Man GLG Core Alpha, JOHCM Japan and LF Morant Wright Nippon Yield are the funds for investors to consider pairing with the top performing Baillie Gifford Japanese, according to industry experts.
The four FE Crown-rated Baillie Gifford fund has been a consistently top performer in the IA Japan sector for some time.
Run by Sarah Whitley and Matthew Brett, the fund sits in the top decile of the sector over one, three, five and 10 years, although it should be noted that past performance is no guarantee of future gains.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Whitley has previously announced that she will retire in April, leaving Brett in charge, but investors should not worry about this transition, according to Tilney managing director Jason Hollands.
“Matthew Brett has been co-managing that for some time now and they genuinely have a team approach there and it is actually one of our high conviction funds,” he said.
More concerning perhaps for investors is that the fund has a strong growth bias – a style that has been in favour for much of the last decade globally.
As such, it may be in line for a period of underperformance should markets begin to focus more on fundamentals and the value style comes back into favour.
Below, FE Trustnet asks market commentators which fund they would pair with the growth-orientated fund in case it goes through a weak period.
LF Morant Wright Nippon Yield
Hollands said he would diversify the growth-focused Baillie Gifford Japanese with a value fund such as LF Morant Wright Nippon Yield.
“One of the features of Baillie Gifford is it has a strong growth investors stance so you can see across many of their portfolios, including Scottish Mortgage Investment Trust, that they have been backing high growth companies with quite a high technology bias,” he said.
“In Japan, our other high conviction fund has much more of a value bias to it and that is the LF Morant Wright Nippon Yield fund.”
The four crown-rated, £562m fund aims to deliver absolute returns by investing in undervalued Japanese companies with strong balance sheets, sound business franchises and attractive dividend yields.
Despite the value approach struggling globally, in Japan it has held up much better over the last decade and the fund has been another top performer in the sector, returning 389.56 per cent since September 2008 compared to 158.29 and 150.6 for the IA Japan sector and Topix benchmark respectively.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“Morant Wright are a boutique house who only do Japanese equities so they leave and breathe it. The team there are all veterans of larger asset managers’ Japanese desk – so you have people there like Denis Clough who for many years ran Schroder Tokyo as well as people from F&C who ran the Japanese desk,” Hollands said.
“They have a very valuation-aware approach and are also multi-cap investors so their funds will invest in the smaller companies not just the large well-known names in Japan.”
He added that the fund also plays into the theme that Japanese companies are being encouraged to be much more shareholder friendly.
“We are seeing – from a very low base – Japanese companies have been raising dividends, increasing share buybacks because of the reforms coming in,” he said.
“Historically the problem with Japan was that companies hoarded a huge amount of cash on their balance sheets and they still are very cash-rich but the market now yields about the same as the US which is also a low-yielding market but is at a substantial discount to it.”
JOHCM Japan
Ben Conway, manager of the Hawksmoor Investment Management’s model portfolios, said he prefers the £341m Baillie Gifford Japanese Income Growth to the Baillie Gifford Japanese fund for the same reason.
“We wanted to capture that [theme] but we also think that the pure Baillie Gifford style is a bit strong for us,” he said.
“I’m sure you are aware that Baillie Gifford’s philosophy is [as] a very strongly growth-orientated house and while we have a huge amount of respect for them as investors, their style has been performing extremely well.”
He added: “We still want exposure to them because they are very talented investors but they launched this fund not that long ago and the fact that it has got the income tilt to it means it dilutes down the strength of that style bias a little bit.”
Conway pairs this with the £501m Jupiter Japan Income fund run by Dan Carter who is the new senior manager on the fund having been co-manager with Simon Somerville since 2011.
“It is a very pragmatically-run fund with no strong style bias though if I had to say it had one it would be with a focus on quality in companies with sustainable return on equity (ROE) that grow,” Conway said.
Turning to the question at hand, he said that investors with exposure to Baillie Gifford Japanese could look towards a strong value proposition such as JOHCM Japan.
“I think if you really want to have a fund to complement the Baillie Gifford Japanese fund it would be the JO Hambro fund which is completely at the other end of the spectrum,” he said.
“They are out-and-out value investors as opposed to the BG fund which is at the growth [end of the] spectrum.”
The fund has made a top quartile return of 174.6 per cent over the last decade but has struggled over three- and five-year periods as the value style has been broadly out of favour.
However, Conway warned that investors should not pair a growth and value strategy for the sake of diversification if the funds bring the exposure close to the index.
“Having said all that why would you want to [own both]? If you are going to do that and have one fund at the growth- and one at the value-end then you are sort of buying the index. You should make your mind up,” he said.
Man GLG Japan Core Alpha
Ryan Hughes, head of fund selection at AJ Bell, said that the key to avoiding inadvertently buying the index is to pick two funds that are very much at either end of the growth and value spectrum.
“There is always the argument that you can just buy the market and I think if they were just a bit value and just a bit growth you would end up with a bit of the market,” he said.
“But if you have people who are very away from the centre in how they think then you do get diversification.”
As such, he chose the Man GLG Japan Core Alpha fund as a good diversifier to the growth-heavy Baillie Gifford Japanese fund.
“We have both of those on our favourite funds list and both think about investing in a totally different way to each another,” he said.
The £2.3bn fund has been another strong performer, returning 205.68 per cent over the last decade to investors but has also outperformed over three and five years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Run by Neil Edwards and Stephen Harker since 2006 with Jeff Atherton (2011) and deputy manager Adrian Edwards (2014) joining later, the fund struggled last year, underperforming the Topix benchmark by 4.79 percentage points.
However, Baillie Gifford Japanese outperformed last year and Hughes said that as long as both stick to their processes he does not mind weak periods of performance providing he can explain why.
“Obviously it is almost impossible for the funds to outperform at the same time – as you are genuinely diversifying – but you would hope that over time both can deliver alpha in their strategies and styles,” Hughes said.
“And they know their strategy. You are not ever going to wake up and find that fund is doing something unexpected and that is what you want when you are picking a stylistic fund – the process that you thought you understood is reflected in the holdings.”