Apollo Multi Asset Management has spent recent months moving into two areas of the market that have been relatively unloved by investors of late – Japan and emerging markets.
Japanese equities, despite a strong performance in 2013, fell out of favour with investors in the opening months of this year after doubts emerged over the viability of prime minister Shinzo Abe’s massive economic stimulus programme.
Over the first six months the Nikkei 225 dropped 6.74 per cent, compared with a 2.85 per cent rise in the MSCI World index, after mixed economic data cast a shadow over the speed and strength of the country’s recovery.
Apollo has been overweight Japanese equities for some time, thanks to a position in Jonathan Dobson’s £221.8m Coupland Cardiff Japan Alpha fund. The holding accounts for 4.5 per cent of Apollo’s cautious fund and is also found in Apollo’s other portfolios.
Over the past month the firm has been increasing this overweight further by adding a new position in Hideo Shiozumi’s £213.1m Legg Mason Japan Equity fund. The fund has built an excellent record over recent years, sitting in IMA Japan’s first quartile over one, three and five years, although it is by far the most volatile portfolio in the sector.
Apollo fund manager Ryan Hughes says: “We wanted something that would focus on the domestic recovery. A lot of people get hung up on the Japanese export story and on how the currency will affect exporters. But we wanted something that was domestic focused, and that led us to the Legg Mason Japan Equity fund.
“We did a lot of work on the volatility profile of the fund to make sure that it was a decent fit with what we are doing. Our analysis showed it worked quite well with Coupland Cardiff Japan Alpha.”
Legg Mason Japan Equity is playing long-term domestic trends such as the ageing population, which it accesses through assets such as care homes, private hospitals and medical devices. It is this focus on real businesses that Apollo finds attractive.
“When you invest in companies, it’s the health of those businesses that is important. When we talk to managers like Legg Mason and Coup-land Cardiff, you can sense they are far, far more interested in talking about what is going on in real businesses and what management is saying to them,” Hughes says.
“If you’re building a portfolio of 30 companies, you can easily argue that the broad health of the Japanese economy and what happens to the currency is pretty much academic. People are again beginning to focus on the fact that good businesses will do well in suitable environments – the fact the economic environment is becoming even more encouraging is a reason why people are beginning to look properly at Japan.”
Investors have been turned off emerging market equities for several years. Over three years the MSCI Emerging Markets index has shed around 7.5 per cent, compared with the 30.40 per cent gain in the MSCI World. However, it only just lagged the MSCI World over the first half of 2014, rising by 2.81 per cent.
Hughes says: “Two months ago we added our first position back into emerging markets. It felt a little bit early and lonely but what we’ve seen since we made that investment is more and more people getting comfortable with the emerging market story.”
Apollo bought the £89.5m Standard Life Investments Global Emerging Markets Equity Unconstrained fund, primarily for its willingness to invest outside the benchmark. The fund has an active share of 92 per cent, which Hughes describes as “huge”.
“We were after a fund that didn’t look like the index – we wanted something that is unconstrained and can go anywhere to capture the recovery. We didn’t want huge exposure to Chinese banks or Russian oil and gas,” the manager says.
“Most emerging market funds are kind of index plus or minus strategies because the emerging market story for the past decade has been one of beta rather than alpha. Trying to find a focused, genuinely unconstrained emerging market fund is much harder than we thought it was going to be.”
Standard Life Investments Global Emerging Markets Equity Unconstrained has since been placed under review by Apollo after manager Ross Teverson resigned in June.
The team is watching the progress of new manager Matthew Williams closely.
“I think emerging markets is an allocation we’ll look to build over the next six months,” Hughes says. “We made an allocation of 2.5 per cent with a view to gradually increasing that as we see stability come through around the world.”
He adds that the team is carrying out research to identify another emerging markets fund either to serve as a complementary fund to the Standard Life Investments offering or to act as its replacement should its progress prove unsatisfactory.
Over the rest of 2014, Apollo also expects to add to Europe, which has been another area unloved by investors but is gaining more attention as the region looks likely to pull out of the crisis that has blighted it for the past six years. The firm has exposure to Europe through Barry Norris’ £282m Argonaut European Alpha fund.
“Europe is one area for us that is really exciting,” Hughes says. “Peripheral Europe continues to recover incredibly strongly. There will be some bumps in the road – in June we saw Greece sell off quite hard – but I think this is one holding that will come through in the second half of the year.”
|Apollo Cautious – Top 10 holdings|
|Macau Property Opportunities IT||6.43|
|Muzinich Long Short High Yield Fund||5.54|
|CF Odey UK Absolute Return Fund||5.47|
|Hermes Asia Ex-Japan Fund||5.32|
|BlueBay Investment Grade Absolute Return Bond Fund||5.32|
|M&G Property Portfolio Fund||5.31|
|FP Argonaut European Alpha Fund||5.11|
|Schroder GAIA Paulson Merger Arbitrage Fund||5.04|
|Guinness Global Energy Fund||4.98|
|Cavendish Opportunities Fund||4.74|
|Source: Apollo Multi Asset Management|
|Apollo Multi Asset Management’s performance|
|FP Apollo Multi Asset Adventurous||-0.01||-0.01||0.78||6.78||0.81||–|
|FP Apollo Multi Asset Balanced||0.05||0.1||0.29||4.12||8.7||15.88|
|FP Apollo Multi Asset Cautious||-0.2||-0.32||0.66||6.12||11.32||20.92|
|FP Apollo Multi Asset Defensive||-0.3||-0.89||-0.76||3.02||3.4||–|
|source: Apollo Multi Asset Management|
About Apollo Multi Asset Management
Apollo Multi Asset Management was founded in July 2008, with the ethos that a multi asset strategy is the best way to preserve and grow the wealth of investors, as no one asset class performs well at all stages of the economic cycle. Its four funds and six discretionary portfolios are managed by Steve Brann, Ryan Hughes, Craig Wetton and Ian Willings.