Performance Review 2005
*Note: The fund was launched in December 2005, so it did not have a full monthly result in 2005.Performance Review 2006
Katsuaki Ogata: "The fund outperformed the benchmark in 2006, effectively its first year, as its holdings benefited from robust global economic growth. The positive relative performance was driven by strong stock selection in capital equipment companies, such as automakers, and industrial commodities names, such as steelmakers. The biggest detractors were consumer finance companies, which were hit by the government’s decision to drastically lower the maximum interest rates on their consumer lending."
Performance Review 2007
Katsuaki Ogata: "Although Japanese equities fell in 2007 as the subprime-mortgage crisis pressured global capital markets, the fund outperformed the benchmark. Commodity-related holdings, such as trading houses and chemical companies, buoyed performance as resilient emerging-market demand supported those companies. Leading detractors were financials, although a lack of exposure to some of the worst-hit banks mitigated the impact."
Performance Review 2008
Katsuaki Ogata: "The subprime-loan crisis snowballed into a broader global credit crisis in 2008, triggering a spike in investors’ risk-aversion. The fund underperformed the benchmark as its deep-value holdings, such as chipmaker Elpida Memory, automaker Nissan and financial-services firm ORIX came under heavy pressure from investors’ flight to quality. Nonetheless, the fund’s bottom-up company research suggested that the sell-off was likely excessive and created value opportunities."
Performance Review 2009
Katsuaki Ogata: "Coordinated monetary and fiscal stimulus measures by global economic policymakers during the crisis set the stage for a sharp equity-market rebound in 2009. The fund sharply outperformed this rebounding market as anxiety in the market subsided and investors flocked back to stocks that had underperformed in the bear market, such as Elpida Memory, Nissan and ORIX. The about-face in investor behaviour also led to the bursting of a bubble in the premium on defensive stocks, such as utilities and telecommunications names—creating value opportunities in such companies."
Performance Review 2010
Katsuaki Ogata: "Although the market’s secular recovery remained largely intact in 2010, supported by resilient emerging-market economies, the European sovereign debt crisis and concerns about a double-dip recession in the developed economies triggered several bouts of risk aversion among investors. The fund outperformed, nonetheless, as the defensive stocks it had bought during the 2009 market rally provided a cushion, while its deep-value holdings continued to benefit from an underlying market recovery."
Performance since 2005
Katsuaki Ogata: "Over the period since the end of 2005, when the fund was launched, our portfolio has outperformed the benchmark TOPIX. It went through difficult times in 2008, due to a spike in investor anxiety in the midst of the credit crisis, but our time-tested value investing approach has helped the fund’s performance come right back in 2009 and maintain its edge in 2010."
Investment Process and Strategy – How does the Fund Manager invest?
Katsuaki Ogata: "Bernstein’s stock selection process relies on a unique integration of quantitative and fundamental research. The investment process begins by narrowing down the strategy’s research universe by using our proprietary quantitative model, which ranks companies by expected returns. For stocks we deem to have potential, analysts generate short- and long-term earnings forecasts. In the course of their research, the analysts meet company managements, as well as suppliers, customers, competitors and industry consultants. This research culminates in detailed forecasts of earnings, balance sheet strength and cash flows for individual companies within the investment universe.
The analysts bring their forecasts to research review meetings for discussions with members of the Investment Policy Group, including the Chief Investment Officer and Director of Research (DOR). They typically examine the key controversies around the stock and the main analytical issues underlying their earnings forecast. The objective is to iron out their view of the earnings prospects for the stock, as well as the risks and potential upside, and the attractiveness of the stock relative to other companies in their coverage.
Once an investment is made, the CIO and the DoR engage with analysts on an ongoing basis to assess the impact of changes in companies’ fundamentals and stock prices. They also work in close collaboration for investment decision-making, weighing each investment opportunity relative to the entire portfolio, determining the timing for purchases and sales, and the appropriate position size for a given stock."
Investment Outlook
Katsuaki Ogata: "Japanese equities have underperformed their global counterparts for most of the last several years. Many observers cite lackluster domestic demand, the potential impact of a strong yen, demographic changes, unattractive ROE as some of the factors behind this.
Our view is that this is a stock-picker’s market, where we can find a wealth of opportunities, particularly value opportunities, by taking a bottom-up approach.
In addition, the Japanese market as a whole has become less expensive as a result of its underperformance in recent years. Japanese companies’ valuations, namely price-to-earnings, used to be much higher than their global counterparts’, but they are now largely near the bottom of their decades-old ranges and in line with other global markets. On a price-to-book basis, they are cheaper than most other global markets.
Furthermore, despite widely held beliefs to the contrary, our research suggests that Japanese companies’ profitability, as a trend, has improved over the past few decades. They have also become more shareholder-friendly, giving back more cash through dividends and share buybacks and reducing cross-shareholdings between mutually supportive companies.
Overall, we believe that our portfolio is well positioned to generate solid returns in the months and years ahead as the market continues to normalize from the credit crisis shock."