Is Japan running the world now?

Nichola Pease, managing director of JO Hambro Capital Management, is one of the smartest operators in the industry. She has built an investment boutique that is targeting the fastest-growing part of asset management – funds of funds. But let’s make this clear: JO Hambro is not offering a fund of funds product. What Pease has identified is that if you put together exactly what the FOF managers are looking for, money will flood your way. That’s why she’s hired Scott McGlashan to run a new Japan fund for JO Hambro. Pease spends her time doing precisely what the FOF managers do – screening every fund in the trust universe and then selecting the best. But instead of putting money their way, she hires them. That way, the FOF managers will be chasing JO Hambro funds without Pease having to spend a packet on marketing and sales. The JO Hambro Continental European fund is already on the books of several FOF operators, such as Credit Suisse Constellation, where it makes up nearly 5% of the fund. The JO Hambro UK Growth fund has been bought by Gartmore’s new fund of funds, as well as Credit Suisse. Now it looks as if they will be queuing up to buy JO Hambro Japan when it launches in April. Granted, the fund won’t have the three-year track record that many look for before buying, but what people will be buying is Scott McGlashan’s track record as one of the best Japan managers in the business. Pease expects the fund to raise around £50m, which is good going for what I imagined to be one of the less attractive markets for retail investors. But Pease says: “Japan is very sellable in the UK and Europe. It’s a much bigger market than Far East ex Japan. Many fund of funds managers are crying out for a general Japan fund.” McGlashan’s hiring will be bad news for Close Finsbury, where he was the adviser for its Japanese Equity fund. Much of the money invested in that fund will walk straight out of the door and into JO Hambro. And guess what the biggest offering is in the Japanese equity section of CS Constellation? Yes, it’s Close Finsbury Japanese Equity. If the managers of CS Constellation decide to follow Scott McGlashan to JO Hambro, then nearly 15% of that fund will be invested, respectively, in JO Hambro UK Growth, JO Hambro Continental European and the new JO Hambro Japan. Nice business if you can get it. Close Finsbury says it is “obviously disappointed” at the loss of McGlashan, now on gardening leave. It has moved swiftly to hire Michael Lindsell of Lindsell Train as his replacement, and says it has had an “encouraging response” from fund of funds investors. But it will be lucky to staunch the flow of cash from the £35m fund. Lindsell ran the £13m Lindsell Train fund, which has outperformed the Topix since inception, but McGlashan’s record will be a hard one to match. At Perpetual, McGlashan ran a highly respected £200m Japan fund, but left to set up Jade Absolute where he not only ran the outsourced Close Finsbury fund, but also Jade Japan, Jade Asia Pacific and the BFS Asia Asset trust. At Close Finsbury Japan, McGlashan took the fund to double-A status from both Standard & Poor’s and Forsyth-OBSR, and won a “Consistent Return” rating from Lipper Leaders. In 2003, the fund rose 40% compared with the 23.3% rise in the Topix and the 23.8% gain for the average Japan-invested fund. What attracted Pease to McGlashan was not just his recent strong record, but his ability to manage money both in bull and bear markets. “Scott’s calibre is down to the fact that he’s done fabulously well in both good markets and bad. He’s a pragmatic manager, who doesn’t slavishly follow either a growth or value bias. On average, he has outperformed the market by 10.5% a year. He’s been ahead of the market in eight out of 10 years, and even when he’s underperformed, it’s always been by no more than a couple of per cent. I looked at all the fund managers working in this sector and he’s the one who stands out big time.” Broadly speaking, McGlashan is a big-cap manager, judging from his top holdings in the Close fund, although he will not be constrained by market capitalisation at JO Hambro. His top 10 holdings at Close included an extraordinary concentration in stocks with the names Mitsui and Sumitomo. As both these names were once two of the big five zaibatusu conglomerates that dominated pre-war Japan, it shows that despite Japan’s continued productive dynamism, it is still a long way behind when it comes to corporate restructuring. Yet it is the restructuring and recapitalisation of Japanese industry that most excites McGlashan. “Perhaps the most important news to come out of Japan during December was that Mizuho Financial Group, Japan’s largest bank, will begin to pay back the capital injected into it by the government several years ago – evidence that the nation’s bad debt problems have peaked,” he says. The downside risk for the fund is clearly the appreciation of the yen versus the dollar, although this is an area where the Bank of Japan’s targeted intervention has shown how superior it is to the clumsy European Central Bank. The yen has appreciated far less than the euro, and Japan has made it clear that it will continue to intervene to restrain its rise. McGlashan says: “The market should do well in the opening weeks of the year, assuming the slide in the US dollar can be controlled, as investors anticipate record profits for fiscal 2003 being announced in the spring of 2004.” Once the Japan fund is established, it’s far from clear where Pease will strike next. The obvious gap in the JO Hambro range is a US fund, although currently Pease is not enthusiastic about a launch. For now the focus is on Japan. As part of any international portfolio, Japan should be a 5-10% holding. There’s a new buzz coming out of Japan now that its relations with China are seen not as a threat but as a huge opportunity, especially for exporters. I write this from a hotel in Bangkok (the Sofitel, which I thoroughly recommend) and it’s interesting how the keyboard offers me the chance to type in a dollar or a yen sign, but there’s no sight of a euro or a sterling sign. It’s clear who’s running the world now.