The manager who runs JP Morgan’s Fusion Funds portfolio - its fund of funds range - alongside Nicholas Roberts, says he has recently been increasing his exposure to the two controversial regions across his funds.
The Fusion Funds range spans five risk-rated funds investing in both active and passive funds across asset classes and with a wide geographical spread.
Lanning says of the two regions he favours Europe over Japan where he thinks a question mark hangs over the strength of the yen in the near term and its impact on the country’s exporters.
Europe and Japan have seen the slowest growth over the past five years compared to other developed markets. The FTSE All Share and S&P 500 have both grown at faster rates, more than three times the rate in the case of the main Japanese index, the Topix.
Performance of indices over 1yr
Source: FE Analytics
“We have been taking money off the table in UK domestic stocks, mostly in retailers and house builders, which did particularly well last year, to buy more into Europe whereas Japan has been funded by reducing our commodities exposure,” said Lanning.
“Europe is our highest conviction area currently. We started adding more to Europe in the middle of last year and we were a little bit late, if I'm honest.”
“Until the middle of last year there was no growth in Europe, particularly in the periphery but also in the euro zone, which was contracting.”
“We are now seeing good stable growth coming from Europe and we believe it is sustainable and so some of the more cyclical companies are not priced for that recovery yet. There is still money to be made.”
“The re-rating of the broader [European] market has passed but significant company specific opportunities abound at a stock level with profit margins still 30 per cent below their peak.”
Lanning says with hindsight, the easy money in Europe was made betting that the eurozone wasn’t going to break up and that there was a big premium for the uncertainty this caused alongside the Greece economy’s near collapse.
“However, when it was clear that Mario Draghi [president of the European Central Bank] had backstopped the market that premium disappeared and that was the first big bounce in Europe,” he said. “The next part is the growth story.”
“The most cyclical part of Europe is the periphery but that is where the most money has been made so far, so I think it’s a little dangerous to just buy a portfolio stuffed full of periphery now.”
He now favours European funds with geographically diverse portfolios with highly active managers.
“The managers we have the highest conviction in now tend to be those with a smaller number of stocks in their portfolios and you will find they are geographically quite diverse.”
Investors have to be a little bit careful on mid cap European companies, Lanning says, because he thinks that if the Yen continues to depreciate exporting companies in Japan could start to steal market share from companies in Europe, so that is something that we need to keep an eye on.
Lanning says he favours Japan because he thinks Abenomics – the economic plan of Japanese prime minister Shinzo Abe – will kick start the economy away from decades-long sluggishness.
Following the unveiling of Abenomics in December 2012, equity markets rallied throughout 2013 but have since gone off the boil.
However, Lanning says the choppy start to year for Japanese equities prompted him to buy more exposure.
“A difficult first quarter has cleared much of the froth out of the equity market and so we have been increasing exposure at the lower prices,” he said.
“We see scope for both earnings growth and valuation expansion and are not deterred by doubts over Abe’s third arrow or fears about the impact of the consumption tax rise.”
“We like Japan because of the structural story - we think they are committed to generating some inflation for the first time. It is not all about the Yen.”
“You hear a lot of people saying to invest in Japan you need to continue to see a falling Yen to feel comfortable to invest there so we own a hedged share class because we think it will continue to depreciate with the balance sheet expansion, but we don't think it has to for Japan to be competitive in the mid and small cap companies.”
“We have been adding to Japan at prices that were 10 per cent cheaper than they were because of what is structurally happening in Japan.”
Lanning says his high conviction play for the region is the £50.6m Polar Capital Japan fund run by FE Alpha Manager James Salter.
Since the introduction of the Abenomics the fund has underperformed compared to its sector average and benchmark. It returned 16.41 per cent compared to an average return of 19.15 per cent in the IMA Japan and a rise in the Topix of 18.45 per cent.
Performance of fund vs sector and benchmark since December 2012
Source: FE Analytics
The range of Fusion funds have an exposure to equities between 45 percent and 100 per cent.
The highest risk-rated fund the Growth Plus fund has outperformed its IMA Flexible sector average since its launch one year ago, returning 6.31 per cent compared to 5.01 per cent.
Performance of fund vs sector over 1yr
Source: FE Analytics
Both Europe and Japan have divided investor opinion over past year, providing a undervalued buying opportunities for some and a stagnant road to recovery mired with potholes for others.
FE Alpha Manager Marcus Brookes who co-manages the Schroder multi-manager range recently advised investors to take profits from both Japan and Europe as he expected a market correction to hit both regions in the coming 12 months.