Japanese equities are at their most attractive entry point for a generation, according to FE Alpha Manager Nathan Gibbs (pictured), who claims he hasn’t seen the market this cheap in his 29-year career. 

"The value we’re seeing at the moment is exceptional," said Gibbs, who heads up the Schroder Japan Alpha Plus fund.

"Prices are back down to where they were in 2008, but this time around there is far better visibility in earnings due to the recovery after last year’s tsunami and there aren’t as many headwinds."

"I’ve been investing in Japan since 1983 and though there have been other times when materially other sectors and companies have been cheaper, I’ve never seen better value on an absolute basis." 

Gibbs says the Topix’s price-to-earnings (PE) ratio of 11 doesn’t paint the full picture of just how cheap the country is. 

"In the past the Japanese market has been structurally underreported, but this figure is for a fully reported market," he explained.

"There have been times when the PE figure was lower, but now we have an index that is more reflective of other developed markets."

The fact that global managers are increasing their exposure to the region has reaffirmed Gibbs' view. 

"It’s important not to get too blinkered because at the end of the day I’m a Japanese long-only manager," he pointed out. "That said, an increasing number of my clients are also speaking Japan up, which is reassuring." 

"It’s not only portfolio investors who are upping their exposure: global companies are also looking to Japan, which is a huge help in itself." 

The highly rated Ruffer Investment Company is one of many investment funds that have recently raised their Japan weighting. 

According to FE data, it has 24 per cent of its assets in Japanese equities – an overweight position of 19.1 per cent compared with its sector average. 

Like his colleague Richard Buxton’s Schroder UK Alpha Plus portfolio, Gibbs’ fund is highly concentrated, currently made up of just 30 stocks. Only four of these have a weighting of less than 2 per cent. 

Performance of fund vs sector and index since launch

 

Source: FE Analytics

According to FE data, Gibbs’ £60m portfolio has returned 26.65 per cent since its launch in December 2000, compared with losses of 15.23 from its Topix benchmark and 22.99 per cent from its sector average. No Japan fund has returned more over this period. 

Schroder Japan Alpha Plus is also a top-five performer over 10 years and has outperformed over three- and five-year periods. However, it has lost more over a 12-month period than the sector average. 

Gibbs takes a three-year view, although he doesn’t completely discount the short-term. 

"If I see no factors that drive performance on a nine- to 12-month basis, I won’t hold it," he explained. 

"The fund is packed with 30 to 35 of my best ideas, but there are plenty of others in reserve competing with those in the portfolio. If one of these looks better in the shorter-term, that could be enough to change my mind." 

Gibbs takes no notice of the benchmark and says he isn’t afraid to add to positions in underperforming stocks. 

"If my view hasn’t changed on the company but it has fallen in value, I’ll bring my weighting back up to what it was before," he commented. 

Unlike many proponents of the Japanese market, Gibbs has not highlighted the weakening of its currency as a principal driver of returns. 

"The yen, like all currencies, is very difficult to forecast," he explained.

"I’m happy to see it weaken, but I’m not counting on it to drive my returns. I don’t ever attribute the under or outperformance of individual companies to movements in the currency." 

Gibbs doesn’t buy into the Bank of Japan’s dedication to increasing inflation, which again many point to as a significant tailwind. 

"I’m not totally convinced that the BOJ are 100 per cent behind this move," he said. "Don’t get me wrong, deflation has been the single biggest problem in Japan in the last 20 years or so, and inflation at this point is nothing other than positive." 

"However, again I wouldn’t count on it suddenly giving companies pricing power."

The manager has a bias towards small to mid caps as he believes blue chips are over-researched and, as a result, too predictable. 

Schroder Japan Alpha Plus has a minimum investment of £1,000 and a total expense ratio (TER) of 1.68 per cent.