Since the end of the financial crisis of 2009, growth stocks, and in particular technology companies, have enjoyed a whirlwind decade of upward returns with few bumps along the way.
During this time, Man GLG Japan Core Alpha fund manager Jeff Atherton said valuations were “placed to one side”, or to put it even more bluntly, “thrown out of the window”.
Now it appears that the tide is turning, and his fund has echoed this. A traditional value portfolio, it has made 26% since the start of 2021 while its average peer in the IA Japan sector and its Topix benchmark have lost 13.4% and 10.9% respectively.
Total return of fund vs sector and benchmark since January 2021
Source: FE Analytics
“I hope we are heading back to a more traditional environment, which is exciting to me and is our strong point,” said Atherton.
“If so, a whole generation of fund managers will need to rethink what they’ve been taught for the past 10 years.”
Below, he tells Trustnet about how he won’t buy a stock unless it has lagged the benchmark by at least 40%, why he has recently given more thought to sustainability and how the fund has turned around from the toughest year of his career: 2020.
Can you describe your process for stock selection?
We run a large-cap, contrarian, value-based strategy in Japan. We look to go against the herd by buying assets that are depressed and unfashionable and we want those assets to be cheaper than their history, with the capability to revert back to normality.
It’s a combination of contrarianism and value. We emphasise both of those, but get side-tracked more often than not into talking about value.
We don’t buy anything unless it has underperformed the market, typically by 40%, over four to eight years. Not every investment hits that, but it is a pretty good guide.
That produces a number of candidates to look at from the top 300 names in our large-cap index. From there it is a question of quality and the characteristics that will get them back to a reasonable price. Here we look at classic value metrics such as price to book, price to sales, price to net asset value and EBITDA [earnings before tax, depreciation and amortisation].
Why should investors pick your fund?
There aren’t that many value funds in the Japanese sector, and we’ve been around a long time and are consistent with what we do. We’ve been doing this since 2006, while the process behind it goes back to 1994.
We’ve never changed our process to fit market conditions and hopefully now value is coming back into fashion, as it has been over the past 18 months.
Returns were patchy in 2019/2020, but the fund has soared over the past 18 months. Why is that?
It is down to the fact that we have had a technology boom and bubble, which is hopefully now bursting. That was always going to make life difficult for us and certainly 2019 was quite tough.
Back then the Federal Reserve was cutting interest rates and tech companies were being revalued hugely. Japan was following the States on that.
We came into 2020 with Covid, which was the toughest year in my 35 years in the industry. It was incredibly tough for a value fund like ours because we had autos, energy, chemicals, steel – every industry that ground to a halt when the world did.
We could not have done much about it, but it was the biggest storm in value for many years, comparable to 1999, which was the worst value market in 50 years.
We have got everything and more back since then and to some extent it has just been a recovery from a bad year or two.
Total return of fund vs sector and benchmark over 5yrs
Source: FE Analytics
What have been your best and worst holdings in recent years?
Mitsubishi Heavy Industries was a top-10 holding at the start of the year, worth 3.3% of the fund. It peaked on 8 June with a 110% year-to-date return and has since fallen back a little, but as of today it is still up 83%, against a market that has fallen 7%.
Our worst however is Japan Post Holdings, which was privatised in October 2015 at a price of Y1,400 [£8.50]. Today the price is Y962, nearly seven years later. We finally exited the position this year after losing faith in the management.
A mis-selling insurance scandal and low interest rates undermined the business and we were a little slow in hindsight to recognise that and act on it.
We sold stock at many different levels, but the loss of approximately one-third of the share price since the IPO probably approximates our loss.
Do you incorporate environmental, social and governance (ESG) in your fund?
It is something we have really taken on board in the past 18 months or so as it is incredibly important and the Japanese have really picked this up.
Historically, they have not been that interested in climate change, but that has changed recently and now every Japanese company we talk to is conscious of ESG, which makes our lives a lot easier.
We are increasingly incorporating it, but our basic process doesn’t change. It is a final factor in our determination of quality.
What do you do outside of fund management?
My big interest in life is military history, which is obviously more pertinent now than usual. When I finally retire, I would like to spend more time looking at that.