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James Smith
James Smith

Major Japanese equity and bond manager Chuo Mitsui took its first steps in the UK market last year with three equity vehicles.
Among these is the A1 Japan fundamental growth fund, a high-conviction portfolio that was one of the country’s best-performing local equity offerings in 2009. The fund has beaten the benchmark Topix index for four of the past five years, with 2008 the exception.

Chuo Mitsui is among Japan’s biggest investment managers. Its 170-strong team has a decade of experience on average and £156.5bn under management.

Tokyo-based manager Shigeru Oshita has worked at the firm since 1986, taking on the growth strategy in 2004. He says the sell-off and high volatility of the Japanese market during early 2009 led to a prolonged period of distorted stock valuations and the team was able to position the portfolio to take advantage of the anticipated correction.

“We continued to select companies with strong growth prospects and as the overall market normalised, the portfolio benefited from a reappraisal of growth prospects and a correction of valuations,” says Oshita.

Chuo Mitsui’s approach is grounded in bottom-up research with 17 analysts working to provide Oshita with an information advantage over his peers among attractively valued growth stocks.

Oshita says Japan’s volatile economic backdrop makes it difficult to expect continuous growth from companies and his process is about identifying corporate change and capturing the resulting alpha. This could be something as basic as a change in management but also less tangible shifts in policy and the team looks to find these through extensive face-to-face company meetings.

For example, the team identified positive production developments in the Japanese automotive industry last year and benefitted from the sector’s solid performance in the subsequent period.

Oshita notes similarly positive fundamentals in the semiconductor market, with PC sales continuing to rise in Japan as e-commerce becomes more popular. Producers of electronic parts for personal computers and mobile phones have been a favoured area for the portfolio, with the manager highlighting names such as TDK and Murata.

Oshita believes Japanese companies are attempting to remain competitive with their global peers by focusing on areas such as IT infrastructure. “IT services is an interesting sector and we increased our weighting last year, buying companies like NS Solutions,” he says.
“Many of these stocks have become more expensive, with an average p/e across the sector of 14 or 15 times, but there is still selective value to be found.”

Another theme for A1 Japan fundamental growth is companies that are well placed to benefit from government initiatives. JS Group, for example, is a housing development business expected to outperform on the back of increased subsidies for insulating houses.
In general, Oshita highlights Japan’s beneficial geography, with long established ties to China and the rest of Asia, and has skewed the fund towards companies exposed to that growth story.

Looking at the general health of corporate Japan, he says many companies restructured during the credit crunch and were able to turn this into strong performance last year. He also feels that the market’s oddities, such as cross-shareholdings, are gradually improving, citing stronger accounting standards than in the past.

On the banks, Chuo Mitsui says many have raised money in the market and used much of this to improve their balance sheets and capitalisation ratios. Now these are looking healthier, Oshita says the banks might begin putting some of this capital to work and as the yield curve remains flat, they are likely to turn to equities for this – providing further support for the market.

“Some of the larger banks are also starting to increase loans to Japanese real estate development companies as credit markets continue to open up,” he says.

“This market has been largely stagnant for the last few years but a new influx of credit should provide a fresh growth driver and we are looking closely at adding stocks in this area.”

One favoured company in the Japanese Reit area is Orix.

Assuming current European debt problems do not lead to wider global macro issues and that Chinese tightening remains limited, he foresees a solid environment for Japanese equities to prosper.


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