Join our community of smart investors

GLG Japan for Nippon bulls

FUND TIP: GLG Japan CoreAlpha Fund (4SJRA)
March 25, 2010

BULL POINTS:

■ Anticipation of improvement in Japan

■ Strong recent performance

■ Experienced fund managers

BEAR POINTS:

■ Volatile short-term performance

■ No currency hedge

IC TIP: Buy at 86.02pp

During January, foreign investors poured a net total of £11bn into Japanese equities, the largest monthly inflow in three years, according to Japanese bank Nomura. And UK professional investors continue to reallocate money to Japan. For example, fund of funds manager T.Bailey recently reported that it moved from an underweight to an overweight position in Japan, with a 9.6 per cent exposure against a benchmark of 7.5 per cent. And in February, Skandia Investment Group (SIG) moved from a negative to positive stance on Japan for the first time in 18 months.

If you believe the professional investors are right and want to take a bet on Japan, the GLG Japan CoreAlpha Fund may be a good option. T.Bailey helped raise its exposure to Japan by increasing its holding in GLG Japan CoreAlpha to 5.7 per cent, while the fund recently won the Best Fund award in its category at the 2010 UK Fund Awards run by Lipper, a ratings agency.

Morningstar, a data provider, has awarded the fund its highest rating out of five possible levels - Elite. Morningstar analyst Muna Abu-Habsa says: “For those wanting this niche exposure, we believe this is well-positioned to ride such a tough market. It boasts a sturdy and proven process, an accomplished management duo whose interests are largely aligned with unit holders, and below median expenses.” The fund's total expense ratio of 1.58 per cent is slightly lower than its Morningstar category median.

IC TIP RATING

Tip style: Growth

Risk rating: High

Timescale: Long term

True, the manager can receive a performance fee. But that's not all bad. Morningstar says it can align the manager's and fund investors' interests. However, the performance fee is based on 12-month performance and Morningstar would prefer a longer time frame.

Since the current management firm took over the fund in 2006, it has generated 1.3 per cent in annualised returns against a 9.1 per cent loss for its sector average. The co-fund manager, Stephen Harker, has 27 years experience of running equities. A key risk, according to Morningstar, is what would happen to the fund's performance if Mr Harker leaves.

GLG JAPAN COREALPHA FUND ACC (4SJRA)

PRICE86.02pSHARPE RATIO0.16
SIZE OF FUND£725m1 YR  PERFORMANCE36%
No OF HOLDINGS383 YR PERFORMANCE8%
SET UP DATE19995 YR PERFORMANCE 12%
MANAGER START DATE2006TOTAL EXPENSE RATIO1.6%
FEESInitial 5.25%, annual 1.5%YIELD0.47%
STANDARD DEVIATION20%MINIMUM INVESTMENT£1,000
BETA1.1MORE DETAILSwww.glgpartners.com

Top ten holdings:

Holding Percentage
Seven & i8.1
Mtisubishi Tokyo Financial6.2
Nomura5.5
Takeda Chemical Industries5.0
Sumitomo Mitsui Financial4.6
NTT DoCoMo4.0
Mizuho Financial3.9
All Nippon Airways3.9
Ajinomoto3.8
Panasonic3.8

Sector breakdown:

SectorPercentage
Hardware6
Media1
Telecommunications11
Healthcare5
Consumer Services10
Business Services15
Financial Services25
Consumer Goods18
Industrial Materials10

However, the other co-fund manager, Neil Edwards, has run Japanese equities for almost 10 years and the managers are helped by a network of local analysts, as well as an external consultant. The fund was acquired by hedge fund specialist GLG from SGAM in April 2009 and, while the managers continue to run it as before, Morningstar reckons the advanced analytical tools now at their disposal could enhance their capabilities further.

The managers invest via a relative-value approach. This involves spotting pricing anomalies followed by a qualitative analysis of potential stocks. They favour quality companies dominant in their sector, but they have a compact portfolio of 40 to 70 stocks and take sizeable stock and sector bets. Therefore even though they have delivered strong performance so far, investors should be prepared for high volatility. While the managers’ contrarian investment approach could mean periods of underperformance relative to their peers.

This means GLG Japan CoreAlpha is not suitable if you have a low-risk tolerance or a short investment horizon. Morningstar suggests using this fund as a small portion of a diversified portfolio.

Besides, GLG Japan CoreAlpha’s currency exposure is not hedged, which could be a problem if the Yen weakens. Despite this limitation, for those taking a long-term view and are willing to ride out the volatility, the fund looks worth buying.