OPTIMAL JAPAN ABSOLUTE LONG FUND

Objective

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$18.023
As at 30 June 2018

Annualised Performance (Net of Fees)

As at 30 June 2018 1 year 3 years 5 Years 10 years Inception*
OJAL 13.2% 2.5% 6.0% 3.8% 4.3%
Topix Index 8.9% 5.5% 6.5% 2.3% 3.0%
Relative +4.3% -3.0% -0.4% +1.5% +1.3%
*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
Beta 1.0 1.0
Absolute Risk 12.3% 11.1%
Active Risk 7.0%
Active Share 92%

Value of US$10,000 INVESTED

OJAL June18.png

Source: Apex Fund Services

MANAGER's REPORT

A quick check of the major stock indices for June would not cause undue alarm. The S&P 500 was up a little, while the main indices for the UK, Europe and Japan were all down by between half and one percent – in local currency terms. Looking further afield and lifting the bonnet however, one finds ample evidence of a return of the “risk off” aversion from the 2014-2016 period. Starting in China, the Shanghai SE Composite Index was down 8% in Renminbi and almost 11% in USD, while the MSCI Asia-Pac (ex-Japan) index and the MSCI EM index were down 4.1% and 4.6% respectively.  

Like the Renminbi, the Yen weakened against the USD in June and so the Topix return in USD was a less respectable -2.6%. Despite that modest index move, it encompassed a best performing sector up 9.1% (Oil & Coal) and a worst performing one down 9.3% (Other Products, being mainly Nintendo). The oil sector notwithstanding, most of the worst falls in June came from global economic sensitive sectors such as steel, glass, shipping, airlines and metal products while the Four Horseman of the Risk-Off Apocalypse (food, pharma, railways and construction) reappeared on the positive side of the sector returns. With the deeply unloved bank sector again among the worst performers, it felt a bit like the dog days of two years ago had returned. 

The world has, however, changed quite a lot since then. The US 10 year yield has doubled to 2.9%, the USA has a new President with a very different approach to statesmanship, and Japan in 2018 has 30 million foreign tourists arriving whereas then it was just over 20 million pa. European politics has been largely unsettled and the EU continues to creak and groan.  

We believe that equity markets are in better shape for having the world’s most important discount rate now offering a yield that has some attraction to a long term risk-averse investor and although respectable, stock returns have hardly been excessive since Mr Trump won the election in November 2016. Most investors would be satisfied with their portfolio returns since then, with the exception of the Chinese shareholder who has seen 10% shaved off their valuation in that time. Maybe it is all going according to some over-arching plan after all. 

In Japan, where we spend much of our time, there has been little new to fret about. With a stronger economy, modest inflation and greater tax receipts, Japan’s debt to GDP ratio has begun to decline. It surprises us that the doomsayers of Japan’s fiscal precipice, so vocal only 6 years ago, have gone to ground and say nothing these days about the “debt mountain” they railed against at the time. Perhaps their views have changed, or maybe they have closed their positions and moved on to the next profitable opportunity. We think that the debt is still a problem, not because it will cause a collapse in the currency or necessitate debt forgiveness, but because the servicing of it – though manageable with rates this low – nevertheless soaks up government expenditure that could be used better elsewhere. For now, the government is comfortable pursuing policies to boost profits, wages and consumption and will not tighten fiscal policy until later next year when the consumption tax rate is due to rise to 10% from the current level of 8. Although a small increase, it will no doubt lead to pre-hike spending and post-hike thrift, but it is not enough to derail Japan’s moderate economic growth on its own. 

Talking of Japan’s growth and prosperity, some big changes have taken place over the past couple of decades. The biggest of these (the post Bubble deflation and the aging population aside) is the increasing importance of Asia to Japan’s companies and economy. Whether one looks at Japan’s export destinations or the geographic split of Japanese companies’ overseas sales and profits, the growth of Asia’s influence is clear.  As the chart below shows, Asian-sourced sales now account for almost half of Japan’s total overseas sales and despite maintaining the value of exports to North America, Japan’s overall reliance on it as a source of sales has declined. It is complicated to trace the source of final demand in traded goods so the bare numbers do not tell a completely accurate story, but there cannot be any doubt that Asia’s economic growth is, and will continue to be, a boon to Japanese companies, and ultimately to Japan’s economy. We expect that over the long term, this trend will be a bigger determinant of stock and sector performance in Japan than US policies and interest rates, and intend to capture this growing source of profits in our portfolio construction.

CHART 1: PROPORTION OF SALES FROM ASIA

Profits Jun18.png

Source: MUFJ

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Key Facts
Strategy Long Only Equity
Benchmark Topix Index
Net Asset Value (NAV) US$18.023
Strategy Assets $41m
Domicile Cayman Islands
Trustee Optimal Fund Management Pty Limited
Currency US Dollars
Launch Date September 2004
Income Distribution Annual
Fees* 1% pa
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.