by Jake Moeller.
Lipper’s Jake Moeller reviews highlights of a presentation by Stephen Harker, Head of Japan Equities, GLG Partners, on January 23, 2015.
Stephen Harker is arguably one of the U.K.’s best known Japanese equities managers and has been analyzing or managing Japanese shares since 1984. He has been involved with the almost £5-billion GLG Japan CoreAlpha strategy through its various incarnations since 2006. In a region that has been subjected to numerous false dawns since its early 1990 atrophy, Mr. Harker’s fund has not only an enviable track record but a highly consistent style bias. Indeed, this fund scores a maximum of Five in each of the Total Return and Consistent Return categories over 10 years in the Lipper Leaders scoring system.
Mr. Harker is a refreshingly candid yet highly considered fund manager, articulate not only on Japanese shares but also on the macro and political environment. Geopolitics, although ignored by the GLG bottom-up stockpicking process, is still recognized as being sufficiently contextually relevant to warrant a dedicated resource in the form of Senior Advisor Robert Brooke.
Fund construction is ostensibly straightforward. This is a contrarian large-cap value fund generally consisting of no more than 70 stocks that are chosen from the 300 largest stocks in the Tokyo market. The fund is high conviction, and stock positions can be punchy. For example, Mitsubishi UFJ Banking Group was 7% of the portfolio for January 2015. The major valuation metrics used to rank stocks are price to book and dividend yield. After credit risk assessment is undertaken, the majority of effort goes into assessing the franchise of a particular stock before final inclusion. This results in extremely low portfolio turnover. For 2014, for example, Mr. Harker acquired only eight new stocks in the portfolio and sold seven.
Table 1. Multi-Period Performance of GLG Japan CoreAlpha (in GBP) v Sector & Peer Group (to February 28, 2015).
The fund style means the Russell Nomura Large Cap Value is the best fit index. The recent years have been a difficult period for these types of companies. Since the Abe election and the start of the bull market in November 2012 the Japanese rally has been a broad-based one with no size or style preference. GLG has benefitted from the high beta it had in place from 2012, but it has not been able to benefit from what Mr. Harker calls the “normal concertina effect” where price-to-book spreads come in. High price-to-book stocks remain high, low price-to-book stocks remain very low, and this—combined with falling dividend volumes and a fascination with defensive and low-volatility companies—has meant Mr. Harker’s positions haven’t been best rewarded. Mr. Harker concedes that it has been a challenging environment for “almost six years.”
Table 2. Three Year Cumulative Performance of GLG Japan CoreAlpha v Relevant Sector Indicies and Peer Group (to February 28, 2015 in GBP).
Mr. Harker is not perturbed by recent performance. He points to the strong performance of the Fund through 2009 as defense of the religious-style discipline that is maintained, and he is particularly proud of performance during the Lehman crisis. Furthermore, the success during this period has been consolidated with more modest outperformance, even though the environment has been difficult.
Mr. Harker is extremely sanguine about the outlook for Japanese equities. He cites the record-low bond yields as a potential “coiled spring” for the market and appears incredulous at some of the valuation anomalies he has identified in the market. Mitsubishi UFJ, for example, he sees as a world-class bank that has survived the worst bear market since WWII but is trading at a 40% discount to market and a 30% discount to book value–a situation he can see as only reverting.
Certainly, there is some validation of this positioning, with some strong performance in last quarter 2014 that was due to Sony and most recently a hitherto unloved position in Nintendo–an overweighted position since 2012—which rose 21% on March 17, 2015. To return to the types of returns GLG experienced up to 2009, it needs large-cap stocks, financials, and low price-to-book stocks to return to favor. Mr. Harker, although unsure of timelines, is confident this will happen and believes these planets will align at the same time.
Table 3. Three Month Share Price History of Nintendo (Local Currency) to March 19, 2015.
There were some words of caution, specifically in relation to the tightness of Japan’s labor market, which when balanced as it currently is (more jobs than applicants) has been a precursor to corrections. He also lamented the loss of Japan as “Asia’s Switzerland” because of currency devaluation as another macro headwind likely to affect shares.
Table 4. Historical Japanese Job offers to Applicants Ratio.
Interestingly, in this presentation, Mr. Harker overtly referred to his age (he just turned 60). At no point had it crossed my mind as a factor that might influence a decision to invest with him. It did, however, serve as a reminder that (although there is a well-resourced team here including fellow senior portfolio managers, Neil Edwards and Jeff Atherton) the key-person risk of this fund remains material.
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.