JO Hambro Japan - managers continue to uncover hidden gems

Dominic Rowles | Mon 16 October 2017

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• A number of attractive opportunities have been found in construction, real estate, transportation and financials
• The managers’ investment style has been out of favour for a number of years, which has held back returns
• Scott McGlashan and Ruth Nash are encouraged by the progress made by the businesses they invest in

Our view

Japan currently ranks among the world’s cheapest developed stock markets, according to our analysis. This means shares are generally priced below their longer-term growth prospects – if and when companies’ prospects are recognised by more investors, their share prices could be set to rise, although there are no guarantees. We believe this represents a unique opportunity for investors.

Scott McGlashan and Ruth Nash, managers of the JO Hambro Japan Fund, are two managers we trust to delve through the stock market to uncover hidden gems. They are two of the most experienced Japanese equity investors in the UK and draw on knowledge accrued over decades to help them find unloved Japanese companies with outstanding prospects.

We believe the managers’ focus on undervalued and out-of-favour companies, combined with a bias towards small and medium-sized companies, distinguishes them from their peers. We remain positive on the prospects for the fund and it retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Portfolio review

Scott McGlashan and Ruth Nash adopt a value-oriented investment approach. They tend to seek cheap, out-of-favour companies whose share prices do not reflect their true worth. Investors have tended to ignore this type of company in recent years in favour of the perceived security of larger companies with more dependable earning streams.

However, the managers believe the latter type of company is overvalued in many cases and they do not believe the prospects for these companies justifies the high share prices. Instead they believe the unloved and out-of-favour companies they seek are almost as cheap as they have ever been. Once investor sentiment changes, the value waiting to be unlocked could be significant.

While this positioning has been a headwind for the fund in recent years, the managers maintain an impressive long-term performance record, although please remember past performance is not a guide to future returns.

JO Hambro Japan - 10 year performance

Past performance is not a guide to future returns. Source: Lipper IM to 30/09/2017

Past performance is not a guide to future returns. Source: Lipper IM to 30/09/2017

The managers have recently identified the greatest value in some of the more economically-sensitive sectors such as construction, real estate and transportation, to which the fund is currently biased. They have also found a number of opportunities in the finance and insurance sectors.

Company in focus - Fukuoka Financial Group

Japan’s population is falling due to its increasing age and a lack of immigration. Many investors believe this could lead to a lack of demand for financial products, such as loans and mortgages, and they have therefore steered clear of this sector.

The managers believe there are still a number of opportunities for eagle-eyed investors, including Fukuoka Financial Group. The company provides deposit services, loans and foreign currency transactions with a focus on the Fukuoka region of Japan. Fukuoka is one of the very few areas where the population is growing and the managers believe many investors have overlooked this fact. This gave them the opportunity to acquire shares in the company at what they believe to be an attractive price and they are confident about the future prospects.

Looking ahead

The managers are encouraged by the progress made by the companies they invest in, with many recently reporting earnings in excess of expectations. Historically, rising earnings have driven share prices, so they believe the portfolio could deliver excellent performance when their investment strategy returns to favour, although there are no guarantees.

Please note the fund carries a performance fee and as it is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme. If you are considering an investment please ensure you read the fund's Key Investor Information Document which contains further details.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.