At nearly two-and-a-half times the size of its economy, Japan has the highest public debt level in the world. For Chris Taylor, manager of the Neptune Japan Opportunities Fund, the debt burden presents an opportunity.
Debt vs. GDP
Source: Neptune, July 2015
The government must alleviate the burden of debt. To do so, it has two options; Reduce spending or increase tax revenues. In recent years the government's efforts to stimulate growth have centred on increasing public spending. Spending reductions can be ruled out. Tax revenues, therefore, must increase.
To do this, the yen is crucial. The end of May saw the domestic currency at a 12-year low against the dollar, and Chris Taylor believes the currency must keep weakening. A weaker yen means profits earned overseas will be worth more in yen terms when converted. An increase in yen profits equals a much needed increase in corporation tax revenue.
Consequently, Japan's large, industry-dominating multinational companies are also vital. Given that these firms earn most of their revenue overseas, they are in the unique position of both driving and benefiting from government policy. These firms are the best in Japan, according to Chris Taylor. They are well positioned internationally, have little reliance on the weak domestic economy and are blessed with good management as well as lots of money.
Take Toyota as an example. Toyota makes more profits than VW and General Motors combined. After the earthquake and tsunami of March 2011, analysts had predicted it would take the company 9 months to recover from a loss of earnings and damages. Toyota managed to rebound in just 10 weeks, for it did not need banks or market loans to put a recovery plan in place. Such strength of reserves and management makes these firms invaluable to the government's strategy.
For Chris Taylor, the economic story has two important implications. Firstly, the manager will continue to hedge the yen back into sterling within his fund. He will do so because he continues to believe the yen will keep falling against the pound, and the hedge will protect investors against such falls. Secondly, while the government works to alleviate the debt crisis, the fund will remain heavily invested in large multinational Japanese companies set to benefit most from the currency's likely weakening.
When the economy is on surer footing, the manager may begin to reposition his portfolio to more domestically focused firms.
Our view on this fund
The Neptune Japan Opportunities fund has been managed by Chris Taylor since May 2005. Over the course of the last ten years, the fund has performed strongly to return 192%, compared to 70%* for the Topix. Please remember past performance does not serve as a guide to future returns.
Chris Taylor uses his detailed wider economic analysis to dictate the shape of his portfolio. At present, this analysis is centred on continuing falls in the value of the yen. While Chris Taylor is extremely experienced, and has built a good track record over the past ten years of managing the Neptune Japan Opportunities fund, investors should be prepared for periods of volatility.
A top-down approach, such as Chris Taylor's, relies upon the central forecast being correct. If this forecast is correct, returns could be spectacular; however, ensuring this forecast is correct all of the time can be difficult, if not impossible. For this reason, the fund does not feature on our Wealth 150 list of our favourite funds across the major sectors.
Investors should also be aware that the fund is concentrated, with 42 holdings at present. While this means each holding can have a big impact on performance, it is a higher risk approach.
|Annual percentage growth|
| Sept 10 -
| Sept 11 -
| Sept 12 -
| Sept 13 -
| Sept 14 -
|Neptune Japan Opportunities (acc)||-0.10%||-12.04%||51.24%||20.31%||3.76%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/09/2015.