The investment team works constantly to deepen our understanding of the businesses in our universe and the industries they operate in. By having a deep knowledge of the ecosystem within and surrounding a company, through the analysis of its supply chain and competitors, we believe we can gain a superior perspective on a business and its associated risks of ownership.
The emphasis of this research is to understand the risks of ownership for these businesses. We price risk rather than forecast the future. The intention is to put ‘preparation before opportunity’ so that when a gap emerges between price and value we are (a) more likely to see it, and (b) more likely to generate superior perspective around the price of risk at that moment.
What’s distinctive about your stock picking approach?
The most consistently distinctive feature of our process is the clear and differentiated approach behind our stock picks. Generating true conviction takes time. Our solution has been to develop a core research universe that has been carefully curated over a significant period of time.
Our definition of conviction is defined as our ability to distinguish between signal and noise. This differentiated thought process sets us apart from a more forecast-driven peer group.
Good stock picking requires the generation of a differentiated, original, long or short thesis identifying a large, exploitable gap between a market price and a highly scrutinised expected-value, where the thesis is backed by high conviction thanks to independent, value-added research, independently verifiable data points, and a highly-defensible assessment of margin-of-safety.
How do you identify investment ideas?
Most of our ideas come from our research rather than screens per se. This allows us to truly be style agnostic and find idiosyncratic investment ideas that are often missed by the market.
By maintaining a rich and consistent dialogue with companies in our universe, we frequently develop insights and ideas that are not thrown up by numeric-based screens. We believe this gives us an edge over the market and makes us distinctive.
How do you construct the portfolio?
We believe in playing to our strengths and defending our weaknesses. The strength being our stock-picking skills and the weakness being macro factors that we cannot forecast. As such, we are benchmark aware. We seek to avoid significant sector, industry and factor biases within the portfolio. Alpha from the strategy should mostly come from stock picking.
How do you approach risk management?
We believe having the skills to navigate risk is critical to the fund’s long-term returns. While stock picking is important for alpha generation, the ability to navigate risk is valuable in volatile markets, helping to prevent any permanent loss of capital, thus allowing investors to access the alpha.
Pre-trade risk control focuses on margin of safety, situational awareness and a review of potential unintended correlations/risks. In our post-trade risk management, we focus carefully on skew and sizing to maximise our profit ratio – rather than just managing the downside.
Ongoing sizing decisions are very much part of our risk navigation. Over time, sizing decisions based on our risk awareness of individual stocks contributes to the performance of the fund and prevents excess volatility to active return.
To ensure stock-specific risk is driving active returns, we keep track of various indicators to maintain a high level of awareness about the various risks embedded within the portfolio.
How do you engage with company management?
An important part of our process rests in our mission to be the ‘shareholder of choice’. We want to be the investor that companies most want to see on their shareholder register. We hope that they want us as shareholders not just because we have patient, long-term capital, but because we add additional value to management in other ways.
We like to help companies become better versions of themselves. Where we can, and when we are invited, we are happy to make suggestions about company strategy, capital policy and sustainability. This approach, which we call “value-added shareholdership”, is particularly relevant in Japan today because so many companies are now on exciting journeys of self-improvement.
A unique factor in our engagement efforts is Dr. Yanagi, a renowned figure across Japan in both stewardship and ESG circles. As the Deputy President of M&G and an exclusive adviser to the fund manager, Dr. Yanagi provides expertise and insight for our engagement with corporates in Japan.
Can you provide an example of your engagement?
A notable example of engagement that helped create value was with Sanrio, which owns the intellectual property for the Hello Kitty franchise (amongst other characters). We engaged with Sanrio for approximately two years as we believed the company was meaningfully underperforming its potential. The company was open to our suggestions and acted on many of them, including suggestions about the China strategy and the profile of their senior management team. The stock has more than quadrupled since we first invested in 2020 and, in our view, provides a great example of how our value-added shareholdership approach can create positive outcomes for companies and investors alike.
Investment team
Who manages the fund?
Carl Vine, Co-Head of the Asia Pacific Equity team, has been the manager of the fund since September 2019. He is responsible for the fund’s investment decisions, supported by his Co-Head David Perrett and the rest of the team.
What is Carl’s experience of investing in Japan?
Carl has been researching, analysing and investing in Japanese companies for close to 30 years. He started his investment career in 1997 and has lived in Japan and Asia for a large part of his career. He has been involved in several high-profile investments in Japanese companies, which have provided him with an unusually high level of board and main-bank experience in a Japanese context. This experience brings significant depth to M&G’s Japanese investment franchise.
What support does the manager have?
As a truly integrated Pan-Asian team, the M&G Asia Pacific Equity team consists of 11 investment professionals (fund managers and analysts), located across London, Singapore, Hong Kong and Mumbai. While physically spread out, the team has over 20 years of shared investment history and is in regular communication.
Carl and David, the Co-Heads, have worked closely together investing in Asia for nearly three decades. They share the same investment philosophy and process and, as deputy fund manager, David is well placed to make sure value-added perspectives and insights from the wider region are reflected in the Japan portfolios.
We believe our Japan investments benefit meaningfully from insights garnered as a result of our coverage of names in the wider Asia Pacific region.
Does the Japan team interact with other teams at M&G?
Our investment programme enjoys the full support of the broader M&G investment franchise. Team members interact frequently with the Central Analyst team for global industry expertise, M&G’s Stewardship & Sustainability team on environmental, social and governance (ESG) issues, the central Risk team for portfolio construction input, as well as the Multi Asset team for macroeconomic perspectives.
Outlook
What is your outlook for the Japanese equity market?
We continue to see a multi-year runway for corporate reform and self-help in Japan.
Since the beginning of 2023, Japan’s stock market has been in a bull market and among the world’s best performing markets. However, the starting point was one of depressed valuation, in our view. As such, whilst valuations have risen, we believe they still do not appear especially demanding today, in an absolute or relative perspective.
With overall valuations at reasonable, but no longer depressed levels, we should expect Japanese equity returns to be driven by earnings per share growth and dividends. We remain upbeat about the structural earnings growth story in Japan, driven by ongoing corporate reform efforts where significant low hanging fruit remains.
As ever, the future is always uncertain and unanticipated risks are par for the course. Our north star is really anchored around the interesting combination of modest valuation, self-help-driven earnings and latent capital being unlocked and returned/reinvested. This north star, for us, points to a good likelihood of strong compound return generation in the years ahead.
Investment proposition
What is distinctive about your investment approach?
- We look for situations where a specific debate or controversy (or lack thereof) has driven a large wedge between the price and what we believe to be the value of a listed equity.
- We deliberately concentrate our efforts around a pre-defined universe of companies across Asia on which we can plausibly claim the right to a superior perspective. Over the past 20 years, we have carefully curated a list of companies, for which we believe we can generate a high-conviction understanding about the company’s underlying business.
- We are benchmark aware – we seek to manage the portfolio’s deviations from the benchmark keenly with a view to maximising the fund’s exposure to intended (and minimising the exposure to unintended) risks.
- We actively engage with companies we invest in, seeking to add value in a range of areas, ranging from more traditional subjects such as shareholder return to strategy and business connections. We believe this differentiates us as investment professionals and can lead us to unique investment opportunities.
What is your investment objective?
The fund aims to provide combined income and capital growth that is higher than that of the Japanese stockmarket (as measured by the MSCI Japan Net Return Index) over any five-year period, while applying environmental, social and governance (ESG) criteria.
What is your investment style?
We are style-agnostic investors. We try to build factor-neutral portfolios, where performance is driven by the specific risks of each company. By doing so, we aim to deliver an evergreen outcome where we are able to provide at least the return of the Japanese equity market during challenging periods, but stock picking alpha in periods when the return from the skill is higher.
Do you take account of macroeconomic views?
We do not take macroeconomic bets in the portfolio. For example, we would not invest in a company as a proxy for our view on the yen or on Bank of Japan policy. Each investment requires a clear corporate-specific investment thesis with identifiable metrics we can track and assess progress.
However, we absolutely consider macro factors when constructing a portfolio, taking care to not allow macro risk to unduly affect fund performance. Thus, while we follow economic data and are highly cognisant of the macro environment within which single stock equities are priced, we do not try and predict macro variables; rather we work on insulating the portfolio from such risks.
Further, such trades, in our view, do not capture the true structural opportunity in Japan today of bottom-up corporate self-help and improvement.
How does your approach fit with the structural opportunity in Japanese equities?
We believe the current opportunity in Japan is structural rather than cyclical. There is a powerful multi-year structural earnings growth story in Japan, in our view, driven by ongoing corporate reform efforts. We think this earnings growth could drive significant upside in Japanese equities for many years to come.
As highly active, style agnostic bottom-up stock pickers, with an emphasis on active engagement with management, we believe we are uniquely positioned to capitalise on the exciting stock picking opportunities that exist.
We pride ourselves in our long-term research and our value-added shareholdership approach. Serendipitously, the long-term research helps us identify companies at the early stage of their transformation and improvement. Our hands-on approach to investment means we can actually help companies accelerate in this transition. Having invested in Japanese equities for close to three decades, we feel fortunate to be in a position to fully capitalise on this structural opportunity in Japan.
Performance
What have been the drivers of the fund’s outperformance in the past three years?
We highlight below some of the stocks that have contributed to fund performance in the past three years, and the reasons behind our investments. Investors are reminded that past performance is not a guide to future performance.
2023
Renesas Electronics, a semiconductor firm, performed well on the back of good earnings. We had invested because we believed the market was mispricing the quality and growth potential of its earnings. Another technology holding, Socionext, added value. We were an anchor investor in the company at the time of its IPO in October 2022 and took the view that the company could benefit from increased semiconductor content in cars. Forest owner Sumitomo Forestry was a notable contributor. We believed the market was not recognising the growth potential from Sumitomo’s carbon credit profile or forestry fund management business.
2022
Sanrio, which we discussed above, was one of the fund’s best performing stocks in 2022. In our view, this demonstrated the power of self-help in a company that had been undervalued for a long time. Logistics company Kintetsu World Express rallied following news of a proposed takeover by its largest shareholder and “system-on-a-chip” design company Socionext had another good year.
2021
Shipping conglomerate Mitsui OSK Lines performed well as its earnings increased driven by favourable demand/supply conditions in its sector. Semiconductor company Fujimi, another company we had engaged with on issues ranging from corporate governance to commercial strategy, also added value. We also engaged with industrial and engineering company Hitachi Zosen. The stock rallied in 2021, and we believe this was a prime example of how we can release value through constructive and active engagement with a company.
Fund performance
Past performance is not a guide to future performance
