Donald Trump’s victory at the US elections prompted suggestions of Armageddon for financial markets: the usual hot air that accompanies an unexpected event. The Japanese stockmarket was one of the first affected. At its close it had fallen 5 per cent as it became evident Hillary Clinton had lost the race.
Investors with unhedged currency exposure were protected from the worst of the falls as the yen – a “safe haven currency” – appreciated on the news. For the majority, I would suggest this was more luck than judgement. Currency markets are notoriously hard to predict and, over the longer term, the more decisions an investor attempts to make, the more likely they are to lose money.
Take the past five years: investors with hedged exposure would have spent the first three-and-a-half years feeling rather smug, only to spend the next 18 months giving back almost all the benefit gained as the currency bounced back.
With this in mind, I favour unhedged investments, although some funds investing overseas will provide investors with both hedged and unhedged versions. Stephen Harker’s Man GLG Japan Core Alpha fund is an example, and one of my favourite investment choices in the region. The fund is focused on large, undervalued companies and until July had experienced five years of relatively lacklustre performance. Value strategies worldwide have struggled over the past few years as investors have favoured the relative safety of growth.
However, this phenomenon has shown signs of reversal, with Trump’s victory adding momentum. This, coupled with a fall in sterling and strengthening yen, has helped the fund to enjoy one of its strongest periods of performance in its 11-year history.
According to Harker, the health of the Japanese market is largely driven by macro events. A fall in oil and commodity prices, for example, is the main contributor to Japan’s recent strength versus the UK, as it imports both in huge quantities. The difficulty in predicting the direction of a stockmarket based on factors outside his control is part of what drives Harker and his team to disregard the wider picture and focus on individual companies.
They employ a strategy of “bottom fishing” to uncover gems among businesses other investors have discarded. They recycle profits from investments that have performed well into companies yet to be recognised by the wider market, thereby ensuring a constant rotation into tomorrow’s winners. Automobiles, steel, banks, mining and real estate are all areas in which they are finding value, with Toyota, Mitsubishi UFJ Financial, and Nippon Steel Sumitomo Metal all significant holdings.
Real estate companies have only recently been represented in the portfolio. The sector has historically been highly overvalued (at one point, the Imperial Palace was valued higher than all the real estate in California) so has not appeared on the manager’s radar. However, share prices of real estate companies have fallen over the past three-and-a-half years and Harker now feels there are pockets of opportunity.
The fund’s price-to-book ratio is currently at an extreme discount relative to the market, implying he owns some of the most undervalued companies in Japan. This makes it well positioned should undervalued companies continue to become more popular.
The fund has reduced in size from around $11bn (£8.6bn) to $7bn as one of its largest investors became impatient with its lacklustre perfor-mance. This is to the benefit of remaining investors, though, who are left with a smaller, nimbler fund.
A well-balanced and diversified portfolio is the best route to long-term returns. A variety of investment strategies is also important to ensure the portfolio does not all move in one direction. As growth investing has been so popular in recent years, most investors are biased that way, with little exposure to value strategies.
Elsewhere, investment interest in Japan remains very low, which experience tells me is a good sign. This fund is a worthy addition to almost any portfolio and remains one of my favourite ways to gain exposure to this vibrant and undervalued market.
Mark Dampier is head of research at Hargreaves Lansdown