Q. What is the underlying methodology for selecting stocks for inclusion in the fund and how many stocks do you typically hold?
The fund is a “Best ideas” portfolio typically holding around 30 stocks. We look for companies which appear to be undervalued based on the research views of our in-house team of analysts. The strongest ideas at any point in time are those where we can also see a clear catalyst to drive performance over the next nine to twelve months.
Q. What were your best and worst stock choices in 2012?
The worst stock choice in 2012 was Tokyo Steel, an electric arc furnace steel maker. The combination of a weaker than expected external environment for exports, together with the strength of the Japanese Yen led to significant underperformance. This began to reverse in the final quarter of 2012 but, for the year as a whole, the stock remained a significant negative contributor. The strongest positive contributor to the fund was Mitsubishi Estate, a major real estate developer. The gradual improvements seen in the real estate market, following a long period of weakness, allowed the stock to outperform consistently throughout 2012, and this trend accelerated in December.
Q. What do you see as the catalyst for Japanese stocks to outperform global equities?
There could be many catalysts for Japan to outperform. We would view an end to deflation as particularly positive, although a weakening of the yen would also have a significant impact on sentiment. More aggressive monetary policy from the Bank of Japan would also help to encourage global investors to reverse their very underweight positions. The catalyst for this change could be the change in the Governor of the Bank of Japan which will take place in April. In recent weeks stock prices have begun to discount the possibility of policy change following the general election in December but, if the new government can deliver on their pledges, there is certainly more potential for the equity market.
Q. What are the biggest opportunities and challenges for the Japanese economy in 2013 and how is the fund positioned to take advantage of these?
The biggest challenge is whether the new Prime Minister can transform his strong rhetoric into policy, and whether he can provoke sufficient change within the Bank of Japan. If so, the underlying economic trends are also gradually moving in his favour and we could see an end to deflation and a re-rating of the equity market as a result. If policy change is insufficient, and external conditions deteriorate again, the Japanese equity market could remain undervalued in the short term.
The fund is not positioned to take a one-way bet on either of these outcomes. The current ideas are drawn from a range of sectors providing broad exposure to companies benefiting from both the domestic and overseas environment. In general, however, the portfolio is likely to retain a relatively high-beta and pro-cyclical stance which reflects the level of undervaluation we find. The forecasts included in this should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
Q. How important is the export industry for Japan and in particular demand from China?
The export industry remains an important part of Japan’s economy although Japanese companies have successfully reduced their dependence on exports in recent years, primarily by moving production overseas. China has been a particularly important component in this change, taking an increasingly large share of Japan’s exports while Japan also remains at the forefront of foreign direct investment in China. The recent weakening of the Yen provides welcome respite for Japanese companies and, if it can be sustained, this will allow the true competitive position of Japanese companies to be seen.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.
Issued in January 2013 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 2015527 England. Authorised and regulated by the Financial Conduct Authority. UK04459