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$15.682
As at 31 January 2019

Annualised Performance (Net of Fees)

As at 31 January 2019 1 year 3 years 5 Years 10 years Inception*
OJAL -19.1% 4.0% 2.5% 4.7% 3.2%
Topix Index -14.4% 6.8% 3.9% 5.0% 2.3%
Relative -4.7% -2.8% -1.4% -0.3% 0.9%
*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 Performance ST Jan19.png

Source: Apex Fund Services

MANAGER's REPORT

The rebound experienced in the first half of January continued through the rest of the month with Topix closing at its highest level on January 31st. This recovery in stock prices has been strong and unusual in the context of previous market sell-offs, both in terms of the price increase and the time taken to recover lost ground – albeit this is more a US phenomenon than a Japanese one.

It is always very difficult to attribute a cause to the effect when it comes to market falls like we experienced at the end of 2018, but evidence of weaker economic activity has been plentiful recently. A year ago, the mood of the economic commentators and policy makers was bullish with a consensus around multiple rate rises in the US and a generally accelerating global economy. A year on and the same commentators are decidedly bearish on the economic outlook although based on data we have seen, it is no foregone conclusion that 2019 will see recessions in Europe and the larger economies in Asia. More importantly, the subsequent equity market return more often than not belies the consensus on the economy and 2018 was a clear case of this as most stock indices had bad years. Notwithstanding the clearly weaker economic outlook for the year ahead, the weight of evidence does not necessarily argue for further equity price falls in 2019.

Looking at our portfolio, a major part of our positive return came from long held positions which also are in our top holdings by share of Fund NAV. Tokyo Electron, Horiba, Hitachi, SMC and Tokai Carbon all shone and each contributed at least 50bps to the Fund’s return.

Hitachi shareholders had an awful 2018 with the stock falling almost 33% over the year so respite was overdue. Operationally, both at the parent company and their listed subsidiaries, Hitachi has been performing well under the guidance of good management and an impressive board comprised of a majority of well qualified independent directors, mostly foreigners. Two unresolved issues had been casting a pall over the company and as these were both unquantifiable potential liabilities, investors sadly assumed the worst (it’s that kind of world!) and marked down the shares to extreme good value. One of these remains outstanding (a dispute with JV partner Mitsubishi Heavy over cost overruns at a power plant operation in South Africa) and continues to create uncertainty, but the other one is no longer relevant. Hitachi has decided to put a freeze on construction and potential operation of a nuclear power plant in the UK and investors clearly liked the decision, marking up the shares by 20% in January. It appears to us that the decision was based on economic common sense rather than corporate pride – as has driven so many decisions by large Japanese companies in the past – and unlike Nissan’s decision to stop producing one of their car models in the UK, Brexit would have had little to do with it, if anything at all.

Valuations are cheap – and I realise that this is not unique to Japan - and Japanese companies are developing a genuine taste for share buy-backs. Company earnings are slowing however, and it is unusual for prices to rise when earnings fall. In the financial year to date (the 9 months to December 2018), revenue and earnings are up, but in the December quarter alone, aggregate earnings look like ending slightly lower than the previous corresponding period. It is clear that investors’ crystal balls are very cloudy and the world is full of uncertainties right now, but share markets are meant to be forward looking discount mechanisms, and from the current valuation levels, one needs to be very bearish on demand and profitability to sell at these prices.

We have entered the Year of the Pig (my Zodiac sign as it happens) and this animal is meant to be a symbol of wealth. I trust that you too will enjoy good fortune in the year ahead.


 

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Key Facts
Strategy Long Only Equity
Benchmark Topix Index
Net Asset Value (NAV) US$15.682
Strategy Assets $30m
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.