Added to this if the Yen weakens further then the only way to gain exposure to that growth is through hedging the Yen because what you gain you will lose if you don’t hedge.
Investing in Japan is like marmite; you either love it or hate it. For many investors Japan is full of many false dawns, and very few remember the growth in the market from the fifties through to the end of the eighties.
It is a complex region and many investors consider that the risk of investing in the area against the potential returns doesn’t match. However, some are arguing that this time is different. This phrase worries me because many will say that and then nothing happens.
However, perhaps there is some truth in this with Japan. A new government came into power in 2012 and where they are different is twofold firstly they have an overall majority in government and secondly of their party. This gives them the freedom to push through reform and we are starting to see the benefits of this.
One fund we have followed for some time is the Neptune Japan Opportunities Fund; this is a high conviction portfolio of 46 holdings and is different to most funds out in the market. The key differences are twofold, firstly the manager uses a Yen hedge and secondly, he focuses on Japanese companies where the majority of their earnings are delivered outside of Japan. His argument is that Japan is all about the companies and not the country and we will cover that further in the update.
The Yen is also important for two reasons, he believes that as a consequence of the reforms the Yen will weaken and therefore if investors don’t hedge then any returns will be reduced. As an example against the GLG Fund; GLG made all of its returns for 2013 in the first six months, when the Yen weakened in the last six months the returns were flat. Over the same period Neptune was flat in the first six months but significantly outperformed both the index and GLG for the year based on the last six months performance.
The manager has never wavered from his belief and strategy and investors need to understand that this fund is different to others in the sector and the key is that outperformance has been driven not only through stock selection, but also by hedging the Yen. This makes the fund significantly more volatile than both the sector and GLG Fund.
In this update we will outline some of the current thoughts from the fund manager.