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$6.363
As at 31 December 2018

Annualised Performance (Net of Fees)

As at 31 December 2018 1 year 3 years 5 Years 10 years Inception*
OJAT -25.0% -3.4% -2.0% 2.2% 5.0%
Benchmark -4.1% 3.9% 7.3% 3.7% -1.1%
Relative -20.9% -7.3% -9.3% -1.5% +6.1%
*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

OJAT Performance ST Dec18.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

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.

Outside Japan, the rest of Asia also saw weaker markets in December but declines were muted in comparison. The MSCI All Country Asia Index (US$) was down 4.4% for the month, and some of our holdings finished higher for the month. Of our 11 non-Japan Asian holdings, five made positive contributions in December with Korean cosmetics giant Amorepacific Corp the standout with a gain of 21%. Although the 11 stocks are spread across 6 countries and differ in business type, they currently trade on a simple average RoE of 17% and have an operating profit margin of more than 20%. In spite of these superior profit measures, the group sells for 18 times this year’s profits and all are financially strong. We expect a big recovery from these in 2019.

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.

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.

FUND DOCUMENTS

HISTORICAL LETTERS

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Key Facts
Strategy Long / Short Equity
Benchmark MSCI AC Asia Index
Net Asset Value (NAV) A$6.363
Fund Size A$8m
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.