Paul Chesson, manager of the 135m Invesco Perpetual Japan fund, has reduced the number of companies held in the portfolio to 33. On average the fund holds 40-70 stocks and Chesson (pictured) says the low number reflects where he is finding value in Japan.
Throughout the past two years, he says, the portfolio has invested in more larger companies. In 2005 this stance led it to underperform the sector drastically, with the fund ranked 52nd out of 54 in the IMA Japan sector over 12 months to January 2, 2006, according to Standard & Poor’s.
However, as the domestic economy has disappointed in 2006, the fund is ranked first out of 58 funds in the peer group over 12 months to November 27, 2006. This follows a return of 4.45%, compared with a peer group average loss of 8.56%.
Chesson says: “Throughout 2005 we did not invest in the domestic cyclical stocks, which hurt the fund as the stockmarket [Nikkei 225] surged by 40% that year. We felt valuations in the cyclicals had become too high and there was room for disappointment in the economy this year. This has proven to be the right call.”
Indeed, last week the Ministry for Economic Trade and Industry (Meti) published the latest retail trade figures for October. Sales were expected to be 0.7% up on October last year, but they were up only 0.1%. Chesson says this shows consumption is not growing as strongly as it should be.
He says: “The reasons are that wages are not growing and taxation has changed. The income tax cuts of the past decade have been reversed. While these rises have not been huge, they are enough to keep spending from growing.”
While the portfolio is not invested in domestic cyclicals, Chesson says, it is still positioned towards the domestic side of the economy. Its biggest positions have been in electric power utility companies and the fund is also overweight in pharmaceuticals, railways and the automobile sector.
“We are committed to investing in large-cap, blue-chip, defensive companies and it is easier to do this in a more concentrated portfolio,” he adds. “Going into 2007 we see similar stock and economic risks to this year. We continue to worry about export performance next year, so we still think the value remains where we are invested at present.
“In this environment we think at best we can make single-digit returns, but no more than that.”