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$15.583|
|As at 28 February 2019|
|As at 28 February 2019||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
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.
Of the 33 sectors that make up the Topix Index, only five had negative returns in February, with some of our former favourites making up three of these. We once had large weightings in the banks and real estate sectors, but a flat yield curve cured us of our liking for banks while poor attitudes to shareholders amongst the major real estate developers led us to divest these. Shipping was a great investment in the pre-GFC years as global trade accelerated but supply caught up with demand and shipping companies’ margins have struggled for many years now. The worst sectoral performance was in oil, although this was solely due to the 12% fall in the price of JXTG which alone accounts for 60% of the sector. We did not hold JXTG but own number two player Idemitsu which had a gain in February of over 3%.
At month end we attended a conference in Japan and met with Idemitsu management for an 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.
It will not come as news to investors in the Optimal Japan Absolute Long Fund that the investment manager and the Fund’s board have decided to wind down the Fund. This is therefore our last Fund monthly report and as the Fund’s equity holdings had all been sold by month-end, this report contains no sector or stock contributions.
We have written almost 180 monthlies for this Fund since its inception in 2004 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 market and companies we’ve owned. We remain committed investors in Japan and intend to continue to regularly visit Japan and meet with companies. 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!
For the history of all our newsletters please click here.
PLEASE CONTACT US FOR ADDITIONAL INFORMATION
|Strategy||Long Only Equity|
|Net Asset Value (NAV)||US$15.583|
|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.|