Aberdeen’s Chern-Yeh Kwok considers the state of Japanese stocks
With Japan and China currently at loggerheads over ownership of some rocky islands, Aberdeen Asset Management’s head of Japanese Equities Chern-Yeh Kwok has taken a bottom up look at local equity.
Japanese stocks look cheap but investors must be especially wary of value traps. It is important, therefore, to identify and understand catalysts for growth, if indeed there are any. This can prove challenging in the current operating environment and particularly in the small cap sector, where analyst coverage tends to be limited and sporadic. Yet smaller companies may also be more nimble and exposed to new growth areas, and narrow coverage can throw up opportunities for stock-pickers willing to do their own homework, such as ourselves.
Given the uncertain global macroeconomic outlook, Japan’s equity markets are likely to stay volatile in the near term. While small caps are often less exposed to external demand, they face a number of headwinds at home too. The domestic economy is slowing, and political instability could resurface with an election expected in coming months. The yen, meanwhile, has remained strong despite government and central bank interventions. Against such a backdrop, picking the right stocks (ie well-run companies with solid balance sheets and robust business models) will prove vital.
We never invest in stocks we have not visited, and we are not driven by benchmarks. Rather, we evaluate companies based on their quality, in terms of business prospects, transparency, balance sheet strength, management openness and fair treatment of shareholders. We shun businesses we do not understand or those with discriminatory shareholder structures. Companies that pass our quality filter are then assessed for value. Equally central to our process is our team approach, where investment managers share company research duties and cross-cover visits; our emphasis is on collective wisdom, not star managers.
The fund’s largest overweight position is in Pigeon, a market leader in baby care products which is underpinned by a strong brand and has substantial growth prospects in Asia. The fund also has considerable exposure to Nabtesco, the world’s largest precision gear maker with about 60% global market share, as well as Asics, a conservatively managed athletic footwear company which has successfully grown its overseas business. On the other hand, the biggest underweight positions are in ATM operator Seven Bank, telecommunications construction company Comsys Holdings and parking lot operator Park 24. These are non-holdings in view of quality concerns.
We do not manage the fund to specific ex-ante tracking error or volatility targets, though we monitor these regularly. With regards to performance, the fund has not only outperformed the benchmark Russell Nomura Small Cap Index for the past several years but it is also consistently ranked in the top quartile of its peer group. On the whole, the outperformance over the years has been driven by good stock selection, a reflection of our holdings’ resilience over an extraordinary period which encompassed the 2008 global financial crisis as well as the earthquake, tsunami and nuclear meltdown in Japan last year.