Taylor, manager of the £169.5m Neptune Japan Opportunities fund, says Sunday’s impending upper house elections in Japan will likely result in a clear majority for prime minister Shinzo Abe and the ruling Liberal Democratic Party.
Abe is preparing to shift the tax burden away from the largest corporates and back on to the private individual, and to deregulate the energy sector, which will give companies and individuals the ability to choose their own energy provider.
"Assuming he gets in, which looks very likely, he has to come up with a supplementary budget proposal and it’s likely that the deregulatory measures that he’s talked about will be enacted," Taylor said.
Taylor adds that the party will likely pick up 70 seats in the next election, giving it a clear 53 per cent majority and bringing it up from the 59 seats it already holds.
He also says the deregulatory measures will be put into a bill that will hopefully be passed by the end of December.
Taylor expects to see growth coming from Japan's defence companies in particular, as it aims to develop pre-emptive strike capability. This comes as a response to Chinese aggression from a territorial dispute in the East China Sea and general confusion over North Korean nuclear developments.
"There will be more money spent on defence forces and aerospace," he said.
"They have already lifted the budget for Japanese defence forces for the first time in 15 years."
Taylor expects companies like Mitsubishi, Kawasaki and Ishikawa Metal to benefit from the boost in expenditure, because they are all involved in the defence areas.
"It’s all about these good global companies that will benefit from yen weakness," he said.
"The Japanese market is cheap. The key is profits growth and we are focusing on areas of restructure and areas of growth. People don’t understand [this], which is why the market is undervalued."
The manager adds Japan is also looking brighter on the income front, saying that yields are back to their pre-crisis levels.
He adds that in the nine months since Abe took over, average household wealth has lifted by nearly 5 per cent.
"It’s going to help people with consumption spending," he said.
However, in spite of the increase in overall household wealth, the manager is avoiding the domestic consumer story.
"For the time being, I’m largely avoiding the domestic demand sectors. Don’t get me wrong, they will have their day in the sun. But we need to see a sustained uplift in domestic wages," he said.
Neptune Japan Opportunities is a top-quartile performer over one, five and 10 years.
It has lagged the sector and Topix index slightly over three years, owing to a difficult 2011 where it lost 21.57 per cent.
However, it came roaring back in 2012, gaining 17.14 per cent while the sector and index picked up just 3.49 per cent and 2.82 per cent respectively.
Since Taylor took over the fund in May 2005, it has gained 147.06 per cent compared with 54.26 and 65.36 per cent from the sector and index.
Performance of fund vs sector and index since May 2005
Source: FE Analytics
However, the fund has been significantly more volatile than the sector and index over the last eight years, with an annualised score of 21.82 per cent. Both the sector and index have volatility scores of roughly 15 per cent, according to FE Analytics.
Although the fund has beaten both the sector and index so far in 2013, it is only second-quartile in terms of relative performance.
Taylor said the fund had a "poor" first quarter in relative terms, lagging its peers and the index, which the manager says is the result of stock selection and an overweight in the out-of-favour industrials and materials sectors.
"They didn’t do too well in the second quarter either," he added. "They started to take off, but when the market crumpled, they crumpled with it. But with leadership changes in these companies, I’m tending to benefit now."
However, Taylor is sticking to his guns when it comes to companies in these sectors.
Industrials continue to be the highest weighting in the fund, at 32.1 per cent, while financials and basic materials make up approximately 19 per cent each.
"These are the guys that are going to do best over the medium- to long-term, based on what’s going on in the global economy," he said.
"The fund is focused on big global companies that dominate their sectors and have the resources to keep reinvesting to maintain their dominance."
The manager holds advanced materials companies such as those that focus on carbon fibres and paints, and industrial engineering and electrical companies.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.72 per cent.
