What is the underlying methodology behind the fund?
In brief, Neptune’s investment staff conduct global sector research on a 3 to 5 year basis to understand what will happen in each sector and use that knowledge to identify which companies are best strategically placed within that sector ie. get the big things right over the analytical time horizon. Such firms constitute the basis of Neptune’s investable universe of stocks.
Each of these is then subject to deeper analysis by the relevant sector team to ensure the company is as good as we first believed and then go on to model future earnings prospects on a core, bull case and bear case basis. These projections are discounted back and probability weighted to arrive at a “fair value” estimate of what the company is worth. Such calculations are initially made after the sector review has been concluded and are then only recalculated if significant change in circumstances is revealed eg. quarterly earnings announcements
Each fund manager then seeks to hold the “best value” 40 to 50 companies’ shares from the relevant geographic part of Neptune’s investment universe ie. those with the greatest potential return which in turn means the greatest discrepancy between a firm’s current share price and what Neptune’s analysts think it is worth. In practice portfolio constituents change mainly as a result of achieving their price targets and there being much more attractively value alternatives available on Neptune’s approved list of stocks.
What market conditions are most beneficial to your fund?
Continued global GDP growth – stable bond market yields – Weak Yen – attractive PE multiples
How do you think the Japan economy and market will respond to the Abenomics policies over the next year or two?
More of the same, over the last 12 months real economic indicators eg. Jobs, wages all moving in the right direction. Any slowdown in the economy will be met with another barrage of QE, monetary base expansion, government spending and Yen weakness ie. “bad” news becomes good news
Economy: the economy will likely continue improving, buoyed by a combination of increased government spending and the benefits of easy monetary conditions, recovering world growth and a weaker Yen. 2014 will likely see an increase in base wages for full-time staff, which will drive a revival in the domestic part of the economy.
Politics: the previously agreed five year, rather than annual, bond issuance negotiations means that there will be no Japanese “Fiscal Cliff”, a combination of expiring tax cuts and government spending cuts, until 2017/18 and no effective limit to spending until then. In the meantime, the government will pass a record regular budget of 100 trillion Yen and a special supplementary budget of 5-7 trillion Yen to offset any short-term negative impact from the VAT hike from 5% to 8% on 1 April 2014.
Corporates: we believe earnings for the year ending 31 March 2014 will show a dramatic ongoing improvement from the previous year. With the first half already having seen average growth of over 100%, the second half is unlikely to match this but will certainly come in at over 50%. The new government’s policies should help, as will further Yen weakening and developed market economic resurgence.
What fund selections have been the most successful and unsuccessful over the past twelve months?
Fund selections – 12 month performance vs TOPIX index +10%
Best : Industrials & Electricals/IT : Oki Electric +124%, Shimizu +66%
Worst : Materials : Titanium stocks -16% to -23%
What do you accredit the strong performance of the fund over the last few years to?
Steady out performance from underlying portfolio of shares and cash (stock selection), strong additional outperformance came from the currency hedge.
Fund focused on sectors where Japanese firms dominate and where earnings are driven by sales to worldwide client bases and Earnings do not depend on yen weakness
– Advanced materials: carbon fibre, paint
– Engineering: vehicles, power generation and machinery
– Electrical and electronics: components and final products
Fund avoids domestic demand dependent sectors
― Utilities: railway, power and telecoms
― Financials: insurance
― Consumer: retailing, food and clothing