The difference a year makes in Japan

A year ago Japan looked to Toby Ricketts, manager of Margetts\' International Strategy fund, to be a no-go area. Now the relative strength of Japanese banks has led him to change that view.

Toby Ricketts has started moving back into Japan after vowing last year never to invest in the region again. The GBP16m International Strategy fund he runs at Margetts Fund Management has a 6.84% weighting in Japan, up from zero at the start of the year.

“A year ago I said I would never buy Japan again. But Japanese banks are in a stronger position than those in the UK, which has made me re-evaluate my view,” says Ricketts.

He invests in the Japanese market through a single holding in Societe Generale’s Japan Core Alpha fund, run by Stephen Harker. “It is the only Japan fund worth holding,” says Ricketts. “It has had good, steady performance in both up and down cycles. Harker took over the fund in December 2005. Previously it had just followed the sector, but the fund’s stellar performance coincided with him joining.”

The manager’s total weighting to Asia has risen to about 14% over the past six months. He says the region’s limited susceptibility to the inflationary pressures that Britain suffers makes it a good investment target. “Japan would love some inflation but the country has not managed it due to its low interest rates,” he says. “Global inflation is mildly positive for Japan.”

America is another key market in which Ricketts has increased his holdings. Three underlying funds make up International Strategy’s 22.36% weighting to America – M&G American, Schroder US Smaller Companies and Soc Gen American Growth.

“We have been underweight the US for as long as I can remember,” Ricketts says. “We have increased our weighting considerably over the past few months but remain underweight our benchmark, which has 44% in the US.

“When there were two dollars to the pound in early summer we went back in. As sterling has weakened it has boosted the performance of these dollar assets.”

Ricketts attributes the fund’s strong relative performance to his American holdings. He emphasises that he avoids what he calls “superstar funds” with managers seeking high alpha. “If you look at funds like BlackRock UK Absolute Alpha or Gartmore UK Focus, they have had a few very nasty negative months. We tend to go for wider, benchmark-focused funds so that if they go wrong they do not go very wrong.”

Since the start of 2008 Ricketts has poured most of his 30% cash position back into the markets. He has not sold any funds in the past six months, preferring to use a buy-and-hold strategy, although he has sold down two cash funds from BlackRock and Goldman Sachs.

Ricketts’ view on global equities is positive over the long term. He says valuations look compelling and, as central banks pump money into their economies, the outlook for equities is improving.

“Gilts have outperformed equities for about the last 15 years,” he says. “Inflation expectations have fallen, making fixed interest more attractive. However, central banks are throwing huge sums of money at economies, which will benefit equities.”