OPTIMAL JAPAN AND ASIA TRUST

Objective

Optimal Japan and Asia Trust (‘OJAT’) invests in the Japanese and Asian equity markets with the objective of maximising investor returns. To this goal, the portfolio might sell index futures, short sell stocks or ETFs and raise cash. The portfolio is concentrated in our best ideas across the region and places emphasis on ensuring an alignment of interest with minority shareholders, long-term business prospects and always ensuring an attractive price at entry. Since its inception, the strategy has concentrated on Japan only and it will continue to keep a strong focus on Japan. It is Australian dollar denominated.

NAV PER UNIT A$7.835
As at 30 September 2018

Annualised Performance (Net of Fees)

As at 30 September 2018 1 year 3 years 5 Years 10 years Inception*
OJAT 3.1% 5.7% 2.2% 3.9% 6.3%
Benchmark 14.2% 8.8% 10.7% 5.3% -0.7%
Relative -11.1% -3.1% -8.5% -1.4% +7.0%
*Since inception (start date 20 December 1999). 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 A$10,000 INVESTED

OJT Sept 2018.png

Source: Apex Fund Services.
Note: The benchmark from 20 December 1999 through 10 August 2018 was the Topix Index, thereafter it will be the MSCI AC Asia Index.

MANAGER's REPORT

Markets were unsettled in September. Japan staged a strong rally after a poor start to the month and climbed almost 8% from the low point to make its first monthly close above 1800 since January. The Shanghai SE Composite Index also had a strong month (+3.5%) but in contrast to Japan, was still down over 20% from its late January high. Most of the other markets in Asia had small moves in September but India stood out within the region - for the wrong reasons - with an index decline of 6.3%.

Behind current market moves are macro concerns – particularly the rise in US interest rates and bond yields. In the period prior to the Lehman Crisis, equity investors would not have been perturbed by a US 10 year yield of 3.2%. It was exactly 10 years ago that the yield on the benchmark US 10 year first reached as low as 3.2%, and then fell more to bottom in July 2016 just below 1.4%. The average yield over the past 20 years is just under 3.6% so today’s level is unremarkable, but US economic strength coupled with tightening by the Fed has created uncertainty over just where the bond market is heading. The more pessimistic forecasts create a discount rate that asks questions of asset values generally and particularly for the most optimistically priced equities and it is in the high profile - and richly valued - tech names where downside appears to be the greatest. Unfortunately in macro-driven moves like these, all equities tend to sell off, so even modestly priced Japanese and Asian equities take a hit.

Outside the markets, Japan’s ruling Liberal Democratic Party held its election for party leader in early September and to no one’s great surprise, Prime Minster Shinzo Abe was successful and will remain leader for a further three years. As the next general election is not due until October 2021, PM Abe will hold office past the Tokyo Olympics in August 2020, by which time he will have become the longest serving Prime Minister since the Meiji Restoration and the introduction of democratically elected governments. From September 2006 when Abe began his first short term following Koizumi’s 5 years, Japan had 6 prime ministers in the 6 years up until Abe returned in December 2012. His second period in power has now lasted almost 6 years and in that time, Japan has experienced generally positive economic conditions with recoveries in the real estate, equities and labour markets. Even the ratio of debt to GDP has begun to fall so there is much to be positive about life under Mr Abe’s leadership. Not a few developed countries would cast an envious eye at what has played out under Abe “Mark II”.

We had a disappointing return for the month with the worst Japanese performers being Horiba (on fears of weakness in semiconductor production) and Murata (MLCCs for smart phones). On the positive side of the P&L was Tokai Carbon (which we wrote about in our May report), Izumi (the Hiroshima-based supermarket operator), Hitachi and MUFJ. The banks have failed to match the Topix return in 2018, but have done better in the past few months along with the rise in global interest rates.

Outside of Japan, alarms rang with the default of the Indian company, Infrastructure Leasing & Financial Services (IL&FS). The company defaulted on its various debt instruments as a consequence of a mismatch in its assets and liabilities. Fearing that the IL&FS problems could be contagious, the Indian market reacted negatively, with the collapse being touted in the media as ‘India’s Lehman moment’. While the government was quick to step in - taking over IL&FS and replacing the entire board - sentiment turned negative in the banking sector as it fell 11% in local currency terms during the month. Coupled with problems of rising inflation and constraints presented by the country’s energy grid, the Indian market was weak as investors worried that GDP will slow. The fund has not been immune to the pressures of the Indian market, although we are now able to find more compelling opportunities to deploy cash where the risk versus reward is highly in our favour.

Important change to Optimal Japan Trust

In light of the increasing importance of Asia to Japan, we have broadened the Fund’s investment mandate from Japan-only to one which covers all of Asia. This will allow us to capitalise on the extensive research we have undertaken to identify Asia’s best managed and most attractively valued businesses and in selectively adding these to the fund, we expect to improve the fund’s overall return and quality. Japan will remain the Fund’s core and major focus.

As a result, the Fund’s name has changed to Optimal Japan and Asia Trust. We have a new Trust Deed and Information Memorandum which formalise these changes, and will send them out to anyone wishing to invest.

We have lowered the Fund’s performance fee from 20% to 15% with all other major terms remaining the same.

Please contact us for more information and join the Optimal team investing in this improved version of the Fund.

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Key Facts
Strategy Long / Short Equity
Benchmark MSCI AC Asia Index
Net Asset Value (NAV) A$7.835
Fund Size A$9m
Domicile Australia
Trustee Optimal Fund Management Pty Limited
Currency Australian Dollars
Launch Date December 1999
Income Distribution Annual
Fees* 1% pa
Performance Fee 15%*
*the fee is levied on the investment’s positive excess returns with a high watermark.