Performance Review 2005
Ernst Glanzmann and Regula Simsa: “In 2005 the fund performed almost inline with its benchmark but finished the year slightly in negative territory.”
Performance Review 2006
Ernst Glanzmann and Daniele Barone: “The fund did quite well in a challenging year 2006. Overweighting Toyota Motors and Canon Corp. paid significantly. So did the Yen-sensitive stocks like Shin-Etsu Chemical (IT related materials), Honda Motor and Yamaha Motor. Negative contribution came from the consumer lending company ACOM. New regulations concerning maximum credit cost charges blurred this segment’s business outlook considerably.”
Performance Review 2007
Ernst Glanzmann and Antonius Knep: “Especially in the first half of 2007 a significant underperformance was incurred. This was mainly due to the overweight of solid businesses which suffered substantially from rising raw material prices. The underweight of late cyclical stocks, which in turn benefited largely from continued strong demand in emerging markets, hurt accordingly. Furthermore, the fund had no exposure to Nintendo Corp. and hence was not able to profit from the “wii boom” of 2007. The underweight in trading companies was diminished in the latter half of the year and several small positions as well as the stake in ACOM (refer to comment for 2006 above) were sold in favour for Sumitomo Trust & Banking and the leasing company Orix Corp.”
Performance Review 2008
Ernst Glanzmann and Antonius Knep (“Diamond Pool“), Carlo Capaul and Stefan Fröhlich (“Quant Pool”): “The first six months of the year proofed to be challenging due to the rising oil price and upheavals in world economy. IT related stocks as well as industrial names detracted from performance. The management team partly shifted from cyclical to more domestic related companies.
In mid 2008, a multi-manager approach was introduced: The former bottom-up approach with its decent diversification of business models and its disciplined buy and hold strategy became even more focused (20-30 names; “Diamond Pool”) and was accomplished by empirical evidence based systematic value investing in the 100 most appropriate stocks of the MSCI Japan universe (“Quant Pool”, semi-annual recalculation and rebalancing). The asset allocation to the separately managed pools is done reciprocal to the respective ex-ante tracking error while their correlation to each other is significantly low.”
Performance Review 2009
Ernst Glanzmann and Antonius Knep (“Diamond Pool“), Carlo Capaul and Stefan Fröhlich (“Quant Pool”): “In 2009 the fund experienced the third best performance since its launch in 1993 – the new multi-manager approach clearly paid with both pools outperforming the benchmark. Stock selection and sector allocation contributed almost in same proportion to overall performance. Characterised by a cyclical bias at the beginning of the year, the “Quant Pool’s” rebalancing in May brought an underweight in the consumer discretionary stocks (especially automobiles) and emphasised consumer staples. The “Diamond Pool” saw the reduction from 25 to 23 names: Asia’s largest maritime carrier Nippon Yusen and software giant Fujitsu Ltd. were sold due to profitability concerns.”
Performance Review 2010 - Year-to-Date
Ernst Glanzmann and Antonius Knep (“Diamond Pool“), Carlo Capaul and Stefan Fröhlich (“Quant Pool”): “Until the end of September 2010 both pools are outperforming the benchmark again. The rebalancing in May this year brought an allocation of 60% of the fund’s assets to the “Quant Pool” and 40% to the “Diamond Pool”. Largest positive contributions so far stem from stock picking in the consumer discretionary, financials and consumer staples sectors whereas the selection of names in the fields of IT, telecom and materials detracted from the performance. On single name basis the underweight in Toyota Motor and the position in bicycle parts maker Shimano Inc. paid off most. IT- related Shinko Electric as well as anti-virus software providing Trend Micro Inc. were a drag on the performance.”
Performance since 2005
For the overall performance from 2005 to 2010 please refer to the comments above!
Investment Process and Strategy – How does the Fund Manager Invest?
Ernst Glanzmann, Carlo Capaul, Antonius Knep, Stefan Fröhlich: "Swiss & Global Asset Management follows a team approach in the decision making process. This process is divided into 4 steps: style screening, stock selection, portfolio construction and independent risk management.
The history of Julius Baer Japan Stock Fund dates back more than 15 years, but July 2008 ushered in a new era: the previous approach of concentrated bets on first-class firms was given an ideal complement in the form of a broadly diversified, quantitatively based investment strategy in the Japanese equity market. Both approaches are followed in separate pools ("Diamond", "Quant") and brought together in a core-satellite strategy (multi-manager approach).
Investment process – Diamond Pool
The managers of the product screen all companies listed in Japan regularly on the basis of the following criteria:
1. Return on shareholder’s equity
2. Net debt to equity ratio
3. Price to book ratio
4. Discount to the calculated fair value
These screenings are executed within Bloomberg and an output file can be generated at anytime.
In general, this creates a list of less than 100 companies.
The managers create a company fact sheet for every pass in order to visualise important characteristics such as development of profitability, capital management, and long-term growth pattern. Firms with an erratic operational history are eliminated already at this stage of the process. Surviving business models are then investigated by means of official publications, media reports, on-site visits, discussions with the management, industry studies, and examination in terms of sensitivity to global economic trends. This occasionally extensive primary research process, which can take up to three years, enables portfolio managers to understand in depth opportunities and risks associated with the business. Moreover, it allows managers to estimate future return-on-equity in order to calculate the fair value of the stock. Ultimately, only companies with the following main characteristics will be successful candidates to be considered for an initial investment:
1. Products with high customer value
2. High entrance barriers
3. High market share globally or domestically
4. Cost-conscious management
5. Above average profitability
6. Strong balance sheet
The managers responsible for this product invest in 20-30 equally weighted “diamonds” from the MSCI Japan universe, selected on the basis of stringent bottom-up criteria as described above. The stocks will ideally be held over a long period and will in principle be rebalanced once a year. With this “classical” buy and hold strategy, the managers aim to participate in the value creation process of superior business models and thus make use of the resulting compound effects.
Buying and selling criteria
In order to be bought, shares of companies passing the screening and fundamental evaluation process have to be traded on a discount of at least 30% to their fair price calculated using elaborated valuation methodologies.
Given that fundamentals haven’t changed, we sell positions as soon as a premium of 30% or more to the calculated fair price is reached and incremental return on equity as anticipated by the market can not be warranted. We also sell stocks if the basic fundamentals – e.g. competitive landscape, structural changes, management accountability, etc. – deviate from our initial assessments of the respective business.
Investment process – Quant Pool
Stock selection in the Quant pool takes place within the MSCI Japan universe on the basis of several value criteria.
No stocks are bought outside the Japanese universe. The monthly data we use on around 500 Japanese companies stem from MSCI and Thomson Reuters and cover a period going back almost 20 years. We determine an overall score based on the aforementioned statistics. The investment strategy of the Quant pool essentially has a value nature. There can also be periods in which small cap firms are given a higher-than-average weighting.
Within the Quant pool, the 100 most suitable MSCI Japan Index stocks are selected according to the criteria mentioned above. In a further step, a check is made to ascertain whether the list of the best companies contains firms that have a high fluctuation rate in top management, that are involved in court proceedings or that have accounting irregularities. Stocks that do not pass this qualitative health check are replaced.
The weightings of the individual positions in the Quant pool are proportional to their market capitalisations. Investments are made in the 100 most attractive benchmark stocks that successfully pass the quality checks. The maximum weighting of a stock may not exceed 5%. The composition of the portfolio is adjusted every six months. However, the qualitative criteria can mean that a position may have to be replaced earlier, i.e. before the six-month adjustment period expires.
Buying and selling criteria
Within the Quant pool buy and sell criteria are set by the four criteria mentioned above.
Bringing together “Diamond Pool” and “Quant Pool”
In principle, the approach of concentrated bets on first-class firms is combined with a broadly diversified, quant-based approach to the Japanese equity market. Both approaches are followed in separate pools and brought together in a multi-manager strategy. The weighting of the two pools depends on their expected tracking error. The higher the expected tracking error of a pool, the lower its weight in the overall portfolio.
A company may be represented in both pools.
Once constructed, the entire portfolio consisting of the Diamond and the Quant pool is checked regularly by means of a factor analysis. When con¬ducting this consistency check we look out for risks vis-à-vis the benchmark and monitor the size of these risks. If undesired discrepancies are identified, we perform the necessary adjustments to optimize the portfolio’s risk and return. The particular weighting of the two pools is done according to their respective ex-ante tracking error.
We take care to ensure effective and efficient implementation. This increasingly involves the use of portfolio trades."
Ernst Glanzmann, Antonius Knep, Carlo Capaul, Stefan Fröhlich: "As described above, the Julius Baer Japan Stock Fund is characterised by a two pillar-approach: The “Quant Pool” with its value investing approach and semi-annual rebalancing and the “Diamond Pool” with its decent diversification of business models and a disciplined buy and hold strategy. Principally, the portfolio is compiled to weather any kind of scenario and should generate alpha uncorrelated to prevailing market circumstances. Its investment horizon lies clearly beyond one or two years.
Regarding macroeconomic outlook, the “Diamond Pool” team closely follows changes in the “World Dollar Base”. This monetary indicator is used to anticipate the economic development of OECD countries. Currently, the World Dollar Base indicates an upward trend for the OECD economies in the years from 2011 onwards.