Investing further down the market cap scale and avoiding troublesome blue-chip names has given GAM’s Ernst Glanzmann greater peace of mind and helped avoid some significant stock-specific risks.
The manager of the five FE-Crown rated GAM Star Japan Equity said not having to worry about big Japanese names that haven’t delivered have made him a happier investor.
“We don’t have to be in these kind of names: they don’t deliver and continuously have problems,” he said.
“There is no reason, strategically, to own companies like Toshiba, that was in the press last year, or Sony, that has strong brand recognition but was impacted as soon as Apple popped up with its smartphones, and the same is true for [camera manufacturer] Canon.”
Glanzmann, who also co-manages GAM Multistock Japan Equity, said taking time to identify businesses that are unique in a global context and are headquartered in Japan has paid off, as they have added value to his portfolio while given him less headaches.
“Applying what I am doing you are always going to get more positive news so in the end you are a cheerful investor, you have less worries,” the manager pointed out.
“There are 3,000 listed firms in the stock exchange and more than 2,000 companies in the first section, the most prominent of the exchange.
“In my view, you don’t have to invest in all of these big names. If you do so, you will be investing in something that has a mediocre or a bad performance.”
Performance of indices over 5yrs
Source: FE Analytics
As the above chart shows the TOPIX Core 30 – an index made up of the 30 largest and most liquid stocks – has significantly underperformed the broader TOPIX index.
Instead, the strategy Glanzmann runs with Reiko Mito focuses on what he called, ‘the best part of the Japanese market’.
He explained: “We asses businesses listed on the exchange and we choose those that are leaders and very good in what they do in the short and in the long term.”
“The business has to be sustainable in terms of growth in sales and net profit, it has to show high return on equity over time and a very solid balance sheet,” said Glanzmann (pictured). 
“Maybe the final consumer doesn’t know these brands as they don’t show up as a label and they don’t make final products but they will play a critical part in a final product.”
In Glanzmann’s view, fund managers who limit themselves to “the strong players” are able to beat exchanged-traded funds (ETFs).
But the lack of time and a need to see results ‘here and now’ makes investors opt for passive strategies instead.
As the below chart shows, the three largest passive Japanese equity products in the IA universe have underperformed the average IA Japan sector fund over the long term.
Passives vs IA Japan sector over 10yrs
Source: FE Analytics
“What investors have to accept is that they will get the pure benefit after a few years; they won’t get it tomorrow,” the GAM manager said.
“If you want to get it tomorrow you are not a strategic investor, you are a tactical investor or a trader and there is nothing wrong with that, but you will then need a different tactic and to find a person that can trade for you.”
A reason for investors’ lack of patience, said Glanzmann, is the great number of temptations available to them. However, one of the things he has learnt after many years is that investing needs discipline and trust.
He said: “As an investor you need to trust, let’s say you invest now in these business models and you know there are positive elements and negative ones.
“Let’s say the negatives stay to play out. You [already] knew it, and you know the company is not going to go bust. We don’t act but people get nervous.”
Another key requirement, in Glanzmann’s opinion, is to avoid staying on the surface of things but going deeper and getting a full understanding of companies and every aspect that has to do with the investment.
“You also need to educate yourself more,” the Japanese equity manager explained. “The easiest way [to invest] of course is to say: ‘okay, I don’t have the time. I’ll buy an ETF, I don’t pay high fees and I am happy with it’.
“But this is not a good attitude and in the market, there are things that are much better, why would you settle with something that is average when you can have something better?”
Patience, discipline and trust as an approach have resulted in a very low portfolio turnover, with an average of 23.4 positions initiated during nine years and an expected holding period of 12 years, with most of the names held in the portfolio today being added at initiation to capture a 10-year value creation process of businesses.
However, if the share price gets 30 per cent above the fair price they are willing to pay the team will then sell the entire position regardless of whether the fundamentals are still intact, he noted.
Top holdings in GAM Star Japan Equity include Nidec, a manufacturer of electric motors, diagnosis instruments supplier Sysmex Corp and IT company Obic.
Performance of fund vs sector and benchmark under Glanzmann and Mito
Source: FE Analytics
Glanzman and Mito have managed the fund since June 2015, during which time GAM Star Japan Equity has delivered a 66.21 per cent total return compared with a 44.74 per cent gain for the average fund in the IA Japan sector and a return of 44.62 per cent for the TSE TOPIX index. It has an ongoing charges figure (OCF) of 1.15 per cent.