Japan Out of Favour Despite Strong Performance

VIDEO: Stephen Harker, manager of the Gold-rated Man GLG Japan Core Alpha Fund, on why the country is now out of favour with international investors

Holly Black 4 November, 2019 | 12:51AM
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Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Stephen Harker. He's manager of the Man Core Alpha Japan Fund.


Stephen Harker: Hello.

Black: So, tell us briefly what does the fund do?

Harker: Well, the fund invests in Japan, fully invested. And we are investing in big Japanese companies, probably the top 300, and we've been doing it for 14 years. And we are very, very consistent and we just buy stocks when they're depressed and hopefully sell them when they go up.

Black: So, one of the key considerations for people investing in Japan is the demographics which are really different to most places in the world.

Harker: Indeed, they are. Yeah. Japan has got a problem to deal with and has been dealing with it effectively for the last 12 years. The population is declining and in particular, the population of working age is declining at about 1.5% every year and will continue to do so for the next 10, 15 years. The population is aging, and a lot of very old people, retired. And there is no sign of any change in that. One of the big problems is that Japan has got a very limited immigration. So, the population will fall relentlessly and that has significant implications for investments in Japan, which parts of the market you want to invest in.

Black: Why is that a problem?

Harker: Well, we need people of working age to work and the employment levels are falling and there are people retiring and they're very difficult to replace. And unless you have a significant improvement in the productivity of individuals, then you're going to shrink and dealing with that shrinkage is going to be a big issue for Japan for the next 15, 20 years.

Black: So, how does that inform where you're investing?

Harker: Well, it does, and it doesn't. I mean, our approach is a bottom-up investment approach. We're trying to invest in companies that are really cheap and trying to buy stocks when they're bottom. But certainly, we spend all of our time looking at aspects of the economy and the social position. And I think, really, what's interesting is that the situation in Japan with the demographics is actually consistent with our investment approach, which is large value big companies. If the domestic economy shrinks, which I think it will, why would you want to invest in small caps, which are essentially domestic and why would you want to invest in companies that are focused on the domestic side of the business. You much better to address 7 billion, 7.5 billion people living overseas rather than the 125 million and falling people who live in Japan.

Black: So, what sort of sectors does that lead you to?

Harker: Well, the sectors that we're in are a consequence of our valuation. We're looking for very cheap stocks that have underperformed a lot with the capacity to recover and as a consequence, we're invested in things like cyclicals, steel, glass, autos and we're also invested in the financial sector. But by and large, everything that we're invested in is top 100 or near to that.

Black: But Japan is not at all a favorite area for U.K. investors, is it? I think people are sort of associated with the big recession of the 90s and stagflation. So, does that make it harder as well?

Harker: The foreign ownership of Japan's stock market is about 30%. And it ebbed and flowed. But by and large, foreigners have been buying Japan to the last 30 years. Over the last two years, they've been evacuating. They've been selling aggressively. And that's been a problem for all the Japanese managers. We've been suffering outflows because people have lost interest. I mean, interestingly, Japan has actually performed much better against the U.K. market and against most of the European markets as well from about mid-14 onwards. So, we've had five really good years relative to what you could have got investing in European stock.

Black: So why do you think that exodus is? Is that profit taking or loss of conviction?

Harker: I think it's a whole series of things. But I suspect mainly it's caused by the fact that in '12, '13, and '14, money poured in when Abe was first elected, and I think it's largely disappointment that the fruits of that economic policy change haven't really been fed through. The market is just cheap still.

Black: But that's good for investors like you?

Harker: It's baffling. And it always has been baffling. So, we just get used to it.

Black: Well, thank you so much for your time.

Harker: Thank you.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk


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