Man GLG Japan CoreAlpha offers developed market growth at a reasonable price

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

Developed markets that offer better value include Europe, as highlighted in last week's tip, though these markets could become volatile in and around elections in France and Germany this year. So another option is Japan, which is still one of the cheapest world markets despite its recent strong run, according to Ben Yearsley, director at Shore Financial Planning, who says that since the Bank of Japan (BoJ) abandoned its negative interest rate policy, this market "has become much more interesting."

Luca Paolini, chief strategist at Pictet Asset Management, adds that "the BoJ, meanwhile, is the only major central bank we don't expect to turn hawkish this year, keeping its policy of yield curve control intact, and it will keep buying domestic equities."

The BoJ is directly buying shares, as is Japan's huge government pension fund, which should support Japan's stock market. Mr Paolini also believes there is an upbeat outlook for Japanese corporate profits.

A good way to get exposure to Japanese equities could be Man GLG Japan CoreAlpha Fund (GB00B0119B50) which is among the top five performers in the Investment Association (IA) Japan sector over one year, and among the top quarter of the sector over five. It also beats its benchmark, the Topix index, over one, three and five years.

"This is a large-cap value fund that buys stocks that others are shunning," says Mr Yearsley. "It is an out and out contrarian fund. Financials, iron and steel are some of the biggest positions in the portfolio. And the GLG management team led by Stephen Harker is one of the premier teams managing Japanese money."

 Mr Harker and his team select companies they believe are capable of a turn around, aiming to buy them when they are cheap and before a change in sentiment occurs. To help select shares they use ratios including price-to-book, which compares a company's market value to its assets and has worked well with the Japanese market. They also look at companies price-to-earnings and dividend cover ratios, and analyse their balance sheets to ensure they are financially secure.

They are long-term investors, though will start to take profits when a company's share price rises.

However, gross domestic product (GDP) growth in Japan is still modest falling from 1.2 per cent in 2015 to 1 per cent in 2016.

And Man GLG Japan CoreAlpha can experience periods of underperformance, in particular when value investing is out of favour.

"Mr Harker's style means that he will tend to beat the index in a rising market,"explain analysts at Tilney Group. "Historically the potential for outperformance in these markets is substantial whilst some of this return is given back in depressed or sideways market environments."

And the fund's contrarian approach means its holdings can remain out of favour for several years, another reason why it can experience periods of underperformance.

But Mr Harker and his team have proved they can make long-term good returns regardless of the economic situation in Japan or market sentiment.

So if you have a long-term investment horizon and can ride out periods of underperformance, Man GLG Japan CoreAlpha Fund remains a good way to tap into the potential for long-term growth in an area of developed markets that is on reasonable valuations. BUY.

Source: Morningstar as at 13 April 2017, *Man GLG

Performance

Source: Morningstar as at 12/04/2017

Top 10 holdings as at 31 March 2017 (%)

Source: Man GLG

Sector breakdown (%)

Source: Man GLG