well. While the auto sector benefited from weakness in the Yen over parts of last year, its recovery more recently has hurt the sector. Nissan Motor and Aisin Corporation were among the fund's worst performing investments.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2023.

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