Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0044849320)Ernst Glanzmann, Reiko Mito (“Diamond Pool”), Carlo Capaul and Stefan Fröhlich (“Systematic Pool”): "The Fund invests in Japanese stocks, uses a team approach and the source of return is solely stock selection. Since July 2008, the managers started to combine two strategies: the “Diamond” and the “Systematic” strategies. Both strategies are implemented in separate pools and brought together in the Fund. The Diamond Pool invests in a limited number (20-30) of quality companies with products of high franchise value; high market share globally or domestically; cost-conscious management; above-average profitability; and strong balance sheet. The investment horizon is 5 years ideally. The portfolio is rebalanced every year and is equal-weighted.
The Systematic Pool invests in 100 of the most attractive value stocks out a universe of about 1200 Japanese companies based on a proprietary value-oriented stock selection model. Every position is subject to a qualitative health check to avoid or to replace companies with accounting irregularities, substantial litigation problems, focused on one single maturing product or with frequent top management changes. Mostly, the investment horizon is 6 months. The portfolio is rebalanced bi-annually and its members are market-cap weighted.
The allocation of the two pools is determined every half-year based on their ex-ante tracking error.
The managers use MSCI Japan (including dividend, net tax) as most of the investors use this benchmark. This benchmark is market-cap weighted, broadly covers the Japanese markets and its constituents have sufficient liquidity."
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
Ernst Glanzmann and Antonius Knep (“Diamond Pool“), Carlo Capaul and Stefan Fröhlich (“Systematic Pool”): “The Fund solidly outperformed the benchmark. The rebalancing in May brought an allocation of 60% of the fund’s assets to the “Systematic Pool” and 40% to the “Diamond Pool”. The largest contributors came from the stock selection in financials, consumer staples and consumer discretionary; represented by the overweight in the largest leasing/financing company Orix, the non-holdings in Toyota Motor, and the overweight in the convenience store FamilyMart respectively. The Fund was negatively impacted from the stock selection in IT and telecom; namely the electronic component maker Shinko Electric and the anti-virus software provider Trend Micro."
Performance Review 2011
Ernst Glanzmann and Antonius Knep (left in June 2011)/Reiko Mito (joined from Nov 2011) (“Diamond Pool”), Carlo Capaul and Stefan Fröhlich (“Systematic Pool”): “While the year 2011 was marked by a double whammy of natural disasters, the Great East Japan Earthquake/tsunami and the Thai flood, the Fund strongly outperformed during 2011. Upon the annual rebalancing in November, the Fund kept the allocation of 60% to the Systematic Pool and 40% to the Diamond Pool. As to the attribution, the positives came from stock picking in the financials, consumer discretionary, and IT whereas the industrials and materials moderately detracted from performance. Looking at single names, the non-holdings of Tokyo Electric Power and overweight in the housing complex construction company Daito Trust and in the sanitary good manufacturer Unicharm had positive effect. The non-holdings of Japan Tobacco and NTT Docomo, and the overweight in Sumitomo Trust & Banking were a drag on the performance.”
Performance 2012 - Year-to-Date
Ernst Glanzmann and Reiko Mito (“Diamond Pool”), Carlo Capaul and Stefan Fröhlich (“Systematic Pool”): “As of Feb-end, the Fund is underperforming the benchmark due to stock selection in financials and IT. The non-holdings in the largest broker Nomura Holdings and the overweight in the anti-virus software provider Trend Micro that had provided negative guidance detracted from performance. In addition, the Fund suffered from the underweight in consumer discretionary represented by the non-holdings in Toyota Motor. Particularly in February, the markets turned favourable to cyclicals supported by the additional financial easing announced by the Bank of Japan namely the additional purchase of Japanese Government Bonds and the 1% inflation rate set as a “goal”.
Performance since 2007
Ernst Glanzmann, Antonius Knep/Reiko Mito (“Diamond Pool”), Carlo Capaul and Stefan Fröhlich (“Systematic Pool”): "During the first half of 2007, the Fund has gone through significant underperformance due to the overweight in solid businesses which suffered substantially from rising raw material prices; and the underweight in late cyclical stocks which benefited from strong demand in emerging markets.
In mid-2008, the Fund introduced a new approach combining the “Diamond” strategy and the “Systematic” strategy (as aforementioned). While the fundamentals started to bottom out in early 2009, the Fund recorded strong performance in 2009. Characterised by a cyclical bias at the beginning of the year, the Systematic Pool has come to underweight in the consumer discretionary stocks (especially automobiles) and overweight consumer staples. In 2010, the Fund had good performance boosted by the stock selection in financials, consumer staples and consumer discretionary. While the year 2011 was marked by the large earthquake/tsunami and the Thai flood, the Fund outperformed solidly."