Investment experts were recommending Melchior Japan Investment Trust as a contrarian play because back in March, Japan was the only major market trading below book value, and the trust's performance had started to pick up following a change in investment policy. It was also on a 30 per cent discount to net asset value (NAV). We in March on the grounds that it was a recovery play and likely to re-rate from its discount to NAV.
Since then, the fund's discount has indeed tightened considerably to 15 per cent. This is much tighter than its sub sector (Japan - smaller companies) average which is nearly 19 per cent. However, over six months and one year the fund's NAV performance has considerably lagged its sector peers, many of whom are on a discount of a similar level.
Stil, Japan's relative attractions for contrarian investors remain, with the market trading cheaply following a correction in the past month. Investment trusts in Japan typically only outperform over longer periods, so a Japan investment trust could still be an option for contrarians with a long-term view, although the discounts to NAV do not present as good value as earlier this year.
| Fund | Tipped at | On | Price now | Gain |
|---|---|---|---|---|
| Melchior Japan Inv. Tst. | 25.25p | 20 Mar 2009 | 38p | 50% |
In our tip we also warned that one of the risks to take into consideration with Japan is a poor short-term outlook. Melchior Japan's managers recently commented: "We are still in the middle of the recovery in corporate earnings, and the correction in November, although severe, was caused primarily by technical reasons which should be digested by the market with time. For the medium-term investor, a correction at these levels should be used to accumulate Japanese equities."
The managers continue to look for good quality business models managed by high-quality management that are set to benefit from secular growth opportunities. But they have reduced stocks which could be vulnerable to government efforts to shore up the country's finances, including possible tax rises.
Some investors are starting to take the view that longer-term Japanese companies have better prospects, including their ability to benefit from trade with Asian partners. Although the yen has been unusually strong, given uncertainty over the country's finances it is expected that this will weaken in the coming months.
Another point in favour of Japan is the better financial health of its banks relative to certain western peers. Also analysts believe the recent market correction is partly attributable to political sentiment following the election of a new government.
Key fund data:
| MELCHIOR JAPAN INVESTMENT TRUST (MJTLN) | |||
|---|---|---|---|
| PRICE | 38p | PERFORMANCE YEAR TO DATE | 15.15% |
| SIZE OF FUND | £33m | TOTAL EXPENSE RATIO | 1.60% |
| No OF HOLDINGS | 42** | 12 MTH YIELD | 0.00% |
| SET UP DATE | 3 April 2006 | GEARING | 96%* |
| NET ASSET VALUE | £44.8m* | 3 YR BETA | 0.89 |
| PRICE DISCOUNT TO NAV | 15.1%* | MORE DETAILS | www.daltonsp.com |
Source: Morningstar, *WINS Investment Trusts, **Dalton Strategic Partnership. Performance data as of 14 December.
