Hickey’s affinity with Japan was sparked at a young age, and his first real engagement with the country was at the tail end of the Eighties as an English teacher, rather than a stock-picker.
“My interest in Japan first developed when teaching English for a couple of years after university, in the countryside towards the north of the main island,” he says. “I found it a fascinating place in terms of the culture and language.
“Combining that with my career plan to work in the investment industry meant Japanese equities was the answer.”
Hickey soon returned to take up an analyst role with Scottish Equitable in Edinburgh but he would return to Japan.
“An opportunity to go back and live in Tokyo working as an analyst for Commerzbank came up, which was fantastic,” he says.
He returned to the UK after landing an investment management job with Edinburgh Fund Managers in
2000. He then went to Shell Pensions before moving to F&C to head up Japanese equities in 2005. He joined the Pictet Japanese equities desk the following year, and has been head of that team since 2009.
The A-team
Hickey oversees two strategies for Pictet: the £300m Japanese Equity Selection Fund and the £1.14bn Japanese Equity Opportunities Fund.
“We run two strategies as a team,” he says. “There are two other fund managers, Sam Perry and Serena Robinson, and we also have support from Tokyo-based analysts.”
Hickey says the Selection fund is a traditional long-only offering, which has a fairly strict target of 50 large-cap stocks.
Japanese Equity Opportunities has a wider brief. A major feature of this long/short fund is the use of pair trades with a 130/30 management approach:
“We typically have around 100 stocks in the strategy and a large proportion of the fund is long/short pair trades.”
Hickey says he uses many different types of pairing, from conventional industry peer couplings to more esoteric ideas. Hickey and his team are free to invest in all corners of the Japanese equities market but have developed clear preferences. “We like the financial sector and think there is a lot of value there at the moment,” he says.
“The big Japanese banks like Mitsubishi Financial Group and Sumitomo, and some residential real estate as well, are significant holdings for us.
“Another theme we are targeting is upgrades to Japanese infrastructure. Quality industrials are a key strength in Japan so we have big holdings in these.”
A prime example of this is the bedrock of Japan’s vehicle industry, Toyota, which Hickey sees as “well positioned and relatively cheap”.
“The weaker yen is helping them and other exporters a lot,” says Hickey, “but they are also helping themselves in many ways in terms of the cost cutting they have done. There is also a refocusing on their core areas of competence under way and returns are improving as a result.”
Ones to avoid
Just as there are some standouts on the positive side of things, some Japanese sectors are best given a wide berth, according to Hickey. He says: “The areas we generally avoid are pharmaceuticals, food and utilities. It can be a struggle to find good companies on attractive valuations in these areas.
“It is not so much competitive rivalry squeezing margins that puts us off but that they operate in a relatively isolated market. They are not under a lot of scrutiny from the global investment community in the same way exporters are. They also do not benefit from a weaker yen.”
Healthcare and pharmaceutical companies present a particular risk in Japan, negating much of the potential opportunity that could stem from an ageing population, says Hickey.
The demography of Japan also limits any upside in domestic consumer-focused companies such as food producers, with the population declining for many years and no change to this in sight.
There are still some domestic companies that present good upside potential in terms of consolidators that are taking advantage of a fractured market, says Hickey, but these are the exception rather than the rule.
Hickey considers himself a company-focused stock-picker first and foremost but the top-down macro picture also has a significant impact on his thinking, and this has been particularly true in recent times.
Macro play
The biggest macro issue currently at play is the monetary stimulus programme pushed through by Prime Minister Shinzo Abe.
So-called ‘Abenomics’ is having a big impact, although the additional boost announced at the end of October did not make a huge difference, according to Hickey, as the direction of travel was already established.
“The latest stimulus was a surprise to us like everybody else, particularly the timing,” he says. “It has not changed our views on constructing the portfolios much, though, because we already had the view that the shift away from deflation to inflation will be sustainable.
“The monetary stimulus has been positive overall and it is also being well supported by fiscal policy, so we think this will be enough to do the job.”
Hickey adds that the initial stimulus would have been adequate to achieve its goal in his view, as the economy was starting to move in the right direction. However, he expects the additional amount to give things another “kick” in terms of the speed at which progress is made.
Moving target
Another major factor Hickey sees driving prices for Japanese stocks over coming months and years is the change to the target asset allocation of the leading public pension fund, which is one of the biggest in the world.
“They have changed allocation targets for domestic bonds to 35% from 60% and domestic equities to 25% from 12%, which means there has to be a big shift of money across the board coming through.
“The average private Japanese investor will likely follow suit in many cases as holding bonds makes less sense as inflation comes through.”
While some of this will already be reflected in equity valuations, Hickey thinks there is still a lot to come from these themes.
He says: “We have come from such a low starting point and we are only seeing the beginning of these shifts.”
While now based in London, Hickey’s enthusiasm for all things Japanese is given a boost twice a year when he makes the long flight to Tokyo to meet with company executives and spend some time with Pictet’s analyst team.
“One of the best aspects of the job is meeting with the companies face to face and hearing all about their numbers, strategy and performance projections,” he says. “Then putting it all together to make an investment decision is what I enjoy most.”
