Morningstar: JOHCM Japan Fund

Ash Kumar, fund analyst at Morningstar: Manager experience is a key competitive advantage for this fund. Scott McGlashan has 32 years' experience of which 26 years is in Japanese equities. Ruth Nash, who backs him up, has been involved with Japanese equities for two decades. In keeping with JOHCM's practice there is no analyst staff backing them. We don't think this is an issue, however, as a cumulative experience of 46 years and the local contacts they have built up through that period compensates. McGlashan has also delivered outstanding relative returns on the three Japan funds under his charge since 1988, and has done so across market-cap ranges- at Invesco and Close he ran large-cap funds and JOHCM is a multi-cap offering with a mid-cap bias through time.

Here, the managers target high-quality Japanese stocks trading at attractive valuations--in a neutral market, they look for discounts of 20% to what they think a firm is worth. The valuation criteria mean they are unlikely to own high growth names, but they also undertake careful research to ensure they don't fall into value traps. For each company they buy, they identify a catalyst which they think will release the trapped value in about 12 months. Although the managers stick to this strategy at all times, they are not dogmatic about where it leads them. For example, although they tend to find most of their ideas in the Topix Mid-400 index, they went up the cap ladder in 2007 and 2008 as large-cap valuations began to look attractive. Thus, although the fund resides in our Japan Small/Mid Cap Equity category, its current portfolio has a significant large-cap bias.

That bias helped the fund in 2007, and even though large-caps underperformed in Japan in 2008, the fund still managed to outperform its small- and mid-cap peers, suggesting the managers' research was strong. One area in which they've done well is transports, and railroads such as East Japan Railway gave the fund a big boost in 2008. However, investors do need to be cognisant of the fact that this is a go-anywhere fund: Although the managers have historically used that flexibility well, high exposure to small and mid caps hurt the fund in 2006, and investors here need to be able to ride out such periods.

In all, however, the managers have delivered strong returns here, without undue risk. We like their experience and we think JOHCM is a strong house that does the right thing for investors and doesn't appear overly focused on marketing (too much emphasis on marketing is always a warning flag to us, as we prefer houses to focus on serving fund investors well). Finally, this fund is capped at #300m, another sign that investor interests are being guarded. There aren't that many good Japan funds around, and we believe this is one of the best.

Strategy

The process seeks to identify mispriced securities with at least 20% discount to what the managers' think a firm is worth. The managers looks for such companies primarily in the Topix Mid 400 Index (even though Topix TR is the stated benchmark), adjusted for liquidity and a $200m minimum market cap. The starting point of research is an analysis of 10 years' profit & loss accounts and balance sheet data, to assess profitability and balance sheet efficiency. They consider a number of factors when searching for mispriced stocks - PB, PCF, PE and PNav as well as catalysts. The latter are expected to release the trapped value over the next 12 months. Qualitative research may involve the use of local brokers who will visit the firm on the managers' behalf. The pair themselves meets around 120 companies a year either in Japan or London.

Up to 15% of stocks in the portfolio are opportunistic plays where the manager expects a quick, sharp gain. The fund is invested across 40 to 60 stocks, with individual positions limited to 6% and at least 15 sectors represented at all times. No other stocks or sector constraints are placed on the managers, who pay little attention to benchmark weights when constructing the portfolio.

Management

Both Scott McGlashan and Ruth Nash have a wealth of experience in running Japanese equities across the capitalization scale. McGlashan has been involved with the Japanese market since 1982. Before joining JOHCM in April 2004, he was co-founder and chairman of Jade Absolute and managed the Close Finsbury Japanese Equity fund for four years from January 2000. Prior to Jade, McGlashan was head of Far East Investment and a director at Perpetual. He also ran the Invesco Perpetual Japan fund for more than 11 years from May 1988.

Working alongside McGlashan is Nash, whose 23 years' industry experience includes 20 years in Japanese equities. She started her career at Coopers and Lybrand in Edinburgh in 1985. In 1987, she joined Scottish Equitable Life Assurance's Japan desk as an analyst, before moving to London in 1988 to join Royal Insurance as a fund manager. In 1996 she joined the Japanese team at Prudential Portfolio Managers and in May 1999 was recruited to manage the Japanese portion of the British Steel Pension fund. She joined JOHCM in 2005.