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Neptune’s Taylor: If I’ve got it right, my fund could triple again

19 September 2014

The manager’s Japan fund made over 80 per cent in 2008 thanks to a big currency bet, and thinks similar returns could again be possible.

By Jenna Voigt,

Editor, FE Investazine

FE Alpha Manager Chris Taylor says if he’s got his currency bet right in Japan his Neptune Japan Opportunities fund could triple the returns of the market over the next five years.

Japan has notoriously been a difficult place for equity investors for what feels like a lifetime, with the Nikkei 225 index down almost 50 per cent since 1990.

After a near 30-year bear market however, Neptune’s Taylor (pictured) says Japan is turning a corner and stocks in the country have a long way to run.

Performance of indices since 1990


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Source: FE Analytics

The FE Alpha Manager says he started hedging back into sterling in 2009, a move that fared well for his fund that year and again from 2012 to 2014.

ALT_TAGA hedging play also contributed to returns in excess of 80 per cent in 2008 as well – a year in which the Nikkei 225 lost money – and he thinks that similar returns could be on the horizon. The manager hedged the portfolio via the sale of futures contracts. This was done to protect the fund's capital value in the face of a declining stock market and a deteriorating outlook for the country. 

When asked if his fund could perform as well over the next five years as the last, Taylor said: “If the currency goes the way I expect it will go, we might well see a repeat of that. [The fund’s outperformance] is partly from stock selection and partly from the hedge and I think that will continue.”

The four-crown rated Neptune Japan Opportunities fund has topped the performance charts since Taylor took the helm in May 2005. Over that period, the fund has made 175.75 per cent – just short of tripling investors’ money.

He has beaten every other fund in the IMA Japan sector over the period and more than tripled the returns of its benchmark, the Tokyo Topix index.


Performance of fund, sector and index since 2005

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Source: FE Analytics

It has been the second-best performing fund in the sector over the last 12 months, picking up 9.61 per cent – an impressive return in a time when the Tokyo Topix index is down 1.01 per cent.

Taylor says the only way for Japan to pull itself out of the economic mire of the last 28 years is to increase the tax take from corporates, which means making them more profitable. In order to do that, he says Japan will send the yen “through the floor”.

What many investors fail to realise, the manager argues, is that Japan is not a truly export-led economy.

Many of the country’s largest businesses produce their products overseas, meaning that if yen falls dramatically in value, it will boost the yen value of overseas products.

“Everybody thinks of Japanese companies as exporters, but that’s only partially true,” he said.

“They make more out of Japan than they do in Japan. The game is – drop the yen through the floor to boost the yen value of overseas profits.”

This is why Taylor is continuing to back large, global companies which are seeing their earnings improve in yen terms but are also seeing improving corporate revenues as the developed world moves along the road to economic recovery.

He also has a bias towards construction and defence firms which are currently benefitting from the government’s QE programme.

Taylor expects to hedge the portfolio back into sterling for the better part of the next decade, and this – combined with an improving economic outlook and cheap valuations – makes him very optimistic for his fund.

“It’s been a 28 year bear market. You’ll struggle to find anywhere that’s ever done that. On the back of a 30 year economic cock-up, if you get things right it could go one for the best part of a decade,” he said.

“I’m going to sit with [the hedge]. I’ve been around too long. I think after more than 30 years on the front line investing in money, people are too impatient. You’re playing for years here. Japan has a long way to go if you get it right.”

Taylor says Japan is making an all-out effort to get its house in order because if it doesn’t, the only option is a failed state.

“They have to do something to sort this out,” he said. “They’ve seized the bull by the horns and got on with it.”

The Neptune fund is a favourite with the FE Research team, who count it among the top funds on the FE Select 100 list of recommended portfolios.

According to FE Research, Neptune Japan Opportunities has a more aggressive profile than its peers – an element shown by its higher volatility relative to the sector and index over the last five years – which means it is more sensitive to Japanese economic cycles.

However, the team say Taylor’s active currency management have allowed the fund to bank massive returns in difficult periods, such as 2008 and 2013, when Neptune Japan Opportunities doubled its returns by anticipating a sharp decline in the yen.

This can be a double-edged sword, they warn, pointing out the fund suffered painful losses in 2010 by getting its call on the yen wrong.

Owing to Taylor’s long track record of outperformance and experience in investing in Japanese equities, FE Research count the fund as one to consider for pure, all-out growth exposure to the Japanese market.


“Taylor is the head of research at Neptune and has spent half his career working in the investment industry in Japan, giving him a unique understanding of the country,” FE Research said.

“Investors need to understand that currency derivatives can have a large impact on the overall total return, and even though the rationale behind using them is legitimate, they have the potential to hinder performance.”

The fund has ongoing charges of 0.77 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.