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Fund managers upbeat on Japan

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Despite years of bad experience in Japan, managers of Japanese equity funds are finally favouring the sector and believe investors should think again about the Japanese market, according to the latest sector review published by Standard & Poor’s Fund Services.

S&P Fund Services spoke to 29 Japan equity funds including those run by GLG, IFDC, Invesco, Orbis and Goldman Sachs.

“The overwhelming majority of these managers felt very positive about the Japanese market,” says S&P Fund Services lead analyst, Guy Boden. “They believe that Japan has gone through its banking crisis while the US and European banks need to further recapitalise.”

This view is reinforced by the weighting to Japan in groups’ global portfolios. S&P Fund Services looked at the exposure that a sample of global equity funds have in Japan relative to the MSCI World index weight.

“Most groups are overweight Japan in their global equity portfolios,” adds Boden. “We found that 60 per cent were overweight, 20 per cent neutral and 20 per cent underweight.”

Many fund managers noted Japan’s attractiveness relative to other equity markets, both on a price-to-book and an earnings basis. Nomura, for example, forecast earnings growth in the 12 months to March 2010 of around 60 per cent, while Nippon Growth Fund’s Yutaka Uda expects company earnings to come in even higher, at 80 to 90 per cent.

Small-caps are seen as attractive, with some managers expecting further relative gains. Akihide Kinugawa, who works for T&D Asset Management and manages the Metzler Japanese Equity Fund, feels that there is a greater possibility of alpha from mid- and small-caps than from large-caps. Stephen Harker and Neil Edwards, managers of the GLG Japan CoreAlpha Fund, note that at 1.4x price-to-book level Japan remains cheap.

Akihiro Sekiya at Pinebridge believes that Japan can decouple from other markets and expects exporters to benefit from a global recovery. Meanwhile, Lesley Kaye, manager of GAM Star Japan Equity Fund, thinks that Japan and the global economy are intertwined and does not believe that it can act independently. As a result, she has only marginally increased domestic plays.

Sector bets in financials and real estate reflect the view that Japanese banks have already weathered their storm. Invesco Japan Core and Invesco Perpetual Far Eastern Japan have 43 per cent in financials and real estate, Orbis has 28 per cent and Jupiter Japan Income 24 per cent, compared with 17 per cent in the benchmark. Electrical appliances were another large sector bet, for example in the GLG Japan Fund.

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