Managers Say Japanese Sell-Off is Overdone

FUND TIMES: Numerous fund managers this week commented on the short-term investment impact of the disaster in Japan; plus new fund launches and closures

Holly Cook 18 March, 2011 | 5:12PM
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Managers Move to Reassure Over Economic and Market Impact of Japan’s Disaster
A large group of successful fund managers from around the globe says the sharp decline in Japanese equities over the past week is overdone.

In short, though they all recognise the devastation and suffering caused by the quake and tsunami, these managers say investors are confusing the tragic human cost of the disaster with the true long-term economic cost to Japanese companies. While short-term volatility is likely, the tragedy and global stock market sell-off in recent days won't affect the long-term value of global equities, the managers say.

Commenting on the crisis, Steve Seneque, Head of Japanese Equities at Fidelity International, said in this type of environment investors' courage is most severely tested. “While it is up to the individual investor to decide what to do, all investors should approach the situation with as much calmness and clarity as they can. Reacting in a knee-jerk fashion is more likely to increase long-term losses,” Seneque commented.

Paul Marson, CIO of Lombard Odier Private Bank, said he believes the shock does not structurally reduce expected trend EPS growth in Japan, rather is simply depresses earnings below trend now and boosts them above trend later. “On that basis, we continue to value the market on a trend earnings basis,” Marson said, “The market is fundamentally cheap in a way that hasn’t been the case since 1989.”

Schroders’ Chief Economist Keith Wade outlined how the typical pattern of activity in an economy after such a shock is a V-shape—a sharp fall in GDP followed by a rebound as reconstruction begins. ”The expectation is a loss of around 1% to 1.5% of GDP in the spring quarter with industrial production bearing the brunt of the adjustment. However, this would then be offset by increased reconstruction spending in the second half of the year and through into 2012.”

Wade added that: “The more long term worry for the equity market and the economy is that companies reappraise the risks of investing and reduce their commitment to the country. That would have a long run effect on investment and growth, making it even more difficult to service that long run debt burden.”

Morningstar colleagues based in the US have been hearing of similar scenarios. Ben Inker, of GMO-run Wells Fargo Advantage Asset Allocation wrote in a note to clients Thursday morning that corporate Japan can bounce back. "Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid 10 or more years in the future, we believe this event is unlikely to have material impact on the long-term fair value of corporate Japan," Inker wrote.

He thinks Japanese equities are one of the cheaper markets in the developed world, a view GMO colleague James Montier also made in a recent research report before the earthquake.

IVA managers Charles de Vaulx and Chuck de Lardemelle share this view. IVA Worldwide had 13.8% of assets in Japanese companies as of February 28 while International had 28% of assets there (both funds are closed to new investors). "We do [think these are short-term losses], as we think indiscriminate selling is taking place to raise liquidity, thus unfairly punishing even the best businesses," DeVaulx wrote. DeVaulx told Morningstar that the firm has been buying more shares of some of their holdings as their prices have declined in recent days.

First Eagle Global's Matthew McLennan made similar comments to Morningstar's Jason Stipp and in a letter to clients, while Causeway International Value manager Sarah Ketterer highlighted how nervous markets are apt to oversell on such shock news.

Matthews Japan manager Kenichi Amaki and Oakmark International's David Herro both think the situation is creating opportunities for investors.

Highlights of Fund Launches and Closures This Week
Schroders is set to launch its second low-cost actively managed fund in the UK and could roll out further products in the range if well received by investors.

Schroders announced the imminent launch of its first fund of this sort at the beginning of March—the UK Core fund will have an estimated maximum total expense ratio of 0.4% per annum.

Details of this second fund are as yet unconfirmed but Schroders hopes that they will provide an active alternative to passive investing vehicles such as exchange-traded funds and index-tracker funds.

Schroders new low-cost offerings come fast on the heels of JP Morgan Asset Management’s inaugural low-cost active offering, the UK Active Index Plus Fund. Read more on these in a previous edition of Fund Times.

Schroders is to hard close two US small- and mid-cap funds as of April 1 due to a surge in inflows, particularly since the start of the year. In a fortnight’s time the investment house will no longer accept new investments in its Schroders ISF US Small & Mid-Cap Equity and US Smaller Companies funds. The former, which carries Morningstar’s Elite qualitative rating and a 4-star quantitative rating, managed EUR 2 billion at February 2, 2011. The latter had EUR 720 million in assets at the start of last month and also carried Morningstar’s Elite rating and 4-start quantitative rating. Both funds are managed by Jenny Jones, under whose steerage they have both repeatedly outperformed their average peers while also keeping volatility under the category norms.

BlackRock names Andy Warwick as new co-manager of BFM Balanced Growth portfolio. Warwick joins Colin Graham at the helm of the £241 million portfolio following the departure of Sunil Krishnan, and has also taken over Krishnan’s management of the £14.2 million BFM Active Managed Portfolio as of earlier this month. Warwick also manages the BGF Flexible Multi-Asset fund and co-manages the BFM Balanced Income Portfolio with Phil Brides.

The changes come following the departure of BlackRock’s global head of active portfolio management, Nicolaas Marais, last December.

Merrill Lynch Wealth Management has appointed Jeremy Brown as Head of Investment Solutions for Merrill Lynch Wealth Management EMEA (Europe, Middle East and Africa). Brown joins from UBS and in his new role will be responsible for the development, delivery and after sales support of product and wealth solutions for Merrill Lynch Wealth Management financial advisors in EMEA.

Brown was an Equity Derivative sales trader at UBS, responsible for flow derivative and cross product sales to institutional and hedge fund clients in the Nordic region, before which he was a Fixed Income Derivatives sales trader. Prior to UBS, he worked at Skandinaviska Enskilda Banken as a Derivative sales trader.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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