OPTIMAL JAPAN ABSOLUTE LONG FUND
Optimal Japan Absolute Long Fund (‘OJAL’) invests in the Japanese equity market with the objective of maximising investor returns. This includes hedging the portfolio. Although the Fund’s NAV is denominated in USD, the underlying investments are in Japanese Yen securities and the Investment Manager does hedge this exposure to the Yen by using forward contracts.
|NAV PER UNIT US$16.061|
|As at 31 October 2018|
|As at 31 October 2018||1 year||3 years||5 Years||10 years||Inception*|
|*Since inception (start date 1 September 2004). Data provided by Apex Fund Services.|
|As at 31 March 2018||OJAL||Topix Index|
|Number of Holdings||26||830|
Value of US$10,000 INVESTED
Source: Apex Fund Services
Investing with a focus on medium to long term returns can have a downside, and October 2018 was definitely one of those months. Macroeconomic and political uncertainties led to a big pullback in most equity markets and the closer one was to China, the worst was the damage. The return for the Fund was as bad as any month since we launched in 1999 – and that covers some epic downturns such as in early 2001 and the nightmare of 2008. With every fall of significance, you are faced with the question of whether the horse has already bolted or is still in the yards. Shutting the gate – in this case by selling, raising cash or going short – means you miss the upside should markets regain their composure, but if you don’t, you take the risk of more painful losses. With the US mid-term elections now over and Messrs Xi and Trump making more (slightly) constructive comments about the chance for a trade deal, the horses seem to have calmed for now. We are betting that October was more akin to February 2016 than to June 2007, and that the lost ground can be regained soon. Market nerves are decidedly frazzled.
The sell-off in some stocks has left one looking on with envy at index declines of “only” high single digits. Within the Topix index, the economic sensitive/global cyclical sectors fell by as much as 18% with the least bad sector returns off only 2% or so. Notable among the less awful sectors is banking, which fell 5% and has continued its recent run of outperformance against the market starting in late June. We have had many periods where banks have had a burst of better performance but over the past decade these have been mere blips in a long, inexorable decline of the sector versus the broad market. Given the clear link between the slope of the yield curve and banking profits and returns, the move in US bond yields to 3.2% - and the general, though muted, rise in most other sovereign bond yields seen this year - is supportive to financials. This even extends to Japanese banks, though when JGB yields rise to any extent will be determined by a change in current Bank of Japan buying policy. There is little to get excited about when looking at the near term trajectory of earnings growth in the Japanese banks, but when there is, it is likely that this will be evident, in the main, with hindsight.
Rising US bond yields against a moderate inflation backdrop means real interest rates have now moved decidedly positive and creates a more challenging environment for equity valuations. Markets, both in the US and elsewhere, will cast a more critical eye over company cash flow and strong free cash flow yields will become that much more prized. It is likely that the market’s penchant of the past few years for companies which hold out a promise – however fantastic – of outsized future earnings will morph into a desire to identify value and near term earnings. Growth has smashed value in most markets in the period of negative real interest rates, so if we are leaving that era behind, it is very likely that value will become more fashionable – and profitable. Putting stock market ructions aside, we believe that there is a very big change afoot in Japan that is in its early days and that will have real significance for the assessment of economic opportunities and asset values. We are talking about labour market reform and especially, relaxed rules towards foreign labour, both temporary and perhaps, even permanent. Anyone trying to find the right price for Japanese assets such as equities or real estate has had to take into account the ageing and declining population and the associated decline in consumer demand. It is clearly a factor at play in the undervaluation of Japanese growth assets relative to the low/no growth assets of cash or JGBs. No politician in Japan is going to be brave enough to trumpet immigration or looser rules for foreign workers given the disproportionate influence of older, socially conservative voters, but there is clear evidence that there has been a low-key but meaningful relaxation of rules allowing foreigners into Japan to help fill shortages in the labour market. Expect to see more articles and commentary about temporary workers from Asia and increasing immigration in the remaining years of Mr Abe’s final term as PM. With Tokyo hosting the 2020 Olympics, the picture they will want to the world to see if going to be different to that long held view of Japan as a closed, xenophic and ageing country. It should boost the surging tourist boom further, and will lead to rising valuations. Mr Abe will claim responsibility for both victories – with plenty of justification.
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|Strategy||Long Only Equity|
|Net Asset Value (NAV)||US$16.061|
|Trustee||Optimal Fund Management Pty Limited|
|Launch Date||September 2004|
|Performance Fee||20%*||*the fee is levied on the investment’s positive excess returns above the return on the Topix index (in USD terms) with a high watermark.|