Buy Japanese value with Man GLG Japan CoreAlpha

Man GLG Japan CoreAlpha manager Stephen Harker takes a high-conviction approach to investing across large-cap Japanese equities, and believes that value-style stocks perform best over the long term. He looks for unloved stocks which are cheap but have the potential to outperform. His style has not been favoured by a quantitative easing (QE)-fuelled market rally, which has pushed up more reliable, quality-orientated stocks. But with sentiment shifting slightly up the risk scale, he could perform well in the coming years.

The fund has 45 holdings and due to its contrarian style differs strongly from its benchmark index, the TOPIX. It is currently highly overweight banks against this index - 15.12 per cent - as well as being 6.91 per cent overweight iron and steel. It is underweight IT and communication by 8.02 per cent, and pharmaceuticals by 5.83 per cent.

In the short term, large-cap value stocks, the fund's primary focus, have borne the brunt of the decline in the TOPIX and banking stocks were hit particularly hard by the Japanese government's surprise decision to move to negative interest rates in January. The fund has lagged over three and five years due to its stylistic slant, but has performed well over the long term, beating the TOPIX and the Investment Association (IA) Japan sector average.

There are also strong reasons to invest in Japan just now other than for pursuing a value approach. Despite losing its shine with investors in recent months, the region remains the best value developed equity market, according to Rory McPherson, head of investment strategy at PSigma. He says Japanese equity markets remain supported by central bank policy and earnings growth is strong. Meanwhile, companies are slowly coming round to the idea of spending more of the cash hoarded on their balance sheets.

Mr Abe launched a stimulus programme when elected four years ago and since then the market has been flooded with QE. With inflation still low there are expectations of more QE on the cards and the government recently decided to move to negative interest rates, meaning it will remain a good region for equity investing.

The outlook for shareholders in Japanese stocks is improving, too. Mr Abe's third 'arrow' of stimulus was aimed at boosting corporate governance and spurring dividend payouts, and it appears to be working. The year 2015 saw record levels of share buybacks, which rose 52 per cent year on year to ¥4.8 trillion, according to figures from Goldman Sachs, while a number of companies have reacted to recent share price falls by announcing new repurchase plans.

Adrian Lowcock, head of investing at AXA Wealth, likes Man GLG Japan CoreAlpha and says: "Sentiment towards Japan is now more mixed as some question whether Abenomics is working. Valuations are more attractive relative to other developed markets and corporate earnings have been growing as a weaker Yen provides a boost to exports. The focus has been on quality growth while value stocks have lagged behind."

Man GLG Japan CoreAlpha is not without risk and could suffer if Japan takes further blows from nervous investors. But fund research company FundCalibre says: "While the fund is very stylistic, and can fall out of fashion from time to time, its long-term performance is exemplary and it rightly has become one of the go-to names in the Japanese equity space."

So if you want core exposure to Japan this fund's focus on large stocks provides a good basis. And for those taking a long-term bet on the Japanese recovery, it offers though concentrated exposure. Buy.

Source:Morningstar, as at 29.03.16

Top 10 holdings

Sector breakdown (%)

Source: Morningstar, as at 29.02.16

Performance in cumulative returns (%)

Source: FE Analytics, as at 29.03.16