David Mitchinson, manager of the Framlington Japan fund, is concentrating his portfolio on cheap, domestic equities that are not driven by global demand, as he fears the world economies are past the peak in the cycle. Japanese funds rose by an average of 23.2% in the 12 months to January 26, according to Standard & Poor’s, on the back of renewed optimism about the domestic economy and the strength of the US recovery. The £39m Framlington Japan fund run by Mitchinson (pictured) grew by 86% in the same period. He says the changes in Japan are happening on a company-by-company basis. He also believes that the global economic cycle is further advanced than many investors believe, and so is more cautious and avoiding high beta, expensive equities. “Lots of valuations are wrong, especially in technology companies, which are on very high earnings multiples and any other measure you choose, as the market has priced everything in and, therefore, could correct sharply if the US economy slows.” He fears this is likely to happen after the stimulus pumped into the US economy, creating the large foreign deficit of about $500bn, is dealt with after the US Presidential elections. As a result he is about 20 percentage points underweight the IT sectors of electrical machinery and information machinery, and also holds no banks bar Shinsei. Instead he is looking at cheaper domestic and uncorrelated stocks not driven by global demand. He adds: “Domestic, demographic and de-industrialisation factors are the lifelines for continued economic recovery and stability.” Domestic investors are still on the sidelines, investing in 0% cash accounts, but are becoming more confident about the economy and so can invest in the markets and in land, Mitchinson explains. Demographics and de-industrialisation are also favouring new service industries, such as nursing homes, that are not correlated to the macro or global economy. Mitchinson holds about 25% of the fund in retail and services, which along with defensive growth plays in pharmaceuticals, makes up the majority of his top 10 holdings. His largest position is in Colo-wide, a restaurant chain, at 3%, then Point, a clothing company, at 2.7% and Fullcast, a temporary recruitment agency, at 2.6%.