Since hitting its peak in 1989 the Japanese market has been rather lacklustre for investors, regularly threatening a new dawn but never really coming close. However, there have still been opportunities to generate returns even at levels far below its zenith, according to Andrew Rose, manager of the Schroder Tokyo Fund, part of the Fidelity Select 50.
He explains: “The market has been in a slump but in there are nine periods where, if you’d bought at the bottom and sold at the top you’d have made 25%.”
Easier said than done of course, with returns made all the more difficult to achieve amid a backdrop of prolonged deflation and mixed company fortunes up and down the index. This is where active stockpicking rooted in bottom-up analysis can prove its worth, seeking to strip out the laggards and only invest in the winners.
“We’re looking to find the best stocks that we can in Japan, we don’t particularly aim for sector weightings, we aim for the best stocks.” says Rose, who opts for bottom-up analysis of potential companies for the portfolio rather than keeping a steady allocation to particular industries.
Based in London, Rose has been managing the fund for 15 years and is backed up by an 11-strong team of analysts on the ground in Tokyo. He looks for companies, with a view to holding them in the fund for at least three years and is particularly sensitive to company valuation in his decision-making. He explains: “If I can’t justify the valuation of a particular company I won’t buy it, and if it runs up against our valuation target I’ll ask the question, ‘Should I be selling it?’.”
Firm buy and sell criteria allow the manager to seek out under-priced ideas in the market and take advantage of a rise in share prices as the wider market begins to recognise a company’s value. So where does the team find these opportunities? Rose explains:
“The fund tends to have a skew towards mid and small-cap companies because that’s where we tend to find under-priced ideas. They are parts of the market that aren’t well looked-at so, given our on the ground research, we should be able to find ideas there. There’s an element of contrarianism in there which I suppose is just my innate way of managing money.”
Such a bottom-up stockpicking approach and focus on undervalued companies, often pointedly going against the grain, mean the fund’s performance will differ markedly from some of its peers and the index - an aspect Rose explains pragmatically:
“It would be nice to outperform every year and every quarter but life isn’t like that. If I look at history, certainly periods where the fund has struggled versus the peer group or the benchmark have been where the markets have been very strong over short periods of time, so that valuation-sensitive long-term approach didn’t work in that type of environment. A mirror image of that is when the market has been more value-driven the fund tends to be at the top of the peer group.”
Visit the Schroder Tokyo Fund factsheet and watch our interview with Andrew Rose below:
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