Man GLG Japan CoreAlpha: February 2021 fund update

Josef Licsauer | Mon 01 March 2021

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Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, cost and performance of the Man GLG Japan CoreAlpha fund.

• Jeff Atherton, an experienced investor in Japan, has taken over as lead manager of the fund
• Long-term performance has been strong, but the fund has struggled in recent years
• Value investing remains out of favour but there have been recent signs of recovery
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The managers of the Man GLG Japan CoreAlpha fund are contrarians and invest for the long term. They invest in large Japanese companies they believe can be bought at a lower share price than their true worth, and sell them when they feel the company and the share price has recovered. It’s a style known as value investing. Their discipline in this approach sets them apart from their peers.

We think this fund could work well in a global investment portfolio designed to provide long-term growth, or sit well alongside a Japanese fund using a growth-style investment approach or focused on smaller or medium-sized companies.

Manager

In October 2020, lead fund manager Stephen Harker and senior manager Neil Edwards announced their retirement and plans to step down from the fund at the end of March 2021.

Jeff Atherton, the fund’s co-manager since 2011, has since taken over as lead manager. Harker and Edwards will remain co-managers until 31 March 2021, at which point Harker will be available for the team to contact for advice for up to one year, but he won’t be involved in the fund’s management.

Atherton has 30 years’ experience investing in Japan and analysing and researching companies based there. It means he has a deep understanding of the Japanese market. He has worked alongside Harker for over a decade, using the same value and contrarian investment philosophy, though it’s a style he also used in his earlier career.

Atherton will continue to be supported by co-manager Adrian Edwards and assistant managers Stephen Harget and Emily Badger. We have met the team many times over the years, and also more recently to understand the changes going forward and assess their capability. A lot of experience will be lost following the departure of Harker and Edwards, and the fund will have less resource behind it. This has naturally dented our conviction.

That said, the remaining team has a strong pedigree investing in Japan and are focused on the job in hand. They’re not involved in running other funds, and are dedicated to the Man GLG Japan CoreAlpha strategy.

The fund remains on our Wealth Shortlist as we feel it’s still in capable hands. Atherton is a highly experienced Japanese equities investor and we believe he can lead the team and fund successfully going forward. That said, we remain in close contact with the managers and will continue to monitor the situation closely. We will inform investors if our views change.

Process

The team continues to implement the same longstanding investment process, investing in unloved Japanese companies they feel are undergoing temporary setbacks. They will patiently wait for them to recover and slowly sell them as the share price rises, or look to invest a little more if the share prices falls. If they feel a company has recovered or if better opportunities emerge, they’ll sell and move onto the next investment.

Atherton and the team recently reviewed the entire portfolio, paying close attention to risk management and how much the fund invests in each company and sector. He has slightly changed the amount invested in certain areas, to maintain sufficient diversification. We feel this is prudent management and are confident he’s sticking to the existing philosophy.

For example, roughly 9% of the fund was invested in steel and, although Atherton thinks there are some great opportunities in this area, he reduced exposure and reinvested in other unloved opportunities. Nippon Steel and JFE Holdings were reduced, bringing the total amount invested in steel to around 7%.

The coronavirus pandemic has caused volatility across global stock markets, and Japan is no exception. However, the managers think it’s created some interesting opportunities for long-term investors, including buying some shares at lower prices. Recent investments include transport operators West Japan Railway and Central Japan Railway, which suffered as more people began to work from home. Atherton thinks Japan’s handled the crisis better than most other countries and, given the impracticalities of working from home in Japan, expects people to return to the office sooner rather than later.

The managers tend to invest in relatively few companies, currently totaling 45. This means each one can make a significant contribution to returns, although it increases risk.

Culture

Man GLG continues to invest in talent, technology and research, giving fund managers every opportunity to perform well over the long term. Fund managers aren't constrained by a 'house view', and have the freedom to invest wherever they see the best opportunities.

They have an open and collaborative culture where the sharing of ideas and debate is encouraged. The team are fully committed to the fund and motivated to succeed over the long term.

The managers of the fund and the wider team invest a significant amount of their own money in the fund. We feel their incentives are aligned with those of investors.

Cost

This fund usually has an ongoing annual charge of 0.90%, but we've secured HL clients an ongoing saving of 0.10%. This means you pay a net ongoing charge of 0.80%.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund has an excellent long-term track record. Since launch in January 2006, and under Harker’s management, it’s returned more than the broader Japanese stock market. Our analysis puts this down to strong stock picking. Past performance isn’t a guide to future returns.

It can take time for a company's share price to recover following a disappointment though and shorter-term periods of weaker performance should be expected. That’s been the case in recent years. The team’s investment style has largely been out-of-favour, and value companies performed particularly poorly since the start of 2020 amid the coronavirus crisis. The fund didn’t hold up as well as we’d expect, given the type of companies it invests in. This suggests the managers’ stock picking was weaker.

One of the fund’s weakest performers was oil company Inpex Corporation. It’s the largest gas exploration and production company in Japan with production projects in 20 countries. It was impacted by global supply chain disruptions and decreases in demand. Investments in the banking sector also hindered performance. Companies like Mitsubishi UFJ Financial and Resona Holdings were also among the worst performers.

In recent months there have been some signs of recovery, though this is over a short time. Top performers include photography businesses Nikon and Canon. Construction and mining company Komatsu and automotive company Denso also performed well. In line with their process, the managers took some profits from these investments and reinvested into other unloved opportunities.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2021.

Find out more about Man GLG Japan CoreAlpha, including charges

Man GLG Japan CoreAlpha Key investor information