Scott McGlashan, the senior manager of the JO Hambro Japan fund, has ditched a third of his large caps in favour of small caps.
About half of his £186.5m fund is typically invested in mid caps, the rest in large and small caps.
Since November last year, McGlashan has upped his allocation to small caps from 20% to 30%. This is an ongoing process and McGlashan says he might top up by another 5-10 percentage points.
Market rallies in Japan are often led by large caps, he says. Overseas investors often miss the investment opportunities in small and mid caps.
“If the market continues to strengthen, we will see more domestic participation,” he says. “There will be more positive earnings surprises in small and mid caps.” (article continues below)
Despite Japan’s dire macroeconomic outlook and its poor demographics, McGlashan says many companies continue to trade on compelling valuations. Improvements in underlying costs and earnings have outweighed the effects of a stronger yen, he adds, which makes many Japanese companies profitable.
Japanese exports to Korea and Taiwan, two competitor nations, as well as to China, are growing too.
“There are not many sector bets,” he says. “The portfolio is largely spread across sectors.” McGlashan also holds 16 stocks of companies he considers as likely takeover candidates, which may benefit the fund.
While McGlashan and Ruth Nash, who co-manage the fund, are generally positive on Japanese manufacturing and electronics, they are negative on financials, pharmaceuticals and utilities.