e-fundresearch: "What is your assessment of the current macro-economic situation in Japan?"
Hisae Toews, Investment Director for Japanese Equities, "Fidelity Funds - Japan Advantage A-JPY" (30.08.2011): "Since the March earthquake, the Japanese economy has plotted a v-shaped recovery, as supply-chain disruptions were quickly resolved and production was brought back online ahead of schedule. As a result, Japan in isolation is recovering well and corporate earnings are poised for a strong rebound in the second half of 2011.
However, the Japanese equity market has outperformed other developed markets, as Japanese equities are now extremely cheap relative to their own history on both asset and earnings based metrics and are generally very under-owned.
History has shown time and again that market crises throw up opportunities to buy some excellent companies at severely distressed valuation levels. Currently more than 60% of Japanese companies are trading below their book value. It has fallen several standard deviations below its normalized average. Furthermore, the Japanese market has lost its valuation premium, with the TOPIX now trading on a forward PER of around 13x, which appears to have already discounted the negative near-term outlook.
Investors’ herding mentality fuels market sell-offs, but the manager believes that share price valuations eventually revert to the mean. Therefore, attractive investment opportunities are abundant across the board in the current market environment."
Tadao Minaguchi, Fondsmanager, "Invesco Japanese Equity Advantage A" (26.08.2011): "Die japanische Wirtschaft ist nach der Erdbebenkatastrophe vom März wieder auf Erholungskurs. Da der jüngste Höhenflug des Yen die Wirtschaft belastet, hat die Regierung an den Devisenmärkten interveniert, um die japanische Währung zu stabilisieren. Zugleich hat die Bank of Japan ihr Programm der umfassenden Liquiditätsversorgung um weitere 10 Billionen Yen aufgestockt. Solange die Weltwirtschaft nicht in eine zweite Rezession abrutscht, meinen wir, dass die japanische Wirtschaft und die japanischen Unternehmen ihre relativ starke Wachstumsdynamik aufrechterhalten können. Die Wirtschaft erholt sich von den Lieferkettenunterbrechungen im Nachgang der Erdbebenkatastrophe und profitiert von der Wiederaufbaunachfrage. Außerdem sind japanische Aktien weiterhin attraktiv bewertet."
Klaus Petersen, Portfolio Manager, "ValueInvest LUX Japan A Cap" (30.08.2011): "It is our general view that the Japanese economy will continue the current path of no or slow growth. The reconstruction after the devastating earthquake and tsunami in March will potentially provide the economy with some stimuli, but in the longer term the demographics and the high level of government debt puts a limit on future growth prospects. On the positive we see Japan as well positioned to benefit from continued growth in the surrounding Asian economies."
e-fundresearch: "Which are the most important elements in your investment process?"
Hisae Toews, Investment Director for Japanese Equities, "Fidelity Funds - Japan Advantage A-JPY" (30.08.2011): "The portfolio manager utilizes a value biased, bottom-up stock selection approach in the management of the fund, an approach that he has applied consistently since he began managing the fund.
His stock selection places particular emphasis on valuation analysis. Catalysts for changes or growth drivers are of little importance to his stock selection. The primary valuation metrics he uses are the price-to-earnings (PER) and price-to-book (PBR) ratios. He tries to invest in low PER and low PBR stocks relative to the market average.
He relies heavily on Fidelity’s internal research inputs in order to carry out his valuation analysis. Fidelity’s research team in Tokyo covers over 80% of the Tokyo market. From that research, the manager holds the financial information in a proprietary database he uses to manage the fund.
Within the database, each stock is set a price target and he reviews that daily, adjusting the price if conditions change. The raw numbers (price, earnings per share etc) are very important but they sometimes miss issues and that is why he always checks with the in-house analysts before making a buy or a sell decision. They can add color around the numbers that is sometimes missed in the pure financials. He, however, adheres strictly to his buy and sell indicators. Sometimes that will mean selling stocks that are popular but valuation is the most important consideration in his stock selection process.
While the manager’s stock selection is driven by bottom-up valuation analysis of individual companies, his portfolio construction process puts emphasis on managing the overall portfolio’s exposure to macro economic risk factors including currency, interest rates, and commodity prices. The manager tries not to take excessive macro risks, while seeking to add value through stock selection."
Tadao Minaguchi, Fondsmanager, "Invesco Japanese Equity Advantage A" (26.08.2011): "Unsere Anlageentscheidungen basieren auf einem von uns eigens entwickelten Bottom-Up-Aktienauswahlprozess. Dabei suchen wir gezielt nach Unternehmen mit überdurchschnittlichem Wertzuwachspotenzial, die sich durch hohe Free Cashflows und langfristige immaterielle Wert- und Wettbewerbsvorteile wie starke Markenwerte, Technologien oder eine hohe Kundenbindung auszeichnen. Wir verfolgen keine Top-Down-Strategien auf der Grundlage von Makro-Wetten, Marktdynamik, Themen- oder Branchenschwerpunkten. Im Einklang mit unserer Investmentphilosophie und unserem Anlageprozess setzen wir auf Unternehmen mit einer Free-Cashflow-Rendite, die über dem Marktdurchschnitt und über der Rendite japanischer Staatsanleihen liegt."
Klaus Petersen, Portfolio Manager, "ValueInvest LUX Japan A Cap" (30.08.2011): "We think that solid long term return can best be achieved by a defensive approach focusing on avoiding mistakes and minimizing the downside risk of the portfolio. We believe low risk of permanent losses can be achieved by purchasing quality companies with solid balance sheets at a substantial discount to its intrinsic value based on the companies earnings power. To ensure that investment risks are appropriately rewarded a margin of safety of at least 35% of intrinsic value is required before investing. When valuing companies the required rate of return is related to the underlying volatility in earnings – i.e. more cyclical companies will be punished by a higher cost of capital. With no benchmark constraints we are free to search for attractive risk/return trade-offs in any industry, and the only constraint is that a minimum of 2/3 of the portfolio shall be invested in the most earnings stable risk categories to ensure a low downside risk."
Question 3
e-fundresearch: "Which over- and underweight positions in stocks do you have currently implemented in your fund?"
Hisae Toews, Investment Director for Japanese Equities, "Fidelity Funds - Japan Advantage A-JPY" (30.08.2011): "The fund maintains overweight positions in undervalued cyclical exporters including automobiles and electronic parts makers. While the fund is underweight in the broad financials sector, major banks that trade below book value are key active positions. Defensive sectors such as utilities and railways are underweight, but exposure to pharmaceuticals continues to be quite significant.
The fund’s largest two overweight positions as of the end of July were Astellas Pharma and Sumitomo Mitsui Financial Group. These holdings fit the profile of the fund’s core holdings, which are cheap on normalized PER adjusted for net cash/debt, and PBR adjusted for unrealized gains or losses. In addition, their cashflow-based valuations look attractive and both companies have strong balance sheets."
Tadao Minaguchi, Fondsmanager, "Invesco Japanese Equity Advantage A" (26.08.2011): "Aktuell sind wir im Dienstleistungssektor und in der Elektroindustrie übergewichtet und untergewichten die Transportausrüster sowie die Strom- & Gasindustrie. Allerdings leitet sich die Branchenallokation ausschließlich aus unserer Aktienauswahl ab. Wir setzen auf ein ausgewogenes Portfolio mit einem fast gleich gewichteten Exposure in exportorientierten und binnenwirtschaftlich ausgerichteten Unternehmen."
Klaus Petersen, Portfolio Manager, "ValueInvest LUX Japan A Cap" (30.08.2011): "We are not concerned about relative weighting as our investment approach is benchmark agnostic and based on a pure bottom-up stock-picking process. In this respect we of course pay close attention to the fundamental risk in the portfolio, and always ensure sufficient diversification. That said, our Japanese portfolio is still fairly concentrated allocated in 27 stocks spread across 15 sub-industries. Thus we place client assets where we find undervalued situations and where we have strong convictions. Currently the largest sector concentration is within Consumer Staples with an allocation of close to 40%. Second largest sector exposure is Health Care with a weight of 21%. "
Question 4
e-fundreseaerch: "Please comment on the performance and risk parameters of your fund in the current year as well as over the past 3 and 5 years."
Hisae Toews, Investment Director for Japanese Equities, "Fidelity Funds - Japan Advantage A-JPY" (30.08.2011):
"The fund’s outperformance for the year-to-date is largely attributable to its sizeable underweight exposure to power utilities. Not holding Tokyo Electric Power, operator of the tsunami-stricken nuclear plan, proved most beneficial in the post-earthquake market. Holdings among key component and material suppliers to PC, cell phones and auto parts rebounded sharply after the post-earthquake sell-off, while rising commodity prices fuelled share price gains by Japanese trading companies which count commodities as its biggest source of profit.
The fund’s outperformance over the last three years was primarily driven by successful stock selection. In 2008, stock selection was particularly rewarding in the other finance, banking and chemicals sectors. Two of the largest contributors were consumer loan companies, Acom and Promise, which rose on easing credit concerns and expectations for earnings upgrades. In the banking sector, underweighting Mitsubishi UFJ Financial Group and Mizuho Financial Group proved prudent amid persistent turmoil in global markets and concerns about equity financing risk. In the chemicals sector, major contributors were a mix of defensive and cyclical stocks including Kobayashi Pharmaceutical, Tokuyma, and Central Glass.
In 2009, a cyclical upswing driven by inventory restocking and signs of stability in some economic indicators spurred the performance of holdings in cyclical exporters. Stock selection was particularly rewarding in the electrical machinery with Canon and TDK being top contributors. Stock selection within the automobile value chain also paid off. Auto parts makers including Aisin Seiki, Koito Manufacturing, and Toyoda Gosei ranked among the top 10 contributors. Moreover, a lack of exposure to power utilities, which suffered a sharp return-reversal after the strong performance in 2008, proved prudent.
In 2010, the fund’s outperformance was driven by successful stock selection in the banking, transport equipment and information & communication sectors. Holdings in the banking sector rebounded due to supportive policy measures, greater visibility regarding global regulations and a rise in long-term rates. In the transport equipment sector, underweighting Toyota Motor amid its extensive product recall in the US market proved prudent, while a holding in Fuji Heavy Industries added value as the company upgraded its earnings projections for fiscal 2010."
Tadao Minaguchi, Fondsmanager, "Invesco Japanese Equity Advantage A" (26.08.2011): "Unser Erfolgsausweis zeigt, dass sich unser „Allwetter“-Ansatz in jedem Marktumfeld bewährt hat. Mit unserer konzentrierten, stilneutralen, alle Marktkapitalisierungsklassen berücksichtigenden Bottom-Up-Strategie haben wir unseren Referenzindex in jedem Jahr seit Auflegung des Fonds geschlagen – im Aufwärtstrend des Jahres 2009 genauso wie im Abwärtstrend der Jahre 2007 und 2008. Unser auf Qualitätsunternehmen fokussierter Aktienauswahlprozess hat sich in Zeiten der Verunsicherung wie nach dem Lehman-Schock und nach dem tragischen Erdbeben in Japan als robust erwiesen, wobei dies sowohl auf Phasen der Verschlechterung als auch der Erholung zutrifft. Die Attributionsanalyse zeigt, dass sowohl die Aktienauswahl als auch die Branchenallokation zum Mehrertrag des Portfolios gegenüber dem Referenzindex (TOPIX) seit Jahresanfang und über drei und fünf Jahre beigetragen haben, wobei die Branchenallokation ein Nebenprodukt der Aktienauswahl ist."
Klaus Petersen, Portfolio Manager, "ValueInvest LUX Japan A Cap" (30.08.2011): "The composition of the portfolio is very different from the overall Japanese market leading to a much lower volatility – e.g. the portfolio has a beta coefficient of only 0.5. The Japanese stock market is very volatile explained by the high proportion of cyclical companies, 41% of the companies belongs to the two most cyclical risk categories! By contrast the Japanese Portfolio has 85% invested in the most stable risk categories. The portfolio benefitted significantly from these conservative and defensive characteristics during the financial crisis in 2008 and in the aftermath of Tsunami in March, which also led to strong outperformance of the overall Japanese equity market measured by MSCI Japan this year, 3 years and 5 years (as of end July 2011)."
Question 5
e-fundresearch: "Which risks do you currently see in Japan?"
Hisae Toews, Investment Director for Japanese Equities, "Fidelity Funds - Japan Advantage A-JPY" (30.08.2011): "At this point most of the downside risks to the Japanese economy are external, such as deceleration in global growth, sovereign credit risk and yen appreciation, rather than internal. The decline in global share prices has gathered speed and dragged down Japanese equities in the process."
Tadao Minaguchi, Fondsmanager, "Invesco Japanese Equity Advantage A" (26.08.2011): "Aufgrund negativer Faktoren wie eines möglichen Übergreifens der europäischen Staatsschuldenkrise auf weitere Staaten sehen wir Risikoanlagen auf kurze Sicht eher verhalten. Weniger pessimistisch sind wir, was den längerfristigen Ausblick für die Weltwirtschaft angeht. Das Wachstum in den USA hat sich zwar – auch in Folge der Lieferkettenunterbrechungen in Japan – verlangsamt. Noch schrumpft die US-Wirtschaft aber nicht. In China könnte der Anstieg der Verbraucherpreisinflation seinen Höhepunkt bald erreicht haben, zugleich könnten die Notenbanken in China und weiteren Schwellenländern bald wieder auf eine weniger restriktive Geldpolitik umschwenken. Unserer Ansicht nach ist das Risiko eines Rückfalls in eine globale Rezession daher begrenzt.
Derweil gehen wir weiter davon aus, dass es den japanischen Qualitätsunternehmen mit ihren etablierten Marken, ihren bewährten Technologien und ihrer stabilen Kundenbasis gelingen wird, ihre erfolgreichen Geschäftsmodelle langfristig auszubauen. Viele dieser Unternehmen werden an den Märkten kaum beachtet und sind daher günstig bewertet."
Klaus Petersen, Portfolio Manager, "ValueInvest LUX Japan A Cap" (30.08.2011): "We currently see three main issues that could adversely affect the Japanese economy: Firstly, the risk that the rebuilding after the earthquake in March will take longer than anticipated, and power shortage could lead to disruption in production, secondly further strengthening of JPY would cripple the exporters in combination with lower Global growth, and thirdly, lack of political support in parliament to address the structural problems in the Japanese economy. However, from a valuation point of view Japan offers many great investment opportunities for buying quality companies with strong balance sheets, some even have no debt, which are attractively valued based on a conservative earnings outlook."
All data per 22.08.2011
