GLG Japan’s Atherton awaits return to value

The second quarter has been tough going for the GLG Japan Core Alpha fund as its large overweight to electronics firms, and largest holding Sony in particular, hurt performance.

After a strong first quarter for the market and the fund, the second quarter has shown a complete reversal, with the Topix index down 9.7% and the fund’s value investment style, with a focus on large firms, continuing to be out of favour. The long-term performance, however, remains strong meaning it remains a key pick in Citywire Selection.

Consumer electronics prove a drag

Fund manager Jeffrey Atherton told investors: ‘Large-cap value was the worst part of the market in the second quarter, and our consumer electronic stocks didn’t help either.’

The fund has 51% in large company value stocks compared with the index’s 26%, and it is also underweight medium-sized and large growth stocks, which have both outperformed in the past few quarters. Small firms were the best overall performers, but this part of the market is usually avoided in the fund.

The value contrarian approach of the team means they are awaiting a mean reversion that would see value stocks back in vogue after being out of favour for three years.

‘This is unusual historically. The underperformance of value against growth is getting very extreme. Last time we had this kind of sustained underperformance of growth against value was at the top of the TMT bubble of 1999/2000,’ Atherton said. ‘When that bubble burst, value was a fantastic strategy to be in. We think we are in the same position now. The duration has now been around three years and it is long overdue to turn.’

Financials overweight remains

The fund continues to be overweight financials and it is focused on the 'core 30': the largest 30 corporates in Japan. Some 51% of the fund is held  in its top-10 stocks.

The portfolio has key positions in Japan’s biggest three banks, Mitsubishi UFJ Financial, Sumitomo Mitsui Financial and Mizuho Financial. Banks make up almost 20% of the fund compared with just 9.8% of the Topix index.

‘Financials have been very strong and this is the first time in a difficult market that the banks have actually outperformed. They are well capitalised and on relatively low valuations. They are continuing to win, and it has started to happen without the help of rising interest rates,' Atherton said.

‘They have no direct exposure to Europe and what has been happening is that as European banks have continued to deleverage, Japanese banks have been able to buy some good quality assets.'

Electronics yet to outperform

Electric appliances are now the fund’s biggest overweight at 23.2% of the fund compared to 12.9% of the index, with Sony the fund’s largest position at 6.9% and Panasonic and Ricoh fourth and fifth largest positions respectively at 5.2% and 4.8%. The weighting has also been increased over the past quarter, although it has acted as a drag on recent performance.

While Ricoh has started to turn positively for the fund, and Panasonic has been improving, Sony has continued to fall in recent weeks.