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Rising hopes

Japan has had several false dawns but multi-managers are starting to see some value in the world’s second-biggest economy, with the Topix index rising by 12 per cent in April.

The past decade has brought deflation and a strong bear market in Japanese equities.

The average fund in the Investment Management Association’s Japan sector has lost 7.1 per cent in the last 12 months while the Nikkei 225 was the worstperforming major sector last year, falling by 11 per cent.

But with re-emerging inflation and earnings looking positive, multi-managers are starting to see a contrarian bet.

Jupiter head of multi-manager John Chatfeild-Roberts has doubled his exposure across the Merlin range, with a highest-ever weighting of 9.7 per cent on the £317m worldwide fund.

At a Money Marketing roadshow in Bristol last week, Chatfeild-Roberts said: “The core inflation rate going positive is extremely interesting and the earnings’ season has also gone well. I think it is a good contrarian call as a lot of stale bulls are still looking to get out. The amount that has come out of Japanese investor hedge funds in the past six months is extremely high and domestic Japanese pension funds have had net inflows into Japanese equities which is also a positive sign.”

Cazenove head of multi-manager Marcus Brookes is currently neutral on Japan but expects to move to a positive footing, possibly adding to the two funds he invests in – Morant Wright Japan and SocGen core alpha plus.

He told delegates at the roadshow: “We have seen a reinvigoration of economic activity and inflation which means the banks can lend. There is enough to keep us interested but if it does not take off, we will run to the hills as Japan has the knack of snatching defeat from the jaws of victory, hence it being the most universally hated market.”

Thames River heads of multi-manager Gary Potter and Robert Burdett have bolstered exposure to Japan across their range of five funds, believing the market to be “behaving better”.

Burdett says: “Our recent manager meetings in this sector has been almost universally bullish, albeit to different degrees and with different expectations on sectors, market cap and economic areas of the market.

“Further support comes from the fact that equity markets yield more than bonds, equities on average are trading below book value and managers are talking about the first time in their career that they can buy sensible stocks at price/ earnings ratios of below 10.

“Key to the Japanese market rising has long been said to be domestic buyers and there is some steady buying by trust banks and domestic pension funds, albeit at a low level.”

Japan’s shares are now looking very cheap in comparison with a number of other markets following consistent underperformance last year. Lack of exposure to sub-prime also makes them more attractive.

An example of value lies in the fact that the average yield on Japanese equities remains higher than the 10-year government bond yield, particularly as volatility in the equity market has seen a mass move into bonds.

Hargreaves Lansdown head of research Mark Dampier believes a number of changes such as the unwinding of cross-holdings – which have traditionally been set up as strategic relationships that defend against hostile takeovers – may mean a change in fortunes.

He says: “Cross-holdings in companies have often put shareholders at the bottom of the barrel in terms of priorities but a lot of that has begun to change.

“I made the call to go into Japan and have struggled but I would say that investing in the area now should come courtesy of a number of funds. Jupiter Japan income, JO Hambro Japan and JPM Japan, despite its recent struggles, are the three I would look at.”

Chelsea Financial Services managing director Darius McDermott says it is still too early to be bought into the Japan argument.

He says: “I would stick in the neutral camp for now because I can remember a false dawn almost every year in the market. I can remember a couple of years ago when everyone became bullish on Japan, like John Chatfeild-Roberts, for example, only for everyone to get burned. Yes, there are some signs of inflation but the cross-holding unwinding argument needs proof to substantiate that it is actually happening.

McDermott recalls rumours that Japanese pension funds were going to be allowed to invest in mid and small caps, only for the change never to come.

Credit Suisse has made an early foray into Japan, having moved to an overweight position across its Constellation and equity managed portfolios, following a 4 per cent fall in the stock exchange during one week in January.

Fathom consulting director Erik Britton has a word of warning for investors that Japan may yet be in the throes of another false dawn.

He told the roadshow: “The last few years have seen deflation problems in Japan and we are now in a world f $120 oil and rising commodity prices and Japan has managed to record 0.5 per cent positive inflation. The worry is if that if those prices go away, the problems will re-emerge and prices will keep falling year on year.”


Data blank

Elizabeth I got upset about the problems caused by shoddy wording of legal documents, when she was adjudicating over a dispute over whether “months” should be taken to mean calendar or lunar ones. “There must be no room for ambiguity”, she said. “Ye must say exactly what ye means.”


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