HK Fund Monthly: November 2008
This month has, like last month, been one of the worst for the markets in Hong Kong’s history, and six month volatility hit 30.1% for the MSCI Hong Kong index as consumer sentiment continued to dwindle in the face of tumbling markets further West, where banking reforms appear to have had little effect.
Funds invested in Europe, Asia Pacific or Emerging Market equities once more shed the most cash over the month, with those at the top of the performance spectrum – the best of a bad bunch may be a better description – tending to be safer vehicles invested in assets like fixed interest and currency.
One year performance has suffered terribly as a result of recent losses, as no sector has posted a positive return. The last two months of turmoil have managed to wipe out any returns made over the last twelve – and we only see figures start to turn green when going back three years.
Staying with the three year view we can also see that the Japanese Small and Midcap sector – a region once to be avoided – is at the top of the table having made a big swing in returns with an impressive 33.7% gain, superseding the China sector – the previous king of the hill – which hit a lower return of 20.3%.
In keeping to the Japan theme, this month we focus on the JF Ultra Japan fund – which is the lowest risk Japanese vehicle operating in this space – and risk no doubt will be at the forefront of any investment decision made in the current investment climate.
Fund Review: JF Ultra Japan
Despite losing 6.1% over the year to October 2008, this fund remains the best performer over one month, three months, six months and one year in the HKM Japan Equity sector – where the sector average lost a whopping 39.9% over the year.
The fund shines thanks to its low risk stance, posting a low 3.3% one year annual volatility which massively undercuts the volatility posted by its peer group benchmark, HKM Japan Equity, at 18.8%.
In comparison to the MSCI Hong Kong index’s one year loss of 54.4% for a 28.6% volatility, the fund and in fact the HKM Japan Equity sector have stood out.
The fund has a low beta and R-squared of less than 0.1 against the HKM Japan Equity sector –suggesting that it has been largely uncorrelated to its benchmark over the year – not surprising as the fund is not restricted solely to securities traded on Japanese stock exchanges.
The fund has actively used its flexibility to full effect this year and, in fact, 87.9% of assets under management are held in the Japanese money market. The remaining 12.1% are in Japanese equities, although it’s worth noting the fund does utilize derivatives to generate further returns and manage risk.
The chart below highlights the performance of the fund compared to the HKM Japan Equity sector average and the MSCI Hong Kong index over the past year;
Outlook
As global markets continued their down trend in October those investors who held on to their cash would have prospered, as once again the best strategy would have been not to have invested at all over this month. In contrast, those that bought into the ‘value’ argument, which continues to increase inline with market falls, might wish they’d waited a little longer.
The burst of the Japanese asset price bubble in 1989 has meant that Japan has experienced over a decade of poor economic growth, resulting in a bear market with ongoing deflation. The Japanese economy has therefore already experienced the turmoil which has taken place in the West, so Japanese banks were already well capitalized and have had minimal direct exposure to the credit crisis.
Having said that, a word of caution must be added as the Japanese economy is very dependent on its exports – a result of the deflationary environment caused by low domestic consumer spending and a weak Yen.
As inflation has grown and the Yen has begun to strengthen, and with Japan’s biggest customers, the USA and China, halting their orders – the Japanese economy could be in for a rocky ride in forthcoming months.
Against this backdrop, JF’s Ultra Japan fund should continue to present an attractive proposition to those seeking to tap into a Japanese stock market resurgence given its low risk approach in a volatile market.
The fund’s unconstrained style allows for a mixture of investments, thus limiting the risk of tracking indices down into the dumps.
Furthermore the flexibility to switch effectively between various assets, coupled with the use of derivatives, poses an attractive prospect for those investors seeking to preserve capital on the down and amplify returns on the up.
Given the fund’s currently defensive stance – reflected by a high weight in money market securities – one can expect it to continue its outperformance in the coming months.
For more on Japan click here.
*Source of data: Financial Express Analytics