Japan is playing a prominent role in the region after decades of economic stagnation. Some fundamental changes are underway. Corporate earnings are growing, even if the economy is sputtering. The recent privatisation of Japan Post could “mark the start of a genuine revolution in Japan’s services sector, and financial services sector in general“.
The rest of Asia, however, is muddling along. China is dealing with slowing economic growth while ASEAN equities are considered way too overvalued. Some economies in that sub-region, many believe, are vulnerable to the coming US interest rate hike.
Therefore, Fund Selector Asia takes a look at the “Asia-Pacific including Japan” sector and compares the Allianz Oriental Income Fund and the JP Morgan Pacific Securities Fund.
Luke Ng, senior vice president at FE Advisory, has provided a comparative analysis.
Investment strategy review
The funds have different benchmark indices and investment strategies.
For Allianz, the fund manager, Stuart Winchester, adopts the MSCI AC Asia Pacific Free Total Return (Net) index as the reference benchmark. Ng said that Winchester favours a flexible approach that allows him to use fixed income instruments and cash (the fund is allowed to invest between 50-100% in Asia-Pacific equities and up to 50% in fixed income instruments).
In terms of holdings, Ng noted that Winchester has deep knowledge in managing funds of under-researched small-cap stocks. His high-conviction philosophy is reflected in his relatively concentrated portfolio of 50 holdings.
Ng said that apart from relying on research from his supporting analysts, Winchester is known to use information from reporters and investigators to get on-the-ground data.
“Winchester does not only look at a stock based on financial data. He likes to focus on a company and apply his own qualitative analysis to come up with his stock selection.”
Winchester has recently made a strategic shift in his portfolio, Ng said. The fund used to invest heavily into Japanese equities, but has started trimming Japanese exposure.
At the JP Morgan fund, a recent change in the management team has resulted in a shift in focus. In the first half of 2015, the fund was co-managed by Victor Lee and Aisa Ogoshi. Lee left the company after the second quarter of 2015, and the management team was restructured. The fund is now co-managed by Ogoshi, Robert Lloyd and Mark Davids.
“Victor Lee used to maintain an underweight position in Japanese equities because he believed that there are better opportunities. But the new team appears to be more flexible, especially in when it comes to Japanese equities. At this point, the JP Morgan team is actually increasing its Japanese exposure,” Ng said.
According to data provided by FE Analytics, roughly 40% of the JP Morgan fund is invested in Japan.
When it comes to stock selection, Ng noted that the JP Morgan team follows an in-house guideline. The team seeks out stocks that fall into one of its three categories: premium, quality and trading.
Premium stocks, from the firm’s perspective, are large-cap stocks. They are usually market leaders and they can consistently outperform the market. Ng noted that there are very few companies that meet these criteria fully.
Trading stocks are selections that come about due to business cycles and events, and these are holdings that tend to be rotated out within one-to-three years. Quality stocks have characteristics that sit between premium and trading stocks.
Ng said that JP Morgan tries to maintain 20% of its holdings in premium stocks and 20% in trading stocks. Quality stocks make up the bulk of the portfolio.
The team holds regular meetings with country managers who will provide input and analysis that helps the manager shape the portfolio. The fund usually maintains around 100 holdings.
A snapshot of portfolio allocation:
| Allianz fund | JP Morgan fund | |
| Launch | 3 October, 2008 | 26 May, 1978 |
| AUM | $314.75m | $351.36m |
| Number of holdings | 50 | 100 |
| Top regions |
Japan – 39.6% China – 16.6% Australia – 12.9% Taiwan – 8.4% Hong Kong – 7.9%
|
Japan – 37.7% South Korea – 17.13% Hong Kong – 16.84% Taiwan – 7.81% New Zealand – 6.27% |
| Top sectors |
Financials – 32.6% Information technology – 21.7% Consumer discretionary – 17.4% Industrials – 7.2% Others – 6.5%
|
Information technology – 27.4% Financials – 21.94% Industrials – 19.49% Consumer discretionary – 15.5% Utilities – 5.83% |
| Top holdings |
Taiwan Semiconducter – 3.6% Ryohin Keikaku – 3.5% AIA Group – 3.4% Tencent Holdings – 3.4% Keyence Corporation – 2.8%
|
EO Technics – 5.35% Mainfreight – 5.24% Yamaha Motor – 4.60% Koh Young Technology – 4.28% Aiful Group – 3.84% |
Source: FE Analytics
Fund performance
Ng noted that the Allianz fund generally performs well through market corrections.
“When the market corrects, the Allianz fund has the flexibility to increase its fixed income exposure.”
In contrast, the JP Morgan fund is heavily exposed to Japan equities. The fund’s performance could be affected if Japan’s economy suffers from unexpected shocks. Ng also pointed out that the fund tends to be overweight on China’s real estate sector.
In 2011, both funds were in negative territory, but the JP Morgan fund was hit hardest of the two due to its exposure to China’s real estate sector, Ng said.
The Allianz fund in that year increased fixed income and cash to around 15-20%, which mitigated the negative performance, he added.
