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$14.440|
|As at 31 December 2018|
|As at 31 December 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
Catastrophe – “an event causing great and usually sudden damage or suffering; a disaster”
Based on the definition of the Oxford Dictionaries above, it would be an exaggeration to call the Fund’s December performance a catastrophe, but combined with the big fall in October, it meant the year ended with something close to a meltdown. There have been previous months and quarters where the market fell more, but not that many. In the December quarter of 2008, the Topix index was off 21% – and that after a 13% fall in September 2008 – but the 17.8% decline in the last quarter of 2018 ranks amongst the worst of the past 20 years. In a continuation of the misery suffered by value investors over the past decade and more, our funds performed badly and finished the year on a low note. The caveat to that is that mid-way through January, we have recovered more than half of the December losses so we hope to extrapolate that recovery through to month-end, and beyond.
We have written countless times of the awful relative performance of value against growth since 2007, and the extent of this misalignment has attracted some recent attention from market commentators. Globally, value stocks’ relative returns are back to the lows reached at the peak of the Tech Bubble’s madness in 2000 and while we can all find theories to explain this phenomenon, it does offer support to a value investing approach if one believes in mean reversion in markets – as we do.
Japan’s equity market has shown a strong correlation with the OECD Leading Indicator and sure enough, as the indicator turned down during 2018, so too did the Topix index. During December, the Merrill Lynch Survey results showed institutional investors’ weightings in Japanese equities relative to their index benchmark were cut from 12% overweight to 1% underweight, which seems like shutting the gate after the horse has bolted, or perhaps just reflected a response indicating where they wish they had been rather than where they had actually got to.
Given that among the leading economies, Japan - along with the USA - scores one of the lowest dependencies on trade as a percentage of GDP, it is counterintuitive that its stock market shows such a strong correlation to a global business cycle indicator such as the OECD LI. This has been explained by the fact that the Japanese equity market composition is more heavily weighted to manufacturers - and thus more reliant on global trade – than manufacturing’s weight in GDP. This is certainly true of auto assemblers, auto parts suppliers and the many companies that provide inputs into the manufacture of essential components, but over the past few decades, the weight of service sector companies in the Topix index has risen relative to manufacturers and yet the equity market still seems to shadow the OECD Leading Index. It does make sense in the context of the expansion of Japan’s companies overseas through new facilities or M&A. In the final analysis, contributions to fluctuations in revenue and earnings for Japanese companies are increasingly coming from international rather than domestic sources. In our October monthly we predicted that there would be a lot more news about loosening of Japan’s laws and regulations regarding foreign workers and in December the Diet passed new laws which make it easier for foreigners to get working visas and permanent residency in Japan. They do not deal with citizenship per se, but with Japanese respondents in a recent NHK survey on public awareness showing less interest in marriage and having children, we would not be surprised if Japan quietly admits more foreigners – albeit well behaved and prepared to fulfill jobs that Japanese are not – with encouragement to address the low birth rate. In the NHK survey, 60% replied that even if they were to marry, they did not feel the need to have children and only 27% felt it was normal for people to want to marry. The same question in 1993 got a response of 45% while 54% felt that if one married, it was normal to want to have children. Whatever has happened to animal spirits in the past 25 years? Sad really.
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|Strategy||Long Only Equity|
|Net Asset Value (NAV)||US$14.440|
|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.|