Japanese equities have performed strongly this year on the back of the widespread quantitative easing, in an effort to inflate the ailing economy. Although there was a hefty correction in the Nikkei 225 index last night, Japan has still outstripped other global markets during the recent equity rally. The Nikkei and the Topix are up around 35 per cent since the start of year, according to FE Analytics.
The principal leader of the surge in equity prices has been Japan’s small cap sector, especially those with a bias towards growth rather than value. The likes of Legg Mason Japan Equity have fully benefitted from this; our data shows it is up 73.22 per cent year-to-date.
However, Troue says that as the yen continues to depreciate and the economy strengthens Harker’s GLG Japan Core Alpha fund could take the reins from the Legg Mason portfolio.
“Harker is quite a contrarian manager with a focus on value,” he said.
“Over the past few years, Japan’s larger companies such as autos and banks have experienced significant headwinds as the yen strengthened. These companies struggled, especially Sony, which was unloved by investors as they believed it to be dead in the water.”
“He stuck by those companies and that view has started to pay off as the new Prime Minister’s policies have provided a boost for exports. This good news has filtered through and management teams are now posting bullish earnings forecasts.”
“I think his fund is in a good position to carry on capitalising from this shift,” Troue added.
Harker (pictured) has more than 29 years of experience of running Japanese equity portfolios.
He took over the £1bn GLG Japan Core Alpha Fund in January 2006. Over that time, it has been the second best performing portfolio in the IMA Japan sector with returns of 53.45 per cent and has beaten its benchmark – the Topix – by nearly 40 percentage points.
Performance of fund versus sector and index since January 2006
Source: FE Analytics
The fund has been top quartile over five years, but has struggled over three as small caps and growth stocks have led the Japanese market.
Nevertheless, the fund has strongly participated in the recent rally and is top quartile over one year, six months, three months and one month.
In an exclusive interview with FE Trustnet, Harker explained that he invests in businesses that have a low price-to-book ratio and are unloved by investors. He says he never falls in love with companies because as soon as it moves from the value bracket into the growth bracket he looks to sell.
Though he has a heavy value bias, Harker says he will look down the market cap for value. Currently, the fund holds 42.5 per cent in large cap value and 42.6 per cent in mid cap value stocks. Unlike other funds, the manager says he will always be fully invested.
“We are always 100 per cent invested as we don’t try and forecast the future,” he said.
“There are managers who always have a bit of cash on the side just in case, but in a rising market that cash is essentially dead. We impose a strong discipline on ourselves so that we never make market calls.”
Harker says he will be looking to increase his large cap exposure going forward and is particularly optimistic about the Japanese financial sector.
“Over the last three and a half years, small caps have been winning over large caps,” he said.
“However, large caps stocks should now be the place to be. Financials have been very depressed for a long time as they basically peaked back in 1987. They have performed quite well over the last 18 months but are still on very depressed valuations.”
“That is why our largest overweight is in large cap financials, as they have very low price to book ratios. We have just short of 30 per cent of the portfolio in financials,” he added.
Our data shows Harker counts banking stocks such as Mitsubishi Financials, Sumitomo Financials and Mizuho Financials as top 10 holdings.
Due to his value approach and focus on low price-to-book ratios, Harker says his two most recent purchases have been Sony Financials and Teijin – a Japanese chemical and pharmaceutical company. He has recently sold out of a number of railway, brokerage and retailer stocks because of their increased share price.
Though Harker avoids making macro calls and instead focuses on stock specific issues, he says he isn’t surprised by the strength of the recent rally.
“It isn’t something that should be a problem for us because we are fully invested and I wouldn’t be able to tell you if Japan is a better bet than the S&P or the oil price,” he explained.
“However, a lot of people think of Japan as a market that has always underperformed against the US and the UK, so they can’t understand why anyone would invest in it. But if you look at the S&P, the FTSE All Share and the Topix over 15 years, they have all returned similar amounts.”
Performance of indices over 15yrs
Source: FE Analytics
“It’s only been in recent times that Japanese markets have been lagging behind, but that’s because the earthquake and the Fukushima disaster kept a lid on things,” he continued.
“Where it goes from here? I have no idea and I don’t want to give any advice, but the recent performance of Japanese equities is just the market reverting to normal,” he added.
GLG Japan Core Alpha requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.66 per cent.
