OPTIMAL JAPAN AND ASIA TRUST

Source: Apex Fund Services.
Note: The benchmark from 20 December 1999 through 10 August 2018 was the Topix Index, thereafter it will be the MSCI AC Asia Index.

The Year of the Pig continues to provide equity investors with more cheer than the Year of The Dog did in 2018. The dog may well be man’s best friend, but for investors, the year lived up to its name and provided little joy. Being bearish seems to remain in vogue. A bearish market outlook has long been seen as a hallmark of a savvy investor and optimism is easily dismissed as Panglossian and trite, but as time goes by, a bearish consensus begins to throw up opportunities for careful buyers. If this were a horse race, bearishness would be the over-hyped favourite while bullishness would be the unsung hero coming into the race in good health and form. The outcome is never certain, but the odds on bullishness are attractive in our view.

The Japan valuation premium is long gone, and in fact on most valuation yardsticks, Japan looks cheap compared to other countries - both in Asia and elsewhere. The measure where is still lags behind is the RoE, though single digit RoEs are not uncommon in Asia Pacific where there is a tendency to hold excess cash on the balance sheet and thereby inflate the denominator. If one focuses instead of the return on assets, Japan – and other Asian markets – stacks up comparatively well.

It is frustrating that in spite of the progress made in improving corporate governance in Japan, aggregate cash held by listed companies continues to grow and sits idly in Japanese bank deposits earning nothing. Putting money away for a rainy day makes sense to everyone, but Japan’s corporate leaders behave as though they were Noahs who had been warned to get prepared for an epic flood. Risk-taking equity investors deserve better than that. If they want to hold cash, they could choose to do that for themselves. If one invests in companies, one does so for a good return on investment, and JPY250 trillion sitting in cash does nothing to help achieve that goal. As far as investment strategies go, it is a poor one, although in our view, not as poor as the “return-free risk” of buying long-dated sovereign bonds at zero or negative yields.

The benefits of broadening this Fund’s investment mandate back in August to an all Asia one became clear in February as over half of the Fund’s equity returns came from non Japan Asia. Our best performing investment was the HK listed XiabuXiabu Catering which has not been one for the faint hearted. It had been as high as HK$17.50 in August and then as low as $9.50 in September. We made four separate purchases between $9.87 and $14.41 for an average cost of $12.98 and enjoyed the 26% share price gain in February. Korean cosmetics company Amorepacific also made it into our top 5 in February while three other NJA stocks (two from HK and one Indian) were amongst our 10 best returns. Also helping the Fund’s return in February was the relative strength is the region’s currencies against the AUD.

At month-end we attended a conference in Japan and met with a number of companies, including three that are in the Fund. One of the meetings was with Idemitsu’s management who gave a positive update on the business as they approach the date (April 1st) of their impending merger with Showa Shell. Notwithstanding an expected annual decline in Japan’s petrol demand of 1-2%, the merged company should be able to maintain high margins as the industry closes old and inefficient refineries. Cost savings from the merger are also targeted at Y60bn by 2021 and at these prices, the stock looks a bargain to us, especially as it carries a 4.5% dividend yield to boot.

Most of the meetings were encouraging but the quality of management and strategy differs greatly among Japanese listed companies. The good ones are truly world class but there are others that seem to embody the Japanese ideal of “the nobility of failure” and remain locked on a path of inevitable decline.

We have written almost 230 monthlies for this Fund since its inception in late 1999 and while sometimes it has been hard to find anything new to say, it has been a pleasure managing the Fund for that time and writing about Japan, the markets and companies we’ve owned. We remain committed investors in Japan and enjoy seeking opportunities available elsewhere in Asia. Japan’s markets have tested our patience over the past 35 years- more than we’d like to recall – but it remains a fascinating country with a resilient culture and many high quality companies that continue to flourish. We just have to keep working to get a just share of the spoils!

Important change to Optimal Japan Trust

In light of the increasing importance of Asia to Japan, we have broadened the Fund’s investment mandate from Japan-only to one which covers all of Asia. This will allow us to capitalise on the extensive research we have undertaken to identify Asia’s best managed and most attractively valued businesses and in selectively adding these to the fund, we expect to improve the fund’s overall return and quality. Japan will remain the Fund’s core and major focus.

As a result, the Fund’s name has changed to Optimal Japan and Asia Trust. We have a new Trust Deed and Information Memorandum which formalise these changes, and will send them out to anyone wishing to invest.

We have lowered the Fund’s performance fee from 20% to 15% with all other major terms remaining the same.

Please contact us for more information and join the Optimal team investing in this improved version of the Fund.

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