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Capture cyclical gains with GLG Japan CoreAlpha Equity

Japanese cyclical equities look set to do well and GLG Japan CoreAlpha Equity Fund is heavily invested in them.
May 13, 2015

Japanese equities have been doing well this year, and while a good run can sometimes be a signal to take profits, in the case of Japan a number of investors and analysts believe there is more to come. Factors such as a cyclical recovery and the early stages of market share gains have meant the Japanese market has recently seen continual upward earnings revisions. "We think there is still more to come as export growth becomes more established," says Christopher Mahon, investment manager and director of asset allocation research at Baring Asset Management. "We believe that the market has only begun to appreciate the changes coming to corporate Japan."

IC TIP: Buy at 170.98p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Good performance
  • Sterling hedge
  • Exposure to cyclicals
  • Experienced managers
Bear points
  • Relatively high charge

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

The Bank of Japan launched a policy of quantitative and qualitative monetary easing in 2013, which was expanded in 2014. This has naturally had a positive impact on Japanese earnings due to a simple currency translation effect, but has caused the currency to weaken against other ones.

Both the Bank of Japan and the national pension fund, meanwhile, are moving their allocations in favour of equities, driving a rally in the Japanese equity market as fundamentals improve.

The most recent leg of outperformance has been the result of Prime Minister Shinzo Abe's third arrow of structural reforms. These include a renewed focus on corporate governance and profitability which has resulted in a rerating of the equity market despite a marginally stronger yen.

Tony Lanning, fund manager at JPMorgan, sees potential for further gains with Japanese equities, in particular with cyclical stocks. Heavy buying of low volatility products has caused a big dislocation in equity valuations so that staples, healthcare and other defensives trade at very high multiples, while banks, autos and other cyclical areas of the market look cheap.

Yen weakness against sterling has detracted from returns for UK based investors over recent years, so if you want to invest in this market a it might be better to do it via a hedged fund. Options include IC Top 100 Fund GLG Japan CoreAlpha Equity (IE00B665M716), which is hedged to sterling.

This has helped the fund outperform its reference index, the Topix, as well as the unhedged version of the fund and the Investment Association Japan sector average, over one, three and five years.

GLG Japan CoreAlpha Equity's portfolio is also heavily overweight cyclicals, a reason why Mr Lanning invests in the fund. For example, banks are the largest sector exposure, and a reason for this is because its managers take a contrarian approach: Japan financials have underperformed since the late 1980s but banks are growing again.

The fund's managers focus on larger companies which account for more than 90 per cent of assets, and in particular value stocks. Its management team, led by Stephen Harker who has been investing in Japan for over 30 years, is well regarded by fund analysts.

The fund has on ongoing charge of 1.86 per cent which is more expensive than a number of funds. However its sterling hedge adds to its costs, and GLG Japan CoreAlpha Equity's ongoing charge is less expensive than that on a number of other sterling hedged funds. Its outperformance of unhedged indices and funds also compensates for this.

Because the fund takes a contrarian approach it could underperform at times, while if currency flucations go against its hedge this could also detract from performance.

However, the fund has out performed over the long-term and seems well positioned to make further gains, so GLG Japan CoreAlpha Equity Fund still looks like a good way to get exposure to Japan. Buy.

 

GLG JAPAN COREALPHA EQUITY DH GBP (IE00B665M716)

PRICE170.98pMEAN RETURN31.51%
FUND TYPE Ireland domiciled open-ended investment companySHARPE RATIO1.35
FUND SIZE$4.5bn*STANDARD DEVIATION20.14%
No OF HOLDINGS48*ONGOING CHARGE1.86%*
SET UP DATE28 January 2010*YIELD0.00%
MANAGER START DATE28 January 2010*MORE DETAILSwww.man.com

Source: Morningstar, *Man

 

 1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
GLG Japan CoreAlpha Equity D H GBP41.193.666.8
GLG Japan CoreAlpha Retail Acc33.346.141.1
Topix TR JPY Index30.941.640.3
Investment Association Japan sector average29.240.538.2

Source: Morningstar as at 30 April 2015

 

Top 10 holdings as at 30 April 2015 (%)

Mizuho Financial5.8
Sumitomo Mitsui Financial5.6
Mitsubishi Tokyo Financial5.1
Nomura4.2
Sumitomo Mitsui Trust3.9
Honda Motor3.8
Asahi Glass3.8
Canon3.8
Inpex Corporation3.8
Nintendo3.4

 

Sector breakdown (%)

Sector%
Financial Services32.3
Industrials18.0
Basic Materials14.7
Technology10.2
Consumer Cyclical9.7
Energy6.5
Communication Services4.1
Utilities2.9
Healthcare1.7

Source: Morningstar as at 31 March 2015