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The star managers riding Japan's rollercoaster recovery

Citywire Discovery reveals the fund managers delivering the best risk-adjusted returns in the Equity - Japan sector.

Comparing the risk-adjusted performance of the big guns over both three and seven years reveals how some have struggled to cope with the changing conditions under prime minister Shinzo Abe’s regime.

Managers’ three year numbers straddle the new regime with Abe having won a landslide victory in December 2012. The market rallied strongly in advance of his accession and continued their upward trajectory for several months thereafter. Perhaps too much so, given the 20% correction seen last June with performance since having continued trending upwards, but punctuated by volatility.

A number of managers appear caught between backing export-led companies to be the big winners of a weaker yen or focusing on more domestic-focused stocks positioned to benefit from Abe’s attempts to bolster consumer spending and reflate the economy.

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Polar Capital ‘s James Salter (pictured) has seen the most notable drop off, slipping from 17th percentile over seven years to 71st over three years. His £2.9 billion Japan fund is one of the biggest in the sector with 6.63% market share.

Invesco Perpetual’s Paul Chesson has also had more middling recent performance, dropping back from 33rd percentile to 45th, while Man Investment’s Stephen Harker and Neil Edwards have fallen from 13th to 36th percentile.

Not that this is bad performance, it is more that investors are more used to seeing these names higher up the ranking tables.

Elsewhere Legg Mason’s Hideo Shoizumi has benefited from the strong performance of smaller companies, surging up the charts from 32nd percentile to 11th. But it is Bailie Gifford Japanese managers Sarah Whitley and Matthew Brett who have been the standout consistent performer over both timeframes.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

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Stephen Harker and Neil Edwards, Man Group

The pair (pictured) manage the GLG CoreAlpha fund with a contrarian value tilt and have achieved a seven year risk-adjusted score of 0.56. This figure is based on a modified information ratio with positive numbers denoting the managers have outperformed their benchmark.

Their process is very much bottom up, with a focus on what they deem high quality companies’ balance sheet, management and market position, aiming to find stocks they believe are undervalued.

Harker and Edwards’ style is to top up their favourite on weakness with the pair favouring a low turnover approach.

The fund has had a number of guises. Originally launched as the SG Japan Alpha fund in March 1998, it was renamed SG Japan CoreAlpha in 2006 following a change in portfolio strategy before becoming the GLG Japan CoreAlpha fund in April 2009. Man Group acquired GLG Partners in May 2010 although the fund has retained its current branding.

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Sarah Whitley and Matthew Brett, Baillie Gifford

Baillie Gifford Japanese fund managers Whitley (pictured) and Brett describe themselves as bottom-up, growth-orientated long-term investors. They favour running a concentrated portfolio with relatively low turnover with the focus very much on proprietary fundamental company research rather than making top down calls.

The pair analyse earnings growth, cash generation, profitability, returns on capital and balance sheet strength, taking a three to five year view. Their process has helped them achieve a seven year risk-adjusted score of 0.71.

They said: ‘We believe that our long-term investment approach differentiates us from the majority of managers investing in Japanese equities. The market’s preoccupation with short-term trends and themes generates exploitable opportunities for patient, bottom-up investors, not least because there is a persistent tendency for the market to undervalue sustainable earnings and cashflow growth, which we believe to be critical factors in evaluating a company’s prospects.’

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Paul Chesson, Invesco Perpetual

Chesson (pictured), who manages the Invesco Perpetual Japan fund with Tony Roberts, is maintaining a bias towards economically sensitive areas of the market with significant exposure to the technology and financial sectors. The pair blend top down and bottom up analysis and are among the most experienced managers in the sector.

Over seven years, the pair have achieved a risk-adjusted score of 0.31.

Late last year Chesson was measured in his outlook. He said that despite the market’s strong rally, earnings ratings had not yet been rerated upwards, which provided opportunities, but he cautioned investors to be more modest in their assumptions of future returns.

He remains cautious, noting last month that business confidence had fallen since the start of the year, despite the Tankan survey of companies showing that actual reported business conditions had improved.

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Hideo Shoizumi, Legg Mason

Investing in Soizumi’s Legg Mason Japan Equity fund has long been a bit of a rollercoaster ride for investors. This is reflected in the manager’s Citywire ratings history. Unrated throughout 2007-2010, he has been a regular in the rankings since 2011, commanding a AAA-rating right through 2013 until April this year.

Over seven years he has achieved a risk-adjusted score of 0.33.

He is renowned for his small cap focus, which works well when the market is rallying but has it record the worst drawdown in the sector over the last decade at -78.79%. Timing is everything buying this fund and investors who bought in at the end of March 2012 were rewarded with a 71.04% return over the next year, slaying the sector average of 15.13%.

Currently just over a third of his fund is in very small caps- companies with sub $750 million market caps.

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