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Turning Japanese

Multi-manager View, Nick Greenwood

The strength of sterling has hampered the performance of genuinely global investment funds this year, yet robust investment ideas abound overseas and managers must look beyond the short-term impact of a strong domestic currency. For sterling-based investors, the FTSE has been one of the best stockmarkets so far this year, even when other indices have had higher absolute returns. Looking across the Atlantic to the world’s biggest stockmarket, the S&P 500 is up about 6 per cent a year to date but when exchange rates are factored in, sterling-based investors would have experienced a loss of 4.6 per cent.

Our global funds have plenty of UK exposure (typically about 30 per cent at the moment) but international diversification, although prudent, has reduced returns. An extreme case is investment in Japan, where the yen has struggled against the world’s other currencies, particularly sterling. Interest rates have not gone up as quickly as expected so the cheap price of borrowing has encouraged significant carry-trade activity by international investors who are busy borrowing yen and reinvesting this money elsewhere. General global stock-market turbulence has also had an impact as foreigners, who provide so much of the swing capital in the Japanese stockmarket, retrench homewards.

Despite these perceived difficulties, iimia has found the prospects for Japanese companies too exciting to overlook. We believe that the yen cannot stay weak forever although the resurgence of carry-trade activity may mean it falls lower before rising up again. We have been playing the Japanese element of our global portfolio through a few themes. First, we have been investing in the likes of Mike Lindsell’s Close Japan fund, where the manager is focused on the Japanese companies that are or are planning to increase their distributions to shareholders. We also favour portfolios run by managers with strong convictions on which firms will win and lose in the coming years. We think there will be fairly big differences between the two and investing near the benchmark will not work. Examples here include the Framlington Japan, Thames River Japan and Martin Currie Japan Alpha funds.

Iimia is bringing in small cap funds which in the past had been over-bought by the market. We believe that in the longer term, these newer companies will be among the winners. Iimia is bullish on Japan in the long term but with our upcoming visit to Tokyo-based fund managers, we are reassessing and challenging one of our core long-term themes.

Nick Greenwood is chief investment officer at iimia

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