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Japan fund blossoms

I think I owe an apology to Anja Balfour of Framlington Japan, whose performance since she took over the fund from David Mitchinson in late September 2004 has been extremely good. I have to admit that I did not feel Framlington really had the resources needed to run a Japanese fund. However, all that has changed since the takeover of Framlington by Axa.

Mind you, even that could have been a mixed blessing if Axa were to interfere too much with the processes and team at Framlington. However, by and large, it has left the fund managers to run the funds while providing resource.

No better example of this resource was the hiring of Chisako Hardie to become Balfour’s deputy on the Japan fund. She has 15 years experience, almost matching Balfour’s 16, and was a highly regarded small-cap manager at Scottish Widows Investment Partnership.

Balfour’s own record shows a stint at Stewart Ivory where she ran the Japanese fund from 1992 to May 2000. She then joined Baillie Gifford, where she ran an institutional Japan fund and was number two on the retail Japanese fund. From the end of 2003, she became lead manager on the retail fund until she left to join Framlington.

Balfour has a universe of some 3,500 stocks which she screens for liquidity, profitability and debt levels into an investable universe of around 500 stocks. From here, she narrows this down to a watch list of 200 stocks.

Company visits are extremely important and now, with Hardie on board, they are able to do well over 300 visits a year in both Edinburgh and Tokyo.

The 200 stocks are narrowed down further to make a portfolio of around 40 to 50 stocks with six key issues in mind. First, the ability to sustain growth and exceed expectations. Second, valuation, to see whether the growth is reflected already in the prospects. Third, the use of capital in value creation – can management use capital to create value for shareholders? Fourth, management attitude to investors – particularly important in Japan where investors have been very much at the bottom of the pecking order. Fifth, a general financial health check looking at the balance sheet and, finally, looking at timing and sentiment to try to buy the company at the right price at the right time.

If most of these key factors are met, Balfour will look to include the stock into the portfolio. In general, she looks for stocks with growth at a reasonable price and she therefore considers herself more of a growth-orientated investor. She also has a greater focus on mid to large caps than the former manager.

She is relatively bullish on the outlook for Japan, finding plenty of stocks that fit into her themes. One of the interesting themes I found was capital investment, particularly a company called Komatsu. This is involved in construction and is taking market share away from Caterpillar in the US.

Another theme is energy efficiency, particularly a company called Toray which is involved in carbon fibre compositive material. This is seeing a huge increase as aircraft manufacturers replace many areas of aircraft with this lighter, stronger material, helping fuel efficiency.

There is no doubt that this fund under Balfour is very different to the one under Mitchinson. We are now taking a much closer look at it with the possibility of dovetailing it with a more aggressive Japan fund. Providing Axa leaves Framlington alone to do the job it is good at – investing money – while continuing to support it in terms of resource, this fund is likely to gain far more attention than it has.


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