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Japan’s large caps set for decade-long dominance, says GLG’s Harker

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Stephen Harker, manager of the GBP1bn GLG Japan CoreAlpha Fund, says a major value shift is taking place in the Japanese stock market, heralding a cycle of outperformance by mega cap stocks on a scale comparable to the dominance of small caps over the last ten years.

 
Harker, whose fund is the only onshore fund out of more than 2,000 in any IMA sector to rank first quartile in each of the past five years, believes the long-term outperformance of Japanese smaller companies has run its course, ushering in an enduring shift towards TOPIX Core 30 companies – the biggest and most liquid in the Tokyo Stock Exchange.
 
“Small caps have been outperforming since the end of 1999 and they are now are at extreme highs relative to their long term range,” Harker says. “After their extraordinary performance we expect a major turn, as the market begins to respond to the realities of economics within companies rather than the weight of money flooding into them. The Core 30 has underperformed for the last three years but we are convinced it will be the place to be for the next decade.”
 
Harker, who this week celebrates the fifth anniversary of the contrarian, value-tilted GLG Japan CoreAlpha Fund – which has returned +24.66% since launch² against a peer group return of -15.03% and Topix index return of -8.53% – is particularly bullish on large financial stocks³, which have underperformed the market since 1987.
 
“The big banks have spent the last decade hunkering down and becoming increasingly conservative,” he says. “As a result Japan is at a different stage of the credit cycle from the west. Banks were squeezed when interest rates fell in 2007 and 2008 but a steady rise now would be unequivocally bullish for banks and financials in general.”
 
The three financial sectors now account for almost 30% of the Japan CoreAlpha portfolio, an aggressive overweight position relative to the index (29.3% v 13.7%). The fund’s largest single active sector weight is, however, in Information & Communication (14.1% v 5.4%). This includes telecoms, which Harker says is currently “the cheapest sector in the market”.
 
Manufacturing, conversely, is a significant underweight, with the fund having no exposure to stocks dependent on demand from the BRIC countries.
 
“China has continued to drive Asia but we do not believe the growing economy will necessarily translate into a positive stock market experience,” Harker says. “In our view, China is an accident waiting to happen.”
 
Although he expects Japan’s economy to remain weak, Harker says a retailer such as Seven & i Holdings – the portfolio’s biggest position at 7% – demonstrates how domestic companies in Japan are internationalising to maximise revenue opportunities. “Seven and i now has more stores overseas than it does in Japan,” he says. “The unfavourable demographic story is an utter red herring. Japan’s big corporates are exploiting their qualities and value-adding abilities not just in Japan but abroad – and that includes the domestic companies as well as the exporters.”

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