Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
This summer, the world’s gaze turns to Japan. The 2020 (now 2021) Olympics host has promised to go ahead with this year’s tournament, in spite of rising infection levels and widespread domestic calls to cancel it.
Concerns around the Olympics reflect a general apathy towards Japanese stocks this year, whose recoveries have generally lagged those of other developed nations.
There’s no hiding the fact that Japan can be a tough nut to crack for the average UK investor. However, a slow initial recovery means this market is still exposed to an uptick in activity. Couple that with Japan’s perennially appealing valuation, and there could be opportunities here for discerning fund managers.
Our Select 50 features three such managers, dedicated to unearthing and managing investment opportunities in the country on your behalf.
Baillie Gifford Japanese
Baillie Gifford has developed a renowned reputation for investing in well-managed businesses with strong, defensive models which exhibit clear competitive advantage. Flagship offerings like the Scottish Mortgage investment trust have become particularly well known for capitalising on the astonishing growth of some of the world’s biggest technology companies.
Matthew Brett, manager of the Baillie Gifford Japanese Fund, applies the firm’s broad ethos to his own investment approach. He’s after companies that look to drive technological change, and have the potential to grow their earnings significantly over the long term.
The manager has roughly a quarter of the portfolio allocated to internet-related businesses with a further focus on factory automation and robotics-related businesses. Examples here include Rakuten, one of the largest ecommerce platforms in the world, and Kubota, developers of autonomous farm machinery, including self-driving tractors, rice transplanters and exoskeletons for manual workers.
Rather than broadly allocating to tech-focused companies, the manager believes opportunity lies in identifying already successful companies who are adapting and integrating new tech into their businesses with a view to maintaining or developing their market leadership.
As well as its growth bias, this fund also has some tilt towards cyclicality - i.e. those stocks whose performance is more closely aligned with the wider economy. This means you can hope to see consistent performance throughout market cycles, though it may underperform in a market where value or low volatility stocks are in favour (such as periods of strong market correction and economic recession).
Lindsell Train Japanese Equity
Investors might recognise the Lindsell Train moniker from the firm’s popular UK and global equity funds. So it will come as no surprise that the approach employed by Michael Lindsell in the Japanese equivalent parallels the rest of the franchise. Focusing on finding exceptional companies with proven histories and dependable income streams, Lindsell consciously avoids economically sensitive, cyclical and low margin firms when investing through his Lindsell Train Japanese Equity Fund.
47% of the fund is currently allocated to consumer franchises, with media (24%) and pharmaceuticals (20%) the next most popular sectors. Lindsell and his management team of five take a very long term view, meaning portfolio turnover is low. This follows the manager’s strategy of identifying products with consistent consumer audiences, often with global interest, as well as attracting attention in Japan.
The company’s holding in Nintendo typifies the manager’s thinking. The gaming company‘s intellectual property in titles like Mario, Zelda and Pokémon is highly valued by Lindsell. In particular, the manager points to the opportunity open to Nintendo in the proliferation of both gaming content and further production of consoles, most notably the Switch.
Because this fund is so highly weighted towards non-cyclical stocks, this fund will underperform in a strong rising market, during periods of economic recovery and when interest rates are rising. Conversely, its defensive characteristics mean it should do well during periods of economic slowdown, and is generally less volatile than average.
Man GLG Japan CoreAlpha
A markedly different style to that of Lindsell and Brett, the Man GLG Japan CoreAlpha Fund focuses on investing in large-cap value opportunities with a heavy contrarian slant. Manager Jeff Atherton has more than 30 years industry experience, having managed Japanese funds since 1990. He has been consistent in believing cyclicality is a strong force at play within the Japanese market and so looks to exploit low prices in unloved companies, selling after a significant positive uplift in price.
A lot of these companies operate globally and so aren’t limited specifically to Japan’s demographics, most notably its ageing population. Examples in the fund include Honda and Canon, with global networks, supply chains and customers.
The manager aims to keep investors’ money 100% invested at all times, meaning companies going through a price rerating need to be sold in order to begin a position in a new overlooked opportunity.
Atherton is currently taking advantage of lowly rated financial services businesses, with banks making up the fund’s top overweight position, ahead of transportation equipment and real estate.
Investors should note that this fund’s strong emphasis on value stocks means it may not always outperform the market. It should do well when markets are rising and value is in vogue, less so during periods of economic slowdown. Atherton is willing to accept long periods of underperformance, preferring to stick to his long-term view and wait for his companies to deliver as he expects.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Lindsell Train Japanese Equity Fund invest in a relatively small number of companies so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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